UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the quarterly period ended June 30, 2010
OR
¨
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the transition period from to
Commission file number: 001-33793
ICx Technologies, Inc.
(Exact name of registrant as specified in its charter)
|
|
|
Delaware
|
|
#77-0619113
|
(State or other jurisdiction of
incorporation or organization)
|
|
(IRS Employer
Identification No.)
|
|
|
|
2100 Crystal Drive, Suite 650
Arlington, VA
|
|
22202
|
(Address of principal executive offices)
|
|
(Zip Code)
|
(703)
678-2111
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90
days. Yes
x
No
¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files). Yes
¨
No
¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act (Check one).:
|
|
|
|
|
|
|
Large accelerated filer
|
|
¨
|
|
Accelerated filer
|
|
¨
|
|
|
|
|
Non-accelerated filer
|
|
¨
|
|
Smaller reporting company
|
|
x
|
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes
¨
No
x
As of July 31, 2010, the registrant had 34,931,678 shares of Common Stock outstanding.
ICx TECHNOLOGIES, INC. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2010
INDEX
2
PART I FINANCIAL INFORMATION
Item 1.
|
Financial Statements
|
ICx TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
Unaudited
June 30,
2010
|
|
|
December 31,
2009
|
|
Assets
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
37,738,861
|
|
|
$
|
22,257,000
|
|
Restricted cash
|
|
|
3,865,928
|
|
|
|
8,464,545
|
|
Trade accounts receivable, net
|
|
|
20,736,876
|
|
|
|
36,751,209
|
|
Unbilled revenue
|
|
|
9,268,225
|
|
|
|
8,957,090
|
|
Inventories
|
|
|
28,929,552
|
|
|
|
22,490,819
|
|
Deferred income taxes
|
|
|
346,721
|
|
|
|
346,721
|
|
Prepaid expenses and other current assets
|
|
|
5,171,685
|
|
|
|
4,205,956
|
|
Current assets of discontinued operations
|
|
|
|
|
|
|
1,065,259
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
106,057,848
|
|
|
|
104,538,599
|
|
Property, plant and equipment, net
|
|
|
9,432,305
|
|
|
|
9,672,581
|
|
Intangible assets, net
|
|
|
7,524,854
|
|
|
|
9,901,567
|
|
Goodwill
|
|
|
70,276,752
|
|
|
|
70,274,490
|
|
Other assets
|
|
|
4,307,014
|
|
|
|
3,671,016
|
|
Noncurrent assets of discontinued operations
|
|
|
|
|
|
|
365,639
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
197,598,773
|
|
|
$
|
198,423,892
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of long-term debt
|
|
$
|
63,549
|
|
|
$
|
63,233
|
|
Accounts payable
|
|
|
6,611,967
|
|
|
|
6,609,983
|
|
Accrued payroll expenses
|
|
|
6,128,603
|
|
|
|
8,419,614
|
|
Accrued expenses and other current liabilities
|
|
|
6,878,769
|
|
|
|
6,106,422
|
|
Deferred revenue
|
|
|
10,885,095
|
|
|
|
4,943,348
|
|
Current liabilities of discontinued operations
|
|
|
|
|
|
|
878,637
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
30,567,983
|
|
|
|
27,021,237
|
|
Long-term debt
|
|
|
86,408
|
|
|
|
117,935
|
|
Deferred income taxes
|
|
|
415,005
|
|
|
|
464,890
|
|
Other liabilities
|
|
|
11,500
|
|
|
|
383,318
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
31,080,896
|
|
|
|
27,987,380
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies
|
|
|
|
|
|
|
|
|
|
|
|
Series A Convertible Redeemable Preferred Stock, par value $.001 per shareauthorized
15,000,000 in 2010 and 2009; issued
and outstanding 0 shares in 2010 and 2009;
liquidation preference $0 at June 30, 2010 and December 31, 2009, respectively
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders Equity:
|
|
|
|
|
|
|
|
|
Common stock, par value $.001 per share, authorized 250,000,000 shares at June 30,
2010 and December 31, 2009,
respectively; issued 35,355,664 and 34,915,021
shares at June 30, 2010 and December 31, 2009, respectively; outstanding
34,929,430 and 34,551,357 shares at June 30, 2010 and December 31,
2009,
respectively
|
|
|
35,355
|
|
|
|
34,915
|
|
Additional paid-in capital
|
|
|
387,832,293
|
|
|
|
385,552,404
|
|
Treasury stock, at cost; 426,234 and 363,664 shares at June 30, 2010 and
December 31, 2009,
respectively
|
|
|
(3,264,257
|
)
|
|
|
(2,815,743
|
)
|
Accumulated deficit
|
|
|
(219,840,861
|
)
|
|
|
(215,131,852
|
)
|
Accumulated other comprehensive income
|
|
|
1,755,347
|
|
|
|
2,796,788
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
166,517,877
|
|
|
|
170,436,512
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
197,598,773
|
|
|
$
|
198,423,892
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
3
ICx TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations and Comprehensive Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product revenues
|
|
$
|
19,583,710
|
|
|
$
|
22,122,579
|
|
|
$
|
41,298,363
|
|
|
$
|
38,443,603
|
|
Contract research and development revenues
|
|
|
10,146,535
|
|
|
|
12,691,959
|
|
|
|
22,307,919
|
|
|
|
23,974,214
|
|
Service and other revenues
|
|
|
6,248,526
|
|
|
|
10,173,034
|
|
|
|
12,942,315
|
|
|
|
29,960,724
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
35,978,771
|
|
|
|
44,987,572
|
|
|
|
76,548,597
|
|
|
|
92,378,541
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of product revenues
|
|
|
8,632,594
|
|
|
|
10,837,066
|
|
|
|
16,998,309
|
|
|
|
18,936,703
|
|
Cost of contract research and development revenues
|
|
|
7,441,381
|
|
|
|
9,565,234
|
|
|
|
16,393,483
|
|
|
|
17,879,352
|
|
Cost of service and other revenues
|
|
|
4,030,860
|
|
|
|
7,334,837
|
|
|
|
8,851,834
|
|
|
|
21,529,226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue
|
|
|
20,104,835
|
|
|
|
27,737,137
|
|
|
|
42,243,626
|
|
|
|
58,345,281
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
15,873,936
|
|
|
|
17,250,435
|
|
|
|
34,304,971
|
|
|
|
34,033,260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
7,247,959
|
|
|
|
6,717,104
|
|
|
|
14,288,199
|
|
|
|
13,906,323
|
|
Selling and marketing
|
|
|
6,280,490
|
|
|
|
5,840,170
|
|
|
|
12,589,221
|
|
|
|
12,194,350
|
|
Research and development
|
|
|
4,227,868
|
|
|
|
3,105,329
|
|
|
|
7,987,837
|
|
|
|
6,621,066
|
|
Depreciation and amortization
|
|
|
1,872,306
|
|
|
|
2,995,834
|
|
|
|
3,824,731
|
|
|
|
6,018,879
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
19,628,623
|
|
|
|
18,658,437
|
|
|
|
38,689,988
|
|
|
|
38,740,618
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(3,754,687
|
)
|
|
|
(1,408,002
|
)
|
|
|
(4,385,017
|
)
|
|
|
(4,707,358
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
15,079
|
|
|
|
39,118
|
|
|
|
26,854
|
|
|
|
90,971
|
|
Interest expense
|
|
|
(17,305
|
)
|
|
|
(37,234
|
)
|
|
|
(44,739
|
)
|
|
|
(54,513
|
)
|
Other, net
|
|
|
587,185
|
|
|
|
344,419
|
|
|
|
834,391
|
|
|
|
400,913
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income
|
|
|
584,959
|
|
|
|
346,303
|
|
|
|
816,506
|
|
|
|
437,371
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(3,169,728
|
)
|
|
|
(1,061,699
|
)
|
|
|
(3,568,511
|
)
|
|
|
(4,269,987
|
)
|
Income tax expense
|
|
|
509,288
|
|
|
|
122,134
|
|
|
|
789,539
|
|
|
|
235,423
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
$
|
(3,679,016
|
)
|
|
$
|
(1,183,833
|
)
|
|
$
|
(4,358,050
|
)
|
|
$
|
(4,505,410
|
)
|
Loss on discontinued operations, net of tax
|
|
|
(8,803
|
)
|
|
|
(86,957
|
)
|
|
|
(322,264
|
)
|
|
|
(240,455
|
)
|
Loss on sale of discontinued operations, net of tax
|
|
|
(28,695
|
)
|
|
|
|
|
|
|
(28,695
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(3,716,514
|
)
|
|
$
|
(1,270,790
|
)
|
|
$
|
(4,709,009
|
)
|
|
$
|
(4,745,865
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment, net of tax
|
|
|
(768,906
|
)
|
|
|
(135,882
|
)
|
|
|
(1,041,441
|
)
|
|
|
(914,866
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
$
|
(4,485,420
|
)
|
|
$
|
(1,406,672
|
)
|
|
$
|
(5,750,450
|
)
|
|
$
|
(5,660,731
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.11
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.13
|
)
|
|
$
|
(0.14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted weighted average shares outstanding
|
|
|
35,324,654
|
|
|
|
34,720,320
|
|
|
|
35,228,438
|
|
|
|
34,605,809
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
4
ICx TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited
|
|
|
|
Stockholders Equity
|
|
|
|
Common Stock
|
|
Additional
Paid-in Capital
|
|
Accumulated
Deficit
|
|
|
Accumulated
Other
Comprehensive
Income
|
|
|
Treasury
Stock
|
|
|
Total
Stockholders
Equity
|
|
|
|
Shares
|
|
Amount
|
|
|
|
|
|
Balances at January 1, 2010
|
|
34,915,021
|
|
$
|
34,915
|
|
$
|
385,552,404
|
|
$
|
(215,131,852
|
)
|
|
$
|
2,796,788
|
|
|
$
|
(2,815,743
|
)
|
|
$
|
170,436,512
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
(4,709,009
|
)
|
|
|
|
|
|
|
|
|
|
|
(4,709,009
|
)
|
Foreign currency translation, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,041,441
|
)
|
|
|
|
|
|
|
(1,041,441
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
(4,709,009
|
)
|
|
|
(1,041,441
|
)
|
|
|
|
|
|
|
(5,750,450
|
)
|
Issuances of common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options, warrants and restricted stock
|
|
440,643
|
|
|
440
|
|
|
1,080,168
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,080,608
|
|
Stock based compensation
|
|
|
|
|
|
|
|
1,199,721
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,199,721
|
|
Purchases of treasury stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(448,514
|
)
|
|
|
(448,514
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at June 30, 2010
|
|
35,355,664
|
|
$
|
35,355
|
|
$
|
387,832,293
|
|
$
|
(219,840,861
|
)
|
|
$
|
1,755,347
|
|
|
$
|
(3,264,257
|
)
|
|
$
|
166,517,877
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of this consolidated financial statement.
5
ICx TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
Unaudited Six Months Ended
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(4,709,009
|
)
|
|
$
|
(4,745,865
|
)
|
Loss on discontinued operations
|
|
|
322,264
|
|
|
|
240,455
|
|
Loss on sale of discontinued operations
|
|
|
28,695
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations, net of tax
|
|
|
(4,358,050
|
)
|
|
|
(4,505,410
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Stock based compensation
|
|
|
1,185,093
|
|
|
|
1,985,002
|
|
Depreciation and amortization
|
|
|
3,824,731
|
|
|
|
6,018,879
|
|
Deferred income taxes
|
|
|
(29
|
)
|
|
|
74,724
|
|
Increase in restricted cash
|
|
|
(19,423
|
)
|
|
|
(19,136
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Trade accounts receivable, net
|
|
|
15,861,341
|
|
|
|
11,090,784
|
|
Unbilled revenue
|
|
|
(302,448
|
)
|
|
|
(744,798
|
)
|
Inventories
|
|
|
(6,777,722
|
)
|
|
|
817,889
|
|
Prepaid expenses and other assets
|
|
|
(1,394,026
|
)
|
|
|
(2,241,564
|
)
|
Accounts payable
|
|
|
90,260
|
|
|
|
(9,120,713
|
)
|
Accrued expenses and other liabilities
|
|
|
(2,701,849
|
)
|
|
|
(2,420,282
|
)
|
Deferred revenue
|
|
|
5,944,839
|
|
|
|
(5,179,995
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) continuing operating activities
|
|
|
11,352,717
|
|
|
|
(4,244,620
|
)
|
Cash provided by (used in) operation of discontinued operations
|
|
|
20,633
|
|
|
|
(412,343
|
)
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in) operating activities
|
|
|
11,373,350
|
|
|
|
(4,656,963
|
)
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment
|
|
|
(928,798
|
)
|
|
|
(938,848
|
)
|
Increase in restricted cash
|
|
|
(3,863,295
|
)
|
|
|
|
|
Decrease in restricted cash
|
|
|
8,481,335
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) continuing investing activities
|
|
|
3,689,242
|
|
|
|
(938,848
|
)
|
Proceeds from sale of discontinued operations
|
|
|
30,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
3,719,242
|
|
|
|
(938,848
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock
|
|
|
1,080,608
|
|
|
|
94,876
|
|
Borrowings under lines of credit
|
|
|
500,000
|
|
|
|
5,693,600
|
|
Repayments under lines of credit
|
|
|
(500,000
|
)
|
|
|
(5,693,600
|
)
|
Repayments of notes payable and long-term debt
|
|
|
(31,210
|
)
|
|
|
(30,654
|
)
|
Purchase of treasury shares
|
|
|
(448,514
|
)
|
|
|
(449,670
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
600,884
|
|
|
|
(385,448
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of foreign exchange rate on cash
|
|
|
(211,615
|
)
|
|
|
417,817
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
15,481,861
|
|
|
|
(5,563,442
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
22,257,000
|
|
|
|
30,348,639
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
37,738,861
|
|
|
$
|
24,785,197
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
6
ICx TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
June 30, 2010 and 2009
1.
|
Description of the Business and Summary of Significant Accounting Policies
|
ICx
Technologies, Inc. and Subsidiaries (ICx or Company) was incorporated in the State of Delaware in 2003 to acquire, develop, and coordinate the operations of security technology companies. ICx develops and integrates advanced
sensor technologies for homeland security, force protection and commercial applications. The Companys proprietary sensors detect and identify chemical, biological, radiological, nuclear, and explosive threats, and deliver superior awareness
and actionable intelligence for wide-area surveillance, intrusion detection and facility security. These technologies are used in nuclear power plants, military installations, natural gas storage systems and pipelines, shopping malls, public
transportation systems, and port facilities.
The holders of a majority of ICx capital stock, DP1, LLC (DP1)
and Valentis SB, L.P. (Valentis), are under the common control of Wexford Capital, LLC (Wexford), which is an SEC registered investment advisor.
As more fully described in Note 8, the Companys Board of Directors approved a plan in 2009 to sell PureTech Systems, Inc.
(PureTech). PureTech was sold in June 2010. As a result, the results of operations and the assets and liabilities of PureTech prior to the sale are included as discontinued operations in the accompanying consolidated financial
statements.
The accounting policies set forth in Note 1 to the consolidated financial statements contained in the Form 10-K
filed with the Securities and Exchange Commission on March 31, 2010 have been followed in preparing the accompanying consolidated financial statements. In the Companys opinion, all adjustments (which include only normal recurring
adjustments) necessary for a fair presentation of the Companys results of operations and financial position for the interim periods presented have been made in the accompanying consolidated financial statements.
In April 2010, the Company entered into a Standby Letter of Credit in conjunction with one of its customer contracts. As such,
approximately $3.9 million of the Companys cash was placed under restriction to serve as collateral for this letter of credit. This restriction expires no later than October 30, 2010.
In May 2010, the Company received an executed release of the performance bond requiring the Company to restrict $8.5 million in cash as
of March 31, 2010 and December 31, 2009.
(c)
|
Allowance for Trade Accounts and Notes Receivable
|
At June 30, 2010 and December 31, 2009, trade accounts receivable, net was comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30,
2010
|
|
|
December 31,
2009
|
|
U.S. government
|
|
$
|
8,663,048
|
|
|
$
|
12,471,620
|
|
Commercial and other
|
|
|
13,263,664
|
|
|
|
24,775,531
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
21,926,712
|
|
|
$
|
37,247,151
|
|
Allowance for doubtful accounts
|
|
|
(1,189,836
|
)
|
|
|
(495,942
|
)
|
|
|
|
|
|
|
|
|
|
Trade accounts receivable, net
|
|
$
|
20,736,876
|
|
|
$
|
36,751,209
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2010 and December 31, 2009, no customer other than the U.S. government accounted for
10% or greater of the net trade accounts receivable balance.
7
At
June 30, 2010 and December 31, 2009, inventories were comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30,
2010
|
|
|
December 31,
2009
|
|
Raw materials
|
|
$
|
15,186,290
|
|
|
$
|
11,696,878
|
|
Work in progress
|
|
|
5,341,363
|
|
|
|
3,662,442
|
|
Finished goods
|
|
|
10,347,355
|
|
|
|
8,302,707
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
30,875,008
|
|
|
$
|
23,662,027
|
|
Reserve for obsolescence
|
|
|
(1,945,456
|
)
|
|
|
(1,171,208
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
28,929,552
|
|
|
$
|
22,490,819
|
|
|
|
|
|
|
|
|
|
|
(e)
|
Goodwill and Other Intangible Assets
|
Goodwill and other intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying
amount of these assets may not be recoverable. Additionally, goodwill is tested for impairment at least annually. Goodwill is not amortized. Pursuant to the Companys policies for assessing impairment of goodwill and long-lived assets, no
goodwill was written off in the first six months of 2010 or 2009. The Company has not historically incurred significant costs to renew or extend the term of recognized intangible assets.
The Company recognizes revenue when all of the following criteria are met: persuasive evidence of an arrangement exists, delivery has
occurred, the price is fixed or determinable, and collection from the customer is reasonably assured. Product revenue is generally recognized upon shipment, unless customer acceptance is required, in which case product revenue is recognized when
documentation of customer acceptance is received.
The Company earns contract research and development revenue by performing
research and development primarily under contracts entered into with the U.S. government or as subcontractors to other commercial entities that contract with the U.S. government. The Company earns the majority of its service and other revenue from
custom development services and project management and technology integration services under contracts entered into with various U.S., state or local government agencies or other commercial entities that contract with these agencies. Most of these
contracts are either based on costs incurred plus a fixed fee or are based on a fixed price. The Company recognizes revenue from these contracts using the percentage of completion method. The Company principally uses labor efforts expended and
estimated gross profit as a percentage of total estimated costs and contract value or contract milestones to measure the progress of contract completeness. Revisions in cost and contract value estimates during the progress of work have the effect of
adjusting earnings in the current period for work that may have been performed in prior periods. When estimates of current costs indicate a loss, provision is made for the total anticipated loss in the current period. Under cost plus fixed fee
contracts, the Company may bill and be reimbursed for costs incurred in advance of revenue recognition if the percentage of contract completeness does not coincide with costs incurred. Additionally, certain fixed price contracts provide for billings
and/or payments that may not coincide with revenue recognition. To the extent that customer billings or payments are in excess of revenues, the excess is recorded as deferred revenue and contract costs in excess of expected earnings under the
contract are deferred. At June 30, 2010 and December 31, 2009, the Company had included in deferred revenue $8,065,753 and $2,685,423 of excess billings or customer payments, respectively, related to percentage of completion timing
differences. Deferred contract costs at June 30, 2010 and December 31, 2009 were not material. In certain circumstances, revenue is recognized and costs are accrued under the percentage of completion method under cost plus and fixed fee
contracts. Additionally, revenue may be recognized prior to billings on these contracts. Such amounts are recorded as unbilled revenue and are expected to be collected within one year of recognition, and if contract costs incurred are below the
earnings that are expected to be realized upon contract completion, they are accrued until the costs are incurred. At June 30, 2010 and December 31, 2009, the Company had unbilled revenue of $9,268,225 and $8,957,090, respectively,
included in the accompanying financial statements, substantially all of which is expected to be collected within one year. At June 30, 2010 and December 31, 2009, this amount included $392,581 and $1,501,147, respectively, of unbilled
revenue related to an engineering and integration project which was billed in the following month, and $2,448,647 and $1,876,580, respectively, of unbilled revenue related to two intelligent transportation solutions projects. Accrued contract costs
at June 30, 2010 and December 31, 2009, were not material. The Company had no material claims outstanding under its research and development contracts as of June 30, 2010.
8
Warranty income under separate agreements is recognized ratably over the life of the
warranty. The Company recognizes revenue from services at the time the related services are performed. Deferred revenue includes $2,463,674 and $1,798,918 at June 30, 2010 and December 31, 2009, respectively, of warranty agreements and
prepayments on service contracts.
The Company recognizes revenue from software license fees when persuasive evidence of an
arrangement exists, delivery has occurred, the price is fixed or determinable, and collection from the customer is reasonably assured. Revenue from post contract customer maintenance and support is deferred and recognized ratably over the life of
the post contract customer maintenance and support agreement. Deferred revenue includes $355,668 and $459,007 at June 30, 2010 and December 31, 2009, respectively, of revenue deferred under multiple-element software arrangements for post
contract customer support.
(g)
|
Accounting for Stock-Based Compensation
|
The Company values equity-classified, share-based payments to employees, including grants of employee stock options at fair value on the
date of grant and expenses stock-based compensation over the applicable vesting period. Share-based awards granted or modified are recognized in compensation expense over the applicable vesting period.
During the three months ended June 30, 2010 and 2009, the Company recorded non-cash stock-based compensation expense of $661,097 and
$963,129, respectively. During the six months ended June 30, 2010 and 2009, the Company recorded non-cash stock-based compensation expense of $1,199,721 and $2,002,100, respectively. As of June 30, 2010, and December 31, 2009, the
Companys total unrecognized compensation cost related to stock-based awards was $4.1 million and $2.8 million, respectively.
The Company calculates basic loss per share by dividing net loss attributable to common stockholders by the weighted-average number of
common shares outstanding during each reporting period. Diluted loss per common share is calculated by dividing net loss attributable to common stockholders by the weighted average number of common shares outstanding during each period adjusted for
the effect of dilutive potential common shares calculated using the treasury stock method. However, the computation of diluted loss per share shall not assume the conversion or exercise of options that would have an anti-dilutive effect (a decrease
in loss per share) on loss per share.
For the quarter ended June 30, 2010, the Company had 35,324,654 weighted average
shares outstanding, and all of the Companys potential common shares were anti-dilutive as the Company was in a net loss position. Those potential common shares consisted of 637,470 weighted average shares of stock.
For the quarter ended June 30, 2009, the Company had 34,720,320 weighted average shares outstanding and all of the Companys
potential common shares were anti-dilutive as the Company was in a net loss position. Those potential common shares consisted of 398,128 weighted average shares of stock.
For the six months ended June 30, 2010, the Company had 35,228,438 weighted average shares outstanding, and all of the
Companys potential common shares were anti-dilutive as the Company was in a net loss position. Those potential common shares consisted of 823,173 weighted average shares of stock.
For the six months ended June 30, 2009, the Company had 34,605,809 weighted average shares outstanding and all of the Companys
potential common shares were anti-dilutive as the Company was in a net loss position. Those potential common shares consisted of 479,750 weighted average shares of stock.
The 2009 balances in the consolidated financial statements and notes to consolidated financial statements have been reclassified to
conform to the 2010 presentation of discontinued operations (Note 8). These reclassifications had no impact on reported net income or earnings per share.
(j)
|
Fair Value Measurements
|
Under U.S. GAAP, fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit
price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value under U.S. GAAP must maximize the use of
observable inputs and minimize the use of unobservable inputs. U.S. GAAP includes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair
value:
|
|
|
Level 1 Quoted prices in active markets for identical assets or liabilities.
|
|
|
|
Level 2 Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities,
quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
|
9
|
|
|
Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or
liabilities.
|
The Company maximizes the use of observable inputs and minimizes the use of unobservable
inputs by requiring that the observable inputs be used when available. Fair value is based upon quoted market prices when available. If listed price or quotes are not available, the Company employs internally-developed models that primarily use
market-based inputs including yield curves and interest rates, among others.
The Company considers cash and cash equivalents,
trade accounts receivable, accounts payable, and accrued expenses to be financial instruments in which the carrying amounts represent fair value because of the short-term nature of the accounts. The Company also considers notes payable, lines of
credit, and long-term debt to be financial instruments in which the carrying amounts approximate fair value because of their short-term nature, variable interest rates or rates that approximate market, and because the Companys credit risk
profile has not changed significantly since the debt agreements were initiated.
Nonfinancial nonrecurring assets and
liabilities included in the Companys consolidated balance sheet include long lived assets such as property, plant and equipment, intangibles and goodwill, which are measured at fair value to test for and measure an impairment charge, when
necessary. These assets fall within level 3 of the fair value hierarchy, as significant unobservable inputs such as the Companys projected operating results are used to estimate the fair value of these assets. Due to the Companys plan to
sell PureTech (Note 8), the related assets and liabilities were classified within level 2 of the fair value hierarchy in the third quarter of 2009. During the three and six months ended June 30, 2010, $148,100 of other long-term assets were
written off in connection with discontinued operations to remeasure these nonfinancial assets to fair value based on a level 2 estimated market price. During the three and six months ended June 30, 2009, no such nonfinancial assets or
liabilities were remeasured to fair value.
(k)
|
Recent Accounting Pronouncements
|
The Financial Accounting Standards Board (FASB) periodically issues new accounting standards in a continuing effort to improve
standards of financial accounting and reporting. The Company has reviewed the recently issued pronouncements and concluded that the following new accounting standards are applicable to the Company.
In April 2010, the FASB issued ASU 2010-17,
Revenue Recognition Milestone Method (Topic 605) Milestone Method of Revenue
Recognition a consensus of the FASB Emerging Issues Task Force
, which defines a milestone and describes when it may be appropriate to apply the milestone method of revenue recognition for research or development transactions. ASU 2010-17
provides guidance on the criteria that should be met for determining whether the milestone method of revenue recognition is appropriate. This guidance is effective on a prospective basis for milestones achieved in fiscal years, and interim periods
within those years, beginning on or after June 15, 2010. Early adoption is permitted. Furthermore, a Company may elect, but is not required, to adopt this guidance retrospectively. The Company is currently assessing the impact of this guidance;
however, adoption is not expected to have a material impact on the Companys consolidated financial position or results of operations.
2.
|
Related Party Transactions
|
Administrative Services Agreement with Wexford
The Company entered into an Administrative Services Agreement with Wexford under which the Company may request certain legal, accounting,
back office, and other services. The Company is obligated to reimburse Wexford for all of its direct and indirect costs allocated to the performance of such services. The Company incurred general and administrative expenses of $43,584 and $13,015 in
the three months ended June 30, 2010 and 2009, respectively, and $62,334 and $30,918 in the six months ended June 30, 2010 and 2009, respectively, pursuant to the agreement. Either party may terminate specific services or cancel the
agreement upon written notice to the other party.
Leases
Juergen Stein, CEO and President of Target GmbH, a subsidiary of the Company, leases facilities to the Company under a lease agreement
dated January 1, 2005. Rent expense of $27,000 was incurred in the three months ended June 30, 2010 and 2009, respectively. Rent expense of $54,000 was incurred in the six months ended June 30, 2010 and 2009, respectively. The lease
term ends on December 31, 2020, and can be renewed for one year terms thereafter.
Strange Family Holdings, LLP, leases
facilities to the Company under a lease agreement dated June 15, 2005. Rent expense of $17,586 and $17,074 was incurred in the three months ended June 30, 2010 and 2009, respectively. Rent expense of $35,172 and $34,148 was incurred in the
six months ended June 30, 2010 and 2009, respectively. The lease term was renewed with similar terms for a one year period ending on September 15, 2010, and can be renewed for five additional one year terms thereafter. Certain family
members of the Strange family hold senior management positions in one of the Companys subsidiaries.
Insurance
Commissions
The Company provides health, dental, vision, life and disability insurance to its employees as an employee
benefit. The Companys insurance broker is Hamilton Green & Company, Ltd., the president and principal stockholder of which is Susan Jacobs, the sister of one of the Companys directors, Joseph M. Jacobs. The Company does not pay
commissions directly to Hamilton Green & Company, Ltd. for these brokerage services and therefore is uncertain as to the total commissions paid to Hamilton Green & Company, Ltd. However, total premiums paid by both the Company and through
payroll deductions were $1,404,209 and $1,440,826 in the three months ended June 30, 2010 and 2009, respectively, and $2,817,871 and $2,878,513 in the six months ended June 30, 2010 and 2009, respectively, pursuant to the insurance policies. The
Company may change its broker designation upon notice to its insurance carrier.
3.
|
Commitments and Contingencies
|
The Company is routinely involved in various legal matters arising from the normal course of business. Management believes that losses, if
any, arising from such actions will not have a material adverse effect on the financial position or results of operations of the Company.
10
On or about February 24, 2010, Research International, Inc. filed a complaint against
ICx Technologies, Inc. and its wholly owned subsidiary, MesoSystems Technology, Inc., in the United States District Court, Western District of Washington at Seattle, alleging infringement of Research Internationals United States Patent Nos.
6,484,594 and 7,261,008. This complaint was settled in April 2010. . In accordance with the settlement agreement, the Company paid a one-time, initial royalty payment of $100,000 and agreed to pay a small royalty on future sales of certain products
until expiration of the patents included in the complaint. As such, settlement did not have a material impact on the Companys consolidated financial position or results of operations.
As of
June 30, 2010 and December 31, 2009, the Company had unrecognized tax benefits of $1.4 million. If recognized in future periods, $1.4 million would reduce the Companys effective income tax rate. No interest or penalties have been
accrued. The Company does not expect the unrecognized tax benefits to significantly change within the next 12 months. The Company has elected to report interest and penalties as a component of income tax expense.
Lines of Credit
One of the Companys subsidiaries has operating line of credit with a bank in which borrowing is generally collateralized by and
based on a percentage of certain eligible accounts receivable, inventory, and/or property and equipment. Interest is based on prime, but the agreement contains an interest rate floor of 5.50%. Maximum borrowings under the line are $2.5 million. The
line matures on April 26, 2011. At June 30, 2010 and December 31, 2009, no amounts were outstanding under the line of credit.
As part
of the Companys stock-based compensation plans, the Company offers employees the opportunity to make required tax payments with cash or through a net share settlement. For employees choosing net share settlement, the Company makes required tax
payments on behalf of employees as their stock awards vest and then withholds a number of vested shares having a value on the date of vesting equal to the tax obligation. The shares withheld were recorded as treasury shares. During the six months
ended June 30, 2010, the Company repurchased 62,570 shares in settlement of employees tax obligations for a total of $448,514 or an average of $7.17 per share.
7.
|
Stock-Based Compensation
|
The following table summarizes activity for nonvested restricted stock (RS) and nonvested restricted stock units
(RSUs) granted under the 2007 Equity Incentive Plan for the six months ended June 30, 2010:
|
|
|
|
|
|
|
|
|
2010
|
|
|
Restricted
Stock and
Restricted
Stock Units
|
|
|
Weighted
Average
Fair Value
|
Nonvested RS and RSUs outstanding at January 1, 2010
|
|
490,512
|
|
|
$
|
6.64
|
RS and RSUs granted
|
|
396,700
|
|
|
|
7.14
|
RS and RSUs vested
|
|
(209,449
|
)
|
|
|
6.88
|
RS and RSUs forfeited
|
|
(18,209
|
)
|
|
|
6.44
|
|
|
|
|
|
|
|
|
|
|
Nonvested RS and RSUs outstanding at June 30, 2010
|
|
659,554
|
|
|
$
|
6.87
|
|
|
|
|
|
|
|
The Company recorded stock-based compensation expense
of $569,389 and $768,332 during the three months ended June 30, 2010 and 2009, respectively, and $999,138 and $1,578,769 during the six months ended June 30, 2010 and 2009, respectively, in connection with grants of RS and RSUs. Grants of
RS and RSUs are valued using the closing market price of the Companys common stock on the date of grant.
The aggregate
intrinsic value of outstanding RS and RSUs at June 30, 2010 was $4.8 million. Also at June 30, 2010, total compensation cost related to nonvested RS and RSU awards that had not yet been recognized totaled $3.3 million. The weighted average
period over which this amount will be recognized is estimated to be 1.8 years.
11
Stock option activity for options issued under the 2007 Equity Incentive Plan was as follows
as of June 30, 2010, and for the six months then ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
Subject to
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual
Term
(in years)
|
|
Aggregate
Intrinsic
Value
|
Options outstanding at January 1, 2010
|
|
2,340,659
|
|
|
$
|
5.84
|
|
|
|
|
|
Options granted
|
|
55,000
|
|
|
|
6.59
|
|
|
|
|
|
Options exercised
|
|
(221,299
|
)
|
|
|
4.88
|
|
|
|
|
|
Options terminated, cancelled or expired
|
|
(31,426
|
)
|
|
|
5.73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at June 30, 2010
|
|
2,142,934
|
|
|
$
|
5.96
|
|
6.32
|
|
$
|
5,684,736
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at June 30, 2010
|
|
1,570,769
|
|
|
$
|
6.22
|
|
5.40
|
|
$
|
3,063,080
|
|
|
|
|
|
|
|
|
|
|
|
|
For options granted in 2010 and 2009, the fair value
of options was estimated at the grant date using the Black-Scholes option pricing model with the following weighted average assumptions:
|
|
|
|
|
|
|
|
|
For the six months ended June 30,
|
|
2010
|
|
|
2009
|
|
Grant date fair value
|
|
$
|
3.64
|
|
|
$
|
1.78
|
|
Risk-free interest rate
|
|
|
3.10
|
%
|
|
|
2.01 2.195
|
%
|
Dividend yield
|
|
|
|
%
|
|
|
|
%
|
Expected life (years)
|
|
|
6.25
|
|
|
|
6.25 6.5
|
|
Expected volatility
|
|
|
45.1
|
%
|
|
|
47.0
|
%
|
No dividend yield assumption was
included because the Company does not plan to pay dividends.
Board-discretionary stock option activity was as follows as of
June 30, 2010, and for the six months then ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
Subject to
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual
Term
(in years)
|
|
Aggregate
Intrinsic
Value
|
Options outstanding at January 1, 2010
|
|
109,200
|
|
|
$
|
0.16
|
|
|
|
|
|
Options granted
|
|
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
(9,860
|
)
|
|
|
0.16
|
|
|
|
|
|
Options terminated, cancelled or expired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at June 30, 2010
|
|
99,340
|
|
|
$
|
0.16
|
|
5.03
|
|
$
|
709,288
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at June 30, 2010
|
|
99,340
|
|
|
$
|
0.16
|
|
5.03
|
|
$
|
709,288
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense pertaining to stock
options totaled $91,708 and $194,797 for the three months ended June 30, 2010 and 2009, respectively, and $200,583 and $423,331 for the six months ended June 30, 2010 and 2009, respectively. Cash received from the exercise of stock options
totaled approximately $31,000 and $44,000 for the three months ended June 30, 2010 and 2009, respectively, and approximately $1.1 million and $95,000 for the six months ended June 30, 2010 and 2009, respectively.
The aggregate intrinsic value of outstanding options at June 30, 2010 was $5.0 million. Also at June 30, 2010, total
compensation cost related to nonvested awards that had not yet been recognized totaled $0.8 million. The weighted average period over which this amount will be recognized is estimated to be 3.0 years.
12
8.
|
Discontinued Operations
|
In the third quarter of 2009, the Companys Board of Directors adopted a plan of sale and put PureTech Systems, Inc. (PureTech), a
unit in the Solutions segment, up for sale, as the business model of this unit no longer aligned with the strategic plans of the Company. The Company completed the sale of PureTech in the second quarter of 2010 for $30,000 in cash and a receivable
of $375,000 payable over three years. In conjunction with this sale, the Company recognized a loss on the sale of discontinued operations of $28,695 in the three months ended June 30, 2010. Additionally, the Company recognized a loss on
discontinued operations of $8,803 and $86,957 in the three months ended June 30, 2010 and 2009, respectively, and a loss on discontinued operations of $322,264 and $240,455 in the six months ended June 30, 2010 and 2009, respectively. The
2010 loss on discontinued operations included a $148,100 impairment charge to write down PureTechs non-current assets to fair market value in the first quarter of 2010. Prior year financial statements included herein have been reclassified to
present the operations of PureTech as discontinued operations.
Revenues and net loss before income taxes of PureTech reported
in discontinued operations are as follows:
|
|
|
|
|
|
|
|
|
|
|
For the three months ended June 30,
|
|
|
|
2010
|
|
|
2009
|
|
Revenues
|
|
$
|
326,800
|
|
|
$
|
433,025
|
|
Net loss before income taxes
|
|
|
(8,803
|
)
|
|
|
(86,957
|
)
|
|
|
|
|
For the six months ended June 30,
|
|
|
|
2010
|
|
|
2009
|
|
Revenues
|
|
$
|
1,281,814
|
|
|
$
|
824,452
|
|
Net loss before income taxes
|
|
|
(322,264
|
)
|
|
|
(240,455
|
)
|
The assets and liabilities
of the discontinued operations are presented separately in the consolidated balance sheets under the captions Current assets of discontinued operations, Noncurrent assets of discontinued operations, and Current
liabilities of discontinued operations and consist of the following:
|
|
|
|
|
|
December 31,
2009
|
Assets of discontinued operations:
|
|
|
|
Cash
|
|
$
|
13,262
|
Accounts receivable, net
|
|
|
1,016,692
|
Inventories
|
|
|
25,805
|
Property, plant and equipment, net
|
|
|
26,845
|
Other assets
|
|
|
348,294
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,430,898
|
|
|
|
|
Liabilities of discontinued operations:
|
|
|
|
Accounts payable
|
|
$
|
3,211
|
Accrued payroll
|
|
|
50,119
|
Accrued expenses
|
|
|
564
|
Deferred revenue
|
|
|
824,743
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
878,637
|
|
|
|
|
The
Company has three reportable segments: detection, surveillance, and solutions. The detection segment provides chemical, biological, radiological, nuclear, and radiation detection activities. The surveillance segment provides perimeter security and
monitoring. The solutions segment designs, creates, and deploys security operating systems and video networking systems. Intersegment revenues are fully eliminated in consolidation. Most general and administrative expenses and all selling and
marketing expenses are allocated to the Companys reportable segments.
13
The following is a summary of information for the Companys reportable segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended June 30, 2010
|
|
|
|
Detection
|
|
|
Surveillance
|
|
|
Solutions
|
|
|
Segments
Combined
|
|
Total revenues
|
|
$
|
22,917,680
|
|
|
$
|
6,962,713
|
|
|
$
|
6,320,866
|
|
|
$
|
36,201,259
|
|
Intersegment revenues
|
|
|
|
|
|
|
|
|
|
|
(222,488
|
)
|
|
|
(222,488
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers
|
|
|
22,917,680
|
|
|
|
6,962,713
|
|
|
|
6,098,378
|
|
|
|
35,978,771
|
|
Segment operating income (loss)
|
|
|
(1,165,995
|
)
|
|
|
(1,708,267
|
)
|
|
|
(103,555
|
)
|
|
|
(2,977,817
|
)
|
Depreciation and amortization
|
|
|
1,291,884
|
|
|
|
344,729
|
|
|
|
75,894
|
|
|
|
1,712,507
|
|
|
|
|
|
For the three months ended June 30, 2009
|
|
|
|
Detection
|
|
|
Surveillance
|
|
|
Solutions
|
|
|
Segments
Combined
|
|
Total revenues
|
|
$
|
24,323,573
|
|
|
$
|
13,388,784
|
|
|
$
|
7,576,020
|
|
|
$
|
45,288,377
|
|
Intersegment revenues
|
|
|
|
|
|
|
(7,600
|
)
|
|
|
(293,205
|
)
|
|
|
(300,805
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers
|
|
|
24,323,573
|
|
|
|
13,381,184
|
|
|
|
7,282,815
|
|
|
|
44,987,572
|
|
Segment operating income (loss)
|
|
|
(556,299
|
)
|
|
|
(831,073
|
)
|
|
|
167,879
|
|
|
|
(1,219,493
|
)
|
Depreciation and amortization
|
|
|
1,940,295
|
|
|
|
748,792
|
|
|
|
118,238
|
|
|
|
2,807,325
|
|
|
|
|
|
For the six months ended June 30, 2010
|
|
|
|
Detection
|
|
|
Surveillance
|
|
|
Solutions
|
|
|
Segments
Combined
|
|
Total revenues
|
|
$
|
50,075,735
|
|
|
$
|
14,239,105
|
|
|
$
|
12,551,392
|
|
|
$
|
76,866,232
|
|
Intersegment revenues
|
|
|
|
|
|
|
|
|
|
|
(317,635
|
)
|
|
|
(317,635
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers
|
|
|
50,075,735
|
|
|
|
14,239,105
|
|
|
|
12,233,757
|
|
|
|
76,548,597
|
|
Segment operating income (loss)
|
|
|
541,978
|
|
|
|
(3,071,227
|
)
|
|
|
(786,376
|
)
|
|
|
(3,315,625
|
)
|
Depreciation and amortization
|
|
|
2,631,429
|
|
|
|
719,327
|
|
|
|
155,151
|
|
|
|
3,505,907
|
|
Segment property, plant and equipment additions
|
|
|
623,009
|
|
|
|
188,732
|
|
|
|
27,620
|
|
|
|
839,361
|
|
|
|
|
|
For the six months ended June 30, 2009
|
|
|
|
Detection
|
|
|
Surveillance
|
|
|
Solutions
|
|
|
Segments
Combined
|
|
Total revenues
|
|
$
|
45,521,181
|
|
|
$
|
29,468,359
|
|
|
$
|
17,840,081
|
|
|
$
|
92,829,621
|
|
Intersegment revenues
|
|
|
|
|
|
|
(7,600
|
)
|
|
|
(443,480
|
)
|
|
|
(451,080
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers
|
|
|
45,521,181
|
|
|
|
29,460,759
|
|
|
|
17,396,601
|
|
|
|
92,378,541
|
|
Segment operating income (loss)
|
|
|
(3,296,200
|
)
|
|
|
(1,233,872
|
)
|
|
|
195,613
|
|
|
|
(4,334,459
|
)
|
Depreciation and amortization
|
|
|
3,855,072
|
|
|
|
1,492,593
|
|
|
|
298,315
|
|
|
|
5,645,980
|
|
Segment property, plant and equipment additions
|
|
|
899,808
|
|
|
|
(35,421
|
)
|
|
|
17,857
|
|
|
|
882,244
|
|
|
|
|
|
|
As of June 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment total assets
|
|
|
97,060,116
|
|
|
|
37,071,125
|
|
|
|
20,282,071
|
|
|
|
154,413,311
|
|
Segment goodwill
|
|
|
51,478,229
|
|
|
|
12,736,716
|
|
|
|
6,061,807
|
|
|
|
70,276,752
|
|
|
|
|
|
|
As of December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment total assets
|
|
|
105,712,857
|
|
|
|
37,555,241
|
|
|
|
23,539,079
|
|
|
|
166,807,177
|
|
Segment goodwill
|
|
|
51,478,229
|
|
|
|
12,736,716
|
|
|
|
6,059,545
|
|
|
|
70,274,490
|
|
14
Following is a reconciliation of the Companys operating losses from reportable
segments to the total Company loss before income taxes:
|
|
|
|
|
|
|
|
|
|
|
For the three months ended June 30,
|
|
|
|
2010
|
|
|
2009
|
|
Operating losses from reportable segments
|
|
$
|
(2,977,817
|
)
|
|
$
|
(1,219,493
|
)
|
Unallocated depreciation and amortization expense
|
|
|
(159,799
|
)
|
|
|
(188,509
|
)
|
Unallocated general and administrative expense
|
|
|
(617,071
|
)
|
|
|
|
|
Interest income
|
|
|
15,079
|
|
|
|
39,118
|
|
Interest expense
|
|
|
(17,305
|
)
|
|
|
(37,234
|
)
|
Other non-operating gains (losses), net
|
|
|
587,185
|
|
|
|
344,419
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
$
|
(3,169,728
|
)
|
|
$
|
(1,061,699
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six months ended June 30,
|
|
|
|
2010
|
|
|
2009
|
|
Operating losses from reportable segments
|
|
$
|
(3,315,625
|
)
|
|
$
|
(4,334,459
|
)
|
Unallocated depreciation and amortization expense
|
|
|
(318,824
|
)
|
|
|
(372,899
|
)
|
Unallocated general and administrative expense
|
|
|
(750,568
|
)
|
|
|
|
|
Interest income
|
|
|
26,854
|
|
|
|
90,971
|
|
Interest expense
|
|
|
(44,739
|
)
|
|
|
(54,513
|
)
|
Other non-operating gains (losses), net
|
|
|
834,391
|
|
|
|
400,913
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
$
|
(3,568,511
|
)
|
|
$
|
(4,269,987
|
)
|
|
|
|
|
|
|
|
|
|
Following is a reconciliation of the property, plant and equipment additions from the Companys
reportable segments to the total property, plant and equipment additions of the Company:
|
|
|
|
|
|
|
|
|
For the six months ended June 30,
|
|
|
2010
|
|
2009
|
Total property, plant and equipment additions from reportable segments
|
|
$
|
839,361
|
|
$
|
882,244
|
Unallocated property, plant and equipment additions
|
|
|
89,437
|
|
|
56,604
|
|
|
|
|
|
|
|
|
|
|
Total property, plant and equipment additions
|
|
$
|
928,798
|
|
$
|
938,848
|
|
|
|
|
|
|
|
Following is a reconciliation of the total assets from
the Companys reportable segments to the total assets of the Company:
|
|
|
|
|
|
|
|
|
June 30, 2010
|
|
December 31, 2009
|
Total assets from reportable segments
|
|
$
|
154,413,311
|
|
$
|
166,807,177
|
Unallocated cash and cash equivalents, including restricted cash
|
|
|
37,380,846
|
|
|
26,105,559
|
Unallocated prepaid expenses and other assets
|
|
|
5,457,895
|
|
|
3,733,537
|
Deferred income taxes
|
|
|
346,721
|
|
|
346,721
|
Current and noncurrent assets of discontinued operations
|
|
|
|
|
|
1,430,898
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
197,598,773
|
|
$
|
198,423,892
|
|
|
|
|
|
|
|
On
August 16, 2010, the Company, FLIR Systems, Inc., an Oregon corporation (Parent), and Indicator Merger Sub, Inc., a Delaware corporation and wholly owned Subsidiary of Parent (Merger Sub) entered into an Agreement and
Plan of Merger (the Merger Agreement).
Pursuant to the Merger Agreement, and upon the terms and subject to the
conditions described therein, Merger Sub has agreed to commence a tender offer (the Offer) for all of the Companys outstanding shares of common stock, par value $0.001 per share (the Company Common Stock), at a purchase
price of $7.55 per share net to the seller in cash, without interest (less any applicable withholding taxes) (the Offer Price). The Offer will expire on the twentieth business day from and including the commencement date unless extended
in accordance with the terms of the Merger Agreement and applicable law. The obligation of Parent and Merger Sub to consummate the Offer is subject to customary conditions, including that a majority of the outstanding shares of Company Common Stock
(determined on a fully diluted basis), shall have been validly tendered and not withdrawn prior to the expiration of the Offer.
Upon successful completion of the Offer, and subject to the terms and conditions of the Merger Agreement, Merger Sub will be merged with
and into the Company, with the Company surviving as a wholly owned subsidiary of Parent (the Merger). At the effective time of the Merger, each issued and outstanding share of Company Common Stock, other than shares held in the treasury
of the Company or owned by Parent, Merger Sub or any of their subsidiaries, and shares of Company Common Stock held by stockholders who properly demand appraisal rights, will be converted into the right to receive the Offer Price. Vested equity
awards will be cancelled in the Merger and converted into the right to receive cash as determined under the Merger Agreement. Unvested equity awards will be converted to a similar right to acquire the number of shares of Parents common stock
as determined under the Merger Agreement.
The Merger Agreement and several related agreements are described in, and copies of
such agreements are filed as exhibits with, a Current Report on Form 8-K filed by the Company on August 16, 2010.
15
Item 2.
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the
consolidated financial statements and related notes included elsewhere in this report. This discussion contains forward-looking statements that involve risk and uncertainties. Our actual results could differ materially from those discussed below.
Factors that could cause or contribute to these differences include, but are not limited to, those identified below, and those discussed in the section entitled Risk Factors included elsewhere in this report.
Forward-looking Statements
In this Quarterly Report on Form 10-Q, ICx Technologies, Inc. and its consolidated subsidiaries are referred to as ICx,
we, us, or our. This report on Form 10-Q includes forward-looking statements. All statements other than statements of historical facts contained in this Form 10-Q, including statements regarding our future results
of operations and financial position, business strategy and plans and our objectives for future operations, are forward-looking statements. We attempt, whenever possible, to identify these forward-looking statements by words such as may,
will, could, should, expect, intend, plan, anticipate, believe, estimate, predict, potential or continue,
and similar expressions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business
strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions. In light of these risks, uncertainties and assumptions, the
forward-looking events and circumstances discussed in this Form 10-Q may not occur, and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.
You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations
reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur. Moreover,
neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements. We undertake no obligation to update publicly any forward-looking statements for any reason after the date of this Form 10-Q
to conform these statements to actual results or to changes in our expectations.
You should read this Form 10-Q and
the documents that we reference in this Form 10-Q and have filed with the SEC with the understanding that our actual future results, levels of activity, performance and events and circumstances may be materially different from what we expect.
Overview
We are a leader in the development and integration of advanced sensor technologies for homeland security, force protection and commercial
applications. Our proprietary sensors detect and identify chemical, biological, radiological, nuclear and explosive threats, and deliver superior awareness and actionable intelligence for wide-area surveillance, intrusion detection and facility
security. By leveraging our technical expertise, ICx pioneers the integration of these advanced sensors into effective security and commercial solutions. We were incorporated in 2003, and our business was primarily formed through a series of
complementary acquisitions in 2005.
We operate our business in three reportable segments: Detection, Surveillance and
Solutions. Our Detection segment develops products and conducts research and development in the areas of chemical, biological, radiation, nuclear and explosives detection. Our Surveillance segment provides products and services for perimeter
security and wide-area surveillance. Our Solutions segment integrates our technologies and products to provide single source solutions that address a broad range of customer-specific security and surveillance needs.
Our direct customers include federal agencies such as the U.S. Department of Homeland Security, U.S. Customs & Border Protection
(Border Patrol) and the U. S. Transportation Security Administration, as well as various state and local governments and agencies, including the New York Police Department and the Port of Long Beach. We also provide products, components and
sub-systems to leading integrators in the security and defense industries who either resell our products or integrate them into comprehensive security installations for their end customers. The value-added-resellers and system integrators that we
sell products to include The Boeing Company, Honeywell International, Inc., Northrop Grumman Corp., Raytheon Company, SAIC, Inc. and Thermo Fisher Scientific, Inc. We also sell to military customers such as the U.S. Department of Defense, the U.S.
Air Force, the U.S. Marines and the U.S. Army. We also sell to private sector customers such as Federal Express Corporation, The Walt Disney Company, Chevron, Dow Chemical Company, Solvay Chemicals, Dallas Water Utilities, Pantex, Magal/Senstar,
Johnson Controls, the Civil Police of Rio de Janeiro, Perth Airport and two international airports serving the city of Houston, Texas and surrounding communities. Due to the breadth and diverse nature of our product and technology portfolio and our
ability to deliver solutions for a comprehensive range of critical security applications, the future success of our business is not dependent upon a single product, technology, customer or government program.
16
Our objective is to grow our business organically and through the acquisition of
complementary companies. To achieve this objective, we plan to:
|
|
|
continue to develop and acquire next generation technologies to strengthen our technological leadership position;
|
|
|
|
continue converting our innovative technologies in our research and development pipeline into new products and platforms to pursue new market
opportunities;
|
|
|
|
continue to provide integrated, single-source solutions that prevent a broad range of critical security threats;
|
|
|
|
continue to extend our geographic reach and market penetration;
|
|
|
|
leverage our existing intellectual property and infrastructure to expand our addressable markets and further accelerate our growth; and
|
|
|
|
grow our business relationships and product offerings by acquiring select companies and assets that enhance our technology leadership, broaden our
product offerings or expand our customer relationships.
|
Current Events
On August 16, 2010, we entered into an Agreement and Plan of Merger (the Merger Agreement) with FLIR Systems, Inc. and
Indicator Merger Sub, Inc. whereby Indicator Merger Sub, Inc. has agreed to commence a tender offer for all of the Companys outstanding shares of common stock at a purchase price of $7.55 per share. For additional information about the Merger
Agreement, refer to Note 10 of the Notes to the Consolidated Financial Statements in Item 1 Financial Statements.
Key Business Metrics
We monitor a number of key metrics to help forecast growth, establish budgets, measure the effectiveness of our selling and marketing
efforts, accelerate product development and measure operational effectiveness.
Product Revenue
. We were
incorporated in 2003, and our business was formed through a series of complementary acquisitions in 2005. Many of these businesses were in the early stages of transitioning advanced technologies into products, integrating solutions and developing
marketing and sales strategies. Beginning in 2005, we began to develop a more comprehensive selling and marketing structure to support our business segments. A key measure of our success is product revenue growth. Because our financial statements
present the results of operations of acquired businesses from the date of acquisition, during periods in which we have significant acquisitions, we monitor revenue growth by comparing current periods against pro forma results of operations as if we
had acquired the businesses as of the beginning of the prior comparable periods.
Product Gross Profit
. Our goal
is to grow product gross profit to increase the profitability of our business. Because of the emerging stage of many of our products, gross profit has been inconsistent and unpredictable. Key factors affecting our gross profit are volume pricing,
warranty costs, product mix, economies of scale and the ability to absorb fixed costs. Our ability to effectively monitor and manage these factors is important in attaining business profitability.
Research and Development.
Our primary source of research and development funds is through direct contracts with the U.S.
government and subcontracts with other commercial entities that contract with the U.S. government. We refer to this externally funded research and development as contract research and development. We also invest in research and development
activities using our own internal funds in an effort to accelerate new and enhanced product offerings and to expand our technological leadership. We refer to this internally funded research and development as internal research and development. One
of our key objectives is to expand our market share by continuing to convert advanced technologies into products and single-source integrated solutions. Accordingly, we intend to continue our research and development activities through both contract
research and development and internal research and development programs to advance our technologies and release new products and provide integrated solutions.
Description of Certain Factors Affecting our Revenue, Gross Profit and Operating Expenses
Product Revenue and Gross Profit.
In our Detection segment, we primarily derive product revenue through the sale of a variety of
chemical, biological, radiological, nuclear and explosive sensor products. In our Surveillance segment, we primarily derive product revenue from the sale of our integrated towers, our thermal imaging cameras and radar products. In our Solutions
segment, we primarily derive product revenue from the sale of our command and control advanced software products.
Our gross profit on product sales is primarily impacted by the relative mix of higher and lower margin
products, the efficiency and scale of our manufacturing operations, the relative mix of direct sales to end customers and sales through original equipment manufacturers and other resellers, and the relative mix of products that are manufactured by
us and those that are manufactured by third parties. We typically earn a higher gross profit on products that we sell directly to end customers and on products that we manufacture ourselves. Because of the emerging stage of many of our products and
our plans for new product introductions, we anticipate that our gross profit may continue to be impacted in the future by fixed overhead costs related to the expansion of our manufacturing capacity. As a result of these factors, our product gross
profit has been inconsistent and may continue to be inconsistent for the foreseeable future.
Contract Research and
Development Revenue and Gross Profit
. We earn contract research and development revenue by performing research and development primarily under contracts that we enter into directly with the U.S. government or as subcontractors to other
commercial entities that contract with the U.S. government. Most of our research and development contracts are either based on our cost plus a fixed fee which is subject to a dollar cap, or are fixed price. We account for earnings under long-term
contracts using the percentage-of-completion method of accounting. See Critical Accounting Policies and EstimatesRevenue RecognitionContract Research and Development and Services.
17
Gross profit on contract research and development revenue is primarily impacted by the mix
of contract type and the estimates inherent in recognizing revenue using the percentage-of-completion method of accounting. Our fee, or profit, under cost plus fixed fee contracts is based on a percentage of contract spending and is subject to a
cap. On a fixed price contract, we are generally only required to incur the costs necessary to complete the contract. The degree of accuracy in determining the costs to complete our deliverables may impact gross profit under both contract types.
Service and Other Revenue and Gross Profit
. We derive service and other revenue from three sources:
(i) custom product design and development services, (ii) project management and technology integration services and (iii) training, installation and warranty contracts. Revenue from custom product design and development services and
project management and technology integration services is derived from our Surveillance and Solutions segments, while training, installation and warranty contract revenues are derived from all three of our segments. A significant portion of our
revenue from project management and technology integration services is derived from customers in the transportation industry. Most of our custom product design and development service contracts and project management and integration service
contracts are for a fixed price and revenue is recognized under the percentage-of-completion method. Revenue from training and installation contracts is recognized upon completion of services. Revenue under product maintenance and extended warranty
contracts is generally recognized over the requisite service period. See Critical Accounting Policies and EstimatesRevenue RecognitionService and Other.
Gross profit under fixed price custom product design and development service contracts and project management and integration service
contracts is primarily impacted by the degree of accuracy in estimating the costs to complete our deliverables under those contracts. Because our product training, installation, maintenance and warranty contracts are generally based on standard
services, we have historically recognized higher margins on those services than on our project management and integration services.
General and Administrative Expenses
. General and administrative expenses represent the costs and expenses of managing and
supporting our operations. In 2008, our general and administrative expenses began to decline as a result of our focused effort to eliminate redundancies in our operations, primarily through reductions in personnel. In 2009, our general and
administrative expenses decreased compared to previous years as we continued to gain efficiencies in the overall integration of our business units and continued our efforts to control costs. In 2010, we expect that our general and administrative
expenses will stabilize or grow slightly compared to 2009.
Selling and Marketing Expenses
. Beginning in 2006
through the end of 2008, we increased our spending on selling, marketing and other related business development matters to support our early stage products and emerging technologies and to support anticipated future growth in our business. With the
downturn of the economy in late 2008 and the continued uncertainty in 2009, we took steps to scale back certain aspects of our commercial selling and marketing activities. Accordingly, during 2009 our selling and marketing expense decreased compared
to previous years and we expect that in 2010 our selling and marketing costs will stabilize or grow slightly compared to 2009.
Research and Development
. In addition to external funding we receive and record as revenue from the U.S. government and
other commercial entities for contract research and development activities, we also invest in research and development activities using our own internal funds in an effort to provide additional means for accelerating the development of new and
enhanced product offerings and to expand our technological leadership. The costs of our internally funded research and development are included in our operating expenses. Beginning in 2006 and throughout most of 2008, we increased our spending on
internally funded research and development activities and the integration of products and technologies among our reportable segments. One of our key objectives is to expand our market share by continuing to convert advanced technologies into
products and single-source integrated solutions. In 2008, we significantly increased our externally funded research and development and have continued to secure additional funding in 2009. Accordingly, our internal research and development expense
declined in 2009 as we utilized our technical resources on externally funded research and development activities, and we expect that in 2010 internal research and development expense will increase compared to 2009.
18
Results of Operations - Comparison of the Three Months Ended June 30, 2010 and 2009
The following table presents selected summarized consolidated financial information for the three months ended
June 30, 2010 and 2009.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
2010
|
|
|
2009
|
|
|
(dollars in thousands)
(unaudited)
|
|
Product revenue
|
|
$
|
19,584
|
|
|
$
|
22,123
|
|
Gross profit %
|
|
|
55.9
|
%
|
|
|
51.0
|
%
|
Contract research and development revenue
|
|
$
|
10,147
|
|
|
$
|
12,692
|
|
Gross profit %
|
|
|
26.7
|
%
|
|
|
24.6
|
%
|
Service and other revenue
|
|
$
|
6,248
|
|
|
$
|
10,173
|
|
Gross profit %
|
|
|
35.5
|
%
|
|
|
27.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
35,979
|
|
|
$
|
44,988
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit %
|
|
|
44.1
|
%
|
|
|
38.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) excluding depreciation and amortization
|
|
$
|
(1,883
|
)
|
|
$
|
1,588
|
|
Depreciation and amortization
|
|
|
1,872
|
|
|
|
2,996
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
$
|
(3,755
|
)
|
|
$
|
(1,408
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
$
|
(3,679
|
)
|
|
$
|
(1,184
|
)
|
Loss from discontinued operations, net
|
|
|
(38
|
)
|
|
|
(87
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(3,717
|
)
|
|
$
|
(1,271
|
)
|
|
|
|
|
|
|
|
|
|
Product Revenue and Gross Profit
. Product revenue decreased $2.5 million, or 11%, to $19.6
million in the second quarter of 2010 from $22.1 million in the second quarter of 2009. The decrease primarily resulted from reduced sales of products in our Surveillance segment which were partially offset by increased product sales in our
Detection segment, as discussed below in Surveillance Segment Comparison of the Three Months Ended June 30, 2010 and 2009 and in Detection Segment Comparison of the Three Months Ended June 30, 2010 and
2009. Gross profit as a percentage of product revenue was 55.9% and 51.0% in the second quarters of 2010 and 2009, respectively. The increase was due to a higher portion of 2010 product revenue from Detection products and camera and radar
products which typically carry higher gross margins than our platform products. In 2009, a higher portion of our product revenue was derived from platform sales.
Contract Research and Development Revenue and Gross Profit
. Contract research and development revenue decreased $2.6 million,
or 20%, to $10.1 million in the second quarter of 2010 from $12.7 million in the second quarter of 2009. In our Detection segment, contract research and development revenue decreased $2.9 million in the second quarter of 2010 compared to the same
period last year primarily due to funding delays under our significant long-term contract award for the development of a nuclear and chemical reconnaissance system (J2) and funding delays in our explosives and radiation groups. The
decreased revenue from Detection was partially offset by a $0.3 million increase in contract research and development revenue in our Surveillance segment in the second quarter of 2010 compared to the same quarter in 2009. Gross profit as a
percentage of contract research and development revenue was 26.7% and 24.6% in the second quarters of 2010 and 2009, respectively. The increase in gross profit is primarily due to the mix of contract types and the estimates inherent in the
recognition of revenue and costs under the percentage-of-completion method.
Service and Other Revenue and Gross
Profit.
Service and other revenue decreased $4.0 million, or 39%, to $6.2 million in the second quarter of 2010 from $10.2 million in the second quarter of 2009. Service and other revenue in our Surveillance segment accounted for approximately
$3.3 million of the decrease, the majority of which relates to the delivery of custom platforms under a contract that ended in the second quarter of 2009. In our Solutions segment, service and other revenue accounted for approximately $1.1 million
of the revenue decrease, the majority of which was related to fewer contracts in our transportation group. Gross profit as a percentage of service and other revenue was 35.5% and 27.9% in the second quarters of 2010 and 2009, respectively. Gross
profit increased in the second quarter of 2010 primarily due to the mix of contract types and the estimates inherent in recognizing revenue and costs under the percentage-of-completion method of accounting.
19
Operating Loss
. Operating loss increased $2.4 million, or 171%, to $3.8 million
in the second quarter of 2010 from $1.4 million in the second quarter of 2009. The increase is primarily related to a decrease in gross profit dollars of $1.4 million over the comparable quarter and a $1.0 million increase in operating expenses. The
decrease in gross profit resulted from lower revenue. The increase in operating expenses primarily resulted from increased spending on internal research and development projects. Operating income (loss) excluding depreciation and amortization is a
non-GAAP financial measure that is derived by reducing our operating loss by depreciation and amortization. Amortization primarily represents costs associated with our business acquisitions that do not correspond to an outlay of current and future
cash flow. Accordingly, we believe operating income (loss) excluding depreciation and amortization is a more meaningful measure of our recurring operations and an indicator of our working capital requirements. Operating income (loss) excluding
depreciation and amortization decreased $3.5 million, or 219%, to a loss of $1.9 million in the second quarter of 2010 from income of $1.6 million in the second quarter of 2009 primarily due to lower revenue and gross profit and increased spending
on internal research and development.
Discontinued Operations
. In the second quarter of 2010, we completed the sale of
PureTech. In conjunction with this sale, we recognized a loss on the sale of discontinued operations of $28,695. Additionally, we recognized a loss on discontinued operations of $8,803 and $86,957 in the three months ended June 30, 2010 and
2009, respectively.
Net Loss
. Net loss increased $2.4 million, or 185%, to $3.7 million in the second quarter of
2010 from $1.3 million in the second quarter of 2009 primarily due to decreased revenue and gross profit and increased operating expenses as explained in the Operating Loss section above.
Reportable Segments
We operate our business in three reportable segments: Detection, Surveillance and Solutions. Our Detection segment develops products and
conducts research and development in the areas of chemical, biological, radiation, nuclear and explosives detection. Our Surveillance segment provides products and services for perimeter security and wide area surveillance. Our Solutions segment
integrates our technologies and products to provide single-source solutions that address a broad range of customer specific security and surveillance needs.
Detection SegmentComparison of the Three Months Ended June 30, 2010 and 2009
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
2010
|
|
|
2009
|
|
|
(dollars in thousands)
(unaudited)
|
|
Revenue and gross profit %
|
|
|
|
|
|
|
|
|
Product revenue
|
|
$
|
11,912
|
|
|
$
|
10,886
|
|
Contract research and development revenue
|
|
|
9,706
|
|
|
|
12,573
|
|
Service and other revenue
|
|
|
1,300
|
|
|
|
865
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
22,918
|
|
|
$
|
24,324
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit %
|
|
|
42.1
|
%
|
|
|
40.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
$
|
(1,166
|
)
|
|
$
|
(556
|
)
|
|
|
|
|
|
|
|
|
|
Product Revenue
. Product revenue increased $1.0 million, or 9%, to $11.9 million in the second
quarter of 2010 from $10.9 million in the second quarter of 2009. The majority of the increase resulted from more sales of our radiation detection products.
Contract Research and Development Revenue
. Contract research and development revenue in the second quarter of 2010 decreased
$2.9 million, or 23%, to $9.7 million in the second quarter of 2010 from $12.6 million in the second quarter of 2009. The decrease is primarily due to delays in funding under our significant long-term contract award for the development of a nuclear
and chemical reconnaissance system (J2) and delays in funding in our explosives and radiation groups.
Service
and Other Revenue
. Service and other revenue in the second quarter of 2010 increased $0.4 million, or 44%, to $1.3 million in the second quarter of 2010 from $0.9 million in the second quarter of 2009.
Gross Profit.
Gross profit as a percentage of revenue increased from 40.2% in the second quarter of 2009 to 42.1% in the second
quarter of 2010 primarily due to a higher percentage of revenue from product sales which carry higher gross margins than revenue from contract research and development projects.
Operating Loss
. Operating loss increased $0.6 million, or 100%, to $1.2 million in the second quarter of 2010 from $0.6
million in the second quarter of 2009. A decrease in gross profit of $0.1 million over the comparable quarter and a $0.5 million increase in operating expenses were the primary factors for the increased operating loss. The decrease in gross profit
is due to lower revenue. The increase in operating expenses primarily resulted from more spending on internal research and development, and higher selling and marketing expenses due to more bid and proposal activity and an increase in international
selling and marketing activities.
20
Surveillance SegmentComparison of the Three Months Ended June 30, 2010 and
2009
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
2010
|
|
|
2009
|
|
|
(dollars in thousands)
(unaudited)
|
|
Revenue and gross profit %
|
|
|
|
|
|
|
|
|
Product revenue
|
|
$
|
5,912
|
|
|
$
|
9,415
|
|
Contract research and development revenue
|
|
|
441
|
|
|
|
119
|
|
Service and other revenue
|
|
|
610
|
|
|
|
3,855
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
6,963
|
|
|
$
|
13,389
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit %
|
|
|
57.0
|
%
|
|
|
35.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
$
|
(1,708
|
)
|
|
$
|
(831
|
)
|
|
|
|
|
|
|
|
|
|
Product Revenue
. Product revenue decreased $3.5 million, or 37%, to $5.9 million in the second
quarter of 2010 from $9.4 million in the second quarter of 2009. The decrease is primarily due to lower revenue from platforms. Customer orders for platforms are typically comprised of a large number of units in a single order which can result in
significant variability in quarterly revenue comparisons which depend on the timing of production and delivery cycles. In 2009, we had two large orders for platforms that we delivered in the second quarter; whereas at the end of our second quarter
of 2010, we have more platform orders in backlog than in 2009. At June 30, 2010, we had $25.2 million of platforms in backlog compared to $3.4 million in backlog at June 30, 2009. We expect to deliver the $25.2 million of platforms in
backlog during the second half of 2010.
Contract Research and Development Revenue
. Contract research and
development revenue increased $0.3 million, or 300%, to $0.4 million in the second quarter of 2010 from $0.1 million in the second quarter of 2009.
Service and Other Revenue
. Service and other revenue in the second quarter of 2010 decreased $3.3 million, or 85%, to $0.6
million in the second quarter of 2010 from $3.9 million in the second quarter of 2009. The decrease resulted from the delivery of integrated platforms under a significant custom development contract that ended in the second quarter of 2009. Most of
our platform orders have been and are expected to continue under contracts for fixed price unit deliveries rather than custom development contracts. Accordingly, we expect the majority of our platform deliveries to be reported as product revenue in
future periods.
Gross Profit.
Gross profit as a percentage of revenue was 57.0% and 35.8% in the second quarters of
2010 and 2009, respectively. The increase in gross profit resulted from a higher percentage of revenue from camera and radar sales which carry higher gross margins than revenue from platforms.
Operating Loss
. Operating loss increased $0.9 million, or 113%, to $1.7 million in the second quarter of 2010 from $0.8
million in the second quarter of 2009. The higher operating loss resulted primarily from a $0.8 million decrease in gross profit due to lower revenues. Total operating expenses in the second quarter of 2010 remained flat compared to the same period
in 2009 at approximately $5.7 million.
21
Solutions SegmentComparison of the Three Months Ended June 30, 2010 and 2009
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(dollars in thousands)
(unaudited)
|
|
Revenue and gross profit %
|
|
|
|
|
|
|
|
|
Product revenue
|
|
$
|
1,746
|
|
|
$
|
1,831
|
|
Contract research and development revenue
|
|
|
59
|
|
|
|
121
|
|
Service and other revenue
|
|
|
4,516
|
|
|
|
5,624
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
6,321
|
|
|
$
|
7,576
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit %
|
|
|
35.7
|
%
|
|
|
35.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
$
|
(104
|
)
|
|
$
|
168
|
|
|
|
|
|
|
|
|
|
|
Product Revenue
. Product revenue decreased $0.1 million, or 6%, to $1.7 million in the second
quarter of 2010 from $1.8 million in the second quarter of 2009.
Service and Other Revenue
. Service and other revenue
decreased $1.1 million, or 20%, to $4.5 million in the second quarter of 2010 from $5.6 million in the second quarter of 2009. The decrease was primarily attributable to fewer contracts in our intelligent transportation group.
Gross Profit.
Gross profit as a percentage of revenue was 35.7% and 35.4% in the second quarters of 2010 and 2009, respectively.
Operating (Loss) Income
. Operating income of $0.2 million for the second quarter of 2009, decreased $0.3 million,
or 150%, to an operating loss of $0.1 million in the second quarter of 2010 due to a $0.4 million reduction in gross profit which was offset by a $0.1 million reduction in sales and marketing expenses.
Total 2010 and 2009 revenues included in the preceding tables include $0.2 million and $0.3 million of intersegment revenues,
respectively. Refer to Note 9 of the Notes to Consolidated Financial Statements for a reconciliation of total revenue to revenues from external customers.
Reconciliation of Reportable Segment Operating Losses to the Consolidated Loss from Continuing Operations
The following tables provides a reconciliation of operating losses from reportable segments to our consolidated net loss from continuing
operations for the three months ended June 30, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(dollars in thousands)
(unaudited)
|
|
Reconciliation of segment operating losses to consolidated loss from continuing operations
|
|
|
|
|
|
|
|
|
Segment operating losses
|
|
$
|
(2,978
|
)
|
|
$
|
(1,219
|
)
|
Unallocated depreciation and amortization expenses
|
|
|
(160
|
)
|
|
|
(189
|
)
|
Unallocated general and administrative expenses
|
|
|
(617
|
)
|
|
|
|
|
Interest expense
|
|
|
(17
|
)
|
|
|
(37
|
)
|
Interest income
|
|
|
15
|
|
|
|
39
|
|
Other nonoperating gains, net
|
|
|
587
|
|
|
|
344
|
|
Income tax expense
|
|
|
(509
|
)
|
|
|
(122
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated loss from continuing operations
|
|
$
|
(3,679
|
)
|
|
$
|
(1,184
|
)
|
|
|
|
|
|
|
|
|
|
22
Results of OperationsComparison of the Six Months Ended June 30, 2010 and 2009
The following table presents selected summarized consolidated financial information for the six months ended June 30,
2010 and 2009.
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(dollars in thousands)
(unaudited)
|
|
Product revenue
|
|
$
|
41,298
|
|
|
$
|
38,444
|
|
Gross profit %
|
|
|
58.8
|
%
|
|
|
50.7
|
%
|
Contract research and development revenue
|
|
$
|
22,308
|
|
|
$
|
23,974
|
|
Gross profit %
|
|
|
26.5
|
%
|
|
|
25.4
|
%
|
Service and other revenue
|
|
$
|
12,942
|
|
|
$
|
29,961
|
|
Gross profit %
|
|
|
31.6
|
%
|
|
|
28.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
76,548
|
|
|
$
|
92,379
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit %
|
|
|
44.8
|
%
|
|
|
36.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) excluding depreciation and amortization
|
|
$
|
(560
|
)
|
|
$
|
1,312
|
|
Depreciation and amortization
|
|
|
3,825
|
|
|
|
6,019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
$
|
(4,385
|
)
|
|
$
|
(4,707
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
$
|
(4,358
|
)
|
|
$
|
(4,505
|
)
|
Loss on sale of discontinued operations, net
|
|
|
(351
|
)
|
|
|
(241
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(4,709
|
)
|
|
$
|
(4,746
|
)
|
|
|
|
|
|
|
|
|
|
Product Revenue and Gross Profit
. Product revenue increased $2.9 million, or 8%, to $41.3
million in the six months ended June 30, 2010 from $38.4 million in the six months ended June 30, 2009. The increase primarily resulted from increased sales of products in our Detection segment which was partially offset by decreased
product sales in our Surveillance and Solutions segments, as discussed below in Detection Segment Comparison of the Six Months Ended June 30, 2010 and 2009, in Surveillance Segment Comparison of the Six Months
Ended June 30, 2010 and 2009, and in Solutions Segment Comparison of the Six Months Ended June 30 2010 and 2009. Gross profit as a percentage of product revenue was 58.8% and 50.7% in the six months ended
June 30, 2010 and 2009, respectively. The increase was due to a higher portion of 2010 revenue from Detection product sales and Surveillance radar and camera sales which carry higher margins than revenue from Surveillance platform sales. In
2009, a higher proportion of product revenue came from Surveillance platform sales.
Contract Research and Development
Revenue and Gross Profit
. Contract research and development revenue decreased $1.7 million, or 7%, to $22.3 million in the six months ended June 30, 2010 from $24.0 million in the six months ended June 30, 2009. In our Detection
segment, contract research and development revenue decreased $2.4 million in the six months ended June 30, 2010 compared to the same period last year. The decrease is primarily due to funding delays under our significant long-term contract
award for the development of a nuclear and chemical reconnaissance system (J2) and funding delays in our explosives and radiation groups. The decreased revenue from Detection was offset by a $0.7 million increase in contract research and
development revenue in our Surveillance segment in the six months ended June 30, 2010 compared to the same period in 2009. Gross profit as a percentage of contract research and development revenue was 26.5% and 25.4% in the six months ended
June 30, 2010 and 2009, respectively. The increase in gross profit is primarily due to the mix of contract types and the estimates inherent in the recognition of revenue and costs under the percentage-of-completion method.
Service and Other Revenue and Gross Profit.
Service and other revenue decreased $17.1 million, or 57%, to $12.9 million in the six
months ended June 30, 2010 from $30.0 million in the six months ended June 30, 2009. Service and other revenue in our Surveillance segment accounted for approximately $13.3 million of the decrease, the majority of which was due to the
final the delivery of custom platforms under a contract that ended in the second quarter of 2009. In our Solutions segment, service and other revenue accounted for approximately $4.5 million of the revenue decrease, the majority of which relates to
fewer contracts in our transportation group. Gross profit as a percentage of service and other revenue was 31.6% and 28.1% in the six months ended June 30, 2010 and 2009, respectively. Gross profit increased in the six months ended
June 30, 2010 primarily due to the mix of contract types and the estimates inherent in recognizing revenue and costs under the percentage-of-completion method of accounting.
23
Operating Loss
. Operating loss decreased $0.3 million, or 6%, to $4.4 million in
the six months ended June 30, 2010 from $4.7 million in the six months ended June 30, 2009. The operating loss improvement is primarily related to an increase in gross profit dollars of $0.3 million over the comparable six month period.
The increase in gross profit resulted from higher gross margin percentages due to the mix of revenue being more heavily weighted to products sales than revenue from contract research and development and service and other contracts. Operating income
(loss) excluding depreciation and amortization is a non-GAAP financial measure that is derived by reducing our operating loss by depreciation and amortization. Amortization primarily represents costs associated with our business acquisitions that do
not correspond to an outlay of current and future cash flow. Accordingly, we believe operating income (loss) excluding depreciation and amortization is a more meaningful measure of our recurring operations and an indicator of our working capital
requirements. Operating income (loss) excluding depreciation and amortization decreased $1.9 million, or 146%, to a loss of $0.6 million in the six months ended June 30, 2010 from income of $1.3 million in the six months ended June 30,
2009 primarily due to increased spending on internal research and development.
Loss from Continuing
Operations
. Our loss from continuing operations decreased $0.1 million, or 2%, to $4.4 million in the six months ended June 30, 2010 from $4.5 million in the six months ended June 30, 2009. Even though total revenue declined,
gross profit improved slightly due to the mix of revenue being more heavily weighted to product sales which carry higher margins than revenue from contract research and development and service and other contracts, and total operating expenses for
the six months ended June 30, 2010 were flat compared the same period last year.
Discontinued Operations
. In the
second quarter of 2010, we completed the sale of PureTech. In conjunction with this sale, we recognized a loss on the sale of discontinued operations of $28,695. Additionally, we recognized a loss on discontinued operations of $0.3 million and $0.2
million in the six months ended June 30, 2010 and 2009, respectively.
Net Loss
. Net loss was $4.7 million
for both the six month periods ended June 30, 2010 and 2009. Even though total revenue declined, gross profit improved slightly due to the mix of revenue being more heavily weighted to product sales which carry higher margins than revenue from
contract research and development and service and other contracts, and total operating expenses for the six months ended June 30, 2010 were flat compared the same period last year.
Detection SegmentComparison of the Six Months Ended June 30, 2010 and 2009
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(dollars in thousands)
(unaudited)
|
|
Revenue and gross profit %
|
|
|
|
|
|
|
|
|
Product revenue
|
|
$
|
26,321
|
|
|
$
|
20,181
|
|
Contract research and development revenue
|
|
|
21,296
|
|
|
|
23,657
|
|
Service and other revenue
|
|
|
2,459
|
|
|
|
1,683
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
50,076
|
|
|
$
|
45,521
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit %
|
|
|
44.6
|
%
|
|
|
40.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
$
|
542
|
|
|
$
|
(3,296
|
)
|
|
|
|
|
|
|
|
|
|
Product Revenue
. Product revenue increased $6.1 million, or 30%, to $26.3 million in the six
months ended June 30, 2010 from $20.2 million in the six months ended June 30, 2009. The increase primarily resulted from increased sales of our explosive and radiation detection products.
Contract Research and Development Revenue
. Contract research and development revenue in the six months ended June 30,
2010 decreased $2.4 million, or 10%, to $21.3 million in the six months ended June 30, 2010 from $23.7 million in the six months ended June 30, 2009. The decrease is primarily due to funding delays under our significant long-term contract
award for the development of a nuclear and chemical reconnaissance system (J2) and funding delays in our explosives and radiation groups.
Service and Other Revenue
. Service and other revenue in the six months ended June 30, 2010 increased $0.8 million, or
47%, to $2.5 million in the six months ended June 30, 2010 from $1.7 million in the six months ended June 30, 2009.
Gross Profit.
Gross profit as a percentage of revenue increased from 40.2% in the six months ended June 30, 2009 to 44.6% in
the six months ended June 30, 2010 primarily due to a higher portion of revenue from product sales which carry higher gross margins than revenue from contract research and development contracts.
Operating Income (Loss)
. Operating income increased $3.8 million, or 115%, to $0.5 million in the six months ended
June 30, 2010 from a loss of $3.3 million in the six months ended June 30, 2009. An increase in gross profit of $4.0 million over the comparable period was offset by $0.2 million in increased operating expenses. The increase in gross
profit is due to an increase in total revenue and higher gross profit percentage due to a higher portion of revenue from product sales which carry higher gross margins than revenue from contract research and development.
24
Surveillance SegmentComparison of the Six Months Ended June 30, 2010 and 2009
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(dollars in thousands)
(unaudited)
|
|
Revenue and gross profit %
|
|
|
|
|
|
|
|
|
Product revenue
|
|
$
|
11,955
|
|
|
$
|
14,526
|
|
Contract research and development revenue
|
|
|
1,012
|
|
|
|
317
|
|
Service and other revenue
|
|
|
1,272
|
|
|
|
14,625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
14,239
|
|
|
$
|
29,468
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit %
|
|
|
55.5
|
%
|
|
|
34.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
$
|
(3,071
|
)
|
|
$
|
(1,234
|
)
|
|
|
|
|
|
|
|
|
|
Product Revenue
. Product revenue decreased $2.5 million, or 17%, to $12.0 million in the six
months ended June 30, 2010 from $14.5 million in the six months ended June 30, 2009. The decrease is primarily due to lower revenue from platforms. Customer orders for platforms are typically comprised of a large number of units in a
single order which can result in significant variability in revenue comparisons which depend on the timing of production and delivery cycles. In 2009, we had more significant platform orders that we delivered in the first six months; whereas at the
end of the first six months of 2010, we have more platform orders in backlog than in 2009. At June 30, 2010, we had $25.2 million of platforms in backlog compared to $3.4 million in backlog at June 30, 2009. We expect to deliver the $25.2
million of platform backlog during the second half of 2010.
Contract Research and Development Revenue
. Contract
research and development revenue increased $0.7 million, or 233%, to $1.0 million in the six months ended June 30, 2010 from $0.3 million in the six months ended June 30, 2009.
Service and Other Revenue
. Service and other revenue in the six months ended June 30, 2010 decreased $13.3 million, or
91%, to $1.3 million in the six months ended June 30, 2010 from $14.6 million in the six months ended June 30, 2009. The decrease resulted from the delivery of integrated platforms under a significant custom development contract that ended
in the second quarter of 2009. Most of our platform orders have been and are expected to continue to be under contracts for fixed price unit deliveries rather than custom development contracts. Accordingly, we expect the majority of our platform
deliveries to be reported as product revenue in future periods.
Gross Profit.
Gross profit as a percentage of revenue
was 55.5% and 34.1% in the six months ended June 30, 2010 and 2009, respectively. The increase in gross profit resulted from a higher percentage of revenue from camera and radar sales which carry higher gross margins than revenue from
platforms.
Operating Loss
. Operating loss increased $1.9 million, or 158%, to $3.1 million in the six months
ended June 30, 2010 from $1.2 million in the six months ended June 30, 2009. The increased loss resulted from a $2.2 million decrease in gross profit due to lower revenue, which was offset by a $0.3 million decrease in operating expenses.
25
Solutions SegmentComparison of the Six Months Ended June 30, 2010 and 2009
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(dollars in thousands)
(unaudited)
|
|
Revenue and gross profit %
|
|
|
|
|
|
|
|
|
Product revenue
|
|
$
|
3,027
|
|
|
$
|
3,769
|
|
Contract research and development revenue
|
|
|
96
|
|
|
|
156
|
|
Service and other revenue
|
|
|
9,428
|
|
|
|
13,915
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
12,551
|
|
|
$
|
17,840
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit %
|
|
|
32.4
|
%
|
|
|
31.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
$
|
(786
|
)
|
|
$
|
196
|
|
|
|
|
|
|
|
|
|
|
Product Revenue
. Product revenue decreased $0.8 million, or 21%, to $3.0 million in the six
months ended June 30, 2010 from $3.8 million in the six months ended June 30, 2009.
Service and Other
Revenue
. Service and other revenue decreased $4.5 million, or 32%, to $9.4 million in the six months ended June 30, 2010 from $13.9 million in the six months ended June 30, 2009. The decrease was primarily attributable fewer contracts
in our transportation group.
Gross Profit.
Gross profit as a percentage of revenue was 32.4% and 31.7% in the six
months ended June 30, 2010 and 2009, respectively. Gross profit increased primarily because of the mix in service and other contract types and estimates inherent in recognizing revenue under the percentage-of-completion method.
Operating (Loss) Income
. Operating income of $0.2 million for the first six months in 2009 decreased $1.0 million, or 500%,
to a loss of $0.8 million in the first six months of 2010. The operating loss resulted from a $1.6 million decrease in gross profit due to lower revenue, and was offset by a $0.6 million decrease in operating expenses primarily due to lower sales
and marketing expenses.
Total 2010 and 2009 revenues included in the preceding tables include $0.3 million and $0.5 million
of intersegment revenues, respectively. Refer to Note 9 of the Notes to Consolidated Financial Statements for a reconciliation of total revenue to revenues from external customers.
Reconciliation of Reportable Segment Operating Losses to the Consolidated Loss from Continuing Operations
The following tables provides a reconciliation of operating losses from reportable segments to our consolidated net loss from continuing
operations for the six months ended June 30, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(dollars in thousands)
(unaudited)
|
|
Reconciliation of segment operating losses to consolidated loss from continuing operations
|
|
|
|
|
|
|
|
|
Segment operating losses
|
|
$
|
(3,315
|
)
|
|
$
|
(4,334
|
)
|
Unallocated depreciation and amortization expenses
|
|
|
(319
|
)
|
|
|
(373
|
)
|
Unallocated general and administrative expenses
|
|
|
(750
|
)
|
|
|
|
|
Interest expense
|
|
|
(45
|
)
|
|
|
(55
|
)
|
Interest income
|
|
|
27
|
|
|
|
91
|
|
Other nonoperating gains, net
|
|
|
834
|
|
|
|
401
|
|
Income tax expense
|
|
|
(790
|
)
|
|
|
(235
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated loss from continuing operations
|
|
$
|
(4,358
|
)
|
|
$
|
(4,505
|
)
|
|
|
|
|
|
|
|
|
|
26
Liquidity and Capital Resources
As of June 30, 2010, our principal sources of liquidity were cash and cash equivalents, including restricted cash, of $41.6 million
and accounts receivable of $20.7 million. Due to advance payments received from customers for integrated surveillance system projects and our increased focus on collection of accounts receivable and cash management, we experienced positive operating
cash flows in the first half of 2010. We expect our cash flows from operating activities to improve as we continue to emphasize cash collections, prioritize internal research and development spending and increase revenue and gross margins through
product revenue growth. At June 30, 2010, we had firm backlog of approximately $73 million and unfunded backlog of approximately $378 million. At June 30, 2009, we had firm backlog of approximately $73 million and unfunded backlog of
approximately $339 million. We believe our backlog and recent bookings will be sufficient to sustain our liquidity and cash flows in 2010 and for the foreseeable future.
Our primary sources of cash historically have been our initial public offering in November 2007, customer payments for our products and
services, lines of credit and short term loans and proceeds from the sale of businesses. We were incorporated in 2003 and have primarily grown our business organically and through a series of complementary acquisitions in 2005. Many of our
businesses have early stage products and/or emerging products and engage in research and development activities that are funded both through external government contracts and internal resources.
During 2007 and into 2008, we increased our investment in sales, marketing and other related business development structures to support
our early stage products and emerging technologies. Additionally, we increased our investment in internally funded research and development activities and the integration of products and technologies among our operating units. We also increased our
general and administrative expenses in 2008 and 2007 through the use of consultants and other professionals to complete certain accounting and legal functions. Consequently, our cumulative net losses, which amounted to approximately $219.8 million
at June 30, 2010, were expected based on the nature of our business, the early stage of our products and technologies and our ongoing research and development activities.
The following table shows our cash and cash equivalents (including restricted cash) and working capital as of June 30, 2010 and
December 31, 2009:
|
|
|
|
|
|
|
|
|
As of June 30,
2010
|
|
As of December 31,
2009
|
|
|
(dollars in thousands)
|
|
|
(unaudited)
|
|
|
Cash and cash equivalents (including restricted cash)
|
|
$
|
41,605
|
|
$
|
30,722
|
Working capital (excluding assets and liabilities of discontinued operations)
|
|
|
75,490
|
|
|
77,331
|
The following table
shows our cash flows from operating, investing and financing activities for the six months ended June 30, 2010 and 2009.
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(dollars in thousands)
(unaudited)
|
|
Summary of cash flow:
|
|
|
|
|
|
|
|
|
Cash flows provided by (used in) operating activities
|
|
$
|
11,373
|
|
|
$
|
(4,657
|
)
|
Cash flows provided by (used in) investing activities
|
|
|
3,719
|
|
|
|
(939
|
)
|
Cash flows provided by (used in) financing activities
|
|
|
601
|
|
|
|
(385
|
)
|
Effect of foreign exchange rate on cash
|
|
|
(211
|
)
|
|
|
418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net change in cash and cash equivalents
|
|
$
|
15,482
|
|
|
$
|
(5,563
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows provided by (used in) Operating Activities
. Our cash flows from operating activities
are significantly influenced by spending required to support the growth of our business in areas such as research and development, selling and marketing, facilities expansion and certain general and administrative costs. Our operating cash
flows are also influenced by our working capital needs to support growth and fluctuations in inventory, accounts receivable, accounts payable and other current assets and liabilities. The concentration of business with the U.S. government also
impacts operating cash flow, particularly for fixed price contracts in which revenue recognition under the percentage-of-completion method may not coincide with billing. Cash flows provided by (used in) operating activities increased $16.1 million,
or 343%, to inflows of $11.4 million for the six months ended June 30, 2010 from outflows of $4.7 million in the six months ended June 30, 2009 primarily due to a net increase in operating assets and liabilities of $10.7 million. We expect
our cash flows from operating activities to improve as we continue to focus on cash collections and increasing our gross margins through product revenue growth. Additionally, we are shifting the utilization of our technical resources from internal
research and development to externally funded research and development contracts whenever possible.
27
Cash Flows provided by (used in) Investing Activities
. Cash flows from investing
activities primarily relate to cash restrictions, business acquisitions and dispositions and capital expenditures. In the six months ended June 30, 2010, cash flows used in investing activities included $0.9 million of capital expenditures and
$3.9 million of cash that was restricted as to use, offset by the release of $8.5 million of restricted cash. In the six months ended June 30, 2009, cash flows used in investing activities included $0.9 million of capital expenditures. Capital
expenditures for the six months ended June 30, 2010 and 2009 primarily pertain to the expansion of facilities and the acquisition of computer equipment and software and manufacturing and lab equipment.
Cash Flows provided by (used in) Financing Activities
. Net debt issuances (repayments) in the six months ended June 30, 2010
and 2009 were less than ($0.1) million, respectively. Additionally, the Company purchased $0.4 million of treasury stock in each of the six months ended June 30, 2010 and 2009, respectively. These outflows were offset by the receipt of $1.1
million and $0.1 million of proceeds from the issuance of common stock upon the exercise of stock options in the six months ended June 30, 2010 and 2009, respectively.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements
which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of our financial statements requires us to make assumptions and prepare estimates that affect the reported amounts
of assets and liabilities, the disclosure of contingent assets and liabilities and revenues and expenses. We base our estimates on historical experience and various other assumptions that we believe are reasonable; however, actual results may
differ. See Note 1 to our consolidated financial statements contained elsewhere in this report for a discussion of our significant accounting policies.
Revenue Recognition
Products
. A significant portion of our revenue is derived from the sale of our products. We
recognize revenue from product sales when all of the following criteria are met: persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed or determinable, title and risk have passed to the customer and collection from
the customer is reasonably assured, which typically occurs at the time the product is shipped.
Revenue Recognition
Contract Research and Development and Services
. For our contract research and development and contract service revenue we account for sales and earnings under long-term contracts using the percentage-of-completion method of
accounting. Under the percentage-of-completion method, we recognize revenue as the work progresseseither as the products are produced and delivered or as services are rendered, as applicable. We estimate profit as the difference between total
estimated revenue and total estimated cost of a contract and recognize that profit over the remaining life of the contract based on either input (e.g., costs incurred) or output (e.g., units delivered) measures, as appropriate. If a revised estimate
of contract profitability reveals an anticipated loss on the contract, we recognize the loss in the period it is identified.
The percentage-of-completion method of accounting involves the use of various estimating techniques to project costs at completion, and
in some cases includes estimates of recoveries asserted against the customer for changes in specifications. Contract estimates involve various assumptions and projections relative to the outcome of future events over a period of several months or
years, including future labor productivity and availability, the nature and complexity of the work to be performed, the cost and availability of materials, the impact of delayed performance, the availability and timing of funding from the customer
and the timing of product deliveries. These estimates are based on our best judgment. A significant change in one or more of these estimates could affect the profitability of one or more of our contracts. We principally use hours of work and
contract milestones to measure the progress of contract completeness. Certain contracts provide for billings and/or payments that may not coincide with revenue recognition. To the extent that customer billings or payments are in excess of revenues,
we record the excess as deferred revenue. To the extent that we recognize revenue under the percentage-of-completion method prior to billings as defined in the contracts, we record such amounts as unbilled revenue, and we expect them to be collected
within one year of recognition. Substantially all of the unbilled revenue is due from various agencies of the U.S. government.
We review our contract estimates monthly to assess revisions in contract values and estimated costs at completion and reflect changes in
estimates in the current and future periods under the reallocation method.
Revenue Recognition
Service and
Other
. Service and other revenue is primarily derived from custom product design and development services, sales of custom designed products and project management and technology integration services using the percentage-of-completion
method described above. We recognize revenue from product training and installation services when the services are provided. We generally recognize revenue for software maintenance and extended warranty contracts on a straight-line basis over the
life of the contract. Under U.S. GAAP, companies are required to defer all revenue from multiple-element software arrangements if sufficient vendor specific objective evidence does not exist for the allocation of revenue to the various elements of
the arrangement. As a result, we recognize any revenue on multi-year software license agreements ratably over the life of the arrangement.
Goodwill and Identifiable Intangible Assets
. We allocate the cost of business acquisitions to the assets acquired and liabilities
assumed based on their estimated fair values at the date of acquisition (commonly referred to as the purchase price allocation). As part of the purchase price allocations for our business acquisitions, identifiable intangible assets are recognized
as assets apart from goodwill if they arise from contractual or other legal rights, or if they are capable of being separated or divided from the acquired business and sold, transferred, licensed, rented or exchanged. However, we do not recognize
any intangible assets apart from goodwill for the assembled workforces of our business acquisitions.
28
A significant component of the businesses we have acquired historically is the presence of
advanced security products and technologies that the business has developed. The most significant identifiable intangible asset that we have separately recognized is core technologies. Our intellectual property and proprietary rights for these core
technologies are typically protected through a combination of patents, copyrights, trademarks, service marks, trade secrets, confidentiality provisions and licensing arrangements. The fair value for core technologies is determined, as of the date of
acquisition, using the Relief from Royalty Method, an approach commonly used in valuing intangible assets. The basic tenet of the Relief from Royalty Method is that without ownership of the subject intangible asset, the user
of that intangible asset would have to make a stream of payments to the owner of the asset in return for the rights to use that asset. By acquiring the intangible asset, the user avoids these payments. The valuation of the core technologies takes
into consideration the percentage of forecasted revenues directly attributable to the underlying core/developed technologies. The royalty rate was selected based on consideration of several factors including external research, industry practices and
margin considerations. Also factoring into the valuations of core technologies are the estimated technological useful lives of the products that use the technologies and the present value of future cash flows. The discount rates used to determine
the present value of future cash flows is based on consideration of the weighted average cost of capital and internal rates of return as well as the risk and return characteristics of the core technologies.
Customer contractual relationships also constitute a significant portion of identifiable intangible assets recognized. All of our
contractual relationships are established through written customer contracts (revenue arrangements). The fair value for customer contractual relationships is determined, as of the date of acquisition, based on estimates and judgments regarding
expectations for the estimated future after-tax earnings and cash flows (including cash flows from working capital) arising from the follow-on sales on contract (revenue arrangement) renewals expected from customer contractual relationships over
their estimated lives, including the probability of expected future contract renewals and sales, less a contributory asset charge, all of which is discounted to present value.
The value assigned to goodwill equals the amount of the purchase price of the business acquired in excess of the sum of the amounts
assigned to identifiable acquired assets, both tangible and intangible, less liabilities assumed. At June 30, 2010, we had goodwill of $70.3 million and identifiable intangible assets, net of accumulated amortization, of $7.5 million.
Intangible assets are amortized over their respective estimated useful lives ranging from one to ten years. The useful life
of an intangible asset is the period over which the asset is expected to contribute directly or indirectly to our future cash flows rather than the period of time that it would take us to internally develop an intangible asset that would provide
similar benefits. The estimate of the useful lives of our intangible asset is based on an analysis of all pertinent factors, in particular:
|
|
|
the expected use of the asset by the entity;
|
|
|
|
the expected useful life of another asset or group of assets to which the useful life of the intangible asset may relate;
|
|
|
|
any legal, regulatory or contractual provisions that may limit the useful life;
|
|
|
|
any legal, regulatory, or contractual provisions that enable renewal or extension of the assets legal or contractual life without substantial
cost (provided there is evidence to support renewal or extension and renewal or extension can be accomplished without material modifications of the existing terms and conditions);
|
|
|
|
the effects of obsolescence, demand, competition and other economic factors (such as the stability of the industry, known technological advances,
legislative action that results in an uncertain or changing regulatory environment, and expected changes in distribution channels); and
|
|
|
|
the level of regular maintenance expenditures (but not enhancements) required to obtain the expected future cash flows from the asset (for example, a
material level of required maintenance in relation to the carrying amount of the asset may suggest a limited useful life).
|
If no legal, regulatory, contractual, competitive, economic, or other factors limit the useful life of an intangible asset, the useful
life of the asset is considered to be indefinite. The term indefinite does not mean infinite. An intangible asset with a finite useful life is amortized over that useful life; an intangible asset with an indefinite useful life is not amortized. We
have no intangible assets with indefinite useful lives. Under U.S. GAAP, goodwill is not amortized.
We review goodwill and
intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable, and also review goodwill annually. U.S. GAAP requires that goodwill be tested, at a minimum,
annually for each reporting unit using a two-step process. A reporting unit is an operating segment, or a component of an operating segment. A component of an operating segment is a reporting unit if the component constitutes a business for which
discrete financial information is available and is reviewed. Two or more components of an operating segment may be aggregated and deemed a single reporting unit for goodwill impairment testing purposes if the components have similar economic
characteristics. The first step is to identify any potential impairment by comparing the carrying value of the reporting unit to its fair value. If a potential impairment is identified, the second step is to measure the impairment loss by comparing
the implied fair value of goodwill with the carrying value of goodwill of the reporting unit. The fair value of a reporting unit is estimated using the following methods: discounted cash flow, similar transactions and guideline company. Indications
of value from all three methods are used to derive the reporting units ultimate fair value by calculating a weighted average based on these three methods. Values resulting from the three methods are weighted based on factors and assumptions
related to the inputs used in each of the methods, giving more weight to inputs believed to be more reliable based on characteristics of the individual reporting units, market conditions and the current business environment. We receive and utilize
quoted market prices in active markets to validate results produced by these three methods, including aggregating the values of the reporting units and comparing this value to the market capitalization of the consolidated company. The discounted
cash flow valuation approach is dependent on estimates for future sales, operating income, depreciation and amortization, income tax payments, working capital changes and capital expenditures as well as expected growth rates for cash flows and
long-term interest rates, all of which are affected by economic conditions related to the industries in which we operate as well as conditions in the U.S. capital markets.
29
The most significant assumptions used in a discounted cash flow valuation regarding the
estimated fair values of our reporting units in connection with goodwill valuation assessments are:
|
|
|
detailed long-range (approximating 10 years) cash flow projections for each of our reporting units;
|
|
|
|
a risk-adjusted discount rate including the estimated risk-free rate of return; and
|
|
|
|
the expected long-term growth rate of our business, which approximates the expected long-term growth rate for the U.S. economy and the industries in
which we operate.
|
The risk-adjusted discount rate represents the estimated weighted average cost of
capital. The weighted average cost of capital focuses on rates of return for equity and debt, and a corresponding capital structure.
A decline in the estimated fair value of a reporting unit could result in a goodwill impairment and a related non-cash impairment charge
against earnings, if estimated fair value for the reporting unit is less than the carrying value of the net assets of the reporting unit, including its goodwill. There was no goodwill impairment charge for the quarters ended June 30, 2010 and
2009.
Stock-based Compensation
. U.S. GAAP requires equity-classified, share-based payments to employees, including
grants of employee stock options, to be valued at fair value on the date of grant and to be expensed over the applicable vesting period. Share-based awards granted or modified are recognized in compensation expense over the applicable vesting
period. We recognize this expense on a straight-line basis over the options expected terms.
During the six months ended
June 30, 2010 and 2009, we granted 55,000 and 671,500 stock options, respectively. During the six months ended June 30, 2010 and 2009, we granted 396,700 and 207,781 shares, respectively, of restricted stock and restricted stock units
pursuant to the 2007 Equity Incentive Plan. Grants of restricted stock and restricted stock units are valued using the closing market price of our common stock on the date of grant.
We estimate the grant date fair value of stock option awards using the Black-Scholes option valuation model, which requires, among other
inputs, an estimate of the fair value of the underlying common stock on the date of grant and the expected term of the options. Separate values were determined for options having exercise prices ranging from $4.09 to $16.00. We applied the resulting
fair values for one share of common stock as of each of the valuation dates to our Black-Scholes option valuation model to arrive at the fair value of the related options granted during the valuation period.
For options granted, we calculate expected option terms based on the simplified method for plain vanilla options,
due to the Companys limited historical trading and exercise information. The simplified method calculates the expected term as the average of the vesting term and the original contractual term of the options. The expected term
affects the assumed rate of forfeitures. If the actual number of forfeitures differs from that estimated by management, we may be required to record adjustments to stock-based compensation expense in future periods. As additional information becomes
available to allow us to estimate the expected term, we will discontinue use of the simplified method. We calculate volatility using the annualized daily volatilities of similar publicly traded entities.
For the six months ended June 30, 2010 and 2009, we recognized stock-based compensation expense of $1.2 million and
$2.0 million, respectively. In future periods, stock-based compensation expense may increase as we issue additional equity-based awards to continue to attract and retain key employees. Additionally, U.S. GAAP requires that we recognize
compensation expense only for the portion of stock options that are expected to vest.
As of June 30, 2010, our total
unrecognized compensation expense related to stock-based awards granted to employees and non-employee directors was approximately $4.1 million.
Income Taxes
. We use an asset and liability approach for accounting for income taxes. Deferred income taxes are recognized
for the tax consequences of temporary differences and carryforwards by applying enacted tax rates applicable to future years to differences between the financial statement amounts and the tax bases of existing assets and liabilities. We establish a
valuation allowance if it is probable that some portion of the deferred tax asset will not be realized. Our determination of whether a valuation allowance is appropriate requires the exercise of judgment. At June 30, 2010, we had net operating
loss carryforwards available for U.S. federal and state income taxes of $107 million which begin to expire in 2017. The net operating loss carryforwards that we acquired in connection with our business acquisitions may also be limited by
provision of the Internal Revenue Code regarding changes in ownership. We have provided a valuation allowance against net U.S. deferred tax assets and operating loss carryforwards in certain non-U.S. jurisdictions. We have recorded a valuation
allowance because of the emerging nature of our business and our history of losses. We will continue to evaluate income generated in future periods in determining the reasonableness of our position. If we determine that future income is sufficient
or insufficient to cause the realization of the net operating loss carryforwards within the required time, the valuation allowance will be adjusted as necessary.
30
Liabilities for Pending and Threatened Litigation
. We are subject to litigation,
investigations, proceedings, claims or assessments and various contingent liabilities incidental to our business or assumed in connection with certain business acquisitions. We accrue a charge for a loss contingency when we believe it is both
probable that a liability has been incurred and the amount of the loss can be reasonably estimated. If the loss is within a range of specified amounts, the most likely amount is accrued, and if no amount within the range represents a better estimate
we accrue the minimum amount in the range. Generally, we record the loss contingency at the amount we expect to pay to resolve the contingency and the amount is generally not discounted to the present value. Amounts recoverable under insurance
contracts are recorded as assets when recovery is deemed probable. Contingencies that might result in a gain are not recognized until realized. Changes to the amount of the estimated loss, or resolution of one or more contingencies could have a
material impact on our results of operations, financial position and cash flows.
Recent Accounting Pronouncements
For a discussion of recent accounting pronouncements refer to Note 1 of the Notes to the Consolidated Financial Statements in
Item 1 Financial Statements.
Off-Balance Sheet Arrangements
As of June 30, 2010 and 2009, we did not have any off-balance sheet arrangements.
Item 3.
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
Foreign Currency Risk
. Our international businesses generate revenue and incur expenses that are denominated in foreign
currencies. Historically, our foreign currency translation adjustments have not been material to our financial position or consolidated results of operations. However, changes in economic conditions impacting foreign currency exchange rates could
materially increase our exposure to foreign currency fluctuations and adversely affect our consolidated results of operations or financial position, specifically with changes in the United States dollar relative to the Canadian dollar and the
European Euro. Our Canadian and German subsidiaries are consolidated into our financial results and under U.S. GAAP, we are required to translate the financial condition and results of operations of these subsidiaries into United States dollars,
with any corresponding translation gains or losses being recorded in other comprehensive income in our consolidated financial statements. For the three months ended June 30, 2010 and 2009, this translation adjustment, net of tax, was a loss of
$0.8 million and $0.1 million, respectively. For the six months ended June 30, 2010 and 2009, this translation adjustment, net of tax, was a loss of $1.0 million and $0.9 million, respectively. We also maintain cash balances denominated in
foreign currencies. At June 30, 2010, we had $3.8 million of cash in foreign accounts. We have not hedged our exposure to changes in foreign currency rates and, as a result, could incur unanticipated translation gains and losses.
Interest Rate Risk
. We had cash and cash equivalents (including restricted cash) of $41.6 million at June 30, 2010.
We do not enter into investments for trading or speculative purposes. We do not believe that we have any material exposure to changes in the fair value of these investments as a result of changes in interest rates. Declines in interest rates,
however, will reduce future income.
At June 30, 2010, we had an open line of credit which bears interest at a variable
rate adjusted based on the prime rate, under which we may borrow a maximum of $2.5 million. At June 30, 2010, no amounts were outstanding under this line of credit. As such, changes in interest rates do not create material exposure to our
business. Increases in interest rates on any future outstanding balances, however, will increase interest expense.
Item 4.
|
CONTROLS AND PROCEDURES
|
Evaluation of
Disclosure Controls and Procedures
As of June 30, 2010, we completed our evaluation, under the supervision and with
the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the evaluation, our Chief Executive
Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934, as
amended, is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and that such information is accumulated and communicated to management as appropriate to allow for
timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the second fiscal quarter of 2010 that have
materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
31
PART II OTHER INFORMATION
Item 1.
|
Legal Proceedings
|
From
time to time, we are involved in various routine legal proceedings. We cannot predict the outcome of these lawsuits, legal proceedings and claims with certainty. Nevertheless, we believe that the outcome of these proceedings, even if determined
adversely, would not have a material adverse effect on our business, financial condition and results of operations.
On or
about February 24, 2010, Research International, Inc. filed a complaint against ICx Technologies, Inc. and its wholly owned subsidiary, MesoSystems Technology, Inc., in the United States District Court, Western District of Washington at
Seattle, alleging infringement of Research Internationals United States Patent Nos. 6,484,594 and 7,261,008. This complaint was settled in April 2010. In accordance with the settlement agreement, the Company paid a one-time, initial royalty
payment of $100,000 and agreed to pay a small royalty on future sales of certain products until expiration of the patents included in the complaint. As such, settlement did not have a material impact on the Companys consolidated financial
position or results of operations.
Except as
indicated below, there have been no material changes in information to the Risk Factors previously described in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2009.
Our international business is subject to regulatory requirements and other risks.
Our international business exposes us to regulatory requirements and other risks associated with doing business in foreign countries.
These risks differ from and potentially may be greater than those associated with our domestic business. Our international sales are subject to U.S. laws, regulations and policies, including the International Traffic in Arms Regulations and the
Foreign Corrupt Practices Act and other export laws and regulations. In certain foreign countries where we conduct business, our sales are also subject to local government laws, regulations and procurement policies and practices which may differ
from U.S. Government regulations, including regulations relating to conducting business locally, import-export control, investments, exchange controls and repatriation of earnings, as well as to varying currency, geo-political and economic risks.
Our international contracts may include requirements on specific in-country purchases, manufacturing agreements or financial support obligations, known as offsets, and provide for penalties if we fail to meet such requirements.
We also are exposed to risks associated with using foreign representatives and consultants for international sales and operations and
teaming with international subcontractors, partners and suppliers in connection with international sales, services and programs. In particular, the Company and/or its foreign representatives and consultants in certain foreign countries may have
certain licensing, permitting, registration and agency requirements for certain activities and may face certain prohibitions and restrictions regarding compensation arrangements, including on sales to certain foreign government and military
customers. As a result of these factors, we could face higher costs of conducting business, experience award and funding delays on international programs and could incur losses on such programs which could negatively impact our results of operations
and financial condition. We have identified possible gaps in compliance with these foreign regulations, have engaged outside counsel to address certain compliance with foreign laws issues, and have adopted compliance measures to address any
potential compliance deficiencies.
Item 2.
|
Unregistered Sales of Equity Securities and Use of Proceeds
|
Use of Proceeds from Public Offering of Common Stock
In the second quarter of 2010, $8.5 million of IPO proceeds that were previously held in escrow as collateral under a performance bond
were released from restriction. There has been no material change in the planned use of proceeds from our IPO as described in the final prospectus filed with the Securities and Exchange Commission pursuant to Rule 424(b).
32
Issuer Purchases of Equity Securities
During the period April 1, 2010 to June 30, 2010, we purchased the following shares:
|
|
|
|
|
|
|
|
|
|
Period
|
|
Total Number
of Shares
Purchased (1)
|
|
Average Price
Paid per
Share
|
|
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs
|
|
Maximum Number of
Shares that May Yet
Be Purchased Under
the Plans or Programs
|
April 1-30
|
|
983
|
|
$
|
6.95
|
|
N/A
|
|
N/A
|
May 1-31
|
|
4,742
|
|
$
|
6.52
|
|
N/A
|
|
N/A
|
June 1-30
|
|
4,712
|
|
$
|
7.21
|
|
N/A
|
|
N/A
|
(1)
|
As part of our restricted stock plan, we offer employees the opportunity to make required tax payments with cash or through a net share settlement. For employees
choosing net share settlement, we make required tax payments on behalf of employees as their stock awards vest and then withhold a number of vested shares having a value on the date of vesting equal to the tax obligation. The shares withheld were
recorded as treasury shares.
|
Item 3.
|
Defaults Upon Senior Securities
|
None
Item 4.
|
(Removed and Reserved)
|
Item 5.
|
Other Information
|
None
|
|
|
2.1
|
|
Agreement and Plan of Merger, dated as of August 16, 2010, by and among ICx Technologies, Inc., FLIR Systems, Inc. and Indicator Merger Sub, Inc., filed as the same numbered exhibit
with ICxs Form 8-K, filed August 16, 2010, Commission File No. 001-33793***
|
|
|
10.19
|
|
Tender and Support Agreement, dated as of August 16, 2010, by and among FLIR Systems, Inc., Indicator Merger Sub, Inc., DP1 LLC, Valentis SB, L.P., Wexford Spectrum Investors LLC,
Wexford Catalyst Investors and Debello Investors LLC, filed as Exhibit 10.1 to ICxs Form 8-K, filed August 16, 2010, Commission File No. 001-33793***
|
|
|
10.20
|
|
Termination of Administrative Services Agreement, dated as of August 16, 2010, by and between ICx Technologies, Inc. and Wexford Capital LP, filed as Exhibit 10.2 to ICxs Form
8-K, filed August 16, 2010, Commission File No. 001-33793***
|
|
|
10.21
|
|
Warrant Cancellation Agreement, dated as of August 16, 2010, by and between ICx Technologies, Inc. and Valentis SB L.P., filed as Exhibit 10.3 to ICxs Form 8-K, filed August
16, 2010, Commission File No. 001-33793***
|
|
|
31.1
|
|
Certification by the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
|
|
|
31.2
|
|
Certification by the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
|
|
|
32.1
|
|
Certification by the Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002**
|
***
|
Incorporated by reference
|
33
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: August 16, 2010
|
|
|
ICX TECHNOLOGIES, INC.
|
|
|
By:
|
|
/
S
/ C
OLIN
J. C
UMMING
|
|
|
Colin J. Cumming
|
|
|
Chief Executive Officer
|
|
|
(Principal Executive Officer)
|
|
|
|
By:
|
|
/
S
/ D
EBORAH
D. M
OSIER
|
|
|
Deborah D. Mosier
|
|
|
Chief Financial Officer
|
|
|
(Principal Financial and Accounting Officer)
|
34
INDEX TO EXHIBITS
|
|
|
Exhibit
Number
|
|
Exhibit Title
|
31.1
|
|
Certification by the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
31.2
|
|
Certification by the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
32.1
|
|
Certification by the Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
35
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