Ballistic Recovery Systems Inc - Quarterly Report of Financial Condition (10QSB)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-QSB


þ		Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended March 31, 2008


o		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 0-15318

BALLISTIC RECOVERY SYSTEMS, INC.

(Exact name of issuer as specified in its charter)


Minnesota		41-1372079

(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

300 Airport Road, South St. Paul, Minnesota		55075-3541

(Address of Principal Executive Offices)		(Zip Code)

(651) 457-7491

(Issuer’s telephone number)

Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

As of June 30, there were 11,330,542 outstanding shares of common stock, par value $0.01 per share.

Transitional Small Business Disclosure Format (check one) Yes o No þ

TABLE OF CONTENTS


	Page

PART I Consolidated Financial Information

Item 1 Consolidated Financial Statements		2

Consolidated Balance Sheets as of March 31, 2008 (unaudited) and September 30, 2006 (audited)		3

Consolidated Statements of Operations for the three months ended and six months ended March 31, 2008 and 2007 (unaudited)		5

Consolidated Statements of Cash Flow for the six months ended March 31, 2008 and 2007 (unaudited)		6

Notes to consolidated financial statements		7

Item 2 Management’s Discussion and Analysis or Plan of Operation		13

Item 3 Controls and Procedures		18

PART II Other Information

Item 1 Legal Proceedings		18

Item 2 Unregistered Sales of Equity Securities

Item 6 Exhibits		19

Signatures		20

Note Regarding Forward-Looking Statements

The following discussion of our financial condition and results of operations should be read in conjunction with the financial statements and the notes to those statements included elsewhere in the Quarterly Report. This Quarterly Report contains statements that are not historical, but are forward-looking in nature, including statements regarding the expectations, beliefs, intentions or strategies regarding the future. In particular, the “Management’s Discussion and Analysis or Plan of Operation” section in Part I, Item 2 of this quarterly report includes forward-looking statements that reflect our current views with respect to future events and financial performance. We use words such as “may,” “could,” “should,” “expect,” “anticipate,” “believe,” “intend,” “estimate,” “plan,” “predict,” and similar expressions to identify forward-looking statements. A number of important factors could, individually or in aggregate, cause actual results to differ materially from those expressed or implied in any forward-looking statements. Such factors include, but are not limited to, risks are described under the section entitled “Risk Factors” in our Annual Report on Form 10-KSB filed on March 7, 2008.

Further, any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for us to predict which factors will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

Part I Financial Information — Item 1. Consolidated Financial Statements

BALLISTIC RECOVERY SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS


	March 31, 2008			September 30, 2007
	(Unaudited)			(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	123,213		$	914,523
Accounts receivable — net of allowance for doubtful accounts of $65,000 and $65,000, respectively		839,198			1,317,113
Inventories		3,286,470			1,788,266
Deferred tax asset — current portion		85,000			85,000
Note receivable		130,958			56,826
Prepaid expenses		782,658			286,130

Total current assets		5,247,497			4,447,858


Furniture, fixtures and leasehold improvements		1,740,295			1,308,235
Less accumulated depreciation and amortization		(724,280	)		(662,032	)

Furniture, fixtures and leasehold improvements — net		1,016,015			646,203


Other assets:
Patents, net of accumulated amortization of $12,966 and $11,814, respectively		55,290			600
Goodwill		173,772			—
Deferred tax asset — net of current portion		1,649,824			1,416,000
Long-term prepaid expenses		—			33,842
Covenant not to compete, net of accumulated amortization of $602,390 and $588,041, respectively		134,906			16,970

Total other assets		2,013,792			1,467,412


Total assets	$	8,277,304		$	6,561,473

See notes to consolidated financial statements.

BALLISTIC RECOVERY SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS


	March 31, 2008			September 30, 2007
	(Unaudited)			(Unaudited)
Liabilities And Shareholders’ Equity
Current liabilities:
Line of credit — bank	$	815,000		$	—
Accounts payable		1,795,922			776,251
Customer deposits		89,673			104,410
Accrued payroll		90,124			75,939
Other accrued liabilities		170,381			294,726

Total current liabilities		2,961,100			1,251,326

Long-term debt, less current portion		399,233			—


Total Liabilities		3,360,333			1,251,326


Minority Interest		7,554			—

Shareholders’ equity:
Common stock ($.01 par value; 11,330,942 and 11,304,767 shares, respectively, issued and outstanding)		113,309			113,048
Additional paid-in capital		10,294,321			10,262,357
Accumulated deficit		(5,498,213	)		(5,065,258	)

Total shareholders’ equity		4,916,971			5,310,147


Total liabilities and shareholders’ equity	$	8,277,304		$	6,561,473

See notes to consolidated financial statements.

BALLISTIC RECOVERY SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months and Six Months ended March 31, 2008 and 2007
(UNAUDITED)


	Three Months Ended						Six Months Ended
	March 31,						March 31,
	2008			2007			2008			2007
Sales	$	2,617,959		$	2,182,872		$	4,915,099		$	4,294,135
Cost of sales		1,865,309			1,772,726			3,525,710			3,161,987


Gross profit		752,651			410,146			1,389,389			1,548,556

Selling, general and administrative		1,016,316			617,921			1,650,288			1,236,141
Engineering		154,591			190,452			375,705			232,016

Intangible amortization		9,526			2,213			15,395			13,826


Income (loss) from operations		(427,782	)		(400,440	)		(651,999	)		(349,835	)

Other income (expense):
Interest expense		(7,767	)		(6,497	)		(8,743	)		(29,593	)

Other income (expense)		(218	)		4,588			39,904			6,371


Income (loss) before income taxes		(435,768	)		(402,349	)		(620,837	)		(373,057	)

Income tax expense (benefit)		(220,070	)		(42,745	)		(224,871	)		(32,045	)


Net income (loss)	$	(215,698	)	$	(359,604	)	$	(395,967	)	$	(341,012	)


Basic earnings (loss) per share	$	(0.02	)	$	(0.04	)	$	(0.03	)	$	(0.01	)


Weighted average number of shares outstanding — basic		11,339,502			7,698,695			11,325,352			7,691,992


Diluted earnings (loss) per share	$	(0.02	)	$	0.00		$	(0.03	)	$	0.00


Weighted average number of shares outstanding — diluted		11,339,502			7,698,695			11,325,352			7,691,992


Dividends per share	$	0.00		$	0.00		$	0.00		$	0.00

See notes to consolidated financial statements.

BALLISTIC RECOVERY SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
For the Six Months Ended March 31, 2008 and 2007
(UNAUDITED)


	2008			2007
Cash flows from operating activity:
Net income (loss)	$	(395,967	)	$	(53,362	)
Adjustments to reconcile net income (loss) to net cash from operating activity:
Deferred income tax		(233,824	)		10,700
Depreciation and amortization		73,216			35,383
Amortization of covenant not to compete		4,621			11,612
(Increase) decrease in:
Accounts receivable		584,055			163,812
Accounts receivable: Other		(44,937	)
Inventories		(992,668	)		(411,098	)
Prepaid expenses		(496,529	)		(75,704	)
Long-term prepaid expenses		—			3,419
Increase (decrease) in:
Accounts payable		1,007,449			(83,118	)
Customer deposits		(14,737	)		22,934
Accrued expenses		(206,584	)		(136,801	)

Net cash from operating activities		(715,905	)		(496,618	)

Cash flows used in investing activities:
Capital expenditures		(186,925	)		(14,542	)

Strategic investments		(709,377	)
Other Investments		(82,358	)

Net cash from investing activities		(130,061	)		(14,542	)

Cash flows from financing activities:
Net proceeds from issuance of common stock		2,790			2,278,270
Net proceeds from borrowings under line of credit — bank		815,000			(302,265	)
Net proceeds from equipment financing		85,466
Principal payments on long-term debt		—			(734,091	)
Principal payments on covenant not to compete		—			(7,069	)


Net cash from financing activities		903,256			1,234,845


Increase (decrease) in cash and cash equivalents		(791,310	)		723,685
Cash and cash equivalents — beginning of period		914,523			53,722


Cash and cash equivalents — end of period	$	123,213		$	777,407


Cash paid for (received from) taxes	$	—		$	—
Cash paid for interest	$	15,571		$	27,715
Cash Paid in business combination
Summary of non-cash activity:
Conversion of bonus accrual into common stock	$	—		$	55,300
Covenant not to compete payable applied to note receivable from shareholder	$	—		$	—

See notes to consolidated financial statements.

BALLISTIC RECOVERY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2008 and 2007
(UNAUDITED)

A. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial statements and the instructions to Form 10-QSB and Item 310(b) of Regulation S-B. They do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.

Operating results for the six months ended March 31, 2008 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2008. These consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-KSB for the year ended September 30, 2007, previously filed with the Securities and Exchange Commission.

In the opinion of management, such statements reflect all adjustments (which include only normal recurring adjustments) necessary for a fair presentation of the financial position, results of operations, and cash flows for the periods presented.

Principles of Consolidation

In September 2005, the Company formed its wholly-owned subsidiary, BRS de Mexico S.A. de C.V. The consolidated financial statements include the wholly-owned subsidiary.

On November 16, 2007, we acquired through our majority owned subsidiary, Advanced Tactical Fabrication Inc., or ATF, substantially all of the assets of Head Lites Corporation, or HLC, a Minnesota corporation which manufactures high visibility personal safety products. ATF, which is 90% owned by us and 10% by HLC, is based in South St. Paul and has production facilities in Pinebluff, North Carolina and Tijuana, Mexico (Tijuana). The consolidated financial statements include ATF and HLC.

ATF paid $648,400 in cash for the acquisition, in addition to the assumption of certain liabilities. In connection with the transaction, ATF entered into a five-year consulting agreement with HLC, whereby ATF will be required to make monthly payments to HLC totaling $50,000 in the first year and $42,000 each year thereafter. ATF also agreed to make monthly non-compete payments to the majority shareholder of HLC for a period of five years, with payments during the first year totaling approximately $36,000 and payments in each year thereafter totaling $24,000. Further, ATF will make five annual gross margin payments to HLC in amounts equal to 2.5% of ATF’s gross margin during each applicable fiscal year (subject to certain conditions).

We also agreed to loan up to $450,000 to ATF in consideration of certain secured promissory notes to be issued by ATF in our favor. The notes will have a three-year term and bear interest at a rate equal to the prime rate plus 1%. The notes require quarterly payments which were interest only for the first payment on January 1, 2008, and principal and accrued interest commencing April 1, 2008, with the final payment scheduled for July 1, 2010.

On October 15, 2007 we established a parachute manufacturing facility in Pinebluff, North Carolina with the specific purpose of meeting “Berry Amendment” requirements for US content (related to defense related products).

All significant intercompany transactions and balances have been eliminated in consolidation.

B. Recently Issued Accounting Pronouncements

On July 13, 2006, Financial Accounting Standards Board (“FASB”) Interpretation (“FIN”) No. 48, Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109 , was issued. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN 48 also prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The new FASB standard also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The provisions of FIN 48 are effective for the Company in fiscal 2008. The Company adopted FIN 48 on October 1, 2007. See Note J for impact on the Company’s consolidated financial statements.

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements (“SFAS No. 157”). This statement establishes a framework for measuring fair value and requires enhanced disclosures about fair value measurements. SFAS No. 157 applies to fair value measurements required by existing accounting pronouncements and does not require any new fair value measurements. SFAS No. 157 is effective for the Company in fiscal 2009. FASB Staff Position No. FAS 157-2 provides a deferral of SFAS No. 157 provisions for non-financial assets and liabilities until fiscal 2010. The Company has not determined the impact, if any, the adoption of this statement will have on its consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS No. 159”). SFAS No. 159 permits entities to choose to measure many financial assets and financial liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected will be reported in earnings. SFAS No. 159 is effective for the Company in fiscal 2009. The Company is currently evaluating the impact of SFAS No. 159 on its consolidated financial statements.

On December 4, 2007, the FASB issued FASB Statement No. 160, “ Noncontrolling Interests in Consolidated Financial Statements — An Amendment of ARB No. 51 ” (“Statement 160”). Statement 160 establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. Specifically, Statement 160 requires the recognition of a noncontrolling interest (minority interest) as equity in the consolidated financial statements and separate from the parent’s equity. The amount of net income attributable to the noncontrolling interest will be included in consolidated net income on the face of the income statement. Statement 160 clarifies that changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation are equity transactions if the parent retains its controlling financial interest. In addition, Statement 160 requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated. Such gain or loss will be measured using the fair value of the noncontrolling equity investment on the deconsolidation date.

Statement 160 also includes expanded disclosure requirements regarding the interests of the parent and its noncontrolling interest. Statement 160 is effective for fiscal years, and interim periods within those fiscal years, beginning with the quarter ended December 31, 2008. Earlier adoption is prohibited.

On December 4, 2007, the FASB issued FASB Statement No. 141 (Revised 2007), “ Business Combinations ” (“FAS 141(R)”). FAS 141(R) will significantly change the accounting for business combinations. Under Statement 141(R), an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. FAS 141(R) will change the accounting treatment for certain specific items, including:

	•		Acquisition costs will be generally expensed as incurred;

	•		Noncontrolling interests (formerly known as “minority interests” will be valued at fair value at the acquisition date);

	•		Acquired contingent liabilities will be recorded at fair value at the acquisition date and subsequently measured at either the higher of such amount or the amount determined under existing guidance for non-acquired contingencies;

	•		In-process research and development will be recorded at fair value as an indefinite-lived intangible asset at the acquisition date;

	•		Restructuring costs associated with a business combination will be generally expensed subsequent to the acquisition date; and

	•		Changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date generally will affect income tax expense.

FAS 141(R) also includes a substantial number of new disclosure requirements. The statement applies prospectively to business combinations for which the acquisition date is on or after the beginning of the fiscal year ended September 30, 2009. Earlier adoption is prohibited.

C. Customer Concentration

The Company had sales to one major customer, Cirrus Design Corporation (Cirrus), which represented 75.3% and 74.5% of the Company’s total sales for the three and six months ended March 31, 2008, as compared to 74.4% and 77.4% for the same prior year periods in fiscal 2007. This customer also accounted for 36.8% (or $309,000) and 63% (or $821,000) of accounts receivable at March 31, 2008 and September 30, 2007, respectively. The Company supplies parachute systems to Cirrus Design from the Company’s general aviation product line.

In its recreational aviation product line, the Company primarily distributes its products through dealers and distributors who in turn sell the products to the end consumer. The Company believes that in the event that any individual dealers or distributors cease to represent the Company’s products, alternative dealers or distributors can be established.

D. Intangibles

Patents are recorded at cost and are being amortized on a straight-line method over 17 years. The covenants not to compete are recorded at cost and are being amortized using the straight-line method over the terms of the agreement which range from two-fifteen years.

Components of intangible assets are as follows:


	March 31, 2008				September 30, 2007
	Gross Carrying		Accumulated		Gross Carrying		Accumulated
	Amount		Amortization		Amount		Amortization
Intangible assets subject to amortization:
Patents	$	64,195	$	12,966	$	12,414	$	11,814
Covenants not to compete	$	737,305	$	593,562	$	605,011	$	588,041

Amortization expense of intangible assets was $9,582 and $15,501 for the three and six months ended March 31, 2008, compared to $11,709 and $14,020 for the three and six months ended March 31, 2007. Amortization expense is estimated to approximate $34,664, $37,589, $29,473 and $29,473 for the years ending September 30, 2008, 2009, 2010, and 2011, respectively.

E. Covenants Not to Compete

On October 26, 1995 the Company entered into an agreement with the president and majority shareholder of Second Chantz Aerial Survival Equipment, Inc. (SCI), whereby SCI ceased all business activities, and SCI’s president and majority shareholder entered into a ten-year covenant not to compete with the Company. The payments required under this agreement contained a non-interest-bearing portion and a portion that bears interest at a rate below the Company’s incremental borrowing rate. Under generally accepted accounting principles the future payments were discounted at the Company’s incremental borrowing rate. The 4% ten year note called for monthly payments of $4,036 through October 2005. This note has been paid in full.

On August 16, 2004, the Company extended the non-compete period by five additional years in exchange for the exercise of stock options held by SCI’s president under a stock subscription agreement backed by a promissory note. The note has a principal sum of $12,500 together with aggregate interest on the unpaid principal balance of $2,500. Payments under the note begin July 1, 2005 and continued monthly with a final maturity date of October 1, 2005. The present value of the Company’s obligation under this agreement was recorded as an intangible asset, is being amortized over a total of fifteen years as shown in the accompanying financial statements.

On November 16, 2007, the Company entered into a non-compete agreement with one of the previous owners of Head Lites Corporation (HLC) as part of the Advanced Tactical Fabrication Inc. (ATF) purchase of HLC. The five-year agreement was recorded at the present value of the Company’s obligation under this agreement, was recorded as an intangible asset, and is being amortized over a total of five years as shown in the accompanying financial statements.

F. Other Financial Information

Inventories

The components of inventory consist of the following at March 31, 2008 and September 30, 2007:


	3/31/2008		09/30/2007
Raw materials		1,855,301	$	1,179,076
Work in process		896,126		598,486
Finished goods		535,043		10,704

Total inventories		3,286,470	$	1,788,266

Furniture, Fixtures and Leasehold Improvements

Furniture, fixtures and leasehold improvements consisted of the following categories at March 31, 2008 and September 30, 2007:


	3/31/2008		09/30/2007
Office furniture and equipment	$	392,962	$	411,823
Manufacturing equipment		1,064,150		613,229
Airplane		283,183		283,183

Total furniture, fixtures and leasehold improvements	$	1,740,295	$	1,308,235

Depreciation Expense

Depreciation expense totaled $31,208 and $62,247 for the three and six months ended March 31, 2008, and $35,285 and $73,709 for the three and six months ended March 31, 2007, respectively.

Other Accrued Liabilities

Other accrued liabilities consisted of the following categories at March 31, 2008 and September 30, 2007:


	3/31/2008		09/30/2007
Bonus and profit sharing plan accrual	$	124,742	$	147,413
Other miscellaneous accruals		45,639		147,313

Total other accrued liabilities	$	170,381	$	294,726

Related Parties — Consulting Agreements with Directors

Effective as of November 19, 2004, the Company entered into a Consulting Agreement with Mr. Boris Popov, a director of the Company, pursuant to which Mr. Popov would provide certain consulting services relating to the Company’s new product development. Pursuant to this agreement, the initial term of which was six months, Mr. Popov is required to provide a minimum of 64 hours of service per month for $3,200 per month and shall be paid an additional $50 per hour for each hour over the 64 hour minimum. On March 16, 2006 the Company extended this agreement for 24 additional months, through May 2008. On April 25, 2008, the Company further extended the term of the agreement for an additional 12 months. Consulting expenses for Mr. Popov were $18,265 for the first and second quarters of fiscal year 2008 and $27,333 for the year ended September 30, 2007.

G. Geographical Information

The Company has operations in South St. Paul, Minnesota, Pinebluff, North Carolina and Mexico. Information about the Company’s operations by geographical location are as follows for the quarter ended March 31, 2008 and the year ended September 30, 2007:


	United States		Mexico		Consolidated
As of March 31, 2008:
Total Assets	$	7,908,176	$	369,128	$	8,277,304
Long-lived assets	$	2,663,271	$	195,830	$	2,859,101
Inventories	$	2,947,261	$	339,209	$	3,286,470


	United States		Mexico		Consolidated
As of September 30, 2007:
Total Assets	$	5,743,770	$	817,703	$	6,561,473
Long-lived assets	$	973,320	$	334,915	$	1,308,235
Inventories	$	1,305,478	$	482,788	$	1,788,266

H. Line-of-Credit Borrowings

In June 2007, the Company entered into a new line-of-credit with a bank for up to $820,000 subject to a borrowing base requirement. The line calls for a variable interest rate (based on the prime lending rate), which was 7.75% at September 30, 2007. The line is collateralized by all of the Company’s assets and expires on April 30, 2008. The Company’s line-of-credit has a balance of $815,000 on March 31, 2008 and $786,230 on July 2, 2008. Pursuant to the loan agreement, the Company is past due and therefore the line-of-credit is callable.

The Company is in negotiation with a lender to establish two new credit facilities which would take the place of the existing line of credit. The first credit facility would be a five year term loan for $820,000. The second facility contemplated would be a line of credit for $500,000.

I. Commitments and Contingencies

Rayner

On September 16, 2005, an action was commenced against us by Robert Treat Rayner, in the Circuit Court of the 5th Judicial Circuit in and from Lake County Florida, File No. 04 CA 1749. The Complaint alleges that plaintiff was injured when his ultralight aircraft crashed while being towed by another ultralight. Plaintiff alleges that he deployed his BRS system, but that it failed to deploy properly. BRS is undertaking an investigation of the claim and has responded to the suit. The case is currently in discovery. At this time, we cannot state with any degree of certainty what the outcome of this matter will be or the amount or range of potential loss, if any. BRS believes that it has strong defenses to the suit and will vigorously defend against the claims.

J. Dividend Payment

The Board of Directors examines the liquidity and capital requirements of the Company at each board meeting. If in the judgment of the Board of Directors, they may declare a special dividend. No dividend was declared or paid in the six months ended March 31, 2008.

K. Acquisition

As noted above the Company acquired through its majority owned subsidiary, Advanced Tactical Fabrication Inc., or ATF, substantially all of the assets of Head Lites Corporation, or HLC, a Minnesota corporation which manufactures high visibility personal safety products, The Company made this acquisition to diversify its product offerings, According to the purchase agreement the Company has the right to offset the purchase price for unsaleable, uncollectible accounts receivable, and if trade payable were underrepresented in the agreement. If the right to offset is invoked, the purchase accounting for transaction will be adjusted, The following unaudited pro forma consolidated condensed financial results of operations for the fiscal year 2007, and the six months ending March 31, 2008 are presented as if the acquisitions had been completed at the beginning of each period presented.


	Year ended			Six Months Ended
	September 30, 2007			March 31, 2008
Pro forma revenues	$	11,860,000		$	7,692,000
Pro forma net (loss)		(2,0666,000	)		(46,000	)
Pro forma basic earnings per share		(.20	)		(.04	)
Pro forma diluted earnings per shares	$	(.20	)	$	(.04	)


ITEM 2.		MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

The following discussion and analysis should be read in conjunction with our selected consolidated financial data and our consolidated financial statements and notes appearing elsewhere in this report.

Results of Operations:

Sales

Total BRS aviation sales increased $84,517, or 3.9%, from $2,182,872 for the three months ended March 31, 2007 to $2,267,389 for the three months ended March 31, 2008. Additionally, sales for Advanced Tactical Fabrication, which was acquired November 16, 2007 contributed $350,571 in sales for the period bringing the total company sales to $2,617,959, or an 19.9% increase over the same period in fiscal year 07. On a year to date basis, total company sales increased $620,964, or 14.4%, from $4,294,135 for the six months ended March 31, 2007 to $4,915,099 for the six months ended March 31, 2008.

Sales from the Company’s general aviation products, which consist primarily of sales to Cirrus, increased $144,778, or 8.9% for the second quarter and increased $171,693, or 5.2% year to date. We are beginning to see increased sales of line cutter kits for the Cirrus aircraft which require replacement every five years. Sales from the Company’s general aviation products accounted for 78.6% and 77.9% of total revenue for the three and six months ended March 31, 2008, compared to 80.5% and 74.3% for the three and six months ended March 31, 2007. Sales from the Company’s recreational and LSA products decreased $57,660, or 11.2%, for the second quarter and decreased $4,334, or 0.5% year to date. LSA and recreational sales accounted for 19.9% of the Company’s revenues for first two quarters of fiscal year 2008 versus 20.7% of the Company’s revenues for the first two quarters of the prior fiscal year. Sport unit sales were off slightly with 158 units sold in the first three months of fiscal 2008 versus 167 for the same period in fiscal 2007. There were 9 Cessna unit sales in the first six months of fiscal 2008 versus 0 for the same period in fiscal 2007. Other revenue, which consists of repairs, repacks, and shipping and packing charges, increased by $3,044, or 3.8%, from $81,017 for the six months ended March 31, 2007 to $84,061 for the six months ended March 31, 2008.

Sales of the Company’s general aviation products consist largely of sales to Cirrus where the Company’s products are standard equipment on the Cirrus SRV, SR20 and SR22 model aircraft. The Company delivered 337 and 324 units to Cirrus in first two quarters of fiscal years 2008 and 2007, respectively. The Company believes that Cirrus has a backlog of aircraft orders, all of which are required to include the Company’s parachute systems. The Company understands that Cirrus expects to be able to fill the backlog of firm aircraft orders during the next 12 months. The Company is forecasting flat growth in 2008 in its general aviation revenues. No assurance can be given that general aviation revenues will remain as anticipated. Until the Company becomes diversified in general aviation, future production volumes for the Company’s parachute systems, will be dictated by ultimate market demands for Cirrus’ products. Accordingly, the Company is, and will likely be, dependent on Cirrus for a material portion of its revenues in fiscal year 2008. Any negative impact on Cirrus’ sales would have a significant negative impact on the Company’s revenues.

The Company anticipates being able to expand its general aviation and recreational product lines to include other certified and non-certified aircraft as the Company’s recovery systems gain further market acceptance. The Company is in ongoing discussions with domestic and foreign general aviation and recreational aircraft companies that have expressed interest in utilizing certain of the Company’s products. These companies produce both certified and non-certified aircraft. No assurance can be made as to the future benefits, if any, that the Company will derive from these discussions.

On October 8, 2007, the Company announced an agreement with Cessna Aircraft Company, a Textron Inc. (NYSE: TXT) company, for the Cessna service stations across the world to begin offering BRS whole-airframe parachute system installations and service for the 172 Skyhawk and 182 Skylane model aircraft. The Company also announced they will begin developing an STC for the parachutes to be installed on the Cessna 206.

We continue to explore opportunities to have our products be standard certified equipment or a factory installed option with several other general aviation manufacturers.

The Company has commenced the establishment of a repack center which will have the capacity to repack the parachute systems. Cirrus will be notifying its owners on a systematic basis of the need to have the parachute system repacked. The Company anticipates that it will be the exclusive provider of repacking services on Cirrus aircraft.

Gross Operating Margin

Gross operating margin as a percentage of revenues was 28.7% for the second quarter of fiscal year 2008 compared to 18.8% for the comparative quarter of fiscal year 2007. The Company continues to full absorb the operational cost for the Mexican facility and all expenses are booked as a cost of goods sold into inventory. We also had a significant increase from our primary Cirrus canopy vendor that negatively impacted the margin. Shipping expenses and production payroll increased during the quarter as a result of the increased business. We also leased new equipment for the start-up operation in North Carolina which will begin to produce sales in the third quarter of fiscal 2008. The Company’s objective is to maintain or improve overall gross margins in the future.

Selling, General and Administrative

Selling, general and administrative costs as a percentage of sales were 34.7% ($921,000) for the second quarter of fiscal year 2008 as compared to 28.3% ($618,000) for the first quarter of fiscal year 2007. This was inclusive of $42,900 (1.6%) of general and administrative start-up costs for our North Carolina production facility. The Company experienced excessive, one-time non-recurring charges in relation to historical performance associated with the replacement of the CFO and subsequent accounting issues and the late filings. Contributing to this one-time charge were: (1) contract labor and consulting, $86,900; (2) accounting and audit fees, $124,000; and (3) legal fees, $78,000. The Company did see reduced expenses in liability insurance, ($36,000), SEC filing fees ($19,000), board fees ($45,000) and litigation fees ($27,000).

Engineering

Engineering costs were 5.9% and 8.7% of sales for the second quarter of fiscal years 2008 and 2007, respectively. Increases in engineering expenditures are planned for the future in the areas of new product development and in the expansion of currently developed products for additional applications, primarily the new increased capacity 3000 series system and the 5000 series system aimed at the single engine jet market. Payroll expenses for engineering were reduced by $37,000 in the second quarter of fiscal 2008 compared to the same period in fiscal 2007 due to the resignation of a senior engineer, offset slightly by the expense of recruiting and hiring a replacement

The Company has undertaken research and development on potential new products and services including enhancements to current products. Such efforts may result in future offerings and model upgrades to existing products. The development efforts are funded through current operations and it is unclear what impact, if any, these will have on future sales or financial performance of the Company.

Acquisitions

As part of the overall growth strategy of the Company, it is management’s intent to seek out, evaluate and execute strategic acquisitions to grow the product base and integrate operations with the primary focus on cost savings and product diversification. Management cannot state at this point with any degree of certainty what the results of any pending acquisitions may be or the financial impact on Company operations.

Net Income (Loss) and Earnings (Loss) per Share

Income (loss) before income taxes as a percentage of revenues was (8.2%) and (6.4%) for the second quarter of fiscal years 2008 and 2007, respectively. On a fully diluted basis, after-tax net (loss) of $(215,698) for the second quarter of fiscal year 2008 was $(0.02) per share, as compared to net (loss) of $(359,604), which was $(0.03) per share, on a fully diluted basis per share for the same period in 2007.

Liquidity and Capital Resources:

We incurred a significant loss before income tax benefit of approximately $1.8 million for the year ended September 30, 2007. In addition, we acquired substantially all of the assets of Head Lites Corporation on November 16, 2007 for $648,000 in cash, made a deposit of approximately $196,000 on October 19, 2007 related to our new lease in Minnesota (see Note 13 to our financial statements found in the Annual Report) and continued to incur excessive production variances from our Mexico plant through December 2007. As of March 3, 2008, we had borrowed the maximum of $820,000 on our line of credit (see Note 13 to our financial statements found in the Annual Report). Management anticipates the impact of the actions listed below will generate sufficient cash flows to pay current liabilities, operating lease obligations and cash necessary to support operations:

	•		Reduction of operating expenses by reductions in personnel made principally at our Mexico plant since year-end

	•		Renew our line of credit — bank agreement (see Note H) which expires on April 30, 2008 and/or explore other financing alternatives including possible long-term debt financing

	•		If necessary, reduce research and development expenses

	•		Other alternatives as deemed necessary

We believe that we will have sufficient cash flows to meet short-term obligations, working capital, and operating requirements for at least the next twelve months.

On August 15, 2007, we entered into a loan agreement with Anchor Bank Saint Paul, N.A., pursuant to which we obtained a line of credit in the aggregate principal amount of up to $820,000, subject to certain limitations. In connection with the loan agreement, we issued Anchor Bank a promissory note in the aggregate principal amount of up to $820,000. The note bears a variable interest at a rate equal to the prime rate, and requires us to make monthly interest-only payments on the outstanding balance, with a balloon payment of outstanding principal and interest on April 30, 2008. Our obligations under the note are secured by all of our business assets. The proceeds of the loan are to be used for general working capital.

We anticipate a need to make continuing capital improvements of approximately $165,000 during the fiscal year ending September 30, 2008 to our current production facilities in both the US and Mexico and continued equipment and tooling upgrades. In addition, we have agreed to make available to ATF a loan of up to $450,000 to be used for its cash needs in its day-to-day operations. BRS has extended funds to ATF on the agreement, and ATF has made interest payments to BRS in accordance with the terms of this loan agreement.

Effective October 2007, we have secured our own product liability insurance for all products world-wide, which includes fielded products. However, a significant judgment against us in our existing litigation could nonetheless have a material impact. The result of obtaining our own policy has lowered our insurance expense by $36,000 during the period as the Company eliminated the discount to Cirrus for liability coverage. We incurred approximately $125,000 in legal and litigation fees during the first six months of fiscal year 2008 and $104,000 in legal and litigation fees for such six months of fiscal year 2007 attributable to all legal support matters and the defense of our pending lawsuits.

In addition to the requirements under the Sarbanes-Oxley Act, we will require increased expenditures as we implement expanded compliance infrastructure and oversight.

Off-Balance Sheet Arrangements

During the quarter ended March 31, 2008, the Company did not engage in any off-balance sheet arrangements as defined in Item 303(c) of Regulation S-B.

Critical Accounting Policies and Estimates

Our discussion and analysis or results of operation is 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 these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, the reported amounts of revenues and expenses during the reporting period, and related disclosures of contingent assets and liabilities for the periods indicated. The notes to the financial statements contained herein describe our significant accounting policies used in the preparation of the financial statements. On an on-going basis, we evaluate our estimates, including, but not limited to, those related to our allowance for doubtful accounts, inventory valuations, the lives and continued usefulness of furniture, fixtures and leasehold improvements, deferred tax assets and contingencies. Due to uncertainties, however, it is at least reasonably possible that management’s estimates will change during the next year, which cannot be estimated. Realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities and projected future taxable income in making this assessment. Actual future operating results, as well as changes in future performance, could have a material adverse impact on the valuation reserves. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates under different assumptions or conditions.

Recently Issued Accounting Pronouncements

	•		Acquisition costs will be generally expensed as incurred;

	•		Noncontrolling interests (formerly known as “minority interests” will be valued at fair value at the acquisition date);

	•		Acquired contingent liabilities will be recorded at fair value at the acquisition date and subsequently measured at either the higher of such amount or the amount determined under existing guidance for non-acquired contingencies;

	•		In-process research and development will be recorded at fair value as an indefinite-lived intangible asset at the acquisition date;

	•		Restructuring costs associated with a business combination will be generally expensed subsequent to the acquisition date; and

	•		Changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date generally will affect income tax expense.


ITEM 3.		CONTROLS AND PROCEDURES

As of March 31, 2008, the Company carried out an evaluation, with the participation of our Chief Executive of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended). Based upon that evaluation, our Chief Executive Officer at the time concluded that our disclosure controls and procedures continue to contain the material weakness noted in our 10k filed March 6, 2008. The material weakness relates to the casting of inventory and related monitoring controls related to the Mexico operation.

We determined that we had made progress in addressing the aforementioned material weakness at September 30, 2007 by:

	•		Contract with a supplier to replace our ERP System with one which is more robust and contains strong inventory control capabilities.

	•		Enhanced record retention strengthening documentation of accounting activity.

	•		Continued development of accounting staff.

	•		Began documentation of the overall control environment.

We will continue these efforts with the goal removing the material weakness.


Part II.		OTHER INFORMATION


ITEM 1.		LEGAL PROCEEDINGS

McGrath

In April 2005, Sue Jean McGrath, individually and as successor in interest to Charles W. McGrath, deceased, Charles W. McGrath III, Tanya Sue McGrath, Janny Sue McGrath, individually v. Cirrus Design Corporation, Ballistic Recovery Systems, Inc., and Aerospace Systems and Technologies, Inc., U.S. District Court, Northern District of California, File No. C05-1542, was commenced. The plaintiffs have alleged vicarious liability, strict product liability, negligence and breach of warranty against the defendants arising from the crash of a Cirrus Design Corp. SR22 airplane near Sugar Bowl, California. On December 6, 2007, the court granted summary judgment to all defendants, including the Company. The plaintiffs have agreed not to pursue an appeal in exchange for our agreement not to seek recoverable costs.

Rayner


ITEM 6.		EXHIBITS

Exhibits

The following documents are included or referenced in this report.


Exhibit Number		Description

	10.1	Asset Purchase Agreement between Advanced Tactical Fabrication, Inc. Head Lites Corporation and shareholders of Head Lites Corporation dated November 16, 2007 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on November 21, 2007).

	10.2	Master Agreement between the Company, Advanced Tactical Fabrication, Inc., Head Lites Corporation and Gary Lesley dated November 16, 2007 (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on November 21, 2007).

	31.1	Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer.

	32.1	Section 1350 Certification of Principal Executive Officer.

Signatures

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



Date: July 3, 2008	By:	/s/ Larry E. Williams
		Larry E. Williams
		Principal Executive Officer and Acting Chief Financial Officer

Exhibit Index


Exhibit Number		Description

	10.1	Asset Purchase Agreement between Advanced Tactical Fabrication, Inc. Head Lites Corporation and shareholders of Head Lites Corporation dated November 16, 2007 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on November 21, 2007).

	10.2	Master Agreement between the Company, Advanced Tactical Fabrication, Inc., Head Lites Corporation and Gary Lesley dated November 16, 2007 (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on November 21, 2007).

	31.1	Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer.

	32.1	Section 1350 Certification of Principal Executive Officer.