10QSB: TRANSBOTICS CORP
7/11/2003 2:56:12 PM
(EDGAR Online via COMTEX) -- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Overview
The Company derives virtually all of its revenues from the sale of hardware, software and engineering services in connection with projects incorporating its Automated Guided Vehicle (AGV) control technology. In prior years the Company's net revenues from AGV systems, vehicles and technology were derived primarily from sales to customers serving a limited number of industries - automotive, food and paper, textiles and newspaper publishing. The Company's results of operations can be expected to continue to depend substantially upon the capital expenditure levels in those industries and in other industries that it may enter.
Due to the long sales cycle involved, uncertainties in timing of projects and the large dollar amount a typical project usually bears to the Company's historical and current quarterly and annual net revenues, the Company has experienced, and can be expected to continue to experience, substantial fluctuations in its quarterly and annual results of operations.
The Company sells its products and services primarily in two ways. Vehicles, technology and other products and services may be sold in a "project" that becomes an integrated AGV system. The other way is to sell hardware, software and services as standard items, with less involvement by the Company in overall system design. The Company generally would recognize lower net revenue but would realize a higher gross profit margin percentage in selling standard items, in each case compared to the sale of a project, due to the inclusion in project sales of other vendors' products and services with margins generally lower than the Company's own products and services. Between any given accounting periods, the level and mixture of standard item sales and project sales can cause considerable variance in net revenues, gross profit, gross profit margin, operating income and net income.
Revenues from standard item sales are recognized upon shipment, while revenues from project sales are recognized under the "percentage of completion" method. Under this method, with respect to any particular customer contract, revenues are recognized as costs are incurred relative to each major component of the project. Although the percentage of completion method will ordinarily smooth out over time, the net revenue and profitability effects of large projects, such method nevertheless subjects the Company's results of operations to substantial fluctuations dependent upon the progress of work on project components. Such components can differ markedly from one another in amount and in gross profit margin.
Project contracts are billed upon attainment of certain "milestones." The Company grants payment terms of 30 to 90 days to its customers. It typically receives a cash advance ranging from 10% to 30% of the total contract amount. Bills are thereafter delivered as milestones are reached. Upon delivery of the project, the customer typically reserves a "retainage" of 10% to 20% pending system acceptance.
Notwithstanding the receipt by the Company of cash advances and periodic payments upon reaching project milestones, the Company requires external financing for its costs and estimated earnings in excess of billings on uncompleted contracts, inventories, receivables and other assets.
The Company's backlog consists of all amounts contracted to be paid by customers but not yet recognized as net revenues by the Company.
Strategy diversification: Management has taken the following actions in an attempt to increase revenues and minimize losses. To date such actions other than reducing operating expenses have not been successful. These approaches include the following:
- Establish and develop strategic alliances with selected customers
- Pursue AGV system business in selected market niches
- Grow the distribution business by adding supplementary products
- Expand the aftermarket sales business
- Reduce operating expenses
The Company is exploring various actions to overcome the urgent need for capital. The Company is also reviewing the feasibility of taking the Company private to reduce expenses if capital is not available through the existing market. (See Liquidity and Capital Resources for further information).
Forward-looking statements: This report (including information included or incorporated by reference herein) contains certain forward-looking statements with respect to the financial condition, results of operation, plans, objectives, future performance and business of the Company.
These forward-looking statements involve certain risk and uncertainties. Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include, among others, the following possibilities:
- Revenues from end user systems sales, new OEMs and new niches may be lower than expected or delayed.
- The Company might be unable to raise the additional working capital needed to finance the current business strategy, either directly or through a business combination.
- General economic or business conditions, either nationally or in the markets in which the Company is doing business, may be less favorable than expected resulting in, among other things, a deterioration of market share or reduced demand for its products.
The table below shows (a) the relationship of income and expense items relative to net revenues, and (b) the change between the comparable prior period and current period, for the three-month and six-month periods ended May 31, 2003 and 2002, respectively. This table should be read in the context of the Company's condensed statements of income presented elsewhere herein:
Federal and state income taxes
Quarter Ended May 31, 2003 compared to the Quarter Ended May 31, 2002
Net revenues decreased by $60,700 or 5.0% from $1,198,051 in the earlier period to $1,137,351 in the latter period. The decrease is primarily due to the decreased project AGV system sales compared to the prior year.
Cost of goods sold decreased from $723,174 to $695,712 or 3.8% due primarily to decreased revenues and lower engineering costs in the current year compared to the prior year. As a percentage of net revenues, cost of goods sold increased to 61.2% compared to 60.4% in 2002. Gross profit decreased by $33,238 or 7.0% from $474,877 to $441,639, while gross profit as a percentage of net revenues decreased to 38.8% from 39.6% due to the same factor.
Selling expenses decreased from $159,926 to $103,835 or 35.1%, primarily due to having a major trade show expense in the prior year compared to no expense in the current year. General and administrative expenses decreased 32.8% from $296,169 to $199,018 compared to the prior year. The decrease is primarily due to decreases in insurance cost, personnel and other expenses. As a percentage of net revenues, general and administrative expenses decreased from 24.7% to 17.5%. The Company incurred $61,070 of research and development expense in 2003 compared to $7,357 in 2002.
Primarily as a result of the foregoing, operating income increased by $66,291 from operating income of $11,425 in the earlier period to operating income of $77,716 in the latter period.
Net interest expense decreased from $3,138 to $1,169, a decrease of $1,969. Lower borrowing in the current year compared to the prior year resulted in the decline.
The Company did not recognize any tax benefits in 2002 for its losses or any income tax expense in 2003 for its earnings as the Company had net operating loss carryforwards. Deferred tax assets have not been recognized since utilization of operating loss carryforwards in the future are not assured to be realized.
Primarily due to lower expenses as described above, the Company had net income of $76,547 in the three months ended 2003 compared to net income of $8,287 in same period of 2002.
Backlog. Backlog consists of all amounts contracted to be paid by customers but not yet recognized as net revenues by the Company. At May 31, 2003, the Company had a backlog of approximately $1,600,000 compared to approximately $1,590,000 one year earlier. Quoting activity for the Company remains good, but there can be no assurances that such activity will result in firm business for the Company.
Six Months Ended May 31, 2003 compared to Six Months Ended May 31, 2002
Net revenues increased by $44,913, or 2.1%, from $2,143,214 in the earlier period to $2,188,127 in the latter period. The increase is primarily due to the increased service work compared to the prior year.
Cost of goods sold decreased from $1,484,191 to $1,340,549, or 9.7%, due primarily to lower engineering costs the current year compared to the prior year. As a percentage of net revenues, cost of goods sold decreased from 69.3% to 61.3%. Gross profit increased by $188,555 or 28.6%, from $659,023 to $847,578 while gross profit as a percentage of net revenues increased from 30.7% to 38.7%.
Selling expenses decreased from $303,950 to $238,648 in 2003 primarily due to lower personnel costs, travel and show expenses. General and administrative expenses decreased from $596,438 to $408,853, or 31.5% compared to the prior year. The decrease is primarily due to decreases in insurance cost, personnel and other expenses. The Company continued to invest in the development of new AGV products to expand its product line in the current year. Investments were significantly more in the current year compared to the prior year.
Primarily as a result of the foregoing, the operating income for the period was $78,000 compared to an operating loss of $265,819 the prior year.
Net interest expense decreased from $7,635 to $2,941, a decrease of 61.5%. The repayment of the loan to Netzler & Dahlgren lowered the Company's 2003 borrowing costs compared to the prior year.
The Company did not recognize any tax benefits in 2002 for its losses or any income tax expense in 2003 for its earning as the Company had net operating loss carryforwards. Deferred tax assets have not been recognized since utilization of operating loss carryforwards in the future are not assured to be realized.
Primarily due to lower expenses as described above, the Company had net income of $75,059 in the six months ended 2003 compared to a net loss of $273,454 in same period of 2002.
Liquidity and Capital Resources
The Company experiences needs for external sources of financing to support its working capital, capital expenditures and acquisition requirements when such requirements exceed its cash generated from operations in any particular fiscal period. The amount and timing of external financing requirements depend significantly upon the nature, size, number and timing of projects and contractual billing arrangements with customers relating to project milestones.
During the six months ended May 31, 2003, net cash provided by operating activities was $130,991. The Company continues to experience cash flow problems in its cash flow. At May 31, 2003 approximately $165,000 of payables were not being paid according to the vendor terms.
The Company has been operating under adverse liquidity conditions due to negative working capital as described in Note 5. The accounts payable balance to Danaher Motion (formerly Netzler & Dahlgren, its major supplier of technology) at May 31, 2003 was approximately $175,000. In 2001, the Company's receivables were pledged to Danaher Motion to secure a note payable having a principal balance of $27,051 at November 30, 2002 ("the N & D note"), in exchange for the security interest previously held by Danaher Motion in the office property. The note was paid in full in December 2002 and the pledge on the Company's receivables was released as of such date.
Danaher Motion has indicated to the Company that Danaher Motion's financial exposure to the Company must be reduced by timely payment of its payables. To ensure prompt payments, the Company must remain profitable or raise additional equity and/or debt to improve its working capital. In the first quarter of 2002, the Company began paying vendors on a deferred basis to meet its obligation to Danaher Motion on the note payable and retain its license agreement. Notwithstanding the pay off of the Danaher Motion's note, as the Company continues to be unable to satisfy the payment terms with Danaher Motion for its current payables, the Company risks termination of its license agreement with Danaher Motion.
There are no assurances that the deficiency in the cash flow will not continue. The Company continues exploring the possibility of raising additional equity capital or subordinated debt, either directly or possibly through a business combination, in order to improve its financial position and have the working capital to address potential growth opportunities. The Company is also reviewing the feasibility of going private to reduce its operating expenses. The Company's current expenses relating to being public are approximately $175,000 annually. There can be no assurances that the Company will be successful in regaining its profitability or raising the additional capital or subordinated debt that may be necessary for the Company's operations. There is substantial doubt about the Company's ability to continue as a going concern if the Company is not able to improve its working capital and liquidity.
Critical Accounting Policies
Revenue Recognition
The Company recognizes revenue from the sales of commercial products as shipments are made.
The Company recognizes revenues under long-term contracts on the percentage of completion method, measured by the percentage of each component cost incurred to date to estimated total component contract costs for each component in the contract. Component costs include material, direct labor, subcontracts, engineering, overhead, and miscellaneous costs. Provisions for estimated losses are made in the period in which they first become determinable.
"Costs and estimated earnings in excess of billings on uncompleted contracts" represent revenue recognized in excess of amounts billed. "Billings in excess of costs and estimated earnings on uncompleted contracts" represent billings in excess of revenues recognized.
Estimates:
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
Jul 11, 2003 |
