MHLX - Amended 10-QSB - Aug 23 2006
Quarterly Report
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion provides information that management believes is relevant to an assessment and understanding of the Company's operations and financial condition. This discussion should be read in conjunction with the unaudited consolidated financial statements and accompanying notes.
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Forward-Looking Statements
This Quarterly Report on Form 10-QSB contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements reflect management's current view and estimates of future economic and market circumstances, industry conditions, company performance and financial results. Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates" and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are subject to risks and uncertainties that could cause our future results to differ materially from the results discussed herein. Factors that might cause such a difference include, but are not limited to, those discussed elsewhere in this Quarterly Report on Form 10-QSB. We do not intend, and undertake no obligation, to update any such forward-looking statements to reflect events or circumstances that occur after the date of this filing.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We evaluate our estimates on an on-going basis, including those related to product returns, bad debts, inventories, prepaid expenses, intangible assets, income taxes, warranty obligations, and other contingencies. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies and related judgments and estimates affect the preparation of our consolidated financial statements.
Revenue Recognition-We recognize revenue from commercial sales of cables, connectors, customized cable assemblies, wire harnesses, and mechanical assemblies when title passes, which is upon shipment. Commercial sales are made F.O.B. point of shipment. The products must be physically shipped from the factory. In some cases, tooling that has been paid for by a customer may remain at our facility or at a vendor's facility. Returns are limited to nonconforming products and the volume of returns has been insignificant. We do not establish reserves for returns because they have been minimal.
RESULTS OF OPERATIONS
Overview
microHelix is a manufacturer and distributor of custom cable assemblies for the medical and commercial Original Equipment Manufacturer ("OEM") markets. We serve a segment of the quick turn, high mix, low volume cable assembly market generally referred to as the custom cable assembly market. Typical cable assemblies include cable, connectors, contacts, flex reliefs, housings and printed circuit boards ("PCBs") and are critical sub-components of medical devices and commercial electronic systems. We operate our business in a single operating segment through two divisions: our Moore division and our MicroCoax division. We sold our wire and cable division in April 2004.
On April 8, 2005, we acquired 100% of the outstanding stock of Moore. Moore, headquartered in Tualatin, Oregon, just outside of Portland was founded in 1978 and is a manufacturer of customized cable assemblies, sub-assemblies, wire harnesses and electro-mechanical assemblies. Moore serves the cable assembly requirements of major medical equipment manufacturers and commercial equipment manufacturers. Moore also does complex mechanical assemblies ("box builds") for commercial and aerospace customers. Many major OEMs outsource their cable assembly work so they can focus on final assembly and testing of their products. Moore's growth has been driven by its ability to partner with its customers, support complex projects with strong in-house engineering resources, provide low-cost assembly services and offer turn-key solutions for custom cable assembly projects. Custom cable assembly work is generally not easily transferred to offshore operations for three reasons: (1) low unit volume; (2) rapid turn (i.e. accelerated delivery and schedule) and (3) frequent engineering changes. We operate Moore as a wholly owned subsidiary.
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Our MicroCoax division designs and manufactures cable assemblies for OEM customers that are used in applications such as medical ultrasound probes, laparoscopes, catheters and flaw detection ultrasound systems.
microHelix began in 1991 in Portland, Oregon as a grant and private equity funded research company, formed to develop leading edge manufacturing techniques for medical device interconnect systems. In the years that followed we established a foundation of proprietary processes and intellectual property in the areas of ultra-thin wall pinhole free wire, micro-interconnect technology, advanced laser micro-machining, specialty connectors and flex circuits. We began manufacturing operations in 1998, designing and building cable assemblies and micro-electric interconnects for use in the medical device and commercial industries.
In April 1999, we acquired Key-Tech, a privately held Portland-based designer and manufacturer of interconnect systems for the medical and commercial markets. In addition to acquiring a customer base, we significantly enhanced our manufacturing and engineering capabilities.
In December 1999, we acquired the assets of the medical ultrasound division of Alcatel NA Cable Systems, Inc , the United States subsidiary of one of the largest wire and cable manufacturers in the world headquartered in Paris, which designs and manufactures cable assemblies for use in non-invasive ultrasound probes and systems. In connection with this acquisition, we acquired facilities and employees in Tucson, Arizona and Nogales, Mexico.
We completed our initial public offering in November 2001. Our Common Stock and Class B Warrants currently trade on the NASDAQ OTC Bulletin Board under the symbols MHLX.OB and MHLXZ.OB, respectively.
In April 2004 we sold the assets of our wire and cable division to Advanced Neuromodulation Systems, and in April 2005 we acquired all of the stock of Moore, a manufacturer of customized cable assemblies, sub-assemblies, wire harnesses and electro-mechanical assemblies. Moore is operated as a wholly owned subsidiary.
We have incurred significant losses since inception and those losses have continued following our initial public offering. In our business we have had to rely on a relatively small number of OEM customers for the majority of our sales. Rapid changes in demand by our OEM customers in the short term make our production scheduling uncertain and, as such, have made our expenses more difficult to control and consequently make our cash requirements difficult to predict. We have not been successful in achieving profitability due to in part the unpredictability of the OEM requirements. During the past two years we have tried to broaden the OEM customer base, in part through our acquisition of Moore.
THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005
On April 8, 2005 the Company acquired 100% of the outstanding stock of Moore and as result of this acquisition date the second quarter, ended June 30, 2006, can effectively be compared with the same quarter in 2005. The results for the six months ended June 30, 2006 will differ, as the Moore acquisition did not occur until early April 2005.
Total sales in the second quarter of 2006 were $3,949,315 compared to $2,443,595 in the second quarter of 2005, an increase of 62%. The sales increases in both the Moore and MicroCoax divisions were a result of increased demand from existing customers while at the same time new customers contributed significantly to the increased sales levels. For the six months ended June 30, 2006 total sales were $7,727,299 compared to $2,862,279, or an increase of $4,865,020 on a year to year basis, an increase of 170%. The primary reason for this increase was due to the acquisition of Moore Electronics and the increase in business during the second quarter as previously discussed.
Gross profit in the second quarter of 2006 was $804,008 compared to $125,427 in the second quarter of 2005. The significant increase in gross profit margin from 5.1% in the second quarter of 2005 compared to 20.3% in the second quarter of 2006 can be attributed to operating the plants at a higher capacity, lower manufacturing expenses, improved inventory management and the sales of higher margin products. For the six months ended June 30, 2006 the total gross profit was $1,014,031 compared to gross profit of $204,003 recorded during the first six months of 2005. The increase in gross profit during this period of $810,028 is primarily due to the acquisition of Moore Electronics and the improvements in operating efficiency achieved during the second quarter of 2006.
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Total operating expenses in the second quarter of 2006 were $760,483 compared to total operating expenses of $964,370 incurred during the same quarter a year earlier. The primarily reason for the decrease in expenses of $203,887 is due to the additional expenses incurred by the Company associated with the acquisition of Moore Electronics in the second quarter of 2005. For the six-month period ending June 30, 2006 total operating expenses were $1,412,115 compared to $1,165,112, or an increase of $247,003. This increase is attributed to an increase in the sales and administrative personnel related to the Moore division.
Interest expense for the second quarter of 2006 was $88,996 compared to $57,245 for the same quarter in 2005. On a six month basis interest expense for 2006 was $156,399 compared to $65,212 in 2005, or an increase of $91,187. The increase in interest expense is attributed to the increase in the outstanding line of credit balance needed to support the increased level of business and the interest expense is related to a shareholder note used in part to acquire Moore Electronics.
Primarily as a result of the significant increase in sales and the associated improvements in gross profit the Company earned a profit of $469 in the second quarter of this year compared to a loss of $895,738 recorded in the second quarter of 2005, or an improvement of $896,207. On a year to date basis for the six months ended June 30, 2006 the Company recorded a loss of $462,296 compared to a loss of $1,025,871 recorded during the first six months of 2005, or an improvement of $563,575 that can primarily be attributed to second quarter changes previously discussed.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2006 the Company had $24,269 of cash and cash equivalents. Cash used in operating activities for the six-month period ended June 30, 2006 was $108,893 compared to $157,291 used in the same period a year ago. The cash used in operations during the first six months of the year primarily related to an increase in inventories of $674,326 and a decrease in customer deposits of $163,456 that were offset by an increase in accounts payable of $859,337. The decrease in cash of $34,043 since December 31, 2005 reflects $108,893 used for operating activities plus $225,529 invested in capital expenditures for tooling and equipment to support our manufacturing partner in Malaysia, and the installation of a new ERP software system. These expenditures were partially financed by $300,379 of cash proceeds from a note and through an increase in our line of credit.
As of June 30, 2006, the Company had a $2,000,000 line of credit for working capital, secured by accounts receivable and inventory. As of June 30, 2006, there was $1,430,165 outstanding on the line of credit and the availability on the line of credit was $569,835. The line of credit expires on April 7, 2007.
On June 22, 2006, the Company entered into a $350,000 term loan agreement secured by equipment. The loan will be repaid in 30 equal installments (August 15, 2006 - January 15, 2009) consisting of principal and interest with the final payment due on January 15, 2009.
As of June 30, 2006, there were no outstanding purchase orders for capital equipment.
On April 8, 2005, the Company issued a promissory note in the amount of $1,250,000 to Marti D. Lundy as part of the Moore acquisition. The note bears an annual interest rate of 10%. On August 8, 2006 the payment terms were changed to state that a monthly payment of $23,482 is due through September 8, 2006, and a monthly payment of $43,482 is due beginning on October 8, 2006 through April 8, 2008, at which time all unpaid principal and accrued but unpaid interest is due and payable. The note is secured by a lien on substantially all of the Company assets.
Each share of our Series B Preferred Stock is convertible into four shares of Common Stock (subject to adjustment for stock splits, stock dividends, reclassifications and the like). We can redeem the shares of Series B Preferred Stock at any time after April 8, 2006 for $1.50 per share (as adjusted for stock splits, stock dividends, reclassification and the like). The Company plans to declare and pay the accrued dividends on our Series B Preferred Stock, in shares of our Common Stock, in connection with our 2006 Annual Meeting of Shareholders on August 17, 2006. We have granted demand and piggy-back registration rights to the holders of Series B Preferred Stock with respect to the underlying shares of Common Stock obtainable upon conversion. |
