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Irvine Sensors Corp. Reports Operating Results (10-Q)
Posted by: gurufocus (IP Logged)
Date: February 16, 2011 04:25PM
Irvine Sensors Corp. (IRSN) filed Quarterly Report for the period ended 2011-01-02.
Highlight of Business Operations:
The current period increase in absolute dollar cost of revenues as compared to the prior fiscal years first quarter was partially the result of the corresponding increase in total revenues in the 13-week period ended January 2, 2011 as compared to the 13-week period ended December 27, 2009. However, the increase in cost of revenues in the current period was proportionately greater than the related increase in total revenues, resulting in the large increase in cost of revenues as a percentage of total revenues in the 13-week period ended January 2, 2011 as compared to the 13-week period ended December 27, 2009. This disproportionate increase in cost of revenues for the current fiscal year first quarter compared to the first quarter of fiscal 2010 was largely the result of the timing and amount of overhead expenses recorded in the current period, which did not occur in the prior fiscal years first fiscal quarter. In the first half of fiscal 2010, we had not yet decided whether we were going to continue our practice of annual stock contributions to our Employee Stock Bonus Plan (ESBP). In the third quarter of fiscal 2010, we made the decision to continue our practice of such contributions and began accruing for the expense, including a catch-up accrual for the first half of fiscal 2010, of which approximately $136,400 applicable to costs of revenues would have been recorded in the 13-week period ended December 27, 2009 had the contribution decision been made in that period. In fiscal 2011, we have accrued for this expense from the beginning of the fiscal year. In addition, in December 2010, we accrued and paid non-recurring compensation to our staff in consideration of the salary reductions and deferrals they had experienced in fiscal 2010 and the first quarter of fiscal 2011, of which $200,300 was allocated to overhead applied to cost of revenues. No comparable expense was incurred in the first quarter of fiscal 2010. Because of these timing variances and non-recurring expenses, we do not believe that the increase in cost of revenues as a percentage of total revenues in the 13-week period ended January 2, 2011 as compared to the 13-week period ended December 27, 2009 is indicative of a continuing trend.
A portion of the increase in absolute dollars of general and administrative expense in the 13-week period ended January 2, 2011 as compared to the 13-week period ended December 27, 2009 was derived from the same timing variance and non-recurring expense discussed above that affected the cost of revenues, namely the timing of the accrued expenses for the ESBP and the non-recurring staff compensation in December 2010. Approximately $50,200 of general and administrative expense would have been recorded in the first quarter of fiscal 2010 had the ESBP contribution decision been made in that period. In addition, approximately $56,400 of general and administrative expense was recorded for non-recurring staff compensation in the first quarter of fiscal 2011, and no comparable expense was incurred in the prior fiscal year period. The increases in general and administrative expenses from these sources in the 13-week period ended January 2, 2011 were offset by reductions in other categories of general and administrative expense, the largest such reduction being an approximate $219,000 decrease compared to the prior fiscal year period in our unallowable general and administrative expense for which we cannot seek reimbursement under most of our government contracts, largely litigation expenses. During the first quarter of fiscal 2010, we were still involved in litigation related to our discontinued Optex subsidiary, but that litigation was subsequently settled and did not produce comparable legal expenses in the first quarter of fiscal 2011. However, in connection with our Institutional Financing in December 2010 and the related management and organizational changes, we incurred $306,500 more stock-based compensation expense in the first quarter of fiscal 2011 than we did in the first quarter of fiscal 2010, which was the largest contributor to the increase in general and administrative expense in the current fiscal year period. Since our total revenues increased in the fiscal 2011 first quarter as compared to the first quarter of fiscal 2010, our general and administrative expense as a percentage of total revenues decreased in the current fiscal period, despite the increase in absolute dollars of general and administrative expense during the same period.
The aggregate of our non-cash depreciation and amortization expense, non-cash interest expense, non-cash change in fair value of derivative instruments and non-cash deferred stock-based compensation was $8,130,200 in the 13 weeks ended January 2, 2011. These non-cash operational expenses partially offset the use of cash derived from our net loss and various timing and cash deployment effects, the largest of which were a $1,319,300 increase in accounts receivable and a $1,889,100 decrease in our accounts payable and accrued expenses, resulting in an operational use of cash in the amount of $5,787,800 in the current quarter. These and other uses of cash were offset by $12,655,500 of net proceeds from our Bridge Financing and Institutional Financing in the current period, resulting in the net $6,465,300 increase of cash in the 13-week period ended January 2, 2011. These financing proceeds were also the primary source of improvement in our working capital deficit in the current period.
At January 2, 2011, our funded backlog was approximately $5.5 million. We expect, but cannot guarantee, that a substantial portion of our funded backlog at January 2, 2011 will result in revenue recognized in the next twelve months In addition, our government research and development contracts and product purchase orders typically include unfunded backlog, which is funded when the previously funded amounts have been expended or product delivery schedules are released. As of January 2, 2011, our total backlog, including unfunded portions, was approximately $26.8 million.
Debt. At January 2, 2011, we had approximately $15,652,400 of debt, which consisted of (i) unsecured convertible and non-convertible debentures issued in the Debenture Private Placement with an aggregate principal balance of $2,752,200; (ii) the Looney Note, with a principal balance of $2,500,000; (iii) Bridge Notes with an aggregate principal balance of $1,801,400 and (iv) Subordinated Notes with an aggregate principal balance of $8,598,800. Each of these instruments is described more fully below. (See Note 2 of Condensed Notes to Consolidated Financial Statements).
In March 2010, we sold and issued convertible debenture units (the Units) with an aggregate principal balance of $2,752,200 in two closings of a private placement (the Debenture Private Placement). Each Unit is comprised of (i) one one-year, unsecured convertible debenture with a principal repayment obligation of $5,000 (the Convertible Debenture) that is convertible at the election of the holder into shares of our common stock at a conversion price of $0.40 per share (the Principal Conversion Shares); (ii) one one-year, unsecured non-convertible debenture with a principal repayment obligation of $5,000 that is not convertible into common stock (the Non-Convertible Debenture and, together with the Convertible Debenture, the Debentures); and (iii) a five-year warrant to purchase 3,125 shares of our common stock (the Debenture Investor Warrant). The conversion price applicable to the Debentures and the exercise price applicable to the Debenture Investor Warrants is $0.40 per share. The Debentures bear simple interest at a rate per annum of 20% of their principal balance. Interest on the Debentures accrues and is payable quarterly in arrears and is convertible at our election into shares of our common stock at a conversion price of $0.40 per share. We elected to pay the first, second and third quarterly interest payments due in June 2010, September 2010 and December 2010, respectively, on the Debentures in the aggregate amount of $414,700 through conversion into 693,600 shares of our common stock. The conversion price of the Debentures is subject to adjustment for stock splits, stock dividends, recapitalizations and the like. We may repay any unpaid and unconverted principal amount of the Debentures in cash prior to maturity at 110% of such principal amount.
Stocks Discussed: IRSN,