10QSB: FORCE PROTECTION INC 5/17/2004 2:20:47 PM
(EDGAR Online via COMTEX) -- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion should be read in conjunction with our financial statements and the notes thereto contained elsewhere in this report.
Critical Accounting Policies
The Securities and Exchange Commission has issued Financial Reporting release No. 60, "Cautionary Advice Regarding Disclosure About Critical Accounting Policies," or FRR 60, suggesting companies provide additional disclosure and commentary on their most critical accounting policies. In FRR 60, the SEC defined the most critical accounting policies as the ones that are most important to the portrayal of a company's financial condition and operating results, and require management to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. The methods, estimates and judgments we use in applying these most critical accounting policies have a significant impact on the results we report in our financial statements.
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
As a general rule, financial information is accounted for and based on cost, not current market value. Revenues and gains should be matched using the accrual method with the expenses giving rise to the revenues and gains to determine earnings for the period. Expenses are necessarily incurred to produce revenue. Expenses are then "matched" in the same accounting period against the revenue generated. Revenues are recognized when they are earned and expenses are recognized in the same period as the related revenue (matching or using a systematic and rational allocation or expensing in the period in which they expire), not necessarily in the period in which the cash is received or expended by the company. Other areas include:
Inventories
Inventories are stated at the lower of cost or market. The cost is determined under the first-in-first-out method base (FIFO) valuation method.
Goodwill
Under SFAS No. 142. Goodwill and other Intangible Assets, all goodwill amortization ceased effective Jan.1, 2002. Rather, goodwill is now subject to only impairment reviews. A fair-value based test is applied at the reporting level. This test requires various judgments and estimates. A goodwill impairment loss will be recorded for any goodwill that is determined to be impaired. Goodwill is tested for impairment at least annually.
We acquired Goodwill, which represents the excess of purchase price over fair value of net assets, in the acquisition of Technical Solutions Group, Inc. in June 2002. We follow SFAS 142, Goodwill and Intangible Assets, which requires us to test goodwill for potential impairment annually. When the carrying value exceeds fair value, the impairment is the difference between the carrying value of goodwill and the implied value. The implied value of goodwill is the difference between the fair value for the unit as a whole and the value of individual assets and liabilities using an "as-if" purchase price.
Loss per Share
We utilize SFAS No. 128, "Earnings per Share." Basic loss per share is computed by dividing loss available to common stockholders by the weighted-average number of common shares outstanding. Diluted loss per share is computed similar to basic loss per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive.
Revenue Recognition
Our revenues are derived principally from the sale of blast and mine-protected vehicles. Revenue from products and services are recognized at the time goods are shipped or services are provided to the customer, with an appropriate provision for returns and allowances. The estimated sales value of performance under fixed-price and fixed-price incentive contracts in process is recognized under the percentage-of-completion method of accounting in which the estimated sales value is determined on the basis of physical completion to date (the total contract amount multiplied by percent of performance to date less sales value recognized in previous periods) and cost (including general and administrative) are expensed as incurred. It is our policy to not recognize revenue until customer acceptance and shipment to the customer. All advance payments are treated as "deferred revenue".
Research and Development
We expense research and development cost as incurred.
Comparison of Three Months Ended March 31, 2004 and 2003.
The following table sets forth our consolidated statements of operations:
THREE MONTHS ENDED MARCH 31,
2003 2004
------------- -------------
Sales $96,349 $1,642,853
Cost of sales 231,753 1,232,037
Gross profit (loss) (135,404) 410,816
Selling, general and administrative 1,648,527 1,603,953
Income/(Loss) from operations (1,783,932) (1,193,136)
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Interest expenses (14,195) (40,314)
Other income 14,458 37,012
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Total other income (expense) 263 (3,303)
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Net income/(loss) $(1,783,669) $(1,196,439)
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Basic loss per share $(0.02) $ (0.008)
Diluted loss per share $(0.02) $ (0.005)
Weighted-average common shares
Basic 78,152,071 144,161,083
Diluted 99,784,564 233,495,731
Net sales for the three months period ended March 31, 2004 increased by
$1,546,504 or 16.1 times 2003 sales compared to three months period ended March
31, 2003. Sales during the first quarter of 2004 were strongly influenced by
2003 orders finalized during the quarter. Final shipment of the first Buffalo
order and spares attributed to the increase in sales.
Cost of sales for 2004 was $1,232,037, or 74.99% of sales, compared to 240.6% of sales in 2003. During the first quarter of 2003, manufacturing period costs were high in comparison to sales due to the start up of a government contract. The cost of goods sold in the first quarter of 2004 were higher than we have experienced in the past due to the percentage of spares shipments in relation to product sales.
Selling, General and Administrative expenses for 2004 decreased slightly by $44,575 to $1,603,953 compared to $ 1,648,528 for 2003. Incremental Research & Development expenditures of $501,850 during the first quarter of 2004 as compared to $0 during 2003 attributed to the relative flat spending between the two periods. Excluding Research & Development expenditures, Selling, General & Administrative spending, normalized was $1,102,103 or 66.8% of the 2003 run rate. Actual marketing expenses increased by $62,847 during the first quarter of 2004, due to increased potential customer presentations. During the first quarter of 2004 we incurred $300,000 of commission fees on the $3,000,000 of raised capital.
During the quarter ended March 31, 2004, other income was $36,021. Inactive accounts payable of $29,048 were settled and an overstated Notes payable of $6,861 was corrected. We earned $1,103 interest income. Bank charges of $708, Loan interest of $610 and factoring expenses of $37,701 accounted for the majority of the $40, 314 of interest expense for the quarter.
Net Loss for three months ended March 31, 2004 was $1,196,436, which decreased by $587,230 from $1,783,669 during the three months period ended March 31, 2003. The decrease is attributed to cost control and the discontinued boat operations. Research & Development activities, fund raising and demonstration expenses accounted for an incremental $864,697 erosion of net income. Excluding these expenses, net loss would have been $331,742.
Business segment analysis of the three months ended March 31, 2004:
10-QSB Segment Information (000's) (approximate)
TSG Corp Total
--------------- ----- ------------ ----------- ----------------
Sales 1,679 1,679
Cost of sales 1,232 1.232
------------ ----------- ----------------
Gross profit 411 411
G.P. % 24.4% 24.4%
SG&A 1,077 527 1,604
--------------- ----- ------------ ----------- ----------------
Segment P&L (669) (527) 1,196
------------- ------- ------------ ----------- ----------------
Mine and blast protected vehicles provided approximately 100% of the total
sales and 100% of the total cost of goods sold.
Going Concern
The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the financial statements, during the year ended December 31, 2003, we incurred losses of $5,321,623 and our current liabilities exceed our current assets by $360,652. During the quarter ended March 31, 2004, we incurred losses of $1,196,439, however current assets exceeded current liabilities by $2,253,207.
Realization of a major portion of the assets in the accompanying balance sheet is dependent upon our continued operations, obtaining additional financing, and the success of our future operations.
Due to the nature of our business it is uncertain whether we will receive orders impeding our cash situation and our ability to pay creditors.
Liquidity and Capital Resources
As of March 31, 2004, cash and cash equivalents were $ 3,210,136 compared to $271,293 as of December 31, 2003. Our principal sources of capital have been cash flow from operations, warrant exercises, and the sale of common stock.
Operating Activities
The cash used by operating activities for the year ended March 31, 2004 was $423,581, as compared to $1,099,887 for the quarter ended March 31, 2003. The cash used can be attributable primarily to funding ongoing operations and the development of the Typhoon - Long. The large decrease is primarily the result of a reduction in inventory of $630,738.
Investing Activities
Our capital expenditures for the three months ended March 31, 2004 were $49,955, related to investments in office and manufacturing equipment. We anticipate that our capital expenditures during 2004 will increase significantly due to contract awards, the improvement of operating efficiencies, and additional manufacturing capacity.
Financing Activities
On March 23, 2004, we closed on a private offering. This offering, sold to six accredited investors, consisted of the following:
(a) 15,000,000 shares at $0.20 per share;
(b) an "A" Warrant for each share purchased, exercisable at $0.24 per share. The "A" Warrants expire March 23, 2006; and
(c) A "Green Shoe" warrant for each share purchased, exercisable at $0.20 per share for a period of 180 days after the effective date of the registration statement, commencing on the effective date of the registration statement.
We generated proceeds of $3,000,000 from the sale of common stock. Commission expense and fees totaled $330,000, generating net proceeds of $2,670,000.
During the three months period ended March 31, 2004, we received $743,750 through the exercise of warrants that were originally issued pursuant to an addendum to the private placement memorandum dated April 10, 2002. $0.01 and $0.10 warrants were exercised yielding $543,750. $0.20 warrants were exercised yielding $200,000.
We repaid 3 promissory notes during the first quarter of 2004, finalized as of May 7, 2004 by receipt of all the required paperwork, totaling $400,000 of principle, all interest was forgiven. $150,000 of cash was repaid and 25 Series C preferred shares were issued to settle all 3 promissory notes.
On September 20, 2003, we entered into an Investment Agreement with Dutchess Private Equities Fund, also referred to as an Equity Line of Credit. That agreement provides that, following notice to Dutchess, we may put to Dutchess up to $3.5 million in shares of our common stock for a purchase price equal to 93% of the lowest closing bid price on the Over-the-Counter Bulletin Board of our common stock during the five day period following that notice. Each put will be equal to either (a) 200% of the average daily volume of our common stock for the 10 trading days prior to the put notice date, multiplied by the average of the three daily closing best bid prices immediately preceding the Put or (b) $10,000; provided that in no event will the Put Amount be more than $1,000,000 with respect to any single Put. Under the March 23, 2004 Private Placement we have agreed not to utilize the Equity Line for a period of 6 months following the effective registration of the shares underlying the Private Placement. The shares underlying the Private Placement were registered on April 15, 2004.
On April 23, 2004 we announced award of a contract to deliver up to 27 Cougar type vehicles. Initial deliveries are scheduled to ship September 2004. Substantial cash will be required for the inventory build and capital infrastructure negatively affecting liquidity and our current favorable cash position. We expect to receive progress payments during production and except to receive final payment per unit shipped within 45 days of acceptance by our customer.
At the present time, we are not generating sufficient revenue to cover expenses. Based on our current operating plan, we anticipate that additional financing will be required to finance our operations and capital expenditures in 2004. Accordingly, our future liquidity will depend on our ability to obtain necessary financing from outside sources and our ability to execute our contract awards. We currently believe that we have sufficient cash to continue for the next 8 months.
Our currently anticipated levels of revenues and cash flow are subject to many uncertainties. Further, unforeseen events may occur that will require us to raise additional funds. The amount of funds we need will depend upon many factors, including without limitation, the extent and timing of sales of our products, future product costs, the timing and costs associated with the establishment and/or expansion, as appropriate, of our manufacturing, development, engineering and customer support capabilities, the timing and cost of our product development and enhancement activities and our operating results. Until we generate cash flow from operations that will be sufficient to satisfy our cash requirements, we will need to seek alternative means for financing our operations and capital expenditures and/or postpone or eliminate certain investments or expenditures. Potential alternative means for financing may include leasing capital equipment, obtaining a line of credit, or obtaining additional debt or equity financing. Additional financing may not be available, or available on acceptable terms. The inability to obtain additional financing or generate sufficient cash from operations could require us to reduce or eliminate expenditures for capital equipment, research and development, production or marketing of our products, or otherwise curtail or discontinue our operations, which could have a material adverse effect on our business, financial condition and results of operations. Furthermore, if we raise funds through the sale of additional equity securities, the common stock currently outstanding will be further diluted.
Inflation
We do not believe that inflation has had or is likely to have any significant impact on our operations. However, with the current shortage of some types of steel, the price of steel may increase significantly and could affect profitability.
Forward Looking Statements
This report, including the foregoing Management's Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements, including statements regarding, among other items, our business strategies, continued growth in our markets, projections, and anticipated trends in our business and the industry in which we operate. The words "believe," "expect," "anticipate," "intends," "forecast," "project," and similar expressions identify forward-looking statements. These forward-looking statements are based largely on our expectations and are subject to a number of risks and uncertainties, certain of which are beyond our control. We caution that these statements are further qualified by important factors that could cause actual results to differ materially from those in the forward-looking statements, including, among others, the following: reduced or lack of increase in demand for our products, competitive pricing pressures, changes in the market price of ingredients used in our products and the level of expenses incurred in or operations. In light of these risks and uncertainties, the forward-looking information contained herein may not in fact transpire or prove to be accurate. We do not intend to update any forward-looking statements, except as required by law.
May 17, 2004
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