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XENONICS HOLDINGS, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations (rounded in thousands)

August 14, 2014

The following discussion and analysis should be read in conjunction with the condensed consolidated financial statements and accompanying notes filed as part of this report.

Forward-Looking Statements

The following Management's Discussion and Analysis of Financial Condition and Results of Operations, as well as information contained elsewhere in this report, contain statements that constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. These statements include statements regarding the intent, belief or current expectations of us, our directors or our officers with respect to, among other things: anticipated financial or operating results, financial projections, business prospects, future product performance and other matters that are not historical facts. The success of our business operations is dependent on factors such as the impact of competitive products, product development, commercialization and technology difficulties, the results of financing efforts and the effectiveness of our marketing strategies, general competitive and economic conditions. Forward-looking statements are not guarantees of future performance and involve risks and uncertainties. Actual results may differ materially from those projected in the forward-looking statements as a result of various factors, including as a result of the factors described in the "Risk Factors" section of our most recent Annual Report on Form 10-K. We do not undertake any obligation to update or revise any forward-looking statements contained in this report, whether as a result of new information, future events or otherwise.

Results of Operations

Three months ended June 30, 2014 compared to the three months ended June 30, 2013

We operate in the security lighting systems and night vision industries, and the majority of our revenues are derived from sales of our illumination products and our SuperVision night vision product to various customers.

Revenues: Revenues for the quarter ended June 30, 2014 were $257,000 compared to revenues of $373,000 for the quarter ended June 30, 2013. In the quarter ended June 30, 2014, 100% of revenues were from sales of our NightHunter products to the military (U.S. Army, U.S. Marines and military distributors). In the quarter ended June 30, 2013, 97% of revenues were from sales of our NightHunter products to the military.

Cost of Goods and Gross Profit: Cost of goods consists of the costs of manufacturing our NightHunter and SuperVision products.

The gross profit percentages were 40% and 34% for the quarters ended June 30, 2014 and 2013, respectively.

Selling, General and Administrative: Selling, general and administrative expenses decreased by $2,000 to $378,000 for the quarter ended June 30, 2014 as compared to $380,000 for the quarter ended June 30, 2013.

Research & Development: Research and development expenses decreased by $42,000 to $57,000 for the quarter ended June 30, 2014 compared to $99,000 for the quarter ended June 30, 2013. The decrease is attributed to lower compensation costs of $26,000, lower outside engineering costs of $6,000 and lower legal costs for patents of $10,000.

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Other Income (Expense): For the quarter ended June 30, 2014 interest expense was $113,000 compared to $127,000 of interest expense for the quarter ended June 30, 2013. The decrease of $12,000 is attributed to lower amortization of debt discount in the quarter ended June 30, 2014.

Net Income (Loss): Lower revenues in the quarter ended June 30, 2014 account for net loss of $446,000 compared to a net loss of $480,000 for the quarter ended June 30, 2013.

Nine months ended June 30, 2014 compared to the nine months ended June 30, 2013



Revenues: Revenues for the nine months ended June 30, 2014 were $337,000 compared to revenues of $1,492,000 for the nine months ended June 30, 2013. For the nine months ended June 30, 2014, 95% of revenues were from sales of our NightHunter products to the military (U.S. Army, U.S. Marines and military distributors) and 5% were from sales of SuperVision units. For the nine months ended June 30, 2013, 92% of revenues were from sales of our NightHunter products to the military market and 8% were from sales of SuperVision units.

Cost of Goods and Gross Profit: Cost of goods consists of the costs of manufacturing our NightHunter and SuperVision products.

The gross profit percentages were 41% and 45% for the nine months ended June 30, 2014 and 2013, respectively.

Selling, General and Administrative: Selling, general and administrative expenses decreased by $87,000 to $1,177,000 for the nine months ended June 30, 2014 as compared to $1,264,000 for the nine months ended June 30, 2013. The reduction is primarily attributable to decreases in Board and management compensation and benefits of $128,000 offset by higher consulting fees of $48,000.

Research & Development: Research and development expenses decreased by $42,000 to $285,000 for the nine months ended June 30, 2014 compared to $327,000 for the nine months ended June 30, 2013. The decrease is primarily attributed to lower compensation costs of $47,000.

Other Income (Expense): For the nine months ended June 30, 2014 interest expense was $298,000 compared to $340,000 of interest expense for the nine months ended June 30, 2013. The decrease of $42,000 is attributed to lower amortization of debt discount in the nine months ended June 30, 2014.

Net Income (Loss): Lower revenues for the nine month period ended June 30, 2014 accounted for a net loss of $1,617,000 compared to a net loss of $1,267,000 for the nine months ended June 30, 2013.

Liquidity and Capital Resources

As of June 30, 2014, the Company had negative working capital of $2,716,000 and a current ratio of 0.3 to 1.0 as compared to working capital of $730,000 and a current ratio of 2.0 to 1.0 as of September 30, 2013. Current liabilities at June 30, 2014 include notes payable of $2,262,000 as described in Note 8 of these unaudited financial statements.

Our net loss of $1,625,000 for the nine months ended June 30, 2014 negatively impacted cash. Significant sources of cash used in operating activities during the first nine months of the current year included decreases in accounts receivable of $28,000 and inventories of $137,000 and increases in accounts payable of $312,000, accrued compensation of $189,000 and accrued expenses of $253,000. Cash used in operating activities totaled $631,000 for the nine months ended June 30, 2014.

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Cash flows from financing activities include the proceeds of notes payable of $420,000 due not later than October 31, 2014.

Our financial statements for the three and nine months ended June 30, 2014 includes an explanatory paragraph relating to our ability to continue as a going concern. Based on the amount of working capital that we had on hand on June 30, 2014 and the amount of unfilled and potential orders we have pending, we are optimistic about our ability to obtain sales orders and/or additional equity or debt financing to continue to support planned operations and satisfy obligations. However, due to the nature of our business, there is no assurance that we will receive new orders during the quarters that we expect them and although management believes it can obtain additional financing, there is no certainty that it can.

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Source: Edgar Glimpses


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