TVI Corporation Q3 2008 Earnings Call Transcript

TVI Corporation (TVIN)

Q3 2008 Earnings Call Transcript

November 25, 2008, 10:00 am ET

Executives

Sherri Voelkel – SVP & CFO; Treasurer & Assistant Secretary

Harley Hughes – President & CEO

Don Yount – EVP & COO

Analysts

Charlie Pond [ph] – Feitl & Company [ph]

Charles Bellows [ph] – White Pine Capital [ph]

Bill John [ph]

Presentation

Operator

Good day, everyone, and welcome to TVI Corporation's third quarter 2008 conference call. Today's call is being recorded. A replay of the call will be available via webcast on TVI's website, www.tvicorp.com. In addition, today's news release is posted on TVI's website for those of you who did not receive it by e-mail. There will be an opportunity for questions and comments after the prepared remarks. (Operator instructions)

At this time I would like to turn the call over to Senior Vice President and CFO, Sherri Voelkel for opening remarks. Please go ahead.

Sherri Voelkel

Thank you and good morning. Statements in this conference call concerning the future business, operating results, and financial condition of TVI Corporation are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These statements are based upon management's current expectations as of today, November 25, 2008, and are subject to a number of risks and uncertainties. These statements may be identified by the use of forward-looking words or phrases such as should, anticipates, believes, intends, expects, seeks, might result, projects, estimates, and others.

These forward-looking statements involve risks and uncertainties and are not guarantees of future performance, as actual results could differ materially from our current expectations. Such risks and uncertainties include, among others, those set forth in the company's Annual Report to stockholders, periodic reports, registration statements, and other filings made with the Securities and Exchange Commission. You are cautioned not to place undue reliance on these forward-looking statements. The company assumes no obligation to update any such forward-looking statements, whether as a result of new information, future events, or otherwise.

With that, I'll turn the call over to Harley.

Harley Hughes

Good morning everybody and thank you for joining us. By now, you will have likely seen the press release we issued this morning and you know that we met our primary goal of achieving operating profitability in the third quarter. As of 9/15, we have been very focused on delivering the progress we said we would deliver. We are proud to have reached this major milestone as it reflects the very real progress we are making turning around TVI. It has been a little over a year since Don, Sherri, and I officially took over the reins here that TVI and thanks to the hard work of our staff, the company has come a long way toward reaching profitability during that time.

For instance, we completed the first-article testing on the C2A1 filter canister and received approval to go under production from the U.S. Army's (inaudible) Group. We then commenced production at our filter canister plant, and today, it is running near full capacity. This effort serves as an example of how we have built or rebuilt relationships with our customers and distributors, how we have diversified our focus by addressing the military market as well as the health and safety markets. At the same time, we dramatically reduced our overall cost structure and reorganized management. And just recently, we announced plans to divest Signature's tent rental business in an effort to channel our resources to higher margin opportunities and monetize unprofitable assets.

Our quarterly financial results have not always reflected this progress; that is why we are proud to have achieved operating profitability in Q3. It shows that we're on the right path and that our turnaround plan is working.

Turning now to the results for the quarter, I would like to remind you all that we have designated our tent rental as discontinued operations, though it is not reflected in the results here. Looking at Q3 from a top line standpoint, revenues from continuing operations grew year-over-year to $11 million, a 51% increase from the third quarter of 2007. At the same time, we saw our gross margin increase year-over-year by more than 200 basis points to 37.7%. This was due to entire quarter of filter canister and C420 PAPR shipments as well as a healthier product mix within our Shelters and Related Products segment. TVI achieved an operating profit of $1.3 million, compared with an operating loss of $1.7 million in the third quarter of 2007. These results reflect strength across all of our business areas. Each segment had a hand in our growth this quarter and we will cover each of them here in a moment.

First, I would like to more fully address our decisions in Signature's tent rental business. We have been considering strategic options of this business since we began implementing out from around. Ultimately, we determined that it did not fit well with the rest of the company, as the synergies we were looking for were not going to materialize. Rather, we believe that the capital needed to rebuild that segment would be better used focusing on the other business lines TVI supports. Therefore, we decided it was in the best interest of TVI and its shareholders to monetize the tent asset. In late 2007, we sold off our California-based Signature tent rental assets for $2.7 million. We recently sold our Florida-based tent rental assets for approximately $500,000, and we have agreed to terms with a buyer to sell the remainder of these assets, which are based in Maryland for about $2.1 million. Obviously, we will make an announcement when we consummate that sale. We are also working to terminate our releases in both Florida and Maryland and that will further reduce our cost structure. Going forward, our focus within Signature will be on the power, air, and kitchen assets, which more strategically complements TVI and present us with opportunities to generate stable, profitable revenue.

With that said, looking at our business segments in more detail, let us start with the Personal Protection, which accounted for 61% of the total Q3 revenue. C2A1 filter canister shipments were a significant part of our growth in this segment as we shipped sizable volume throughout the quarter to fill orders in our backlog. The addition of a third shift in the beginning of the quarter enables us to increase production, while minimizing overtime costs, leading to greater top line contributions and margin improvement. To date, we have won more than $10 million of canister orders, including the $3.5 million of C2A1 canisters that we received from the Army in September. Our existing order flow will drive production at the canister plant well into 2009 and we expect additional orders from military to generate even more backlog. The plant is running near full capacity and it represents a key asset for us going forward. While our near-term capital resources are somewhat constrained, as part of our longer-term growth strategy, we are evaluating the benefits of expanding filter canister capacity at some future point.

On our last conference call, we announced that we had introduced two new powered air respirators. They are FlexAir and PureAir, and that is for the healthcare sector. Distributors and end-users alike have reacted enthusiastically to the new designs and are creating a (inaudible) within the industry. We are pleased that these new products, which are lightweight and feature-rich, are in some degree marketing themselves. We look forward to positive contributions from them down the road as we further penetrate the market.

Turning to the Shelter and Related Product segment, our product mix took on a more traditional look in Q3, and our revenue grew by 16% sequentially. Our goal is to further diversify our revenue stream with new products and maintain or incrementally improve our margins within this segment. We are also working to expand our distributor relationships to help drive revenue growth.

As we mentioned in today's release, we have decided to integrate our TVI and SafetyTech sales and marketing efforts as a way to capture additional cross-selling opportunities in the government, logistics, and the health and safety sectors. The outlook for both these segments is solid as we see additional prospects within the National Guard as well as the other military branches. With this move, we will be able to more effectively target our customer base in every sales opportunity across all our product lines, increase efficiency scenarios such as material management and manufacturing, and further consolidate our cost structure.

Moving on to Signature, with the tent rental asset removed, this segment is clearly in the business of providing power, air, and kitchen or PAK rental equipment. As we have noticed in the past, we see no sureties of demand for PAK rentals, especially the kitchen's, and we see an opportunity to grow revenue by focusing our experienced sales force on PAK customers and devoting (inaudible) resources we can on expanding the inventory. We anticipate a small but more stable and more profitable revenue contribution from Signature in the near term, which we grow once we can access more capital and more – significantly increase the inventory.

For now, we believe we can strategically increase Signature's revenue contribution in several ways. First, as we have exited the tent business, we can leverage the popularity of our PAK equipment to build partnerships with a variety of tent rental companies that previously viewed us as competitors. Second, we will focus on opportunities for our products will be needed for longer periods of time, like temporary and military facilities. Lastly, we are looking at expanding our mobile kitchen fleet with new (inaudible) and technology upgrades to enhance our position relative to our competitors. On this last goal, we will require capital, as a necessary part of our long-term growth strategy. We clearly see opportunities for Signature and believe that it will be a stable contributor to our overall business going forward.

Before I turn the call back to Sherri, I would like to elaborate on our position with BB&T. As we outlined in today's release, we have entered into a forbearance agreement with BB&T. We were overdue with our October loan payment and had not repaid amounts borrowed in excess of our borrowing base. While technically in default, BB&T has not called the loan. Obviously, that says a lot about their willingness to continue to work with us. Our forbearance agreement will provide us with additional time to address defaults and give us an opportunity to negotiate financial restructuring that we need to effectively run our business for the longer term. The agreement is in place until January 30, with an option to extend to April 30.

The forbearance agreement is beneficial to TVI in two important ways. First, it provides us with $3.5 million in additional capital to address occurring expenses and half the liaison growth opportunities. Second, BB&T has agreed to defer any principal payments on our long term debt during the term of the agreement and that includes the overdue October payments. In exchange for these two benefits, we agreed to some additional financial and non-financial metrics. The interest rate on our total debt increased by 50 basis points. We also have agreed to a reverse springing warrant, whereby we give BB&T warrant to purchase up to 4.9% of the company at approximately the current market price. As we pay off the principal on the loan, this warrant will essentially blow away at various levels, assuming we retire our debt in whole or in part through April 2010.

BB&T also requested more frequent communication and we're meeting within 3 to 4 times a month. And we also agreed to bring in an outside turnaround consultant to explore ways to maximize our resources. BB&T remains a viable partner for TVI. We are grateful for their support and we believe they will continue to work closely with us as we focus on improving the health of or balance sheet.

As we enter the final quarter of 2008, we are confident that our results will continue to illustrate the effectiveness of our turnaround plan. We are proud that we have been able to meet the goals we have set thus far, even with our heavy debt loan and even with an even heavier credit crisis in the market at large.

Heading into 2009, we remain focused on growth operating profitability. And we have got to improve our balance sheet. We're going to stay focused on driving innovation in the product development area, even with a tight R&D budget; we are finding ways to constructively cut cost. We anticipate positive funding events in the military and the health and safety sectors that will provide opportunities for each of our business segments to increase growth. We firmly believe, based on our (inaudible) that this focus is well within the developing policies of President-elect Obama's administration. But we know there is still work to be done and occurring economic conditions creates some uncertainty. We believe in our plan and our ability to continue delivering on our promises. We look forward to reporting additional milestones in the quarters ahead.

With that, I will turn the call back to Sherri.

Sherri Voelkel

Thanks, Harley and good morning everyone. As a reminder, and in compliance with generally accepted accounting principles, the contributions from the discontinued operations of the Signature business have been excluded from our financial review. The financials I'm about to go through reflect our results from continuing operations.

Revenue for the third quarter of 2008 was $11 million, up 51% from $7.3 million in Q3 of 2007. As Harley outlined, this increase is primarily the result of significant revenue growth within our Personal Protection Equipment segment. Revenue for the first nine months of 2008 was $23.5 million compared with $22.2 million for the first nine months of 2007.

Q3 2008 gross margin was 37.7%, compared with 35.6% in Q3 2007. Gross margin increased from last year as a result of contributions from a complete quarter of filter canister and C420 PAPR shipments, and an improved revenue mix in our Shelters and Related Products segment.

For Q3 2008, SG&A expenses were $2.7 million, or 25% of revenue, a significant improvement over the $4 million, or 54% of revenue we reported in Q3 2007. The decrease in SG&A reflects our efforts to lower overall costs throughout the business, by reducing headcount, selectively limiting our sales and marketing activities, and reducing bad debt by focusing on higher-quality revenue. In addition, legal and professional fees were $800,000 lower in Q3 2008 than Q3 2007, due to reduced activity related to the investigations into certain activities of former management. We do continue to respond to inquiries from the agencies involved.

R&D expenses in Q3 2008 were $148,000, compared to R&D expenses of $294,000 in Q3 2007. Q3 2007 included expenses under an R&D contract that was terminated on June 30, 2008. Our R&D costs in the quarter were primarily related to the enhancements and general product engineering in our shelter, PAPR, and filter businesses.

Interest expense in the quarter was $556,000, down 16% from the $664,000 we incurred in Q3 2007. Q3 2007 included charges related to non-compete agreements that were subsequently terminated. At quarter end, our total debt stood at approximately $28 million.

TVI achieved an operating profit before other charges and expenses of $1.3 million in the third quarter of 2008 compared with an operating loss before other charges and expenses of $1.7 million in Q3 2007. As Harley mentioned earlier, we reached our goal of an operating profit by generating higher margin revenue and eliminating costs from our business. In addition, our filter canister plant is running near full capacity and operating at a high level of efficiency. Going forward, all of these factors will continue to positively affect our operating profitability.

Turning to the bottom line, TVI reported a loss from continuing operations of $4.7 million, or $0.14 per share for Q3 2008, compared with a loss from continuing operations of $1.6 million or $0.05 per share for Q3 2007. The loss from continuing operations for the third quarter of 2008 includes a $4.2 million non-cash impairment charge related to the elimination of goodwill and reduction in carrying value of our demonstration inventory and a non-cash income tax expense of $1.2 million.

As a result of the fall of some of the credit facility and our resulting forbearance agreement, we felt it necessary to re-assess the carrying value of both our goodwill and net operating loss carry forward, and to simply eliminate both, resulting in the two large non-cash charges. The loss from continuing operations for the first nine months of 2008, which includes the two non-cash charges, was $8.7 million or $0.25 per share, compared with a loss from continuing operations of $17.5 million or $0.52 per share for the first nine months of 2007.

Net loss, which includes the two non-cash charges and an additional $9.1 million in charges related to the divestiture of the Signature tent rental assets was $13.8 million or $0.40, compared with a net loss of $3.9 million or $0.12 per share for the third quarter of 2007. Net loss for the first nine months of 2008 was $19.8 million or $0.58 per share compared with net loss of $21.4 million or $0.64 for the first nine months of 2007.

Our income taxes for the quarter were negatively impacted by the increase in valuation allowance of $5.9 million recorded on a net operating loss carry forward. Although we may generate taxable income in the future years, eventually restructuring, refinancing or re-capitalizing the business may significantly limit the availability of these future deductions.

Now let me provide some specifics on our designated business segments before addressing the balance sheet.

In our Shelters and Related Products segment, revenue was approximately $2.9 million, compared with approximately $3.7 million for the third quarter of 2007, and $2.5 million in Q2 2008. For the nine-month period, revenue in this segment was $7.9 million in 2008, compared with $9.7 million in 2007.

Personal Protection Equipment, which includes our line of PAPRs and filter canisters, generated approximately $6.7 million in revenue, compared with approximately $1.7 million for the third quarter of 2007 and $3.7 million in Q2 2008. For the nine-month period, revenue was $11.5 million, compared with $5 million in 2007.

Our Signature business accounted for approximately $1.3 million in revenue, compared with $1.9 million in the same period of 2007 and $1.3 million in Q2 2008. For the nine-month period, revenue was $4.1 million in 2008, compared with $7.5 million in 2007. These numbers reflect revenue from our continuing Signature operations, which includes the power, air and kitchen equipment rental.

Turning to the balance sheet, at September 30, 2008, TVI's cash totaled $521,000, compared with $328,000 at December 31, 2007. That number will increase as the proceeds from the tent assets sales will be placed into our cash collateral account at BB&T. The proceeds will first be used to pay the shutdown cost of our Florida and (inaudible) tent rental businesses and then to reduce our obligations under the credit agreement.

For the quarter ended September 30, 2008, accounts receivable was $5.3 million, compared with accounts receivable of $6.2 million at year-end. DSOs were approximately 44 days at September 30, 2008, an improvement compared to DSOs of 68 days at December 31, 2007. DSOs improved due to our focus on higher quality customers.

Inventories at September 30 were $5.9 million compared with $5.2 million at year-end. Annualized inventory turnover for Q3 2008 was 3.9, compared with 4.2 at June 30, 2008, and 3.0 at December 31, 2007.

At September 30, 2008, accounts payable was $6.3 million, compared with accounts payable of $7.5 million at the end of Q2. Accounts payable has declined sequentially due to the repayment of certain existing accounts and the tightening of our available credit with our critical vendors, some of whom in response to a tighter credit market have begun requiring all or a portion of payment in advance of shipment, or have put TVI on tighter payment terms.

Total debt at September 30 was $28 million, compared with $27.2 million at the end of Q2 and $25.4 million at year-end. Our financing needs have increased in part due to the tightening credit terms with our vendors just mentioned and to the growth of our business. These needs were among the factors that led TVI to enter into the forbearance agreement Harley discussed earlier. As you have noticed, this agreement provides TVI with short-term financing over the next few months, and possibly through April, during which time TVI and BB&T will examine potential refinements to the turnaround plan and discuss more long-term financing alternatives. Even though the assets to be completed during the forbearance focus on the longer-term health of the company, due to defaults under the credit facility and the short-term nature of the forbearance agreement, as of September 30, we have classified all of our debt as current.

That concludes my prepared remarks on the financials. Before I turn the call over for questions, I would like to provide an update on our NASDAQ listing status.

In October, NASDAQ suspended the list price and market value requirements of publicly-held shares on its exchange through Friday, January 16, 2009. These (inaudible) will be re-instated on Monday, January 19, 2009. As a result of the temporary suspension of the minimum bid price rule, TVI now has until March 6, 2009 to regain compliance with the minimum bid price rule. Therefore, we are pressed on any decision regarding reverse stock split, particularly in light of our forbearance agreement and ongoing discussions to create long-term financing for the company. In the meantime, we will continue to make reasonable efforts needed to regain or maintain compliance for their listing requirements.

With that, we will now open the call for your questions. Operator?

Question-and-Answer Session

Operator

(Operator instructions) Our first question comes from the line of Charlie Pond [ph] with Feitl & Company [ph].

Charlie Pond – Feitl & Company

Good morning everyone and congratulations on achieving your previously stated goal of operating profitability.

Harley Hughes

Thank you.

Charlie Pond – Feitl & Company

I will have a few questions but I will get back in the queue so I will just ask two to begin with. How much do you anticipate it is going to cost to close up the entire Florida shelter operation?

Sherri Voelkel

Charlie, the Florida shelter operation has essentially already been folded up, and most of the charges are reflected in the third quarter P&L. The remaining thing that we have to do is negotiate a termination on the lease agreement, and we are in the process of that. The termination fee, as it stands now is 12 months of lease payments, which are $360,000, offset by a security deposit that we have there.

Charlie Pond – Feitl & Company

Okay. And for a follow-up, could you please repeat again the terms of the so-called reverse springing warrant that you have negotiated with BB&T on the forbearance agreement?

Don Yount

Hey, Charlie, it is Don. The reverse springing warrant is for 4.9% of the outstanding common stock to be purchased at essentially market. It is an average of trading days, so we determine the price in the warrant agreement.

Charlie Pond – Feitl & Company

When does that kick in though?

Don Yount

It was as of the closing date, which was last Thursday, November 20, approximately $0.16 or $0.17. Actually, it is $16.4, now that I think about it. And the reason that we use the term reverse springing warrant is because as the company pays down the debt based on some specific milestones in the agreement, the warrant was a way. It only exists for lack of a better term, with the file date being April 2010, the spring of 2010. And it was a future that the bank agreed to on the off chance we were able to accelerate payments on the term loan and our prospects of doing that are obviously up in the air. But it was a mechanism that we put in place to un-dilute the current shareholders that we were able to perform exceedingly well.

Charlie Pond – Feitl & Company

Okay, well, under the circumstances of these extraordinary times that we are in right now, it seems like it was a fairly reasonable request to grant to BB&T under the circumstances.

Harley Hughes

Thank you.

Charlie Pond – Feitl & Company

I don't really have any issues about that. I will get back, I have got a couple of other things, but I will get back in queue and let anybody else ask anything else, there are other people waiting.

Harley Hughes

Thanks a lot.

Sherri Voelkel

Thanks, Charlie.

Operator

(Operator instructions) Our next question comes from the line of Charles Bellows [ph] with White Pine Capital [ph].

Charles Bellows – White Pine Capital

Could you expand a little bit on capital needs, Harley, you have talked about them a number of times and can you give us a little bit of a feel for what you see and what your capital plans are?

Harley Hughes

They are more constrained than we want, of course. We plan on putting it – in the Shelter side for example, in very reasonable efforts to enhance the current systems that we have got. I don't know what percentage that would be but it would be very low compared to any normal R&D investment. Well, we have come a long way in that regard. The way that I was going to mention on the kitchen, we will just have to be very judicious about what we do there.

Don Yount

Charles, you were asking specifically about a number or where they would go which is how Harley interpreted your question.

Charles Bellows – White Pine Capital

I am more of a number if you can or a range as to what you think you need in here to continue, because it was spoken about needing capital to build this business and continue the turnaround.

Don Yount

Well, for the shorter term and even for the intermediate term, the next six to nine months, I would say that we negotiated that number with BB&T; it's the $3.5 million.

Charles Bellows – White Pine Capital

It is the $3.5 million, okay.

Harley Hughes

Sorry about that Charles.

Don Yount

Yes, I guessed Harley was misinterpreting the question. The $3.5 million with BB&T as Harley said puts us in a position to start thinking about restructuring the right side of the balance sheet. So then comes the question of – well, do you need capital on top of that and the answer today is yes, we would love to have a big chunk of change to go grow the business; but for now where we are with the opportunities that we see with the R&D projects that we feel we have to launch with the enhancements we feel like we have to make to build a plant and to the other components of the business that $3.5 million gets us to where we need to be to achieve what we need for 2009. So that I would say is an intermediate term number, now if we could raise a lot more than that and not be incredibly dilutive to existing shareholders and it will give us an opportunity to really ramp up the growth. We would have to take a serious look at that, I would not say we do it but we have got to take a serious look at it and see what the impact would be on all the investors as well as our creditors and obviously BB&T but for now the $3.5 million number is the number that we have pegged. We came up with it Sherri went through exhaustive analysis of how to get there, so that is what we work towards with BB&T and they agreed with us.

Charles Bellows – White Pine Capital

So that $3.5 million really you feel gives you your capital going through 2009 for what you have planned and what you need to do.

Harley Hughes

Yes, it gets us well into 2009 and sets us up for the kind of positive EBITDA we need to keep to the business going.

Charles Bellows – White Pine Capital

Okay, good. Thanks, I appreciate it.

Harley Hughes

I would say, this may be a bit curious but obviously some folks think the new administration is going to change things in the cabinet, each of the various cabinet agencies, some say fast, some say slow but it looks to me like and from what we hear downtown here, it would be very aggressive, the administration is going to be very aggressive and there will be a significant focus on the Defense Department and without describing the policies, I can assure you that it is really pretty good news for us the way that the policies are developing and what you might see by July or August of '09 as opposed to late December of '09.

Charles Bellows – White Pine Capital

Okay, so you are feeling more positive about some of the initiatives that are being at least talked about as how they affect your business.

Harley Hughes

That's right.

Charles Bellows – White Pine Capital

You would see it happening sooner, do you also feel confident that unlike sometimes that funding will in fact go with the policies?

Harley Hughes

Yes, I don't think there is any question about that because it does – the one really quick way to get money in the hands of the American people to spend to get their beauty parlors back operating and so forth is through the military, not buying large aircraft or aircraft carriers and that kind of thing, but nuts and bolts and equipment like ours that has not gone missed on the folks that are coming into power. They can do it through the guards very easily, they can do it through the military services and we think that is what is going to happen.

Charles Bellows – White Pine Capital

Okay, good, thank you very much.

Operator

We have a follow up question from the line of Charlie Pond.

Charlie Pond – Feitl & Company

Yes, a couple of things, first of all, regarding – at the present time is there any intention on the part of people in management on the Board to start doing any insider buying down at these levels?

Sherri Voelkel

I guess I should expand on probably why there has been no activity in the recent past. As you know, we have insider trading rules and we subject ourselves to blackout periods and I would say that we have put ourselves in either mandatory or voluntary blackout periods because of the fact that we have material non-public information that we believe limits us, basically eliminates our ability to purchase stock in the company. We are in a current blackout period from the end of the quarter until three business days after the earnings release. I can't speak for all the individuals of management and their intentions to buy stock, but it is obviously something that we discuss frequently.

Don Yount

And Charlie, let me add that TVI has been under a fair amount of scrutiny for the last two plus years from a couple of different angles and I would take regulatory angles because of the activities of our former senior management team members, so we are very conscious of our responsibilities regarding trading, regarding trying to manage material non-public information, etc. So if we are overly cautious about that, I hope you will forgive us but we are, and we are so because we do believe that TVI has been and for some indefinite period in the future, we are under a lot of scrutiny.

Harley Hughes

This has always – actually we have counseled advice on these blackout periods so – as long as we can agree with or disagree with but a conservative approach has been used but I guarantee that when we are without knowledge which is it is amazing the kind of things that come up (inaudible) just because of that situation we are going to be stepping up.

Charlie Pond – Feitl & Company

So the normal reporting period regarding your earnings today, I mean the blackout period ends in a couple of days but if it wasn't for that at this point in time would you still be under a so called voluntary blackout period after that?

Sherri Voelkel

We really can't answer that question; if we did you would know whether or not we had material become public information.

Charlie Pond – Feitl & Company

Okay, alright. On to the areas something more operational, is there any – your filter canister business has been doing great for you for the last several quarters and it is really good to hear that you are running at nearly full capacity and you are talking about potentially even expanding the facility. I would like to get a feel of what if anything has changed outside of what you are specifically doing and what you are seeing differently or how your competitors are responding to it and how if in any ways the competitive landscape has changed in the filter canister market itself?

Don Yount

Well, Charlie the first thing is that for the last couple of quarters and for a big chunk of the immediate future we only have one competitor obviously that is 3M and that is because TVI and 3M are the only two companies that are certified to produce C2A1. I could not venture a guess as to how 3M views us, we view them obviously as a formidable competitor because they are so big and they have been at this so long. We think we have a couple of or many more than a couple of competitive advantages in terms of how we build our C2A1 but if that is – it is sort of an artificial world by virtue of the fact that there are only two of us but the critical factor in the analysis is that we devoted, because of the army's requirements, we devoted almost 100% of our production capacity to C2A1 and we think that with some investment and with some improvements in our efficiency we will be producing other filter canisters, other types of filter canisters in the current monsoon and definitely in 2009.

One of the decisions that we made very early on was to diversify that filter plant, the first step in that was to make sure we had the right team of people running in to make sure that we had qualified R&D capability to design and test other canister filters and we have workers and in 2009 we will be introducing other types of filters. What that means competitively remains to be seen, the filter canister market is pretty big, there are a number of players in it, a lot of folks that we work with and have partnership relationships with. So there will be a number of avenues we can go down to expand the capabilities of filter line but for today it is kind of an artificial construct by virtue of the fact that we devoted so much of our capacity to C2A1 and down the road I think there will be a number of different ways for us to be successful not only with C2A1 but with other kinds of canisters all the way from PAPR canisters to combination filters and the nicest part about the opportunity there is that there is a significant amount of demand out there in the marketplace for these products, I think there is enough room for there to be a number of different players and the way you maximize revenues how you partner.

Charlie Pond – Feitl & Company

Okay, let me just pursue this just a little bit, just backtracking into the C2A1 arena for a moment, has your presence in that market over the last several quarters at all and being somewhat of a new upstart in gathering some share now as I guess the only domestic supplier, is there any concern on your part that 3M is an entity or the subsidiary 3M is going to be in a position to flex their muscles so to speak to make things more difficult to you that could upset the apple cart a little bit with the position that you put all this hard work into stretching out for the last year or so with the C2A1 market do you feel fairly or are you telling us that you feel very secure with your placement in that market right now?

Don Yount

3M is the (inaudible) so they could always do something to upset production, they could always challenge us in some way just because they have partnering resources that we do. The changes that we have is once you get the first article testing, you are a qualified, certified provider of material to the US Military and the army's requirements are very specific and while they may like the 3M canister, we think they also like our canister and in terms of nudging us out of the C2A1, as long as the army has demand and as long as we have capacity, we think the army will always be our customer.

But the real – to get to the more important question Charlie, our eggs all seem to be in one basket right now with the C2A1 and that is why I talked earlier about our ability to develop and deploy other kinds of filters whether it is in the industrial markets or all the way to other military applications, and then how do we sell them, do we partner with some of our traditional business partners on an OEM basis, do we use our filters, our respirators, maybe we have partnerships with people that we haven't partnered with. I think there are a number of different avenues we go down with different kinds of filters. So the goal here is to diversify what remains true and then build some diversity into the revenue stream so that we are not relying solely on C2A1 the filter business as much as we like doing it and we will do all orders that the army asks us to do but we also need to diversify that revenue stream.

Charlie Pond – Feitl & Company

Just a last thing about that, do you expect that the pie grows larger next year for C2A1 funding as a whole?

Don Yount

I can't answer that, to answer that would be to rely purely on historical data and I am not sure that we have enough historical data to give you a reasonable answer. If you are asking me if I think C2A1 is going away, the answer is definitely no. There are lots and lots of masks deployed in the US Military and I don't know – there are alternatives to the standard negative pressure masks that is used by the military today but even if the army made a decision to give it to an alternative that somehow gave rise to an alternative to the C2A1, it would take a long time to deploy and it would take a great deal of work and in the mean time we will still be selling the army C2A1s to the soldiers in the field. But I think a lot of it depends on the need. You have to remember that for the C2A1, it is all driven by the war fighter and what the war fighter needs take on business yes.

Charlie Pond – Feitl & Company

Okay, Don thanks very much and thank you everyone and continued good luck on all the hard work.

Sherri Voelkel

Thank you.

Don Yount

Thanks Charlie.

Operator

Our next question comes from the line of Bill John, a private investor.

Bill John

Yes hello and congratulations, I like the direction the company has headed.

Sherri Voelkel

Thank you.

Bill John

Question just regarding the cost allocated to discontinued operations and this goes to the point of any fixtures or continuing G&A costs that may have been allocated for historical periods to discontinued operations?

Sherri Voelkel

All of the administrative fixed overhead costs that were previously allocated to the tent business are still in our operations P&L.

Bill John

They are in the continuing operations P&L.

Sherri Voelkel

That is correct. We did not classify any administrative overhead costs as discontinued operation.

Bill John

Okay I understand, thank you.

Sherri Voelkel

You are welcome.

Operator

At this time, we have reached the end of the Q&A section. I will now turn the conference back to Mr. Hughes for any closing or additional remarks.

Harley Hughes

Okay, thanks very much folks, thank you for your interest in TVI. We look forward to talking to you with our end of year report sometime in 2009, early 2009.

Operator

And that concludes our conference call. Thank you for joining us today.

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