rwc_10q.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For the
quarterly period ended March 31, 2010
OR
o TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For the
transition period from _________ to _________
Commission
file number 000-07336
| RELM WIRELESS
CORPORATION |
| (Exact name of
registrant as specified in its charter) |
|
Nevada
|
|
59-3486297
|
State
or other jurisdiction of
Incorporation
or organization
|
|
(I.R.S.
Employer
Identification
No.)
|
7100
Technology Drive
West
Melbourne, Florida 32904
(Address
of principal executive offices and Zip Code)
Registrant’s
telephone number, including area code: (321) 984-1414
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes £ No
£
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
Yes £ No
£
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company. See definitions of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):
|
Large
accelerated filer
|
o
|
Accelerated
filer
|
o
|
|
Non-accelerated
filer
|
þ
|
Smaller
reporting company
|
o
|
|
(Do
not check if a smaller reporting
company)
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes £ No
þ
There
were 13,489,815 shares of common stock, $0.60 par value, of the registrant
outstanding at April 23, 2010.
PART
I. - FINANCIAL INFORMATION
ITEM
1. FINANCIAL STATEMENTS
RELM
WIRELESS CORPORATION
Condensed
Consolidated Balance Sheets
(In thousands, except share
data)(Unaudited)
| |
|
March
31,
2010
|
|
|
December
31,
2009
|
|
| ASSETS |
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
| Cash
and cash equivalents |
|
$ |
5,684 |
|
|
$ |
7,660 |
|
| Trade
accounts receivable (net of allowance for doubtful |
|
|
|
|
|
|
|
|
| accounts
of $44 at March 31, 2010 and at December 31, 2009,
respectively) |
|
|
5,555 |
|
|
|
3,767 |
|
| Inventories,
net |
|
|
7,296 |
|
|
|
6,623 |
|
| Deferred
tax assets, net |
|
|
1,610 |
|
|
|
1,611 |
|
| Prepaid
expenses and other current assets |
|
|
830 |
|
|
|
896 |
|
|
Total
current assets
|
|
|
20,975 |
|
|
|
20,557 |
|
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
1,282 |
|
|
|
1,306 |
|
|
Deferred
tax assets, net
|
|
|
6,203 |
|
|
|
6,183 |
|
|
Capitalized
software, net
|
|
|
3,383 |
|
|
|
3,024 |
|
|
Other
assets
|
|
|
342 |
|
|
|
351 |
|
|
Total
assets
|
|
$ |
32,185 |
|
|
$ |
31,421 |
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
|
| Current
liabilities: |
|
|
|
|
|
|
|
|
| Accounts
payable |
|
$ |
1,898 |
|
|
$ |
1,250 |
|
| Accrued
compensation and related taxes |
|
|
829 |
|
|
|
1,086 |
|
| Accrued
warranty expense |
|
|
276 |
|
|
|
228 |
|
| Accrued
other expenses and other current liabilities |
|
|
299 |
|
|
|
195 |
|
| Total
current liabilities |
|
|
3,302 |
|
|
|
2,759 |
|
| |
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
− |
|
|
|
− |
|
| Commitments
and contingencies |
|
|
|
|
|
|
|
|
| Stockholders'
equity: |
|
|
|
|
|
|
|
|
| Preferred
stock; $1.00 par value; 1,000,000 authorized shares |
|
|
|
|
|
|
|
|
| none
issued or outstanding |
|
|
− |
|
|
|
− |
|
| Common
stock; $.60 par value; 20,000,000 authorized shares: |
|
|
|
|
|
|
|
|
13,484,815
and 13,416,127 issued and outstanding shares at March 31, 2010 and
December 31, 2009, respectively
|
|
|
8,091 |
|
|
|
8,050 |
|
Additional
paid-in capital
|
|
|
24,250 |
|
|
|
24,071 |
|
|
|
|
|
(3,458 |
) |
|
|
(3,459 |
) |
| Total
stockholders' equity |
|
|
28,883 |
|
|
|
28,662 |
|
| |
|
|
|
|
|
|
|
|
| Total
liabilities and stockholders' equity |
|
$ |
32,185 |
|
|
$ |
31,421 |
|
See notes to condensed consolidated
financial statements.
RELM
WIRELESS CORPORATION
Condensed
Consolidated Statements of Operations
(In thousands, except per share
data) (Unaudited)
|
|
|
Three
Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales,
net
|
|
$ |
6,449 |
|
|
$ |
3,973 |
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
Cost
of products
|
|
|
3,485 |
|
|
|
2,358 |
|
|
Selling,
general and administrative
|
|
|
2,950 |
|
|
|
2,467 |
|
|
Total
expenses
|
|
|
6,435 |
|
|
|
4,825 |
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
|
14 |
|
|
|
(852 |
) |
|
|
|
|
|
|
|
|
|
|
|
Other
(expense) income:
|
|
|
|
|
|
|
|
|
|
Net
interest (expense) income
|
|
|
- |
|
|
|
(16 |
) |
|
Other
(expense) income
|
|
|
(12 |
) |
|
|
1 |
|
|
Total
other (expense) income
|
|
|
(12 |
) |
|
|
(15 |
) |
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before income tax (expense) benefit
|
|
|
2 |
|
|
|
(867 |
) |
|
|
|
|
|
|
|
|
|
|
|
Income
tax (expense) benefit
|
|
|
(1 |
) |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
1 |
|
|
$ |
(867 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net
earnings (loss) per share-basic:
|
|
$ |
0.00 |
|
|
$ |
(0.06 |
) |
|
Net
earnings (loss) per share-diluted:
|
|
$ |
0.00 |
|
|
$ |
(0.06 |
) |
|
Weighted
average shares outstanding-basic
|
|
|
13,436,736 |
|
|
|
13,410,871 |
|
|
Weighted
average shares outstanding-diluted
|
|
|
13,873,677 |
|
|
|
13,410,871 |
|
See notes to condensed consolidated
financial statements.
RELM
WIRELESS CORPORATION
Condensed
Consolidated Statements of Cash Flows
(In thousands) (Unaudited)
|
|
|
Three
months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
1 |
|
|
$ |
(867 |
) |
|
Adjustments
to reconcile net income (loss) to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
Allowance
for doubtful accounts
|
|
|
7 |
|
|
|
(36 |
) |
|
Inventories
reserve
|
|
|
128 |
|
|
|
91 |
|
|
Deferred
tax asset
|
|
|
1 |
|
|
|
- |
|
|
Depreciation
and amortization
|
|
|
154 |
|
|
|
165 |
|
|
Shared-based
compensation expense
|
|
|
132 |
|
|
|
15 |
|
|
Excess
tax benefit from share-based compensation
|
|
|
(20 |
) |
|
|
- |
|
|
Change
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(1,795 |
) |
|
|
(559 |
) |
|
Inventories
|
|
|
(801 |
) |
|
|
642 |
|
|
Prepaid
expenses and other current assets
|
|
|
66 |
|
|
|
338 |
|
|
Other
assets
|
|
|
9 |
|
|
|
(74 |
) |
|
Accounts
payable
|
|
|
648 |
|
|
|
149 |
|
|
Accrued
compensation and related taxes
|
|
|
(257 |
) |
|
|
82 |
|
|
Accrued
warranty expense
|
|
|
48 |
|
|
|
(27 |
) |
|
Accrued
other expenses and other current liabilities
|
|
|
104 |
|
|
|
62 |
|
|
Net
cash used in operating activities
|
|
|
(1,575 |
) |
|
|
(19 |
) |
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities
|
|
|
|
|
|
|
|
|
|
Purchases
of property, plant and equipment
|
|
|
(71 |
) |
|
|
(320 |
) |
|
Capitalized
software
|
|
|
(418 |
) |
|
|
(489 |
) |
|
Net
cash used in investing activities
|
|
|
(489 |
) |
|
|
(809 |
) |
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities
|
|
|
|
|
|
|
|
|
|
Proceeds
from issuance of common stock
|
|
|
68 |
|
|
|
- |
|
|
Excess
tax benefit from share-based compensation
|
|
|
20 |
|
|
|
- |
|
|
Cash
provided by financing activities
|
|
|
88 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
change in cash and cash equivalents
|
|
|
(1,976 |
) |
|
|
(828 |
) |
|
Cash
and cash equivalents, beginning of period
|
|
|
7,660 |
|
|
|
5,475 |
|
|
Cash
and cash equivalents, end of period
|
|
$ |
5,684 |
|
|
$ |
4,647 |
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure
|
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$ |
- |
|
|
$ |
3 |
|
See notes to condensed consolidated
financial statements.
Notes
to Condensed Consolidated Financial Statements
Unaudited
(in
Thousands, Except Share Data and
Percentages)
1. Condensed
Consolidated Financial Statements
The
condensed consolidated balance sheets as of March 31, 2010 and December 31,
2009, the condensed consolidated statements of operations for the three months
ended March 31, 2010 and 2009 and the condensed consolidated statements of cash
flows for the three months ended March 31, 2010 and 2009 have been prepared by
RELM Wireless Corporation (the Company), and are unaudited. In the
opinion of management, all adjustments, which include normal recurring
adjustments, necessary for a fair presentation have been made. The
condensed consolidated balance sheet at December 31, 2009 has been derived from
the Company’s audited consolidated financial statements at that
date.
Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America have been condensed or omitted. It is
suggested that these condensed consolidated financial statements be read in
conjunction with the audited consolidated financial statements and notes thereto
included in the Company’s Annual Report on Form 10-K for the fiscal year ended
December 31, 2009, as filed with the Securities and Exchange
Commission. The results of operations for the three months ended
March 31, 2010 are not necessarily indicative of the operating results for a
full year.
Recent
Accounting Pronouncements
In August
2009, the Financial Accounting Standard Board (FASB) issued Accounting Standards
Update (ASU) 2009-05, which provides additional guidance under the FairValue Measurements and
Disclosures Topic, ASC 820-10 Application to Liabilities. The guidance
clarifies that the quoted price for the liability when traded as an asset in an
active market is a Level 1 measurement, when no adjustment to the quoted price
is required. In the absence of a Level 1 (quoted price) measurement, an entity
must use one or more valuation techniques to estimate fair value in a manner
consistent with the principles in ASC 820. The Company’s adoption of
this guidance is not expected to have an impact on its consolidated financial
statements.
In
October 2009, the FASB issued ASU 2009-14 which amended the accounting
requirements under the Software Topic, ASC 985-605
Revenue Recognition. The objective of this update is to address the accounting
for revenue arrangements that contain tangible products and software.
Specifically, products that contain software that is “more than incidental” to
the product as a whole will be removed from the scope of ASC subtopic 985-605
(previously AICPA Statement of Position 97-2). The amendments align the
accounting for these revenue transaction types with the amendments under ASU
2009-13. The guidance provided within ASU 2009-14 is effective for fiscal years
beginning on or after June 15, 2010 and allows for either prospective or
retrospective application, with early adoption permitted. The Company
is currently evaluating the impact that adoption of this guidance will have on
its consolidated financial statements.
In
January 2010, the FASB issued ASU No. 2010-06, which requires new fair
value disclosures pertaining to significant transfers in and out of Level 1 and
Level 2 fair value measurements and the reasons for the transfers and activity.
For Level 3 fair value measurements, purchases, sales, issuances and settlements
must be reported on a gross basis. Further, additional disclosures are required
by class of assets or liabilities, as well as inputs used to measure fair value
and valuation techniques. ASU No. 2010-06 is effective for interim and
annual reporting periods beginning after December 15, 2009, except for the
disclosures about purchases, sales, issuances and settlements on a gross basis,
which is effective for fiscal years beginning after December 15, 2010. The
Company’s adoption of this guidance is not expected to have an impact on its
consolidated financial statements.
In
February 2010, the FASB issued ASU No. 2010-09, which amends subsequent
event disclosure requirements for SEC filers. An entity that is an SEC filer is
not required to disclose the date through which subsequent events have been
evaluated. This ASU was effective upon issuance and adoption of this ASU did not
result in a material impact to its consolidated financial
statements.
Notes
to Condensed Consolidated Financial Statements
Unaudited
(in
Thousands, Except Share Data and
Percentages)
2. Significant
Events and Transactions
In April
2010, the Company was selected as one of a group of P25 digital two-way radio
equipment suppliers to the City of Phoenix, Arizona. The initial
period of the contract spans five years, which commenced on March 15, 2010, and
may be extended for up to five additional one-year periods. The
estimated total value of the initial contract period is $6 million, but may be
higher or lower depending on the city’s needs and budgets. The
contract does not specify purchase dates or quantities of equipment from any
particular supplier.
In March
2010, the Company successfully completed P25 interoperability tests on
Motorola’s ASTRO P25 system infrastructure. The Company’s KNG-Series
radios demonstrated interoperability by passing all of the required P25 Phase 1
Common Air Interface Trunked Interoperability tests specified by the
Telecommunications Industry Association (TIA) and the U.S. Department of
Homeland Security. This testing is required by these agencies to meet
radio users’ need for documented proof of interoperability on the Motorola
infrastructure. The testing was conducted at Motorola’s lab as part
of the formal P25 Compliance Assessment Program.
In March 2010, the Company demonstrated
its trunked version KNG-Series P25 digital radios at the International Wireless
Communications Exposition held March 10-12, 2010 in the Las Vegas Convention
Center.
In
February 2010, the Company received an order totaling approximately $6.6 million
from the U. S. Department of Agriculture Forest Service. This order
is comprised of RELM’s long-time flagship D-Series digital P-25 portable and
mobile radios. A portion of the order was fulfilled during the first
quarter of 2010 while the remainder is anticipated to be fulfilled during the
second quarter of 2010.
3. Allowance
for Doubtful Accounts
The
allowance for doubtful accounts on trade receivables was approximately $44 on
gross trade receivables of $5,599 and $3,811 at March 31, 2010 and December 31,
2009, respectively. This allowance is used to state trade receivables
at a net realizable value or the amount that the Company estimates will be
collected of the Company’s gross receivables as of March 31, 2010.
4. Inventories,
net
The
components of inventory, net of reserves for slow-moving, excess or obsolete
inventory, consist of the following:
|
|
|
|
|
|
|
|
|
Finished
goods
|
|
$ |
2,019 |
|
|
$ |
1,879 |
|
|
Work
in process
|
|
|
2,216 |
|
|
|
2,172 |
|
|
Raw
materials
|
|
|
3,061 |
|
|
|
2,572 |
|
|
|
|
$ |
7,296 |
|
|
$ |
6,623 |
|
Reserves
for slow-moving, excess, or obsolete inventory were approximately $2,475 at
March 31, 2010, compared with approximately $2,346 at December 31, 2009.
The reserve for slow-moving, excess, or obsolete inventory is used to state the
Company’s inventories at the lower of cost or market.
Notes
to Condensed Consolidated Financial Statements
Unaudited
(in
Thousands, Except Share Data and
Percentages)
5. Income
Taxes
Net
income tax expense totaling approximately $1 has been recorded for the three
months ended March 31, 2010.
As of
March 31, 2010, the Company’s deferred tax assets totaled approximately $7,813,
compared with $7,794 as of December 31, 2009, and are primarily composed of net
operating loss carry forwards (NOLs). These NOLs are available to offset
any Federal or state taxable income and expire starting in 2018 through
2028.
In order
to fully realize the net deferred tax assets, the Company will need to generate
sufficient taxable income in future years to utilize its NOLs prior to their
expiration. ASC Topic 740 “Income Taxes” requires the
Company to analyze all positive and negative evidence to determine if, based on
the weight of available evidence, the Company is more likely than not to realize
the benefit of the net deferred tax assets. The recognition of the net deferred
tax assets and related tax benefit is based upon the Company’s conclusions
regarding, among other considerations, estimates of future earnings based on
information currently available, current and anticipated customers, contracts
and product introductions, as well as historical operating results and certain
tax planning strategies.
The
Company has evaluated the available evidence and the likelihood of realizing the
benefit of its net deferred tax assets. From its evaluation, the Company has
concluded that based on the weight of available evidence the Company is more
likely than not to realize the benefit of its net deferred tax assets recorded
at March 31, 2010. Accordingly, no valuation allowance has been
established. The Company cannot presently estimate what, if any,
changes to the valuation of its deferred tax assets may be deemed appropriate in
the future. If the Company incurs future losses, it may be necessary
to record a valuation allowance related to the deferred tax assets recorded as
of March 31, 2010.
In April
2010, the Company was notified by the Internal Revenue Service of its intent to
examine the Company’s federal tax return for the fiscal year ended December 31,
2007. The examination has not commenced.
6. Capitalized
Software
The
Company accounts for the costs of software within its products in accordance
with ASC Topic 985-20 “Costs
of Software to be Sold, Leased or Marketed”, under which certain
software costs incurred subsequent to the establishment of technological
feasibility are capitalized and amortized over the estimated lives of the
related products. The Company determines technological feasibility to be
established upon the internal release of a detailed program design as specified
by Topic 985-20. Upon the general release of the product to customers,
development costs for that product are amortized over periods not exceeding five
years, based on current and future revenue of the product. For the three months
ended March 31, 2010, the Company’s amortization cost was $59 compared with $58
for the three months ended March 31, 2009. Net capitalized software
costs totaled $3,383 and $3,024 as of March 31, 2010 and December 31, 2009,
respectively.
7. Stockholders’
Equity
The
changes in consolidated stockholders’ equity for the three months ended March
31, 2010 are as follows:
|
|
|
|
|
|
|
|
|
Additional
Paid-In Capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2009
|
|
|
13,416,127 |
|
|
$ |
8,050 |
|
|
$ |
24,071 |
|
|
$ |
(3,459 |
) |
|
$ |
28,662 |
|
|
Common
stock option exercise and issued
|
|
|
68,688 |
|
|
|
41 |
|
|
|
27 |
|
|
|
|
|
|
|
68 |
|
|
Excess
tax benefit from share- based compensation
|
|
|
|
|
|
|
|
|
|
|
20 |
|
|
|
|
|
|
|
20 |
|
|
Share-based
compensation
expense
|
|
|
− |
|
|
|
− |
|
|
|
132 |
|
|
|
− |
|
|
|
132 |
|
|
Net
income
|
|
|
− |
|
|
|
− |
|
|
|
− |
|
|
|
1 |
|
|
|
1 |
|
|
Balance
at March 31, 2010
|
|
|
13,484,815 |
|
|
$ |
8,091 |
|
|
$ |
24,250 |
|
|
$ |
(3,458 |
) |
|
$ |
28,883 |
|
Notes
to Condensed Consolidated Financial Statements
Unaudited
(in
Thousands, Except Share Data and
Percentages)
8. Income
(loss) per Share
The
following table sets forth the computation of basic and diluted income (loss)
per share:
|
|
|
Three
Months Ended
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
Net income
(loss) (numerator for basic and diluted earnings per
share)
|
|
$ |
1 |
|
|
$ |
(867 |
) |
|
Denominator:
|
|
|
|
|
|
|
|
|
|
Denominator
for basic earnings per share weighted average shares
|
|
|
13,436,736 |
|
|
|
13,410,871 |
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
Options
|
|
|
436,941 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
|
|
|
|
Denominator
for diluted earnings per share weighted average shares
|
|
|
13,873,677 |
|
|
|
13,410,871 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
income (loss) per share
|
|
$ |
0.00 |
|
|
$ |
(0.06 |
) |
|
Diluted
income (loss) per share
|
|
$ |
0.00 |
|
|
$ |
(0.06 |
) |
A total
of 1,186,912 shares related to options are not included in the computation of
diluted loss per share for the three months ended March 31, 2009 because to do
so would have been anti-dilutive for that period.
9. Non-Cash
Share-Based Employee Compensation
The
Company has employee and non-employee director stock option
programs. Related to these programs, and in accordance with ASC Topic
718, “Compensation-Stock
Compensation”, the Company recorded $132 of non-cash share-based employee
compensation expense for the three months ended March 31, 2010, compared with
$15 for the same period last year. The Company considers
its non-cash share-based employee compensation expenses as a component of cost
of products ($14 for the three months ended March 31, 2010, compared with $0 for
the same period last year) and selling, general and administrative expenses
($118 for the three months ended March 31, 2010, compared with $15 for the same
period last year). There was no non-cash share–based employee
compensation expense capitalized as part of capital expenditures or inventory
for the periods presented.
The
Company uses the Black-Scholes-Merton option valuation model to calculate the
fair value of a stock option grant. The non-cash share-based employee
compensation expense recorded in the three months ended March 31, 2010 was
calculated using the assumptions noted in the following
table. Expected volatilities are based on the historical volatility
of the Company’s common stock over the period of time commensurate with the
expected life of the stock options. The dividend yield of zero is
based on the fact that the Company presently has no intention to pay cash
dividends in the future and the Company is prohibited from doing so under its
current secured revolving credit facility. The Company
has estimated future stock option exercises by the optionees. The
expected term of option grants is based upon the observed and expected time to
the date of post vesting exercises and forfeitures of options by the
optionees. The risk-free interest rate is derived from the average
U.S. Treasury rate for the periods, which approximates the rate at the time of
the stock option grant.
Notes
to Condensed Consolidated Financial Statements
Unaudited
(in
Thousands, Except Share Data and
Percentages)
|
|
|
Three
months ended
March 31,
2010
|
|
|
|
|
|
|
|
Expected
Term in Years
|
|
|
6.5 |
|
|
Expected
Volatility
|
|
|
76.6% |
|
|
Risk-Free
Rate
|
|
|
2.85% |
|
|
Expected
Dividends
|
|
|
0.00
|
|
A summary
of stock option activity under the Company’s stock option plans as of March 31,
2010, and changes during the three months ended March 31, 2010 are presented
below:
|
|
|
|
|
|
Wgt.
Avg. Exercise
Price
($)
|
|
|
Wgt.
Avg. Remaining Contractual Life (Years)
|
|
|
Wgt.
Avg. Grant Date Fair Value($)
|
|
|
Aggregate
Intrinsic
Value
($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
979,912 |
|
|
|
2.34 |
|
|
|
- |
|
|
|
1.53 |
|
|
|
- |
|
|
Vested
|
|
|
883,245 |
|
|
|
2.42 |
|
|
|
- |
|
|
|
1.60 |
|
|
|
- |
|
|
Nonvested
|
|
|
96,667 |
|
|
|
1.58 |
|
|
|
- |
|
|
|
0.84 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
activity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued
|
|
|
125,000 |
|
|
|
4.07 |
|
|
|
- |
|
|
|
2.88 |
|
|
|
- |
|
|
Exercised
|
|
|
68,688 |
|
|
|
1.00 |
|
|
|
- |
|
|
|
0.71 |
|
|
|
- |
|
|
Forfeited
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Expired
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of March 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
1,036,224 |
|
|
|
2.64 |
|
|
|
4.16 |
|
|
|
1.75 |
|
|
|
1,719,837 |
|
|
Vested
|
|
|
856,223 |
|
|
|
2.62 |
|
|
|
3.28 |
|
|
|
1.74 |
|
|
|
1,512,136 |
|
|
Nonvested
|
|
|
180,001 |
|
|
|
2.73 |
|
|
|
8.36 |
|
|
|
1.78 |
|
|
|
207,701 |
|
10. Commitments
and Contingencies
Legal
Proceedings
From time
to time the Company may be involved in various claims and legal actions arising
in the ordinary course of its business. There were no pending material claims or
legal matters as of March 31, 2010.
Other
As of
March 31, 2010, the Company had commitments for purchase orders to suppliers of
approximately $5,345.
Significant
Customers
Sales to
United States government agencies represented approximately $4,654 (72.2%) of
the Company’s total sales for the three months ended March 31, 2010, compared
with approximately $1,000 (31.1%) for the same period last
year. Accounts receivable from agencies of the United States
government were approximately $4.2 million as of March 31, 2010 compared with
approximately $0.7 million at the end of the same period last year.
ITEM
2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SPECIAL
NOTE CONCERNING
FORWARD-LOOKING
STATEMENTS
We
believe that it is important to communicate our future expectations to our
security holders and to the public. This report, therefore, contains
statements about future events and expectations which are “forward-looking
statements” within the meaning of Sections 27A of the Securities Act of 1933 and
21E of the Securities Exchange Act of 1934, including the statements about our
plans, objectives, expectations and prospects under the heading “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.” You can expect to identify these statements by
forward-looking words such as “may,” “might,” “could,” “would,” ”will,”
“anticipate,” “believe,” “plan,” “estimate,” “project,” “expect,” “intend,”
“seek” and other similar expressions. Any statement contained in this
report that is not a statement of historical fact may be deemed to be a
forward-looking statement. Although we believe that the plans,
objectives, expectations and prospects reflected in or suggested by our
forward-looking statements are reasonable, those statements involve risks,
uncertainties and other factors that may cause our actual results, performance
or achievements to be materially different from any future results, performance
or achievements expressed or implied by these forward-looking statements, and we
can give no assurance that our plans, objectives, expectations and prospects
will be achieved.
Important factors that might cause our
actual results to differ materially from the results contemplated by the
forward-looking statements are contained in the “Risk Factors” section of and
elsewhere in our Annual Report on Form 10-K for the fiscal year ended December
31, 2009 and in our subsequent filings with the Securities and Exchange
Commission, and include, among others, the following:
| ● |
changes in customer
preferences; |
| ● |
our inventory and
debt levels; |
| ● |
heavy reliance on
sales to agencies of the United States government; |
| ● |
federal, state and
local government budget deficits and spending limitations; |
| ● |
quality of
management, business abilities and judgment of our personnel; |
| ● |
the availability,
terms and deployment of capital; |
| ● |
competition in the
land mobile radio industry;
|
| ● |
reliance on contract
manufacturers; |
| ● |
limitations in
available radio spectrum for use of land mobile radios; |
| ● |
changes
or advances in technology; and
|
| ● |
general economic and
business conditions. |
We assume
no obligation to publicly update or revise any forward-looking statements made
in this report, whether as a result of new information, future events, changes
in assumptions or otherwise, after the date of this report. Readers
are cautioned not to place undue reliance on these forward-looking
statements.
Reported
dollar amounts in management’s discussion and analysis are disclosed in millions
or as whole dollar amounts.
Executive
Summary
For the
first quarter ended March 31, 2010, our financial and operating results improved
significantly from the comparable period last year. This included
increased total sales, increased P25 digital sales, and increased operating
income for the quarter. We also maintained our strong working capital
position while remaining long-term debt-free.
A
previously announced order from the U.S. Department of Agriculture Forest
Service contributed significantly to our results for the first
quarter. We also continued to progress with our P25 Trunking
development; demonstrating Trunked KNG products in March 2010 at the
International Wireless Communications Exposition, and passing interoperability
tests on Motorola’s ASTRO P25 system infrastructure.
For the
first quarter ended March 31, 2010, total sales were approximately $6.4 million,
an increase of approximately $2.5 million (62.3%), compared with the same
quarter last year. Sales of P25 digital products for the first
quarter comprised approximately $4.5 million (69.5% of total sales) compared
with approximately $1.8 million (45.2% of total sales) for the same quarter last
year.
Gross
margins as a percentage of sales for the three months ended March 31, 2010 were
46.0% compared with 40.6% for the same quarter last year. Our gross
margins for the first quarter, while improved from the first quarter last year,
reflect competitive pricing pressures and additional manufacturing
costs.
For the
three months ended March 31, 2010, selling, general and administrative expenses
increased approximately $483,000 (19.6%) compared with the same period last
year, reflecting costs related to marketing and sales, as well as product
development initiatives during the quarter, some of which are non-recurring for
the remainder of the year.
Pretax
income for the three months ended March 31, 2010 improved by $0.9 million to
approximately $2,000 compared with a pretax loss of approximately $867,000 for
the same quarter last year.
For the
three months ended March 31, 2010, we recognized income tax expense of
approximately $1,000, which is primarily non-cash. For the same
quarter last year, we recognized neither income tax expense nor
benefit.
Net
income for the three months ended March 31, 2010 was approximately $1,000 ($0.0
per basic and diluted share), compared with a net loss of approximately $867,000
($0.06 per basic and diluted share) for the same quarter last year.
As of
March 31, 2010, we had approximately $17.7 million in working capital of which
$11.2 million was comprised of cash and trade receivables; substantially
unchanged from December 31, 2009. Additionally, we had no indebteness
on our revolving credit facility as of March 31, 2010.
Results of
Operations
As an aid
to understanding our operating results for the periods covered by this report,
the following table shows selected items from our condensed consolidated
statements of operations expressed as a percentage of sales:
|
|
|
Percentage
of Sales
Three
Months Ended
March
31, 2010
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
Cost
of products
|
|
|
(54.0 |
) |
|
|
(59.4 |
) |
|
Gross
margin
|
|
|
46.0 |
|
|
|
40.6 |
|
|
Selling,
general and administrative expenses
|
|
|
(45.7 |
) |
|
|
(62.1 |
) |
|
Net
interest expense
|
|
|
0.0 |
|
|
|
(0.4 |
) |
|
Other
(expense) income
|
|
|
(0.2 |
) |
|
|
0.1 |
|
|
Pretax income
(loss)
|
|
|
0.1 |
|
|
|
(21.8 |
) |
|
Income
tax (expense) benefit
|
|
|
(0.0 |
) |
|
|
0.0 |
|
|
Net
income (loss)
|
|
|
0.1 |
% |
|
|
(21.8 |
%) |
Net
Sales
Net sales
for the first quarter ended March 31, 2010, totaled approximately $6.4 million,
an increase of approximately $2.5 million (62.3%), compared with the same
quarter last year. Sales of P25 digital products for the quarter
totaled approximately $4.5 million (69.5% of total sales), compared with
approximately $1.8 million (45.2% of total sales) for the same quarter last
year.
A
previously announced order from the U.S. Department of Agriculture Forest
Service contributed significantly to our sales growth for the
quarter. The order was primarily for our D-Series P25 digital
portable and mobile radios with accessories. This large purchase
emphasizes the importance of our long-term customers and legacy products in our
continued success. Also, in April 2010, we were selected as a
supplier on a contract with the City of Phoenix, Arizona, an initial success in
our strategic efforts to penetrate the state and local government
segment. These events combined with improved sales for the first
quarter of 2010, and for the second half of 2009, offer encouraging signs of
recovery in the industry and with our customers.
Meaningful
progress has continued in the development of our P25 trunking products and
capabilities, which we anticipate should be commercially available later this
year. During the quarter, we demonstrated these items at our
industry’s primary trade show, the International Wireless Communications
Exposition (IWCE). Shortly thereafter, we achieved an important
milestone by successfully completing P25 interoperability tests on Motorola’s
ASTRO P25 system infrastructure.
Cost
of Products and Gross Margin
Gross
margins as a percentage of sales for the three months ended March 31, 2010 were
46.0% compared with 40.6% for the same quarter last year.
Our cost
of products and gross margins are primarily related to product mix,
manufacturing volumes and pricing. Compared with the same quarter
last year, our gross margins for the quarter reflected increased manufacturing
volumes and an improved sales-mix of high-margin P25 digital
products. Consequently, we more fully utilized and absorbed our base
of manufacturing and support expenses. However, gross margins were
impacted by competitive pricing considerations and some increased product
manufacturing costs. Some of these factors were specific to the
circumstances of the quarter and are not expected to be recurring, nor are they
reflective of permanent changes in our pricing or cost structure.
We
continue to utilize contract manufacturing relationships to maximize production
efficiencies and minimize material and labor costs. We also regularly
consider manufacturing alternatives to improve quality, speed and to reduce our
product costs. We anticipate that the current contract manufacturing
relationships or comparable alternatives will be available to us in the
future. Leveraging increased sales volumes and P-25 product sales
combined with the introduction of planned new products, we believe, should
result in further cost improvements
and efficiencies. We anticipate that competitive
pricing pressures will continue in future quarters, however, the extent of their
impact on gross margins is uncertain.
Selling,
General and Administrative Expenses
Selling,
general and administrative (SG&A) expenses consist of marketing, sales,
commissions, engineering, product development, management information systems,
accounting, headquarters and non-cash share-based employee compensation
expenses.
SG&A
expenses for the first quarter of 2010 were approximately $3.0 million, or 45.7%
of sales, compared with approximately $2.5 million, or 62.1% of sales, for the
same quarter last year.
Engineering
and product development expenses for the three months ended March 31, 2010
increased approximately $186,000 (20.7%) compared with the same quarter last
year. During the first quarter, we incurred additional costs
primarily associated with our P25 mobile, and other engineering and new product
development initiatives. New products and capabilities in our KNG
line, including a P25 mobile radio and P25 trunking, are in the pipeline and
planned for introduction later this year.
Marketing
and selling expenses for the three months ended March 31, 2010 increased by
approximately $160,000 (16.6%) compared with the same quarter last
year. During the quarter we increased sales and marketing programs
designed to raise the profile of the Company and our new products, some of which
related to our enhanced presence at the International Wireless Communications
Exposition trade show. Also, in the same quarter last year we reduced
selling expenses and payroll in response to sluggish sales. We plan
to continue investing in selling and marketing initiatives that we believe will
support our efforts to penetrate new customers and markets.
General
and administrative expenses for the three months ended March 31, 2010 increased
by approximately $137,000 (22.6%), compared with the same quarter last year as
primarily a result of non-cash share-based employee compensation and other
headquarters and public company related expenses.
Operating
Income
Operating
income for the three months ended March 31, 2010 increased to approximately
$14,000 (0.2% of sales), compared with an operating loss of $852,000 (21.4% of
sales) for the same quarter last year. The improvement in operating
income for the three months ended March 31, 2010 was derived primarily from
increased total sales and sales of P25 digital products, which yielded improved
gross margins.
Net
Interest (Expense) Income
For the
three months ended March 31, 2010, we incurred no interest expense or income,
compared to net interest expense of approximately $16,000 for the same period
last year. We incur interest expense on outstanding borrowings under
our revolving credit facility and earn interest income on our cash
balances. For the quarter, we had no borrowings outstanding under our
revolving credit facility. The interest rate on such revolving credit
facility as of March 31, 2010 was 5.5%. This rate is variable based
on the prime rate plus 100 basis points (subject to a reduction of 50 basis
points anytime our quarterly net income is greater than $1.0
million).
Income
Taxes
We
recorded net income tax expense of approximately $1,000 for the three months
ended March 31, 2010. For the same quarter last year, we did not
record any income tax expense or benefit. Our income tax expense is
primarily non-cash.
As of
March 31, 2010 and December 31, 2009,, we had deferred tax assets of
approximately $7.8 million, These assets are primarily composed of net operating
loss carry forwards (NOLs), which are available to offset any federal and state
taxable income. The NOLs expire starting in 2018 through
2028.
In order
to fully realize the net deferred tax assets, we will need to generate
sufficient taxable income in future years to utilize our NOLs prior to their
expiration. ASC Topic 740, “Income Taxes” requires us to
analyze all positive and negative evidence to determine if, based on the weight
of available evidence, we are more likely than not to realize the benefit of the
net deferred tax assets. The recognition of the net deferred tax assets and
related tax benefits is based upon our conclusions regarding, among other
considerations, estimates of future earnings based on information currently
available, current and anticipated customers, contracts and product
introductions, as well as historical operating results, and certain
tax planning strategies.
We have
evaluated the available evidence and the likelihood of realizing the benefit of
our net deferred tax assets. From our evaluation we have concluded
that based on the weight of available evidence we are more likely than not to
realize the benefit of our net deferred tax assets recorded at March 31,
2010. Accordingly, no valuation allowance has been
established. We cannot presently estimate what, if any, changes to
the valuation of our deferred tax assets may be deemed appropriate in the
future. If we incur future losses, it may be necessary to record a
valuation allowance related to the deferred tax assets recorded as of March 31,
2010.
In April
2010 we were notified by the Internal Revenue Service of its intent to examine
our federal tax return for the fiscal year ended December 31,
2007. The examination has not commenced.
Inflation
and Changing Prices
Inflation
for the three months ended March 31, 2010 did not have a material impact on our
operations. In some instances during the quarter, product unit prices
were reduced to enhance our competitive position and sales prospects, which
unfavorably impacted gross margins. We anticipate that competitive
pricing pressure will continue in future quarters. The extent of
their impact is uncertain.
Liquidity
and Capital Resources
For the
quarter ended March 31, 2010, net cash used in operating activities totaled
approximately $1.6 million, compared with net cash used in operating activities
of approximately $19,000 during the same period last year. Cash used in
operating activities resulted from net income of approximately $1,000 compared
with a net loss of approximately $0.9 million for the same period last year, as
well as a $1.8 million increase in accounts receivable compared with an increase
of $0.6 million for the same period last year. The increase in
accounts receivable as of March 31, 2010 was primarily the result of sales
occurring later in the quarter. Net inventories increased during the
quarter by approximately $0.8 million in support of customer
orders. For the same period last year, inventory decreased
approximately $0.7 million from the sale of products in stock and reduced
manufacturing. Likewise, accounts payable increased as of March 31,
2010 by approximately $0.6 million primarily due to material purchases related
to the aforementioned customer orders. For the same period last year,
accounts payable increased approximately $0.1
million. Deferred tax assets for the first three months
of 2010 remained static . For the same period last year, deferred tax
assets were also unchanged. Depreciation and amortization totaled
approximately $154,000 for the three months ended March 31, 2010, compared with
$165,000 for the same period last year.
Cash used
in investing activities was primarily to fund digital software development and
the acquisition of assets pertaining to the development of our new digital
products. During the three months ended March 31, 2010, we incurred
$418,000 in capitalized software compared with $489,000 for the same period last
year. Purchases of property, plant and equipment for the three months
ended March 31, 2010 were approximately $71,000 compared with approximately
$320,000 for the same period last year. We anticipate that future capital
expenditures will be funded through our existing cash balance and operating cash
flow.
Cash
generated from financing activities for the three months ended March 31, 2010
totaled approximately $88,000, representing $68,000 in proceeds from
the issuance of common stock and $20,000 in tax benefits from the exercise and
sale of employees’ stock options. For the same period last year,
there was no cash generated by or used in financing activities.
We have a
secured revolving credit facility with Silicon Valley Bank (SVB). The SVB
facility provides borrowing availability of up to $3.5 million and is
governed by a loan and security agreement entered into between us and SVB. The
facility is available on a revolving basis during the period that commenced on
October 23, 2008 and ending on October 22, 2010. Under the terms and
conditions of the loan and security agreement for the facility, advances are
generally subject to customary borrowing conditions, including the accuracy of
representations and warranties, compliance with financial maintenance and
restrictive covenants and the absence of events of default. For additional
information about the terms and conditions of the loan and security agreement,
reference is made to Note 6 (Debt) of the consolidated financial statements
included in our Annual Report on Form 10-K for the fiscal year ended December
31, 2009.
Advances
under the facility bear interest at a variable rate equal to the prime rate, in
effect from time to time, plus 100 basis points, subject to a reduction of 50
basis points anytime our quarterly net income is greater than $1.0 million.
Under the terms and conditions of the loan and security agreement for the
facility, advances may be prepaid in whole or in part without premium or
penalty. Under the terms and conditions of the loan and security agreement for
the facility, our obligations are secured by substantially all of our assets,
principally accounts receivable and inventory. We were in compliance with all
covenants under the loan and security agreement as of the date of this report.
As of March 31, 2010, we had no borrowings outstanding under the facility and
approximately $3.2 million of borrowing availability.
Our cash
balance at March 31, 2010 was approximately $5.7 million. We believe these
funds combined with anticipated cash generated from operations and borrowing
availability under our secured revolving credit facility with SVB are sufficient
to meet our working capital requirements for the next twelve months. However,
although we do not anticipate needing additional capital in the near term, the
current financial and economic conditions could limit our access to credit and
impair our ability to raise capital, if needed, on acceptable terms or at all.
We also face other risks that could impact our business, liquidity and financial
condition. For a description of these risks, see “Item 1A. Risk Factors” set
forth in our Annual Report on Form 10-K for the fiscal year ended December 31,
2009.
Critical
Accounting Policies
In
response to the SEC’s financial reporting release, FR-60, Cautionary Advice
Regarding Disclosure About Critical Accounting Policies, we have selected for
disclosure our revenue recognition process and our accounting processes
involving significant judgments, estimates and assumptions. These
processes affect our reported revenues and current assets and are therefore
critical in assessing our financial and operating status. We regularly
evaluate these processes in preparing our financial statements. The
processes for determining the allowance for collection of trade receivables, the
reserves for excess or obsolete inventory, and software cost and income taxes
involve certain assumptions and estimates that we believe to be reasonable under
present facts and circumstances. These estimates and assumptions, if
incorrect, could adversely impact our operations and financial position.
Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31,
2009 includes a detailed discussion of these critical accounting
policies.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
We may be
subject to the risk of fluctuating interest rates in the ordinary course of
business for borrowings under our revolving credit facility, which bears
interest at a variable rate based on the prime rate, in effect from time to
time, plus 100 basis points (subject to a reduction of 50 basis points anytime
our quarterly net income is greater than $1.0 million). As of March
31, 2010, we had no borrowings outstanding under the facility.
ITEM
4T. CONTROLS AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures
Our Chief
Executive Officer and Chief Financial Officer (who serves as our principal
financial and accounting officer) have evaluated the effectiveness of our
disclosure controls and procedures (as defined in the Securities Exchange Act of
1934 Rules 13a-15(e) and 15d-15(e)) as of March 31, 2010. Based on
this evaluation, they have concluded that our disclosure controls and procedures
were effective as of March 31, 2010.
Changes
in Internal Control over Financial Reporting
During
the first quarter ended March 31, 2010, there were no changes in our internal
control over financial reporting identified in connection with the evaluation
required by paragraph (d) of Securities Exchange Act Rules 13a-15 or 15d-15 that
have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
PART
II- OTHER INFORMATION
ITEM
1. LEGAL PROCEEDINGS
Reference
is made to Note 10 of the Company’s Condensed Consolidated Financial Statements
included elsewhere in this report for the information required by this
Item.
Item
5. Exhibits
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Exhibit
31.1
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Certification
Pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
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Exhibit
31.2
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Certification
Pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
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Exhibit
32.1
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Certification
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 (furnished pursuant to Item 601(b)(32) of
Regulation S-K).
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Exhibit
32.2
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Certification
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 (furnished pursuant to Item 601(b)(32) of
Regulation S-K).
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SIGNATURES
Pursuant
to the requirements of Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
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RELM
WIRELESS CORPORATION
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(The
“Registrant”)
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Date: May
5, 2010
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By: /s/ David
P.
Storey
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David P. Storey
President and Chief Executive
Officer
(Principal executive officer
and duly
authorized
officer)
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Date: May
5, 2010
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By: /s/
William P.
Kelly
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William P. Kelly
Executive Vice President
and
Chief Financial
Officer
(Principal financial and
accounting
officer and duly authorized
officer)
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Exhibit
Index
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Exhibit
Number
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Description
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31.1
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Certification
Pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
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31.2
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Certification
Pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
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32.1
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Certification
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 (furnished pursuant to Item 601(b)(32) of
Regulation S-K).
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32.2
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Certification
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 (furnished pursuant to Item 601(b)(32) of
Regulation S-K).
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