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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10 - Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended March 31, 2005.
000-18122
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(Commission File Number)
ARC Wireless Solutions, Inc.
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(Exact name of registrant as specified in its charter)
Utah 87-0454148
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(State or other jurisdiction of (IRS Employer
incorporation) Identification Number)
10601 West 48th Avenue
Wheat Ridge, Colorado, 80033-2163
---------------------------------
(Address of principal executive offices including zip code)
(303) 421-4063
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(Registrant's telephone number, including area code)
Not Applicable
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(Former Name or Former Address, if Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act 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 X No
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Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
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As of May 1, 2005, the Registrant had 153,878,685 shares outstanding of its
$.0005 par value common stock.
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ARC Wireless Solutions, Inc.
Quarterly Report on FORM 10-Q For The Period Ended
March 31, 2005
Table of Contents
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 2005
(unaudited) and December 31, 2004................................3
Consolidated Statements of Operations for the Three Months
Ended March 31, 2005 and 2004 (unaudited)........................4
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 2005 and 2004 (unaudited)........................5
Notes to Consolidated Financial Statements.........................6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................11
Item 3. Quantitative and Qualitative Disclosures About Market Risk........16
Item 4. Controls and Procedures...........................................16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................17
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds ......17
Item 6. Exhibits .........................................................17
Signatures.................................................................17
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
2
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
ARC Wireless Solutions, Inc.
Consolidated Balance Sheets
March 31, December 31,
2005 2004
Assets (unaudited) *
Current assets:
Cash and equivalents $ 354,000 $ 321,000
Accounts receivable - trade, net 4,223,000 4,145,000
Accounts receivable - vendors, net 953,000 688,000
Inventory, net 4,726,000 5,624,000
Other current assets 510,000 209,000
---------------------------------------
Total current assets 10,766,000 10,987,000
---------------------------------------
Property and equipment, net 483,000 527,000
---------------------------------------
Other assets:
Goodwill, net 10,824,000 10,824,000
Intangible assets, net 110,000 113,000
Deposits 76,000 42,000
---------------------------------------
Total assets $ 22,259,000 $ 22,493,000
=======================================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 3,352,000 $ 2,253,000
Bank debt - current 505,000 493,000
Accrued expenses 705,000 890,000
Current portion of capital lease obligations 55,000 62,000
---------------------------------------
Total current liabilities 4,617,000 3,698,000
Capital lease obligations, less current portion 82,000 90,000
Bank debt, less current portion 2,202,000 3,243,000
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Total liabilities 6,901,000 7,031,000
---------------------------------------
Commitments
Stockholders' equity:
Common stock 78,000 78,000
Preferred stock -- --
Additional paid-in capital 21,701,000 21,704,000
Treasury stock (1,195,000) (1,195,000)
Accumulated deficit (5,226,000) (5,125,000)
---------------------------------------
Total stockholders' equity 15,358,000 15,462,000
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Total liabilities and stockholders' equity $ 22,259,000 $ 22,493,000
=======================================
* These numbers were derived from the audited financial statements for the year
ended December 31, 2004.
See accompanying notes.
3
ARC Wireless Solutions, Inc.
Consolidated Statements of Operations
Three months ended March 31,
2005 2004
--------------------------------------
(unaudited)
Sales, net $ 9,025,000 $ 7,233,000
Cost of sales 7,613,000 5,876,000
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Gross profit 1,412,000 1,357,000
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Operating expenses:
Selling, general and administrative expenses 1,584,000 1,283,000
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Total operating expenses 1,584,000 1,283,000
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Income (loss) from operations (172,000) 74,000
Other income (expense):
Interest expense, net (69,000) (67,000)
Other income 148,000 82,000
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Total other income (expense) 79,000 15,000
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Income (loss) before income taxes (93,000) 89,000
Provision for income taxes (8,000) (8,000)
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Net Income (loss) $ (101,000) $ 81,000
======================================
======================================
Net income (loss) per share - basic $ (.001) $ .001
======================================
Net income (loss) per share - diluted $ (.001) $ .001
======================================
See accompanying notes.
4
ARC Wireless Solutions, Inc.
Consolidated Statements of Cash Flows
Three months ended March 31,
2005 2004
----------------------------------
(unaudited)
Operating activities
Net income (loss) $ (101,000) $ 81,000
Adjustments to reconcile net income (loss) to net cash provided by
Operating activities:
Depreciation and amortization 68,000 57,000
Provision for doubtful accounts 72,000 30,000
Non-cash expense for issuance of stock and options (3,000) 1,000
Changes in operating assets and liabilities:
Accounts receivable, trade and vendor (415,000) 218,000
Inventory 898,000 (391,000)
Prepaids and other current assets (301,000) (112,000)
Other assets (34,000) (5,000)
Accounts payable and accrued expenses 914,000 255,000
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Net cash provided by operating activities 1,098,000 134,000
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Investing activities
Patent acquisition costs (1,000) (4,000)
Purchase of plant and equipment (20,000) (48,000)
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Net cash used in investing activities (21,000) (52,000)
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Financing activities
Repayment of line of credit and capital lease obligations (1,044,000) (12,000)
Net borrowings under lines of credit and other debt -- 101,000
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Net cash provided by (used in) financing activities (1,044,000) 89,000
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Net increase (decrease) in cash 33,000 171,000
Cash, beginning of period 321,000 227,000
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Cash, end of period $ 354,000 $ 398,000
==================================
Supplemental cash flow information:
Cash paid for interest $ 69,000 $ 95,000
Equipment acquired under capital lease -- $ 52,000
See accompanying notes.
5
ARC Wireless Solutions, Inc.
Notes to Consolidated Financial Statements
March 31, 2005
Note 1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
for interim financial information and pursuant to the rules and regulations of
the Securities and Exchange Commission. Accordingly, they do not include all of
the information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements. In the opinion
of management, all adjustments considered necessary for a fair presentation have
been included. For further information, refer to the financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-K for the
year ended December 31, 2004.
The Company operates in three business segments which are identified as
distribution, manufacturing and cable offering a wide variety of wireless
component and network solutions to service providers, systems integrators, value
added resellers, businesses and consumers, primarily in the United States.
Operating results for the three months ended March 31, 2005 are not necessarily
indicative of the results that may be expected for the year ended December 31,
2005 or any future period.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates and such
differences may be material to the financial statements.
Consolidation Policy
The accompanying unaudited consolidated financial statements include the
accounts of ARC Wireless Solutions, Inc. ("ARC" or the "Company") and its
wholly-owned subsidiary corporations, Winncom Technologies Corp. ("Winncom") and
Starworks Wireless Inc. ("Starworks"), since their respective acquisition dates,
after elimination of all material intercompany accounts, transactions, and
profits.
Stock Based Compensation
The Company has elected to follow APB Opinion No. 25 and related interpretations
in accounting for its stock options and grants since the alternative fair market
value accounting provided for under Statement of Financial Accounting Standards
(SFAS) No. 123 requires use of grant valuation models that were not developed
for use in valuing employee stock options and grants. Under APB Opinion No. 25,
if the exercise price of the Company's stock grants and options equals or
exceeds the fair value of the underlying stock on the date of grant, no
compensation expenses are recognized.
6
If compensation cost for the Company's stock-based compensation plans had been
determined based on the fair value at the grant dates for awards under those
plans consistent with the method of SFAS No. 123, then the Company's net income
(loss) and per share amounts for the three months ended March 31, 2005 and 2004,
respectively, would have been adjusted to the pro forma amounts indicated below:
March 31,
2005 2004
-------------------------------------
Net income (loss) as reported $ (101,000) $ 81,000
Add: stock based compensation included in reported net
income (loss) -- --
Deduct: Stock-based compensation cost under SFAS 123 (4,000) (4,000)
-------------------------------------
Pro forma net income (loss) $ (105,000) $ 77,000
======================================
Pro forma basic and diluted net income (loss) per share:
Pro forma shares used in the calculation of pro forma net
income (loss) per common share- basic 153,892,000 153,883,000
Pro forma shares used in the calculation of pro forma net
income (loss) per common share- diluted 153,892,000 154,133,000
Reported net income (loss) per common share - basic and diluted
$ (.001) $ .001
Pro forma net income (loss) per common share - basic and
diluted $ (.001) $ .001
Pro forma information regarding net loss is required by SFAS 123, which also
requires that the information be determined as if the Company had accounted for
grants subsequent to December 31, 1994 under a method specified by SFAS 123.
Options granted were estimated using the Black-Scholes valuation model. The
following weighted average assumptions were used:
Three Months Ended March Three Months Ended
31, 2005 March 31, 2004
---------------------------------------- ------------------------- ------------------
Volatility 1.024 .87
Expected life of options (in years) 2 2
Dividend Yield 0.00% 0.00%
Risk free interest rate 4.00% 2.50%
Note 2. Earnings Per Share
SFAS 128 provides for the calculation of Basic and Dilutive earnings (loss) per
share. Basic earnings (loss) per share includes no dilution and is computed by
dividing income available to common stockholders by the weighted average number
of common shares outstanding for the period. Diluted earnings (loss) per share
reflects the potential dilution of securities that could share in the earnings
of the entity. For the quarter ended March 31, 2005, the Company incurred a net
loss and stock options and stock warrants totaling 2,176,000 were not included
in the computation of diluted loss per share because their effect was
anti-dilutive; therefore, basic and fully diluted loss per share are the same
for the quarter ended March 31, 2005.
7
The following table represents a reconciliation of the shares used to calculate
basic and diluted earnings per share for the respective periods indicated:
Three Months Three Months
Ended Ended
March 31, 2005 March 31, 2004
Numerator: Net Income (Loss) $ (101,000) $ 81,000
=============================
Denominator:
Denominator for basic earnings per share -
weighted average shares 153,892,000 153,883,000
Effect of dilutive securities
Employee stock options -- 250,000
Common stock warrants --
-----------------------------
Denominator for diluted earnings per share
- - adjusted weighted average shares and
assumed conversion 153,892,000 154,133,000
=============================
Basic earnings (loss) per share $ (.001) $ .001
=============================
Diluted earnings (loss) per share $ (.001) $ .001
=============================
Note 3. Inventory
Inventory is valued at the lower of cost or market using standard costs that
approximate average cost. Inventories are reviewed periodically and items
considered to be slow-moving or obsolete are reduced to estimated net realizable
value through an appropriate reserve. Inventory consists of the following:
March 31, December 31,
---------------------------------
2005 2004
---------------------------------
Raw materials $ 979,000 $ 917,000
Work in progress 128,000 112,000
Finished goods 4,364,000 5,307,000
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5,471,000 6,336,000
Inventory reserve (745,000) (712,000)
---------------------------------
Net inventory $ 4,726,000 $ 5,624,000
=================================
Note 4. Revolving Bank Loan Agreements and Notes Payable
On October 1, 2003 our subsidiary Winncom, executed a new $4,000,000 line of
credit agreement with a bank with interest at prime plus .5% (6.25% at March 31,
2005) due April 30, 2006 and converted $500,000 of the balance outstanding under
the line of credit at September 30, 2003 into a 36-month term loan with monthly
principal payments of $13,888 plus interest at prime plus .75% (6.5% at March
31, 2005). The term loan will become due on October 26, 2006.
The agreement contains several covenants, which, among other things, require
that Winncom maintain certain financial ratios as defined in the line-of-credit
agreement. In addition, the agreement limits the payment of management fees by
Winncom to the Company, and also limits dividends and the purchase of property
and equipment. As of March 31, 2005 Winncom was in compliance with these
covenants.
We entered into a new financing agreement with Wells Fargo Business Credit, Inc.
("WFBC"), (the "WFBC Facility") on December 9, 2003. The new financing agreement
is for a term of one year and is renewable for additional one-year terms. The
8
WFBC Facility provides for the sale of accounts receivable by the Company to
WFBC at a 1% discount for the first 15 days and an additional .055 of 1% per day
until the account receivable is paid in full. Sales of accounts receivable and
advances under the WFBC Facility are subject to conditions and restrictions,
including, without limitation, accounts receivable eligibility restrictions,
verification, and approval. Obligations under the WFBC Facility are
collateralized by substantially all of the assets of the Company. Advances under
the WFBC Facility are made only at the sole discretion of WFBC, even if the
accounts receivable offered by ARC for sale to WFBC satisfy all necessary
conditions and restrictions. WFBC is under no obligation to purchase accounts
receivable from the Company or to advance any funds or credit to the Company
under the WFBC Facility.
On May 10, 2005 the Company entered into a new $1.5 million revolving line of
credit agreement (the "Credit Facility") with Citywide Banks. The new Credit
Facility has a maturity of one year, is interest bearing at 2% over prime,
contains covenants to maintain certain financial statement ratios and is
collateralized by essentially all of the assets of ARC Wireless Solutions, Inc
("ARC") and its wholly owned subsidiary Starworks Wireless Inc.("Starworks"),
excluding Winncom Technologies Corp.. The borrowing base will be based on a
percentage of trade accounts receivable and inventory for ARC and Starworks
combined. The new Credit Facility will replace the Wells Fargo Business Credit
Accounts Receivable Factoring Facility.
Revolving bank lines of credit and other bank debt at March 31, 2005 and
December 31, 2004 consist of:
March 31, December 31,
------------------------------
2005 2004
------------------------------
Bank line of credit - Winncom $ 2,119,000 $ 3,118,000
Bank term loan - Winncom 250,000 292,000
Bank Facility - ARC 338,000 326,000
------------------------------
2,707,000 3,736,000
Less current portion (505,000) (493,000)
------------------------------
Long-term portion $ 2,202,000 $ 3,243,000
==============================
Note 5. Equity Transactions
For the quarter ended March 31, 2004, the Company recorded the issuance of 4,790
shares of common stock to directors for outstanding obligations for accrued
directors' fees in the amount of $750.
For the quarter ended March 31, 2005, the Company recorded the issuance of 3,332
shares of common stock to directors for outstanding obligations for accrued
directors' fees in the amount of $500. In addition, during the quarter ended
March 31, 2005, 20,000 shares of common stock were returned to the Company in
settlement of a dispute regarding shares issued for consulting fees in 2001.
Note 6. Recent Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment," which
is a revision of SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No.
123(R) is effective for the Company beginning January 1, 2006, supersedes APB
Opinion No. 25, Accounting for Stock Issued to Employees, and amends SFAS No.
95, Statement of Cash Flows.
SFAS No. 123(R) requires all share-based payments to employees, including grants
of employee stock options, to be recognized in the income statement based on
their fair values. Pro-forma disclosure is no longer an alternative. The Company
has not yet completed its evaluation of the effect of SFAS No. 123(R) but
expects its adoption to have an effect on the financial statements similar to
the pro-forma effects reported in Footnote 1 to the Consolidated Financial
Statements under the caption above "Stock Based Compensation".
9
In November 2004, the FASB issued SFAS 151, Inventory Costs, which revised ARB
43, relating to inventory costs. This revision is to clarify the accounting for
abnormal amounts of idle facility expense, freight, handling costs and wasted
material (spoilage). This Statement requires that these items be recognized as a
current period charge regardless of whether they meet the criterion specified in
ARB 43. In addition, this Statement requires the allocation of fixed production
overheads to the costs of conversion be based on normal capacity of the
production facilities. SFAS 151 is effective for inventory costs incurred during
fiscal years beginning after June 15, 2005. The Company does not believe the
adoption of SFAS 151 will have a material impact on the Company's financial
statements.
The FASB issued SFAS 153, Exchanges of Nonmonetary Assets, which changes the
guidance in APB Opinion 29, Accounting for Nonmonetary Transactions. This
Statement amends Opinion 29 to eliminate the exception for nonmonetary exchanges
of similar productive assets and replaces it with a general exception for
exchanges of nonmonetary assets that do not have commercial substance. A
nonmonetary exchange has commercial substance if the future cash flows of the
entity are expected to change significantly as a result of the exchange. SFAS
153 is effective during fiscal years beginning after June 15, 2005. The Company
does not believe the adoption of SFAS 153 will have a material impact on the
Company's financial statements.
Note 7. Industry Segment Information
SFAS No. 131 "Disclosure about Segments of an Enterprise and Related
Information" requires that the Company disclose certain information about its
operating segments where operating segments are defined as components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. Generally, financial
information is required to be reported on the basis that is used internally for
evaluating segment performance and deciding how to allocate resources to
segments.
The Company has three reportable segments that are separate business units that
offer different products as follows: distribution of wireless communication
products, antenna manufacturing and cable products. Each segment consists of a
single operating unit and the accounting policies of the reporting segments are
the same as those described in the summary of significant accounting policies.
Intersegment sales and transfers are recorded at cost plus an agreed upon
intercompany profit on intersegment sales and transfers.
Financial information regarding the Company's three operating segments for the
quarters ended March 31, 2005 and 2004 are as follows:
Distribution Manufacturing Cable Corporate Total
----------------------------------------------------------------------------------
Net Sales 2005 $ 7,938,000 $ 1,092,000 $ 61,000 $ (66,000) $ 9,025,000
2004 $ 5,626,000 $ 1,606,000 $ 77,000 $ (76,000) $ 7,233,000
Net Earnings (Loss) 2005 $ 125,000 $ (28,000) $ (13,000) $ (185,000) $ (101,000)
2004 $ 93,000 $ 171,000 $ (13,000) $ (170,000) $ 81,000
Earnings (Loss)
before Income Taxes 2005 $ 133,000 $ (28,000) $ (13,000) $ (185,000) $ (93,000)
2004 $ 101,000 $ 171,000 $ (13,000) $ (170,000) $ 89,000
Identifiable Assets 2005 $20,658,000 $ 3,091,000 $ 194,000 $(1,684,000) $22,259,000
2004 $20,979,000 $ 3,678,000 $ 284,000 $(1,723,000) $23,218,000
Corporate represents the operations of the parent Company, including segment
eliminations.
10
Approximately $1.2 million or 14% of the sales for the quarter ended March 31,
2005 represented foreign sales in Eastern Europe which includes Russia,
Kazakhstan and Uzbekistan.
Note 8. Commitments and Contingencies
On May 9, 2005, the Export Import Bank of the United States ("Ex-Im Bank") Board
of Directors approved the majority of the financing for a project awarded to
Winncom Technologies Corp. ("Winncom") for the development of a modern
telecommunications infrastructure to be located on the left bank of the City of
Astana, Kazakhstan. The Ex-Im Bank is the official export credit agency of the
United States. Ex-Im Bank's mission is to assist in financing the export of U.S.
goods and services to international markets.
In October 2004, Winncom, a wholly owned subsidiary of ARC Wireless Solutions,
Inc., entered into a "Frame" Agreement (Agreement of Understanding) with Joint
Stock Company Kazakhtelecom ("Kazakhtelecom"), Kazakhstan's national
telecommunications operator for the Republic of Kazakhstan, that gives Winncom
the right, subject to Winncom obtaining 100% financing for the project upon
terms and conditions acceptable to Kazakhtelecom, and subject to a number of
other matters, to undertake, on a turnkey basis, development of a modern
telecommunications infrastructure to be located on the left bank of the City of
Astana, Kazakhstan. With several competing bids, Winncom was awarded the
contract after several months of negotiations. The cost of the project is for a
total of $54,945,700.
As of May 11, 2005, Kazakhtelecom has not approved the financing terms from
Ex-Im Bank, and Winncom has no commitments for the additional financing to be
able to undertake the project. If Winncom is able to obtain the financing,
Winncom will be paid on a pro-rata basis by the financial institution(s) after
Kazakhtelecom enters into the appropriate agreements with the financial
institution(s) for the repayment of the funds to the financial institution(s).
Also, in order for Winncom to commence the project, Kazakhtelecom must approve a
work program and timeline to be submitted by Winncom. This has not yet occurred.
The project, if it commences, is expected to take approximately 30 months from
the date the work program and total financing have been approved by
Kazakhtelecom. This timeline may be delayed for seasonal purposes due to
inclement winter weather in Kazakhstan.
Although the financing is the only known obstacle at this time, there can be no
assurances that Winncom will be successful in securing the financing or in
meeting all of the other terms and conditions pursuant to the terms of the
Agreement to the extent that the financing for the project is secured.
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Results of Operations
Sales were $9.0 million and $7.2 million for the three-month periods ended March
31, 2005 and 2004, respectively. The increase in revenues during the three
months ended March 31, 2005 is attributable to an increase in revenues from our
subsidiary Winncom from $5.6 million for the quarter ended March 31, 2004 to
$7.9 million for the quarter ended March 31, 2005, partially offset by a
decrease in our subsidiary Starworks' revenues from $77,000 for the quarter
ended March 31, 2004 to $61,000 for the quarter ended March 31, 2005 and a
decrease in our Wireless Communications Solutions Division revenues from $1.6
million for the quarter ended March 31, 2004 to $1.1 million for the quarter
ended March 31, 2005. Winncom's revenues in the first quarter of 2005 were
boosted by a sale to a single customer of $1.4 million. The decrease in revenues
from the Wireless Communication Solutions Division is primarily the result of
managements' decision to withhold shipments and minimize the Company's risk to a
significant customer whose credit privileges were suspended due to delinquent
payments. The customer has announced a recapitalization of its company which it
expects to complete by the end of May 2005. If the recapitalization is complete,
shipments could commence in June of 2005.
11
Gross profit margin was 15.6% and 18.8% for the three-months ended March 31,
2005 and March 31, 2004, respectively. The decrease in gross margin for the
quarter ended March 31, 2005 as compared to the quarter ended March 31, 2004 is
primarily the result of a higher percentage of the overall sales by Winncom and
a lower percentage of the overall sales from the Wireless Communications
Solutions Division, whose products have a higher margin than the products of
Winncom or Starworks. For the quarter ended March 31, 2005, the Wireless
Communications Solutions Division sales accounted for 11.4% of revenues compared
to the quarter ended March 31, 2004 in which the Wireless Communications
Products Division sales accounted for 21.2% of revenues.
Selling, general and administrative expenses (SG&A) increased by $301,000 for
the three months ended March 31, 2005 compared to March 31, 2004. The increase
in SG&A from 2004 to 2005 is primarily attributable to increases in
international marketing, costs incurred in connection with the Kazaktelecom
Agreement (see note 8 to the consolidated financial statements) that have been
expensed due to the contingencies remaining before we can actually commence the
development project, and compensation (including commissions). With a 25%
increase in revenues, commissions increased proportionally with the increase in
revenues, which is expected. In an effort to grow international sales, which
increased 20% over this same period last year, Winncom has increased its
marketing efforts internationally. The benefit of these efforts is expected to
be realized in future periods. SG&A as a percent of revenues decreased from
17.8% for the three months ended March 31, 2004 to 17.6% for the three months
ended March 31, 2005. Salaries and wages, including commissions, remain the
largest component of SG&A constituting 52.7% and 54.7% of the total for the
quarters ended March 31, 2005 and 2004, respectively.
Net interest expense was $69,000 for the three months ended March 31, 2005
compared to $67,000 for the three months ended March 31, 2004. While the average
balance outstanding on the lines of credit and term loan was $3.2 million for
the quarter ended March 31, 2005 compared to $3.7 million for the quarter ended
March 31, 2004, the interest rate was 6.25% for the quarter ended March 31, 2005
as compared to 4.75% for the quarter ended March 31, 2004.
The Company had a net loss of $101,000 for the quarter ended March 31, 2005 as
compared to net income of $81,000 for the quarter ended March 31, 2004. While
overall sales increased by $1.8 million from 2004 to 2005, primarily due to
increased sales from Winncom, there was a decrease in sales from the Wireless
Communications Solutions Division, which reduced gross margin from 18.8% in 2004
to 15.6% in 2005. In addition, SG&A expenses increased by $301,000.
Financial Condition
The net cash provided by operating activities was $1,098,000 for the quarter
ended March 31, 2005 and $134,000 for the quarter ended March 31, 2004. The net
cash from operations in 2005 was primarily due to a substantial decrease in
inventory and an increase in accounts payable, partially offset by an increase
in accounts receivable during the quarter. For the quarter ended March 31, 2005,
Winncom reduced its stocking inventories by approximately $900,000, increased
trade accounts payable by $1.1 million, and accounts receivable increased by
only $340,000, despite an 25% increase in revenue. Accounts payable increased
because of a 25% increase in sales rather than a deterioration of the aging of
accounts payable. The net cash from operations in the first quarter of 2004 was
primarily due to net income for the quarter. For the quarter ended March 31,
2004, increases in inventory and other current assets were funded through a
reduction in accounts receivable and increases in trade accounts payable.
The net cash used in investing activities was $21,000 for the quarter ended
March 31, 2005 compared to $52,000 for the quarter ended March 31, 2004,
primarily the result of expenditures for patents and equipment.
For the quarter ended March 31, 2005 the Company was able to pay down its lines
of credit and other bank debt by nearly $1 million, resulting in the net cash
used in financing activities as shown on the consolidated statements of cash
12
flows for the quarter. By reducing inventory by nearly $900,000, the Company was
able to use those proceeds to reduce bank debt. The net cash provided by
financing activities for the quarter ended March 31, 2004 is primarily the
result of increases in funding by the Company under its accounts receivable
factoring credit facility. We have not had to increase borrowings under other
lines of credit facilities.
The Company's working capital at March 31, 2005 was $6.15 million compared to
$7.29 million at December 31, 2004. The decrease is partially due to the net
loss for the quarter, but primarily due to available cash during the quarter
being used to reduce long term bank debt rather than reduce accounts payable.
On October 1, 2003, Winncom executed a new $4,000,000 bank line of credit
agreement with interest at prime plus .5% (6.25% at March 31, 2005 and 5.75% at
December 31, 2004), due April 30, 2006, and converted $500,000 of the balance
outstanding under the line of credit at September 30, 2003 into a 36-month term
loan with monthly principal payments of $13,888 plus interest at prime plus .75%
(6.5% at March 31, 2005). This term loan shall come due on October 26, 2006.
The bank line of credit agreement contains several covenants, which, among other
things, require that Winncom maintain certain financial ratios. In addition, the
agreement limits the payment of management fees by Winncom to the Company, and
also limits dividends and the purchase of property and equipment. As of March
31, 2005, Winncom was in compliance with these covenants. ARC is a general
corporate guarantor of this loan.
We entered into a new financing agreement with Wells Fargo Business Credit, Inc.
("WFBC"), (the "WFBC Facility") on December 9, 2003. The new financing agreement
is for a term of one year and is renewable for additional one-year terms. The
WFBC Facility provides for the sale of accounts receivable by the Company to
WFBC at a 1% discount for the first 15 days and an additional .055 of 1% per day
until the account receivable is paid in full. Sales of accounts receivable and
advances under the WFBC Facility are subject to conditions and restrictions,
including, without limitation, accounts receivable eligibility restrictions,
verification, and approval. Obligations under the WFBC Facility are
collateralized by substantially all of the assets of the Company. Advances under
the WFBC Facility are made only at the sole discretion of WFBC, even if the
accounts receivable offered by the Company for sale to WFBC satisfy all
necessary conditions and restrictions. WFBC is under no obligation to purchase
accounts receivable from ARC or advance any funds or credit to the Company under
the WFBC Facility.
On May 10, 2005 the Company entered into a new $1.5 million revolving line of
credit agreement (the "Credit Facility") with Citywide Banks. The new Credit
Facility has a maturity of one year, is interest bearing at 2% over prime,
contains covenants to maintain certain financial statement ratios and is
collateralized by essentially all of the assets of ARC Wireless Solutions, Inc
("ARC") and its wholly owned subsidiary Starworks Wireless Inc.("Starworks"),
excluding Winncom Technologies Corp.. The borrowing base will be based on a
percentage of trade accounts receivable and inventory for ARC and Starworks
combined. The new Credit Facility will replace the Wells Fargo Business Credit
Accounts Receivable Factoring Facility.
Management believes that current working capital and available borrowings on new
and existing bank lines of credit, together with additional equity infusions
that management believes will be available, will be sufficient to allow the
Company to maintain its operations through December 31, 2005 and into the
foreseeable future.
Forward-Looking Statements
This Quarterly Report on Form 10-Q includes "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. All statements
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other than statements of historical fact included in this Quarterly Report,
including "Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operation", regarding our financial position, business strategy,
plans and objectives of our management for future operations and capital
expenditures, and other matters, other than historical facts, are
forward-looking statements. Although we believe that the expectations reflected
in such forward-looking statements and the assumptions upon which the
forward-looking statements are based are reasonable, we can give no assurance
that such expectations will prove to have been correct.
Additional statements concerning important factors that could cause actual
results to differ materially from our expectations are disclosed in the
following "Risk Factors" section and elsewhere in this Quarterly Report. In
addition, the words "believe", "may", "will", "when", "estimate", "continue",
"anticipate", "intend", "expect" and similar expressions, as they relate to ARC
Wireless, our business or our management, are intended to identify
forward-looking statements. All written and oral forward-looking statements
attributable to us or persons acting on our behalf subsequent to the date of
this Quarterly Report are expressly qualified in their entirety by the following
Risk Factors. See the Company's Annual Report on Form 10-K for the year ended
December 31, 2003 for additional risk factors that could cause actual results to
differ materially from the Company's expectations.
Risk Factors
1. We have a history of prior losses and there is no assurance that our
operations will be profitable in the future. From inception in September
1987 through the fiscal year ended December 31, 1992, and again for the
years ended December 31, 1998 through the fiscal year ended December 31,
2001 and for the fiscal year ended December 31, 2003, we incurred losses
from operations. We operated profitably during each of the fiscal years
ended December 31, 1993 through 1997 and again for the fiscal years ended
December 31, 2002 and 2004. Profits for some of these years were marginal,
and we cannot be assured that our operations in the future will be
profitable. See the financial statements included in Item 14 of this Annual
Report on Form 10-K.
2. Our industry encounters rapid technological changes and there is no
assurance that our research and development activities can timely lead to
new and improved products when the market demands them. We do business in
the wireless communications industries. This industry is characterized by
rapidly developing technology. Changes in technology could affect the
market for our products and necessitate additional improvements and
developments to our products. We cannot predict that our research and
development activities will lead to the successful introduction of new or
improved products or that we will not encounter delays or problems in these
areas. The cost of completing new technologies to satisfy minimum
specification requirements and/or quality and delivery expectations may
exceed original estimates that could adversely affect operating results
during any financial period.
3. We rely on the protection of patents and certain manufacturing practices to
protect our product designs and there is no assurance that these measures
will be successful.. We attempt to protect our product designs by obtaining
patents, when available, and by manufacturing our products in a manner that
makes reverse engineering difficult. These protections may not be
sufficient to prevent our competitors from developing products that perform
in a manner that is similar to or better than our products. Competitors'
successes may result in decreased margins and sales of our products.
4. We have limited financial resources available that may restrict our ability
to grow. Additional capital from sources other than our operating cash flow
may be necessary to develop new products. We cannot predict that this
financing will be available from any source.
5. We face intense competition in our industry and there is no assurance that
we will be able to adequately compete with our larger competitor. The
communications and antenna industries are highly competitive, and we
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compete with substantially larger companies. These competitors have larger
sales forces and more highly developed marketing programs as well as larger
administrative staffs and more available service personnel. The larger
competitors also have greater financial resources available to develop and
market competitive products. The presence of these competitors could
significantly affect any attempts to develop our business. However, we
believe that we will have certain advantages in attempting to develop and
market our products, including a more cost-effective technology, the
ability to undertake smaller projects, and the ability to respond to
customer requests more quickly than some larger competitors. We cannot be
certain that these conclusions will prove correct.
6. Our success depends on the availability of efficient labor and we cannot
predict that we will continue to have access to this labor at an affordable
cost. We produce and assemble our antenna and coaxial cable kit products at
our own facilities and are dependent on efficient workers for these
functions. We cannot predict that efficient workers will continue to be
available to us at a cost consistent with our budget.
7. The success of our business is highly dependent on key employees, some of
whom do not have employment agreements with us. We are highly dependent on
the services of our executive management, including Randall P. Marx, our
Chief Executive Officer and Gregory Raskin, Winncom's CEO. The loss of the
services of any of our executive management could have a material adverse
effect on us.
8. We may incur significant costs in complying with new governmental
regulations which affect our industry, and this may require us to divert
funds we use for the development of our business and products . We are
subject to government regulation of our business operations in general.
Certain of our products are subject to regulation by the Federal
Communications Commission ("FCC") because they are designed to transmit
signals. Because current regulations covering our operations are subject to
change at any time, and despite our belief that we are in substantial
compliance with government laws and regulations, we may incur significant
costs for compliance in the future.
9. Historically, there has been an extremely limited public market for our
shares. We and we cannot predict that the recent trading volume will be
sustained. Historically, there has been an extremely limited public market
for our shares. We cannot predict that the recent trading volume will be
sustained. The prices of our shares are highly volatile. Due to the
relatively low price of the shares, many brokerage firms may not effect
transactions and may not deal with low priced shares, as it may not be
economical for them to do so. This could have an adverse effect on
sustaining the market for our shares. Further, we believe it is improbable
that any investor will be able to use our shares as collateral in a margin
account. For the foreseeable future, trading in the shares, if any, will
occur in the over-the-counter market and the shares will be quoted on the
OTC Bulletin Board. On March 1, 2005, the low bid price for the common
stock was $0.147, the high asked price was $0.152 and the closing sale
price was $0.147. Because of the matters described above, a holder of our
shares may be unable to sell shares when desired, if at all.
10. We have not paid any cash dividends with respect to our shares, and it is
unlikely that we will pay any cash dividends on our shares in the
foreseeable future. We currently intend that any earnings that we may
realize will be retained in the business for further development and
expansion.
Other Risks. In addition, there are other risks, which if realized, in whole or
in part, could have a material adverse effect on our business, financial
condition and/or results of operations, including, without limitation:
o intense competition, regionally and internationally, including
competition from alternative business models, such as
manufacturer-to-end-user selling, which may lead to reduced prices,
lower sales or reduced sales growth, lower gross margins, extended
payment terms with customers, increased capital investment and
interest costs, bad debt risks and product supply shortages;
15
o Termination of a supply or services agreement with a major supplier or
customer or a significant change in supplier terms or conditions of
sale;
o the continuation or worsening of the severe downturn in economic
conditions (particularly purchases of technology products) and failure
to adjust costs in a timely fashion in response to a sudden decrease
in demand;
o losses resulting from significant credit exposure to reseller
customers and negative trends in their businesses;
o reductions in credit ratings and/or unavailability of adequate
capital;
o failure to attract new sources of business from expansion of products
or services or entry into new markets;
o inability to manage future adverse industry trends;
o future periodic assessments required by current or new accounting
standards resulting in additional charges;
o the loss of a distribution agreement with a major supplier or the loss
of a major supplier, such as Proxim Corporation, could have a material
adverse impact on the business of Winncom.
We have instituted in the past and continue to institute changes in our
strategies, operations and processes to address these risk factors and to
mitigate their impact on our results of operations and financial condition.
However, no assurances can be given that we will be successful in these efforts.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We have not used derivative financial instruments.
We are exposed to market risk through interest rates related to our notes
payable to the banks which has a variable interest rate equal to the existing
bank prime rate (5.75% as of March 31, 2005) plus one-half to two percent. The
prime interest rate increased from 4.0% to 5.75% since June 1, 2004 and has
increased from one-half a percent since January 1, 2005. An increase in the
bank's prime interest rates on the various notes payable by .5% would increase
our yearly interest expense by approximately $15,000, assuming borrowed amounts
remain outstanding at current levels. Our management believes that fluctuation
in interest rates in the near term will not materially affect our consolidated
operating results, financial position or cash flow.
Item 4. Controls and Procedures
The Company maintains a set of disclosure controls and procedures that are
designed to ensure that information required to be disclosed in the reports
filed by the Company under the Securities Exchange Act of 1934, as amended is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms. As of the end of the quarterly period covered by
this report, the Company carried out an evaluation, under the supervision of the
Chief Executive Officer and Chief Financial Officer, of the effectiveness of the
16
design and operation of our disclosure controls and procedures pursuant to Rule
13a-14 of the Exchange Act. Based on that evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls and
procedures are effective.
There have been no significant changes in the Company's internal controls or
other factors that could significantly affect those controls subsequent to the
date of their evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company and its subsidiaries are involved in various legal proceedings of a
nature considered normal in the course of its operations. These are principally
accounts receivable collections. While it is not feasible to predict or
determine the final outcome of these proceedings, management has reserved as an
allowance for doubtful accounts for that portion of the accounts receivable it
estimates will be uncollectible.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On March 15, 2005, the Company recorded the issuance of 3,332 shares of common
stock to directors for accrued directors' fees in the amount of $500. These
shares were issued pursuant to exemptions from registration set forth in Section
4(2) of the Securities Act of 1933, as amended, and Regulation D promulgated
thereunder.
Item 6. Exhibits
Exhibit No. Description
----------- -----------
31.1 and 31.2 Certifications of the Chief Executive Officer and Chief
Financial Officer pursuant to Section 302 of the
arbanes-Oxley Act of 2002
32.1 Certifications of Chief Executive Officer and Chief
Financial Officer pursuant to 18 U.S.C. Section 1350
as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
ARC WIRELESS SOLUTIONS, INC.
Date: May 13, 2005 By: /S/ Randall P. Marx
----------------------------
Randall P. Marx
Chief Executive Officer
Date: May 13, 2005 By: /S/ Monty R. Lamirato
----------------------------
Monty R. Lamirato
Chief Financial Officer
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