Attached files
file | filename |
---|---|
EX-31.2 - WEGENER CORP | v208050_ex31-2.htm |
EX-32.2 - WEGENER CORP | v208050_ex32-2.htm |
EX-31.1 - WEGENER CORP | v208050_ex31-1.htm |
EX-32.1 - WEGENER CORP | v208050_ex32-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
x QUARTERLY REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the
quarterly period ended December 3, 2010
OR
¨ TRANSITION REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the
transition period from
______________________________to_____________________________
Commission
file No. 0-11003
WEGENER
CORPORATION
(Exact
name of registrant as specified in its charter)
Delaware
|
81–0371341
|
|
(State or other jurisdiction
|
(I.R.S. Employer
|
|
of incorporation or organization)
|
Identification No.)
|
|
11350 Technology Circle, Johns Creek, Georgia
|
30097-1502
|
|
(Address of principal executive offices)
|
(Zip Code)
|
Registrant's telephone number,
including area code: (770) 623-0096
Registrant’s
web site: HTTP://WWW.WEGENER.COM
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 x 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
the definitions of “large accelerated filer,” “accelerated filer” and
“smaller reporting company” in Rule 12b-2 of the Exchange
Act. (Check one):
Large
accelerated filer ¨ Accelerated filer ¨ Non-accelerated
filer ¨ Smaller reporting
company x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes ¨ No x
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date:
Common Stock, $.01 par value
|
13,147,051 Shares
|
|
Class
|
Outstanding at December 29, 2010
|
WEGENER
CORPORATION AND SUBSIDIARY
Form
10-Q For the Quarter Ended December 3, 2010
INDEX
Page
|
||
PART
I.
|
Financial
Information
|
|
Item
1.
|
Financial
Statements
|
|
Introduction
|
3
|
|
Consolidated
Statements of Operations
|
||
(Unaudited)
- Three Months Ended
|
||
December
3, 2010 and November 27, 2009
|
4
|
|
Consolidated
Balance Sheets - December 3,
|
||
2010
(Unaudited) and September 3, 2010
|
5
|
|
Consolidated
Statements of (Capital Deficit) Shareholders' Equity
|
||
(Unaudited)
- Three Months Ended December 3,
|
||
2010
and November 27, 2009
|
6
|
|
Consolidated
Statements of Cash Flows
|
||
(Unaudited)
- Three Months Ended December 3,
|
||
2010
and November 27, 2009
|
7
|
|
Notes
to Consolidated Financial
|
||
Statements
(Unaudited)
|
8
|
|
Item
2.
|
Management's
Discussion and Analysis of Financial
|
|
Condition
and Results of Operations
|
16
|
|
Item
4.
|
Controls
and Procedures
|
22
|
PART II.
|
Other
Information
|
|
Item 1A.
|
Risk
Factors
|
22
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
22
|
Item
6.
|
Exhibits
|
22
|
Signatures
|
24
|
2
PART I. FINANCIAL
INFORMATION
Item 1. Financial
Statements
INTRODUCTION
The consolidated financial statements
included herein have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission. The consolidated statements of operations
for the three months ended December 3, 2010 and November 27, 2009; the
consolidated balance sheet as of December 3, 2010; the consolidated statements
of (capital deficit) shareholders' equity as of December 3, 2010 and November
27, 2009; and the consolidated statements of cash flows for the three months
ended December 3, 2010 and November 27, 2009 have been prepared without audit.
The consolidated balance sheet as of September 3, 2010 has been audited by
independent registered public accountants. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, although the Company believes that the
disclosures herein are adequate to make the information presented not
misleading. It is suggested that these consolidated financial statements be read
in conjunction with the financial statements and the notes thereto included in
the Company's Annual Report on Form 10-K for the fiscal year ended September 3,
2010, File No. 0-11003.
In the opinion of management of the
Company, the statements for the unaudited interim periods presented include all
adjustments, which were of a normal recurring nature, necessary to present a
fair statement of the results of such interim periods. The results of operations
for the interim periods presented are not necessarily indicative of the results
of operations for the entire year.
3
WEGENER
CORPORATION AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended
|
||||||||
December 3,
2010
|
November 27,
2009
|
|||||||
Revenues,
net
|
$ | 2,970,347 | $ | 1,917,785 | ||||
Operating
costs and expenses
|
||||||||
Cost
of products sold
|
1,815,390 | 1,494,034 | ||||||
Selling,
general and administrative
|
801,397 | 961,675 | ||||||
Research
and development
|
291,796 | 374,067 | ||||||
Operating
costs and expenses
|
2,908,583 | 2,829,776 | ||||||
Operating
income (loss)
|
61,764 | (911,991 | ) | |||||
Interest
expense-related party
|
(82,755 | ) | (62,803 | ) | ||||
Interest
expense
|
(4,785 | ) | (15,616 | ) | ||||
Net
loss
|
$ | (25,776 | ) | $ | (990,410 | ) | ||
Net
loss per share:
|
||||||||
Basic
and diluted
|
$ | * | $ | (.08 | ) | |||
Shares
used in per share calculation
|
||||||||
Basic
and diluted
|
12,647,051 | 12,647,051 |
* Less
than $ (.01) per share
See
accompanying notes to consolidated financial statements.
4
WEGENER
CORPORATION AND SUBSIDIARY
CONSOLIDATED
BALANCE SHEETS
December 3,
|
September 3,
|
|||||||
2010
|
2010
|
|||||||
(Unaudited)
|
||||||||
Assets
|
||||||||
Current
assets
|
||||||||
Cash
|
$ | 164,346 | $ | 231,091 | ||||
Accounts
receivable, net
|
2,536,346 | 1,633,971 | ||||||
Inventories,
net
|
2,076,501 | 3,145,090 | ||||||
Other
|
173,336 | 234,986 | ||||||
Total
current assets
|
4,950,529 | 5,245,138 | ||||||
Property
and equipment, net
|
1,568,950 | 1,618,015 | ||||||
Capitalized
software costs, net
|
1,261,889 | 1,263,405 | ||||||
Other
assets
|
225,242 | 234,944 | ||||||
Total
assets
|
$ | 8,006,610 | $ | 8,361,502 | ||||
Liabilities
and Capital Deficit
|
||||||||
Current
liabilities
|
||||||||
Line
of credit-related party
|
$ | 3,800,000 | $ | 3,850,000 | ||||
Accounts
payable
|
1,684,577 | 2,142,114 | ||||||
Accrued
expenses
|
1,997,089 | 1,731,522 | ||||||
Deferred
revenue
|
450,222 | 529,583 | ||||||
Customer
deposits
|
232,186 | 239,971 | ||||||
Total
current liabilities
|
8,164,074 | 8,493,190 | ||||||
Commitments
and contingencies
|
||||||||
Capital
deficit
|
||||||||
Common
stock, $.01 par value; 30,000,000 shares authorized; 12,647,051 shares
issued and outstanding
|
126,471 | 126,471 | ||||||
Additional
paid-in capital
|
20,006,702 | 20,006,702 | ||||||
Accumulated
deficit
|
(20,290,637 | ) | (20,264,861 | ) | ||||
Total
capital deficit
|
(157,464 | ) | (131,688 | ) | ||||
Total
liabilities and capital deficit
|
$ | 8,006,610 | $ | 8,361,502 |
See
accompanying notes to consolidated financial statements.
5
WEGENER
CORPORATION AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF (CAPITAL DEFICIT) SHAREHOLDERS’ EQUITY
(Unaudited)
Additional
|
||||||||||||||||
Common Stock
|
Paid-in
|
Accumulated
|
||||||||||||||
Shares
|
Amount
|
Capital
|
Deficit
|
|||||||||||||
Balance
at August 28, 2009
|
12,647,051 | $ | 126,471 | $ | 20,006,702 | $ | (17,951,481 | ) | ||||||||
Net
loss for the three months
|
- | - | - | (990,410 | ) | |||||||||||
BALANCE
at November 27, 2009
|
12,647,051 | $ | 126,471 | $ | 20,006,702 | $ | (18,941,891 | ) | ||||||||
Balance
at September 3, 2010
|
12,647,051 | $ | 126,471 | $ | 20,006,702 | $ | (20,264,861 | ) | ||||||||
Net
loss for the three months
|
- | - | - | (25,776 | ) | |||||||||||
BALANCE
at December 3, 2010
|
12,647,051 | $ | 126,471 | $ | 20,006,702 | $ | (20,290,637 | ) |
See
accompanying notes to consolidated financial statements.
6
WEGENER
CORPORATION AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited)
Three months ended
|
||||||||
December 3,
2010
|
November 27,
2009
|
|||||||
Cash
flows from operating activities
|
||||||||
Net
loss
|
$ | (25,776 | ) | $ | (990,410 | ) | ||
Adjustments
to reconcile net loss to
|
||||||||
cash
provided by (used for) operating activities
|
||||||||
Depreciation
and amortization
|
285,911 | 320,657 | ||||||
Increase
in provision for bad debts
|
55,000 | 15,000 | ||||||
Increase
in provision for inventory reserves
|
35,000 | 15,000 | ||||||
Increase
in provision for warranty reserves
|
20,000 | - | ||||||
Changes
in assets and liabilities
|
||||||||
Accounts
receivable
|
(957,375 | ) | (4,101 | ) | ||||
Inventories
|
1,033,589 | 330,218 | ||||||
Other
assets
|
62,235 | 36,858 | ||||||
Accounts
payable
|
(477,537 | ) | (683,830 | ) | ||||
Accrued
expenses
|
265,567 | 124,307 | ||||||
Deferred
revenue
|
(79,361 | ) | (27,470 | ) | ||||
Customer
deposits
|
(7,786 | ) | 18,378 | |||||
Net
cash provided by (used for) operating activities
|
209,467 | (845,393 | ) | |||||
Cash
flows from investing activities
|
||||||||
Property
and equipment expenditures
|
(3,750 | ) | (2,219 | ) | ||||
Capitalized
software additions
|
(222,462 | ) | (212,261 | ) | ||||
Net
cash used for investing activities
|
(226,212 | ) | (214,480 | ) | ||||
Cash
flows from financing activities
|
||||||||
Change
in borrowings under revolving line-of-credit
|
(50,000 | ) | 1,141,953 | |||||
Net
cash (used for) provided by financing activities
|
(50,000 | ) | 1,141,953 | |||||
(Decrease)
increase in cash
|
(66,745 | ) | 82,080 | |||||
Cash,
beginning of period
|
231,091 | 3,476 | ||||||
Cash,
end of period
|
$ | 164,346 | $ | 85,556 | ||||
Supplemental
disclosure of cash flow information:
|
||||||||
Cash
paid for:
|
||||||||
Interest
|
$ | 3,154 | $ | 15,616 |
See
accompanying notes to consolidated financial statements.
7
WEGENER
CORPORATION AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1
Going Concern
The
accompanying consolidated financial statements have been prepared on a going
concern basis which contemplates the realization of assets and liquidation of
liabilities in the normal course of business and do not include any adjustments
to reflect the possible future effects on the recoverability and classification
of assets or the amounts and classification of liabilities that may result from
the possible inability of the Company to continue as a going
concern.
We have
experienced recurring net losses from operations, which have caused an
accumulated deficit of approximately $20,291,000 at December 3,
2010. We had a working capital deficit of approximately $3,214,000 at
December 3, 2010 compared to working capital deficits of $3,248,000 at September
3, 2010 and $1,139,000 at August 28, 2009.
At
December 3, 2010, our primary source of liquidity was a $4,250,000 loan
facility, which initially matures on April 7, 2011. The loan facility
automatically renews for successive twelve (12) month periods provided, however,
the lender may terminate the facility by providing ninety (90) days’ prior
written notice of termination at any time beginning on or after ninety (90) days
prior to the maturity date. No assurances may be given that
subsequent to April 7, 2011, our loan facility will continue for the duration of
the twelve month renewal period. In the event of a ninety day notice
of termination of our loan facility, we would need to obtain additional credit
facilities or raise additional capital to continue as a going concern and to
execute our business plan. There is no assurance that such financing
would be available or, if available, that we would be able to complete financing
on satisfactory terms.
Our cash
flow requirements during the first quarter of fiscal 2011 were financed by our
working capital. Our net borrowings under our loan facility decreased $50,000 to
$3,800,000 at December 3, 2010 from $3,850,000 at September 3,
2010. At January 7, 2011, the outstanding balance on the line of
credit was at the maximum limit of $4,250,000 and our cash balances were
approximately $387,000.
During
the prior three fiscal years, we made reductions in headcount, engineering
consulting, and other operating and overhead expenses. Beginning in
January 2009 and continuing throughout fiscal 2010, we reduced paid working
hours Company-wide by approximately 10%. During the first quarter of
fiscal 2011, to increase engineering capacity, the 10% reduction in paid working
hours was eliminated for engineering personnel. In addition during
the first quarter of fiscal 2011, we made further reductions in headcount to
bring the current number of employees to 47. During fiscal 2009 and fiscal 2010,
as well as to date in fiscal 2011, due to insufficient cash flow from operations
and a maximum borrowing limit under our loan facility, we negotiated extended
payment terms with our two offshore vendors and have been extending other
vendors well beyond normal payment terms. Until such vendors are paid within
normal payment terms, no assurances can be given that required services and
materials needed to support operations will continue to be
provided. In addition, no assurances can be given that vendors will
not pursue legal means to collect past due balances owed. Any
interruption of services or materials or initiation of legal means to collect
balances owed would likely have an adverse impact on our operations and could
impact our ability to continue as a going concern.
During
the first quarter of fiscal 2011 bookings were approximately $3.2 million
compared to $1.8 million in the same period of fiscal 2010. During fiscal 2010
and fiscal 2009 bookings were $8.3 million and $5.5 million,
respectively. These bookings, as well as our fiscal 2008 bookings,
particularly during the fourth quarter of fiscal 2008, were well below our
expectations primarily as a result of customer delays in purchasing decisions,
deferral of project expenditures and general adverse economic and credit
conditions.
Our
backlog scheduled to ship within eighteen months was approximately $6.3 million
at December 3, 2010, compared to $6.0 million at September 3, 2010, and $4.2
million at November 27, 2009. The total multi-year backlog at
December 3, 2010 was approximately $6.3 million, compared to $6.1 million at
September 3, 2010 and $6.6 million at November 27, 2009. Approximately $3.3
million of the December 3, 2010 backlog is scheduled to ship during the
remainder of fiscal 2011.
Our
bookings and revenues to date in fiscal 2011 and during fiscal 2010 and fiscal
2009 have been insufficient to attain profitable operations and to provide adequate
levels of cash flow from operations. In addition, significant fiscal
2011 shippable bookings are currently required to meet our quarterly financial
and cash flow projections for the remainder of fiscal 2011.
8
WEGENER
CORPORATION AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Our near
term liquidity and ability to continue as a going concern is dependent on our
ability to timely collect our existing accounts receivable balances and to
generate sufficient new orders and revenues in the near term to provide
sufficient cash flow from operations to pay our operating expenses and to reduce
past due amounts owed to vendors and service providers. Should increased
revenues not materialize, we would need to further reduce operating costs to
bring them in line with reduced revenue levels. Should we be unable
to achieve near term profitability and generate sufficient cash flow from
operations and if we are unable to further reduce operating costs, we would need
to raise additional capital or obtain additional borrowings beyond our existing
loan facility. No assurances can be given that operating costs can be further
reduced, or if required, that additional capital or borrowings would be
available to allow us to continue as a going concern. If we are unable to
continue as a going concern, we will likely be forced to seek protection under
the federal bankruptcy laws.
Note
2 Significant Accounting Policies
The
significant accounting policies followed by the Company are set forth in Note 2
to our audited consolidated financial statements included in the Annual Report
on Form 10-K for the year ended September 3, 2010. The following are updates to
those policies.
Recently
Adopted Accounting Guidance
On
September 4, 2010, we adopted guidance issued by the Financial Accounting
Standards Board (“FASB”) on revenue recognition. Under the new guidance on
arrangements that include software elements, tangible products that have
software components that are essential to the functionality of the tangible
product are no longer within the scope of the software revenue recognition
guidance, and software-enabled products are now subject to other relevant
revenue recognition guidance. Additionally, the FASB issued guidance on revenue
arrangements with multiple deliverables that are outside the scope of the
software revenue recognition guidance. Under the new guidance, when vendor
specific objective evidence or third party evidence of the selling price for
deliverables in an arrangement cannot be determined, a best estimate of the
selling price is required to separate deliverables and allocate arrangement
consideration using the relative selling price method. The new guidance includes
new disclosure requirements on how the application of the relative selling price
method affects the timing and amount of revenue recognition. Adoption of the new
guidance did not have a material impact on our consolidated financial statements
or result in any change in our units of accounting or timing of revenue
recognition and is not expected to have a material impact in subsequent periods.
Revenue
Recognition
Our
principal sources of revenue are from the sale of satellite communications
equipment (“hardware products”) and network control software products (“software
poducts”), and product repair services, extended maintenance contracts and
installation and training services (“services”). Historically,
product repair services, maintenance contracts and installation and training
services are less than 10% of our net revenues. Our revenue
recognition policies are in compliance with FASB Accounting Standards
Codification (ASC) Topic 605 “Revenue Recognition.” Revenue is
recognized when persuasive evidence of an agreement with the customer exists,
delivery has occurred or services have been provided, the sales price is fixed
or determinable, collectability is reasonably assured, and risk of loss and
title have transferred to the customer. Revenue from hardware product
sales is recognized when risk of loss and title has transferred which is
generally upon shipment or in some cases upon delivery. Hardware
products are typically sold on a stand-alone basis but may include hardware
maintenance contracts. Embedded in our hardware products is
internally developed software of varying applications that function together
with the hardware to deliver the product's essential
functionality. The embedded software is not sold separately,
is not a significant focus of the marketing effort and we do not provide
post-contract customer support specific to embedded software. The
functionality that the software provides is marketed as part of the overall
product. When arrangements contain multiple elements, the
deliverables are separated into more than one unit of accounting when the
following criteria are met: (i) the delivered element(s) has value to the
customer on a stand-alone basis, and (ii) if a general right of return
exits relative to the delivered item, delivery or performance of the undelivered
element(s) is probable and substantially in the control of the Company. We
allocate revenue to all deliverables based on their relative selling prices. In
such circumstances, we use a hierarchy to determine the selling price to be used
for allocating revenue to deliverables: (i) vendor-specific objective
evidence of selling price (“VSOE”), (ii) third-party evidence of selling
price (“TPE”), and (iii) management’s best estimate of the selling price
(“BESP”). VSOE generally exists only when we sell the deliverable separately and
is the price actually charged by the Company for that deliverable. The objective
of BESP is to determine the price at which the Company would transact a sale if
the product or service were sold on a stand-alone basis. We determine the BESP
for a product or service by considering multiple factors including, but not
limited to, geographies, market conditions, competitive landscape, internal
costs, gross margin objectives, and pricing practices. If a delivered
element does not meet the criteria in the applicable accounting guidance to be
considered a separate unit of accounting, revenue is deferred until the
undelivered elements are fulfilled. Accordingly, the determination of
BESP can impact the timing of revenue recognition for an
arrangement.
9
WEGENER
CORPORATION AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Service
revenues are recognized at the time of performance. Extended
maintenance contract revenues are recognized ratably over the term of the
arrangement, which is typically one year. For network control
software products we recognize revenue in accordance with the applicable
software revenue recognition guidance as previously discussed in our most recent
annual report on Form 10k. Typical deliverables in a software
arrangement may include network control software, extended software maintenance
contracts, training and installation. Provisions for returns,
discounts and trade-ins, based on historical experience, have not been
material.
We
recognize revenue in certain circumstances before delivery has occurred
(commonly referred to as “bill and hold” transactions). In such
circumstances, among other things, risk of ownership has passed to the buyer,
the buyer has made a written fixed commitment to purchase the finished goods,
the buyer has requested the finished goods to be held for future delivery as
scheduled and designated by the buyer, and no additional performance obligations
by the Company exist. For these transactions, the finished goods are
segregated from inventory and normal billing and credit terms are
granted. During November 2010, approximately $550,000 of revenues to
one customer were recorded as bill and hold transactions.
We have
included all shipping and handling billings to customers in revenues, and
freight costs incurred for product shipments have been included in cost of
products sold.
Use
of Estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenue and expenses during the reporting period.
Examples include valuation allowances for deferred tax assets, and provisions
for bad debts, inventory obsolescence and accrued expenses. Actual
results could differ from these estimates.
Fiscal
Year
We use a
fifty-two, fifty-three week year. The fiscal year ends on the Friday
closest to August 31. The first quarter of fiscal years 2011 and 2010
both contained thirteen weeks. Fiscal year 2011 contains fifty-two
weeks while 2010 contained fifty-three weeks.
Note
3 Accounts Receivable
Accounts
receivable are summarized as follows:
December 3,
|
September 3,
|
|||||||
2010
|
2010
|
|||||||
(Unaudited)
|
||||||||
Accounts
receivable – trade
|
$ | 2,730,547 | $ | 1,743,411 | ||||
Other
receivables
|
503 | 30,253 | ||||||
2,731,050 | 1,773,664 | |||||||
Less
allowance for doubtful accounts
|
(194,704 | ) | (139,693 | ) | ||||
Accounts
receivable, net
|
$ | 2,536,346 | $ | 1,633,971 |
10
WEGENER
CORPORATION AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note
4 Inventories
Inventories
are summarized as follows:
December 3,
|
September 3,
|
|||||||
2010
|
2010
|
|||||||
(Unaudited)
|
||||||||
Raw
material
|
$ | 3,302,448 | $ | 3,641,664 | ||||
Work-in-process
|
609,412 | 703,531 | ||||||
Finished
goods
|
2,650,207 | 3,275,183 | ||||||
6,562,067 | 7,620,378 | |||||||
Less
inventory reserves
|
(4,485,566 | ) | (4,475,288 | ) | ||||
Inventories,
net
|
$ | 2,076,501 | $ | 3,145,090 |
Our
inventory reserve is to provide for items that are potentially slow moving,
excess or obsolete. Changes in market conditions, lower than expected
customer demand and rapidly changing technology could result in additional slow
moving, excess or obsolete inventory that is unsaleable or saleable at reduced
prices. No estimate can be made of a range of amounts of loss from
obsolescence that is reasonably possible should our sales efforts not be
successful.
Note
5 Accrued Expenses
Accrued
expenses consisted of the following:
December
3,
|
||||||||
2010
|
September
3,
|
|||||||
(Unaudited)
|
2010
|
|||||||
Vacation
|
$ | 565,985 | $ | 538,268 | ||||
Interest
|
521,547 | 436,490 | ||||||
Payroll
and related expenses
|
205,427 | 101,939 | ||||||
Royalties
|
143,183 | 99,212 | ||||||
Warranty
|
156,448 | 136,448 | ||||||
Taxes
and insurance
|
76,227 | 97,810 | ||||||
Commissions
|
23,413 | 23,413 | ||||||
Professional
fees
|
120,055 | 155,238 | ||||||
Other
|
184,084 | 142,704 | ||||||
$ | 1,997,089 | $ | 1,731,522 |
Note
6 Deferred Revenue
Deferred
revenue consists of the unrecognized revenue portion of extended service
maintenance contracts. Extended service maintenance contract revenues are
recognized ratably over the maintenance contract term, which is typically one
year. At December 3, 2010, deferred extended service maintenance
revenues were $440,000 and are expected to be recognized as revenue in varying
amounts throughout fiscal 2011 and into fiscal 2012.
Note
7 Finance Arrangements
Revolving
Line of Credit
WCI’s
revolving line of credit (“loan facility”), amended and effective October 8,
2009, is provided by The David E. Chymiak Trust Dated December 15, 1999 (the
“Trust”). The Trust is controlled by David E. Chymiak who is a beneficial owner
of 8.8% of our outstanding common stock. The loan facility provides a
maximum credit limit of $4,250,000 excluding any accrued unpaid interest and
bears interest at the rate of eight percent (8.0%) per annum. The
term of the amended loan facility is eighteen (18) months beginning October 8,
2009 (“Original Term”), or upon demand in the event of default as provided by
the loan facility. The loan facility automatically renews for
successive twelve (12) month periods provided, however, the lender may terminate
the facility by providing ninety (90) days’ prior written notice of termination
at any time beginning on or after ninety (90) days prior to the expiration of
the Original Term. Principal and interest shall be payable upon the
earlier of the maturity date, an event of default, or 90
days following the date on which the Trust provides written notice to
terminate the agreement. All principal and interest shall be payable
in U.S. dollars or, upon mutual agreement of the parties decided in good faith
at the time payment is due, other good and valuable
consideration.
11
WEGENER
CORPORATION AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The loan
facility is secured by a first lien on substantially all of WCI’s assets,
including land and buildings, and is guaranteed by Wegener
Corporation. At December 3, 2010, balances outstanding on the
revolving line of credit amounted to $3,800,000. At January 7, 2011,
the outstanding balance on the line of credit was at the maximum credit limit of
$4,250,000.
The
amended loan facility requires us to be in compliance with a solvency
representation provision on the last day of our second quarter in fiscal 2011
(March 4, 2011). This representation requires us to be able to pay our debts as
they become due, have sufficient capital to carry on our business and own
property at a fair saleable value greater than the amount required to pay our
debts. In addition, we are required to retain certain executive
officers and are precluded from paying dividends.
No
assurances may be given that subsequent to the maturity date of April 7, 2011
our loan facility will continue for the duration of the twelve month renewal
period. In the event of a ninety day notice of termination of our
loan facility, we would need to obtain additional credit facilities or raise
additional capital to continue as a going concern and to execute our business
plan. There is no assurance that such financing would be available
or, if available, that we would be able to complete financing on satisfactory
terms.
Note
8 Income Taxes
For the
three months ended December 3, 2010, no income tax benefit was recorded due to
an increase in the deferred tax asset valuation allowance. The
valuation allowance increased $10,000 in the first quarter of fiscal
2011. At December 3, 2010, net deferred tax assets of $7,460,000 were
fully reserved by a valuation allowance.
At
December 3, 2010, we had a federal net operating loss carryforward of
approximately $14,158,000, which expires beginning fiscal 2021 through fiscal
2031. Additionally, we had an alternative minimum tax credit of
$134,000 which was fully offset by the valuation allowance.
Note
9 Share-Based Compensation
Subsequent
to December 3, 2010, pursuant to the 2010 Incentive Plan, the Compensation
Committee authorized the issuance to all eligible employees of the Company
common stock options to purchase an aggregate of 563,700 shares of common stock
and issued equally to the four non-employee members of the Board of Directors
common stock options to purchase an aggregate of 100,000 shares of common stock.
Stock options for 638,700 shares of common stock are exercisable at $0.125 and
one stock option for 25,000 shares of common stock, issued to a 10% or greater
stockholder and executive officer, is exercisable at $0.1375. The options vest
upon issuance and expire five years from the date of issuance. In addition,
500,000 shares of restricted common stock were granted to two executive
officers. Such shares may not be sold until a six-month restricted
period expires. The aggregate grant date fair value of the total awards,
calculated in accordance with ASC 718, were approximately $111,000 which will be
recognized as compensation expense in the second quarter of fiscal 2011. The
weighted-average assumptions used in the option pricing model for the stock
option grants were as follows: expected volatility - 70%; risk free interest
rate - 1.50%; expected life – 5 years; expected dividend yield –
none. In addition, tax reimbursement bonuses related to the
restricted stock awards were granted in the amount of $32,319 which will also be
recognized as compensation expense in the second quarter of fiscal 2011.
Subsequent to these awards, 86,300 shares of common stock remained available for
issuance under the 2010 Incentive Plan.
Note
10 Earnings Per Share (Unaudited)
The
following table presents required disclosure of the reconciliation of the
numerators and denominators of the basic and diluted net (loss) earnings per
share computations. The calculation of (loss) earnings per share is
subject to rounding differences.
12
WEGENER
CORPORATION AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three months ended
|
||||||||||||||||||||||||
December 3, 2010
|
November 27, 2009
|
|||||||||||||||||||||||
Loss
(Numerator)
|
Shares
(Denominator)
|
Per
share
amount
|
Loss
(Numerator)
|
Shares
(Denominator)
|
Per
Share
amount
|
|||||||||||||||||||
Net
loss
|
$ | (25,776 | ) | $ | (990,410 | ) | ||||||||||||||||||
Basic
loss per share:
|
||||||||||||||||||||||||
Net
loss available to common shareholders
|
$ | (25,776 | ) | 12,647,051 | $ | * | $ | (990,410 | ) | 12,647,051 | $ | (.08 | ) | |||||||||||
Effect
of dilutive potential common shares:
|
||||||||||||||||||||||||
Stock
options
|
- | - | - | - | ||||||||||||||||||||
Diluted
loss per share:
|
||||||||||||||||||||||||
Net
loss available to common shareholders
|
$ | (25,776 | ) | 12,647,051 | $ | * | $ | (990,410 | ) | 12,647,051 | $ | (.08 | ) |
* Less
than $(.01) per share
Stock
options which were excluded from the diluted net (loss) earnings per share
calculation due to their antidilutive effect are as follows:
Three months ended
|
||||||
December 3,
2010
|
November 27,
2009
|
|||||
Common
stock options:
|
||||||
Number
of shares
|
665,375
|
731,375
|
||||
Range
of exercise prices
|
$.63 to $2.50
|
$.63 to $2.50
|
Note
11 Segment Information and Concentrations (Unaudited)
In
accordance with ASC Topic 280 “Segment Reporting,” we operate within a single
reportable segment, the manufacture and sale of satellite communications
equipment.
In this
single operating segment we have two sources of revenues as
follows:
Three months ended
|
||||||||
December 3,
|
November 27,
|
|||||||
2010
|
2009
|
|||||||
Product
Line
|
||||||||
Direct
Broadcast Satellite
|
$ | 2,853,966 | $ | 1,796,509 | ||||
Service
|
116,381 | 121,276 | ||||||
Revenues,
net
|
$ | 2,970,347 | $ | 1,917,785 |
13
WEGENER
CORPORATION AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Concentration
of revenues for the respective periods’ revenues are as follows:
Three months ended
|
||||||||
December 3,
|
November 27,
|
|||||||
2010
|
2009
|
|||||||
Product/Service
|
||||||||
iPump
media servers
|
41.3 | % |
(a
|
) | ||||
Audio
broadcast receivers
|
24.3 | % | 22.4 | % | ||||
Professional
video receivers
|
(a
|
) | 29.1 | % | ||||
Network
control software products
|
(a
|
) |
(a
|
) | ||||
Product
service repairs
|
(a
|
) |
(a
|
) | ||||
Extended
maintenance contracts
|
(a
|
) |
(a
|
) | ||||
(a)
less than 10% of total revenues
|
Products
representing 10% or more of annual revenues are subject to fluctuations from
quarter to quarter as new products and technologies are introduced, new product
features and enhancements are added, and as customers upgrade or expand their
network operations.
Revenues
by geographic area are as follows:
Three months ended
|
||||||||
December 3,
|
November 27,
|
|||||||
2010
|
2009
|
|||||||
Geographic
Area
|
||||||||
United
States
|
$ | 1,345,232 | $ | 1,715,056 | ||||
Latin
America
|
1,197,944 | 25,757 | ||||||
Canada
|
41,526 | 1,610 | ||||||
Europe
|
373,775 | 99,567 | ||||||
Other
|
11,870 | 75,795 | ||||||
Revenues,
net
|
$ | 2,970,347 | $ | 1,917,785 |
Customers
representing 10% or more of the respective periods’ revenues are as
follows:
Three
months ended
|
||||||||
December
3,
|
November
27,
|
|||||||
2010
|
2009
|
|||||||
Customer
1
|
22.8 | % | 23.0 | % | ||||
Customer
2
|
(a
|
) | 10.2 | % | ||||
Customer
3
|
(a
|
) | 10.1 | % | ||||
Customer
4
|
39.3 | % |
(a
|
) |
(a)
Revenues for the period were less than 10% of total revenues.
Note
12 Commitments
We have
one manufacturing and purchasing agreement for certain finished goods
inventories. At December 3, 2010, outstanding purchase commitments under these
agreements amounted to $614,000.
14
WEGENER
CORPORATION AND SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note
13 Indemnifications
We
routinely sell products with limited intellectual property indemnification
included in the terms of sale or in certain contractual arrangements. The scope
of these indemnities varies, but in some instances includes indemnification for
costs, damages and expenses (including reasonable attorneys’ fees) finally
awarded in any suit by a third party against the purchaser to the extent based
upon a finding the design or manufacture of the purchased item infringes the
proprietary rights of such third party. Certain requests for indemnification
have been received by us pursuant to these arrangements.
On
June 1, 2006, a complaint was filed by Rembrandt Technologies, LP
(Rembrandt) against Charter Communications, Inc. (Charter), Cox Communications
Inc. (Cox), CSC Holdings, Inc. (CSC) and Cablevisions Systems Corp.
(Cablevision) in the United States District Court for the Eastern District of
Texas alleging patent infringement. The complaint alleges that
products and services sold by Charter infringe certain Rembrandt patents related
to cable modem, voice-over internet, and video technology and
applications. The case may be expensive to defend and there may be
substantial monetary exposure if Rembrandt is successful in its claim against
Charter and then elects to pursue other cable operators that use the allegedly
infringing products. Wegener has not been named a party in the
suit. However, subsequent to December 1, 2006, Charter has requested
us to defend and indemnify Charter to the extent that the Rembrandt allegations
are premised upon Charter’s use of products that we have sold to
Charter. To date, we have not agreed to Charter’s request.
On
June 1, 2006, a complaint substantially similar to the above described suit
was filed by Rembrandt against Time Warner Cable (TWC) in the United States
District Court for the Eastern District of Texas. Wegener has not
been named a party in the suit, but TWC has requested us (as well as other
equipment vendors) to contribute a portion of the defense costs
related to this matter as a result of the products that we and others have sold
to TWC. To date, we have not agreed to contribute to the payment of
legal costs related to this case.
In
addition, Cisco Systems, Inc. (Scientific Atlanta) has made indemnity demands
against us, related to the fact that a number of Cisco’s customers that are
defendants in the Rembrandt lawsuit have made indemnity demands against
Cisco. Cisco’s demands are based upon allegations that Wegener sold
devices to these companies that are implicated by the patent infringement claims
in the Rembrandt lawsuit. To date, we have not agreed to Cisco’s
demands.
These
actions have been consolidated into a multi-district action pending in the
United States District Court for the District of Delaware. On October
23, 2009, the Delaware District Court issued an Order dismissing eight of the
substantive patent claims embodied in the consolidated action, as well as all
counterclaims. The parties also have agreed to summary judgment of
non-infringement on a remaining patent claim, but the grounds for such summary
judgment have not yet been finalized. The Court subsequently asked each of the
parties to the consolidated lawsuits to submit any motions for fees and costs
with respect to one another by November 16, 2009. Parties have
submitted briefs on that issue, which has yet to be decided by the
Court.
On
October 4, 2010, a Second Amended Complaint was filed by Multimedia Patent Trust
(“MPT”) against Fox News Networks, LLC (“Fox News”) and other parties in the
United States District Court for the Southern District of California for patent
infringement. (The initial Complaint was filed on January 19,
2010). The Second Amended Complaint asserts that Fox News has
infringed upon certain MPT patents relating to video compression, encoding and
decoding. This litigation may be very expensive to defend and there
could be significant financial exposure if MPT is successful in its claims. On
November 3, 2010, however, Fox News wrote to Wegener, asking Wegener to fully
indemnify, hold harmless and defend Fox News in connection with the
litigation. In its letter, Fox News states that it has identified
Wegener as a vendor that provided Fox News with products and/or services
relating to video compression. Fox News states further that it
believes that MPT’s claims give rise to indemnity obligations and other
obligations for Wegener products obtained from Wegener by Fox
News. The November 3, 2010 letter asks Wegener to acknowledge such
tender on or before November 24, 2010. Wegener has not agreed to do
so, nor has Wegener acknowledged or agreed that the specific claims against Fox
by MPT give rise to such obligations on the part of Wegener. At this point, we
are unable to assess the impact of this litigation, if any, on
Wegener.
To date,
there have been no findings related to the above matters that our products
and/or services have infringed upon the proprietary rights of others. Although
it is reasonably possible a liability may be incurred in the future related to
these indemnification claims, at this point, any possible range of loss cannot
be reasonably estimated.
Additionally,
we are obligated to indemnify our officers and the members of our Board of
Directors pursuant to our bylaws and contractual indemnity
agreements.
15
ITEM 2.
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
This
information should be read in conjunction with the consolidated financial
statements and the notes thereto included in Item 1 of this Quarterly Report and
the audited consolidated financial statements and notes thereto and Management’s
Discussion and Analysis of Financial Condition and Results of Operations for the
year ended September 3, 2010 contained in the Company’s 2010 Annual Report on
Form 10-K.
Certain
statements contained in this filing are “forward-looking statements” within the
meaning of the Private Securities Litigation Reform Act of 1995, and the Company
intends that such forward-looking statements are subject to the safe harbors
created thereby. Forward-looking statements may be identified by words
such as "believes," "expects," "projects," "plans," "anticipates," and similar
expressions, and include, for example, statements relating to expectations
regarding future sales, income and cash flows. Forward-looking
statements are based upon the Company’s current expectations and assumptions,
which are subject to a number of risks and uncertainties including, but not
limited to: the Company’s ability to continue as a going concern, customer
acceptance and effectiveness of recently introduced products; development of
additional business for the Company’s digital video and audio transmission
product lines; effectiveness of the sales organization; the successful
development and introduction of new products in the future; delays in the
conversion by private and broadcast networks to next generation digital
broadcast equipment; acceptance by various networks of standards for digital
broadcasting; the Company’s liquidity position and capital resources; general
market and industry conditions which may not improve during fiscal year
2011 and beyond; and success of the Company’s research and development
efforts aimed at developing new products. Additional potential risks
and uncertainties include, but are not limited to, economic conditions, customer
plans and commitments, product demand, government regulation, rapid
technological developments and changes, intellectual property disputes,
performance issues with key suppliers and subcontractors, delays in product
development and testing, availability of raw materials, new and existing
well-capitalized competitors, and other risks and uncertainties detailed from
time to time in the Company’s periodic Securities and Exchange Commission
filings, including the Company’s most recent Annual Report on Form
10-K. Such forward-looking statements are subject to risks,
uncertainties and other factors and are subject to change at any time, which
could cause actual results to differ materially from future results expressed or
implied by such forward-looking statements. Forward-looking
statements speak only as of the date the statement was made.
These
risks were exacerbated by the 2008 crisis in national and international
financial markets and the resulting global economic downturn, which has
continued into 2011, and we are unable to predict with certainty what long-term
effect these developments will continue to have on our
Company. During 2008 and into 2009, the capital and credit markets
experienced extended volatility and disruption. We believe that these
unprecedented developments have adversely affected our business, financial
condition and results of operations in fiscal years 2009 and 2010 and into the
first quarter of fiscal 2011.
Forward-looking
statements speak only as of the date the statement was made. The Company
does not undertake any obligation to update any forward-looking
statements.
OVERVIEW
We design
and manufacture satellite communications equipment through Wegener
Communications, Inc. (WCI), a wholly-owned subsidiary. WCI is an international
provider of digital video and audio solutions for broadcast television, radio,
telco, private and cable networks. With over 30 years experience in optimizing
point-to-multipoint multimedia distribution over satellite, fiber, and IP
networks, WCI offers a comprehensive product line that handles the scheduling,
management and delivery of media rich content to multiple devices, including
video screens, computers and audio devices. WCI focuses on long- and
short-term strategies for bandwidth savings, dynamic advertising, live events
and affiliate management.
WCI’s
product line includes: iPump® media servers for file-based and live broadcasts;
Compel® Network Control and Compel® Conditional Access for dynamic command,
monitoring and addressing of multi-site video, audio, and data networks; and the
Unity® satellite media receivers for live radio and video
broadcasts. Applications served include: digital signage,
linear and file-based TV distribution, linear and file-based radio distribution,
Nielsen rating information, broadcast news distribution, business music
distribution, corporate communications, video and audio simulcasts.
Revenues
for the first quarter of fiscal 2011 increased $1,052,000, or 54.9%, to
$2,970,000 from $1,918,000 for the same period in fiscal 2010. The operating
results for the three month period ended December 3, 2010, were a net loss of
$(26,000) or less than $(0.01) per share, compared to a net loss of $(990,000)
or $(0.08) per share, for the three month period ended November 27,
2009.
16
The
accompanying consolidated financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification of
assets or the amounts and classification of liabilities that may result from the
possible inability of the Company to continue as a going concern. The
audit reports relating to the Consolidated Financial Statements for the years
ended September 3, 2010, August 28, 2009 and August 29, 2008 contained
explanatory paragraphs regarding the Company’s ability to continue as a going
concern. (See the Liquidity and Capital Resources section for further
discussion.)
RESULTS
OF OPERATIONS
THREE
MONTHS ENDED DECEMBER 3, 2010 COMPARED TO THREE MONTHS ENDED NOVEMBER 27,
2009
The
following table sets forth, for the periods indicated, the components of our
results of operations as a percentage of sales:
Three months ended (unaudited)
|
||||||||
December 3,
2010
|
November 27,
2009
|
|||||||
Revenues,
net
|
100.0 | % | 100.0 | % | ||||
Cost
of products sold
|
61.1 | 77.9 | ||||||
Gross
profit margin
|
38.9 | 22.1 | ||||||
Selling,
general and administrative
|
27.0 | 50.1 | ||||||
Research
and development
|
9.8 | 19.5 | ||||||
Operating
income (loss)
|
2.1 | (47.5 | ) | |||||
Interest
expense
|
( 3.0 | ) | ( 4.1 | ) | ||||
Net
loss
|
(0.9 | )% | (51.6 | )% |
The
operating results for the three months ended December 3, 2010, were a net loss
of $(26,000) or less than $(0.01) per share, compared to a net loss of
$(990,000) or $(0.08) per share for the three months ended November 27,
2009.
During
the prior three fiscal years, we made reductions in headcount, engineering
consulting and other operating and overhead expenses. Beginning in
January 2009 and continuing through fiscal 2010, we reduced paid working hours
Company-wide by approximately 10%. During the first quarter of fiscal
2011, in order to increase engineering capacity, the 10% reduction in paid
working hours was eliminated for engineering personnel. In addition,
during the first quarter of fiscal 2011, we made further reductions in headcount
to bring the current number of employees to 47. The operating results
for the first quarter of fiscal 2011 included severance costs of approximately
$24,000 compared to $247,000 in the same period of fiscal 2010.
Net
Revenues - Revenues for the first quarter of fiscal 2011 increased
$1,052,000, or 54.9%, to $2,970,000 from $1,918,000 for the same period in
fiscal 2010. The increase in revenues was due to an increase in
shippable bookings for the quarter. First quarter fiscal 2011
revenues included ipump® 562
enterprise media receivers for an international satellite digital signage
project, ipump® 6400
media server equipment for an international health and education network and
continued shipments of Encompass LE2 audio receivers to business music provider,
Muzak.
First
quarter fiscal 2010 revenues were adversely affected by lower than expected
shippable bookings as discussed above. First quarter fiscal 2010
revenues included continued shipments of Encompass LE2 audio receivers, to
business music provider, Muzak LLC, Unity® 4600 and
Unity® 4650
receivers to Roberts Communications Network for network upgrades and shipments
to MegaHertz for distribution of our products to the U.S. cable
market.
Revenues
and order backlog are subject to the timing of significant orders from customers
and remain difficult to forecast. As a result, we expect future revenue levels
and operating results to continue to fluctuate from quarter to
quarter. Sales to a relatively small number of major customers have
typically comprised a majority of our revenues and that trend is expected to
continue throughout fiscal 2011 and beyond. For the three months
ended December 3, 2010, two customers accounted for 39.3% and 22.8% of
revenues, respectively. For the three months ended November 27, 2009,
three customers accounted for 23.0%, 10.2% and 10.1% of revenues,
respectively.
Our
backlog is comprised of undelivered, firm customer orders, which are scheduled
to ship within eighteen months. WCI’s backlog scheduled to ship
within eighteen months was approximately $6.3 million at December 3, 2010,
compared to $6.0 million at September 3, 2010, and $4.2 million at November 27,
2009. Two customers accounted for approximately 40.8%and 32.4%,
respectively, of the backlog at December 3, 2010. The total
multi-year backlog at December 3, 2010 was approximately $6.3 million, compared
to $6.1 million at September 3, 2010 and $6.6 million at November 27,
2009. Approximately $3.3 million of the December 3, 2010 backlog is
scheduled to ship during fiscal 2011.
17
Gross
Profit Margin – The Company’s gross profit margin percentages were 38.9%
for the three month period ended December 3, 2010, compared to 22.1% for the
three month period ended November 27, 2009. Gross profit margin dollars
increased $731,000 for the three month period ended December 3, 2010 compared to
the same period ended November 27, 2009. The increases in margin
percentages and dollars were mainly due to the increase in revenues which
resulted in lower unit fixed overhead costs.
Cost of
products sold in the first quarter of fiscal 2011 included capitalized software
amortization expense of $224,000 compared to $211,000 for the same period of
fiscal 2010. Inventory reserve and warranty provisions included in cost of
products sold were $35,000 and $20,000, respectively, in the first quarter of
fiscal 2011, compared to $15,000 and none in the same period of fiscal
2010. Severance costs charged to cost of products sold in the first
quarter of fiscal 2010 were $51,000 compared to none in the first quarter of
fiscal 2011.
Selling,
General and Administrative - Selling, general and administrative
(SG&A) expenses decreased $160,000, or 16.7%, to $801,000 in the first
quarter of fiscal 2011 from $962,000 in the first quarter of fiscal
2010. Corporate SG&A expenses in the first quarter of fiscal 2011
decreased $34,000, or 23.7%, to $108,000 from $142,000 in same period of fiscal
2010, mainly due to a decrease in professional fees. WCI’s SG&A
expenses decreased $127,000, or 15.4%, to $693,000 in the first quarter of
fiscal 2011 from $820,000 in the same period of fiscal 2010. WCI’s SG&A
severance expenses in the first quarter of fiscal 2011 decreased $147,000 to
$24,000 from $171,000 in the same period of fiscal 2010. Additional
decreases in SG&A expenses included professional fees of $25,000 and general
overhead costs of $36,000 due to lower amortization expense and overall cost
reduction efforts. These expense reductions were offset by increases in bad debt
expense of $40,000 and in-house commission expense of $16,000 due to an increase
in bookings. As a percentage of revenues, SG&A expenses were
27.0% for the three month period ended December 3, 2010, compared to 50.1% for
the same period ended November 27, 2009.
Research
and Development - Research and development expenditures, including
capitalized software development costs, were $514,000 or 17.3% of revenues in
the first quarter of fiscal 2011, compared to $586,000 or 30.6% of revenues for
the same period of fiscal 2010. The decrease in expenditures in the
first quarter of fiscal 2011 compared to the same period of fiscal 2010 was
mainly due to lower salaries as a result of reduced head
count. Capitalized software development costs amounted to $222,000 in
the first quarter of fiscal 2011 compared to $212,000 in the first quarter of
fiscal 2010. Research and development expenses, excluding capitalized software
development costs, were $292,000 or 9.8% of revenues in the first quarter of
fiscal 2011 compared to $374,000 or 19.5% of revenues in the same period of
fiscal 2010. During the first quarter of fiscal 2011, to increase engineering
capacity, the 10% reduction in paid working hours was eliminated for engineering
personnel. We currently expect to add two additional engineers during
the remainder of fiscal 2011 to current staffing levels to accomplish research
and development activities scheduled during fiscal 2011. Should
additional engineering resources be required in fiscal 2011, we believe
engineering consulting services would be sufficiently available.
Interest
Expense -
Interest expense increased $10,000 to $88,000 in the first quarter of fiscal
2011 from $78,000 in the same period in fiscal 2010. The increase was
primarily due to an increase in the average outstanding line of credit balance
in the first quarter of fiscal 2011 compared to fiscal 2010.
Income
Tax Expense - For the three months ended December 3, 2010, no income tax
benefit was recorded due to an increase in the deferred tax asset valuation
allowance. The valuation allowance increased $10,000 in the first
quarter of fiscal 2011. At December 3, 2010, net deferred tax assets
of $7,460,000 were fully reserved by a valuation allowance. At
December 3, 2010, we had a federal net operating loss carryforward of
approximately $14,158,000, which expires beginning fiscal 2021 through fiscal
2031. Additionally, we had an alternative minimum tax credit of
$134,000 which was fully offset by the valuation allowance.
LIQUIDITY
AND CAPITAL RESOURCES
THREE
MONTHS ENDED DECEMBER 3, 2010
We have
experienced recurring net losses from operations, which have caused an
accumulated deficit of approximately $20,291,000 at December 3,
2010. We had a working capital deficit of approximately $3,214,000 at
December 3, 2010 compared to working capital deficits of $3,248,000 at September
3, 2010 and $1,139,000 at August 28, 2009.
18
At
December 3, 2010, our primary source of liquidity was a $4,250,000 loan
facility, which initially matures on April 7, 2011. The loan facility
automatically renews for successive twelve (12) month periods provided, however,
the lender may terminate the facility by providing ninety (90) days’ prior
written notice of termination at any time beginning on or after ninety (90) days
prior to the maturity date. No assurances may be given that
subsequent to April 7, 2011 our loan facility will continue for the duration of
the twelve month renewal period. In the event of a ninety day notice
of termination of our loan facility, we would need to obtain additional credit
facilities or raise additional capital to continue as a going concern and to
execute our business plan. There is no assurance that such financing
would be available or, if available, that we would be able to complete financing
on satisfactory terms. The loan facility requires us to be in compliance with a
solvency representation provision on the last day of our second quarter in
fiscal 2011 (March 4, 2011). This representation requires us to be able to pay
our debts as they become due, have sufficient capital to carry on our business
and own property at a fair saleable value greater than the amount required to
pay our debts. In addition, we are required to retain certain
executive officers and are precluded from paying dividends.
During
the first three months of fiscal 2011, our line of credit net borrowings
decreased $50,000 to $3,800,000 at December 3, 2010, from $3,850,000 at
September 3, 2010. At January 7, 2011, the outstanding balance on the
line of credit was at the maximum limit of $4,250,000 and our cash balances were
approximately $387,000. Our cash flow requirements during the first quarter of
fiscal 2011 were financed by our working capital.
During
the prior three fiscal years, we made reductions in headcount, engineering
consulting and other operating and overhead expenses. Beginning in
January 2009 and continuing throughout fiscal 2010, we reduced paid working
hours Company-wide by approximately 10%. During the first quarter of
fiscal 2011, to increase engineering capacity, the 10% reduction in paid working
hours was eliminated for engineering personnel. During the first
quarter of fiscal 2011, we made further reductions in headcount to bring the
current number of employees to 47. During fiscal 2009 and fiscal 2010, as well
as to date in fiscal 2011, due to insufficient cash flow from operations and
borrowing limitations under our loan facility, we negotiated extended payment
terms with our two offshore vendors and have been extending other vendors well
beyond normal payment terms. Until such vendors are paid within normal payment
terms, no assurances can be given that required services and materials needed to
support operations will continue to be provided. In addition, no
assurances can be given that vendors will not pursue legal means to collect past
due balances owed. Any interruption of services or materials or initiation of
legal means to collect balances owed would likely have an adverse impact on our
operations and could impact our ability to continue as a going
concern.
During
the first quarter of fiscal 2011 bookings were approximately $3.2 million
compared to $1.8 million in the same period of fiscal 2010. During fiscal 2010
and fiscal 2009 bookings were $8.3 million and $5.5 million,
respectively. These bookings, as well as our fiscal 2008 bookings,
particularly during the fourth quarter of fiscal 2008, were well below our
expectations primarily as a result of customer delays in purchasing decisions,
deferral of project expenditures and general adverse economic and credit
conditions.
Our
backlog scheduled to ship within eighteen months was approximately
$6.3 million at December 3, 2010, compared to $6.0 million at September 3,
2010, and $4.2 million at November 27, 2009. The total multi-year
backlog at December 3, 2010 was approximately $6.3 million, compared to $6.1
million at September 3, 2010 and $6.6 million at November 27,
2009. Approximately $3.3 million of the December 3, 2010 backlog is
scheduled to ship during fiscal 2011.
Our
bookings and revenues to date in fiscal 2011 and during fiscal 2010 and fiscal
2009 have been insufficient to attain profitable operations and to provide adequate
levels of cash flow from operations. In addition, significant fiscal
2011 shippable bookings are currently required to meet our quarterly financial
and cash flow projections for the remainder of fiscal 2011.
Our near
term liquidity and ability to continue as a going concern is dependent on our
ability to timely collect our existing accounts receivable balances and to
generate sufficient new orders and revenues in the near term to provide
sufficient cash flow from operations to pay our operating expenses and to reduce
past due amounts owed to vendors and service providers. Should increased
revenues not materialize, we would need to further reducing operating costs to
bring them in line with reduced revenue levels. Should we be unable
to achieve near term profitability and generate sufficient cash flow from
operations and if we are unable to further reduce operating costs, we would need
to raise additional capital or obtain additional borrowings beyond our existing
loan facility. No assurances can be given that operating costs can be further
reduced, or if required, that additional capital or borrowings would be
available to allow us to continue as a going concern. If we are unable to
continue as a going concern, we will likely be forced to seek protection under
the federal bankruptcy laws.
19
Financing
Agreements
WCI’s
revolving line of credit (“loan facility”), amended and effective October 8,
2009, is provided by The David E. Chymiak Trust Dated December 15, 1999 (the
“Trust”). The Trust is controlled by David E. Chymiak who is a beneficial owner
of 8.8% of our outstanding common stock. The loan facility provides a
maximum credit limit of $4,250,000 excluding any accrued unpaid interest and
bears interest at the rate of eight percent (8.0%) per annum. The
term of the amended loan facility is eighteen (18) months beginning October 8,
2009 (“Original Term”), or upon demand in the event of default as provided by
the loan facility. The loan facility automatically renews for
successive twelve (12) month periods provided, however, the lender may terminate
the facility by providing ninety (90) days’ prior written notice of termination
at any time beginning on or after ninety (90) days prior to the expiration of
the Original Term. Principal and interest shall be payable upon the
earlier of the maturity date, an event of default, or 90
days following the date on which the Trust provides written notice to
terminate the agreement. All principal and interest shall be payable
in U.S. dollars or, upon mutual agreement of the parties decided in good faith
at the time payment is due, other good and valuable consideration.
The loan
facility is secured by a first lien on substantially all of WCI’s assets,
including land and buildings, and is guaranteed by Wegener
Corporation. At December 3, 2010, balances outstanding on the
revolving line of credit amounted to $3,800,000. At January 7, 2011,
the outstanding balance on the line of credit was at the maximum credit limit of
$4,250,000.
Cash
Flows
During
the first quarter of fiscal 2011, operating activities provided $209,000 of
cash. Net loss adjusted for expense provisions and depreciation and
amortization (before working capital changes) provided cash of $370,000, while
changes in accounts receivable, deferred revenue and customer deposit balances
used $1,045,000 of cash. Changes in accounts payable and accrued
expenses used $212,000 of cash, while changes in inventories and other assets
provided $1,096,000 of cash. Cash used by investing activities was
$226,000, which consisted of capitalized software additions of $222,000 and
equipment additions of $4,000. Financing activities used $50,000 of cash for net
line of credit payments.
Contractual
Obligations
We have
one manufacturing and purchasing agreement for certain finished goods
inventories. At December 3, 2010,
outstanding purchase commitments under these agreements amounted to
$614,000.
The
Company’s long-term contractual obligations as of December 3,
2010 consisted of:
Payments Due by Period
|
||||||||||||||||
Contractual Obligations
|
Total
|
Fiscal
2011
|
Fiscal
2012-2013
|
Fiscal
2014-2015
|
||||||||||||
Operating
leases
|
$ | 137,000 | $ | 47,000 | $ | 90,000 | $ | - | ||||||||
Line
of credit-related party
|
3,800,000 | 3,800,000 | - | - | ||||||||||||
Purchase
commitments
|
614,000 | 614,000 | - | - | ||||||||||||
Total
|
$ | 4,551,000 | $ | 4,461,000 | $ | 90,000 | $ | - |
CRITICAL
ACCOUNTING POLICIES
The
accounting policies and related estimates that we believe are the most critical
to understanding our consolidated financial statements, financial condition and
results of operations and those that require management judgment and
assumptions, or involve uncertainties are as follows:
20
Revenue
Recognition – Our principal sources of revenue are from the sale of
satellite communications equipment and network control software products and
product repair services, extended maintenance contracts and installation and
training services. Historically, product repair services, maintenance
contracts and installation and training services are less than 10% of our net
revenues. Our revenue recognition policies are in compliance with
FASB Accounting Standards Codification (ASC) Topic 605 “Revenue
Recognition.” Revenue is recognized when persuasive evidence of an
agreement with the customer exists, delivery has occurred or services have been
provided, the sales price is fixed or determinable, collectability is reasonably
assured, and risk of loss and title have transferred to the
customer. Revenue from hardware product sales is recognized when risk
of loss and title has transferred which is generally upon shipment or in some
cases upon delivery. Hardware products are typically sold on a
stand-alone basis but may include hardware maintenance
contracts. Embedded in our hardware products is internally developed
software of varying applications that function together
with the hardware to deliver the product's essential
functionality. The embedded software is not sold separately,
is not a significant focus of the marketing effort and we do not provide
post-contract customer support specific to embedded software. The
functionality that the software provides is marketed as part of the overall
product. Service revenues are recognized at the time of
performance. Extended maintenance contract revenues are recognized
ratably over the term of the arrangement, which is typically one
year. For network control software products we recognize revenue in
accordance with the applicable software revenue recognition
guidance. Typical deliverables in a software arrangement may include
network control software, extended software maintenance contracts, training and
installation. Provisions for returns, discounts and trade-ins, based
on historical experience, have not been material.
When
arrangements contain multiple elements, the deliverables are separated into more
than one unit of accounting when the following criteria are met: (i) the
delivered element(s) has value to the customer on a stand-alone basis, and
(ii) if a general right of return exits relative to the delivered item,
delivery or performance of the undelivered element(s) is probable and
substantially in the control of the Company. We allocate revenue to all
deliverables based on their relative selling prices. In such circumstances, we
use a hierarchy to determine the selling price to be used for allocating revenue
to deliverables: (i) vendor-specific objective evidence of selling price
(“VSOE”), (ii) third-party evidence of selling price (“TPE”), and
(iii) management’s best estimate of the selling price (“BESP”). VSOE
generally exists only when we sell the deliverable separately and is the price
actually charged by the Company for that deliverable. The objective of BESP is
to determine the price at which the Company would transact a sale if the product
or service were sold on a stand-alone basis. We determine the BESP for a product
or service by considering multiple factors including, but not limited to,
geographies, market conditions, competitive landscape, internal costs, gross
margin objectives, and pricing practices. If a delivered element does
not meet the criteria in the applicable accounting guidance to be considered a
separate unit of accounting, revenue is deferred until the undelivered elements
are fulfilled. Accordingly, the determination of BESP can impact the
timing of revenue recognition for an arrangement.
We
recognize revenue in certain circumstances before delivery has occurred
(commonly referred to as “bill and hold” transactions). In such
circumstances, among other things, risk of ownership has passed to the buyer,
the buyer has made a written fixed commitment to purchase the finished goods,
the buyer has requested the finished goods to be held for future delivery as
scheduled and designated by the buyer, and no additional performance obligations
by the Company exist. For these transactions, the finished goods are
segregated from inventory and normal billing and credit terms are
granted. During November 2010, approximately $550,000 of revenues to
one customer were recorded as bill and hold transactions.
These
policies require management, at the time of the transaction, to assess whether
the amounts due are fixed or determinable, collection is reasonably assured, and
to perform an evaluation of arrangements containing multiple elements, including
management’s estimate of the selling price. These assessments are
based on the terms of the arrangement with the customer, past history and
creditworthiness of the customer. If management determines that
collection is not reasonably assured or undelivered elements are unfulfilled,
revenue recognition is deferred until these conditions are
satisfied.
Inventory
Reserves -
Inventories are valued at the lower of cost (at standard, which
approximates actual cost on a first-in, first-out basis) or
market. Inventories include the cost of raw materials, labor and
manufacturing overhead. We make inventory reserve provisions for slow
moving, excess or obsolete inventories as necessary
to properly reflect inventory value. Changes in market conditions,
lower than expected customer demand and rapidly changing technology could result
in additional slow moving, excess or obsolete inventory that is unsaleable or
saleable at reduced prices, which could require additional inventory reserve
provisions. At December 3, 2010,
inventories, net of reserve provisions, amounted to $2,077,000.
Capitalized
Software Costs -
Software development costs are capitalized subsequent to establishing
technological feasibility. Capitalized costs are amortized based on
the larger of the amounts computed using (a) the ratio that current gross
revenues for each product bears to the total of current and anticipated future
gross revenues for that product or (b) the straight-line method over the
remaining estimated economic life of the product. Expected future
revenues and estimated economic lives are subject to revisions due to market
conditions, technology changes and other factors resulting in shortfalls of
expected revenues or reduced economic lives, which could result in additional
amortization expense or write-offs. At December 3, 2010,
capitalized software costs, net of accumulated amortization, amounted to
$1,262,000.
21
Deferred
Tax Asset Valuation Allowance – Deferred tax assets are recognized for
deductible temporary differences, net operating loss carryforwards, and credit
carryforwards if it is more likely than not that the tax benefits will be
realized. Realization of our deferred tax assets depends on
generating sufficient future taxable income prior to the expiration of the loss
and credit carryforwards. At December 3, 2010, deferred tax assets in the amount
of $7,460,000 were fully reserved by a valuation allowance. For the three months
ended December 3, 2010, the valuation allowance was increased by
$10,000.
Accounts
Receivable Valuation – We maintain allowances for doubtful accounts for
estimated losses resulting from the inability of our customers to make required
payments. If the financial condition of our customers were to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances would be required. At December 3, 2010,
accounts receivable, net of allowances for doubtful accounts, amounted to
$2,536,000.
ITEM
4. CONTROLS AND PROCEDURES
The
Company carried out an evaluation, under the supervision and with the
participation of the Company’s management, including the Chief Executive Officer
(CEO) and the Chief Financial Officer (CFO), of the effectiveness of the design
and operation of the Company’s disclosure controls and procedures as of the end
of the period covered by this report (December 3, 2010). Based upon
that evaluation, the Company’s CEO and CFO have concluded that the Company’s
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
of the Securities Exchange Act of 1934, as amended) are effective. There has
been no change in the Company’s internal control over financial reporting during
our most recent fiscal quarter that has materially affected, or is reasonably
likely to materially affect, the Company’s internal control over financial
reporting.
PART II. OTHER
INFORMATION
ITEM
1A. RISK FACTORS
Our
operations and financial results are subject to various risks and uncertainties
that could adversely affect our business, financial condition, results of
operations, and the market price for our Common Stock. Part I,
Item 1A, “Risk Factors,” contained in our Annual Report on Form 10-K for
the year ended September 3, 2010, includes a detailed discussion of these
factors which have not changed materially from those included in the Form
10-K.
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
Subsequent
to December 3, 2010, pursuant to our 2010 Incentive Plan, the Compensation
Committee authorized the issuance to all eligible employees of the Company
common stock options to purchase an aggregate of 563,700 shares of common stock
and issued equally to the four non-employee members of the Board common stock
options to purchase an aggregate of 100,000 shares of common stock. Stock
options for 638,700 shares of common stock are exercisable at $0.125 and one
stock option for 25,000 shares of common stock, issued to a 10% or greater
stockholder and executive officer, is exercisable at $0.1375. The options vest
upon issuance and expire five years from the date of issuance. In addition,
500,000 shares of restricted common stock were granted to two executive
officers. Such shares may not be sold until a six-month restricted
period expires. The issuances of the restricted stock were made in reliance
upon an exemption from securities registration afforded by the provisions of
Section 4(2) of the Securities Act of 1933, as amended, and the provisions
of Regulation D promulgated thereunder.
As of
January 14, 2011, a registration statement for the 2010 Incentive Plan has not
been filed, although the Company currently intends to file a Form S-8
Registration Statement. Therefore, all of the foregoing securities are deemed
restricted securities for purposes of the Securities Act.
ITEM
6. EXHIBITS
The
following documents are filed as exhibits to this report. An asterisk
identifies those exhibits previously filed and incorporated herein by reference
below. For each such asterisked exhibit there is shown below the
description of the previous filing. Exhibits which are not required
for this report are omitted.
22
Exhibit No.
|
Description of Exhibit
|
||
3.1
|
*
|
Certificate
of Incorporation as amended through May 4, 1989. (1)
|
|
3.1.1
|
*
|
Amendment
to Certificate of Incorporation. (2)
|
|
3.2
|
*
|
By-laws
of the Company, as Amended and Restated May 17, 2006.
(3)
|
|
31.1
|
Certification
of the Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
||
31.2
|
Certification
of the Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
||
32.1
|
Certification
of the Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
||
32.2
|
Certification
of the Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
(1)
|
Incorporated
by reference to the Company's Annual Report on Form 10-K for the fiscal
year ended September 1, 1989, as filed with the Commission on November 30,
1989.+
|
|
(2)
|
Incorporated
by reference to the Company's Quarterly Report on Form 10-Q for the
quarter ended May 30, 1997, as filed with the Commission on June 30,
1997.+
|
|
(3)
|
Incorporated
by reference to the Company's Current Report on Form 8-K, dated May 17,
2006, as filed with the Commission on May 22, 2006.+
|
|
+
|
SEC file No. 0-11003 |
23
SIGNATURES
Pursuant
to the requirements of the Securities and Exchange Act of 1934, the Registrant
has duly caused this Report to be signed on its behalf by the undersigned
thereunto duly authorized.
WEGENER
CORPORATION
|
||
(Registrant)
|
||
Date: January
14, 2011
|
By:
|
/s/ C. Troy Woodbury,
Jr.
|
C.
Troy Woodbury, Jr.
|
||
President
and Chief Executive Officer
|
||
(Principal
Executive Officer)
|
||
Date:
January 14, 2011
|
By:
|
/s/ James Traicoff
|
James
Traicoff
|
||
Treasurer
and Chief
|
||
Financial
Officer
|
||
(Principal
Financial and Accounting Officer)
|
24