WEGENER CORP - FORM 10-Q

Attached files

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EX-31.1 - WEGENER CORP	v228714_ex31-1.htm
EX-32.1 - WEGENER CORP	v228714_ex32-1.htm
EX-32.2 - WEGENER CORP	v228714_ex32-2.htm
EX-31.2 - WEGENER CORP	v228714_ex31-2.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 June 3, 2011

¨ 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 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 June 30, 2011

WEGENER CORPORATION

Form 10-Q For the Quarter Ended June 3, 2011

INDEX

PART I. Financial Information

Item 1.	Financial Statements	3

	Introduction	3

	Consolidated Statements of Operations (Unaudited) - Three and Nine Months Ended June 3, 2011 and May 28, 2010	4

	Consolidated Balance Sheets – June 3, 2011 (Unaudited) and September 3, 2010	5

	Consolidated Statements of (Capital Deficit) Shareholders' Equity (Unaudited) - Nine Months Ended June 3, 2011 and May 28, 2010	6

	Consolidated Statements of Cash Flows (Unaudited) - Nine Months Ended June 3, 2011 and May 28, 2010	7

	Notes to Consolidated Financial Statements (Unaudited)	8

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	18
Item 4.	Controls and Procedures	25

PART II. Other Information

Item 1A.	Risk Factors	25
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	26
Item 6.	Exhibits	27
	Signatures	28

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

INTRODUCTION - CONSOLIDATED FINANCIAL STATEMENTS

The consolidated financial statements of Wegenerä Corporation (the “Company”, “Wegener”, “we”, “our” or “us”) 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 and nine months ended June 3, 2011, and May 28, 2010; the consolidated balance sheet as of June 3, 2011; the consolidated statements of (capital deficit) shareholders' equity as of June 3, 2011, and May 28, 2010; and the consolidated statements of cash flows for the nine months ended June 3, 2011, and May 28, 2010; 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 unaudited consolidated financial statements be read in conjunction with the audited 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. These consolidated financial statements include the accounts of Wegener Communications, Inc. (WCI), our wholly-owned subsidiary.

In the opinion 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.

WEGENER CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three months ended						Nine months ended
	June 3, 2011			May 28, 2010			June 3, 2011			May 28, 2010

Revenue, net	$	2,214,505		$	2,075,276		$	6,617,652		$	6,344,207

Operating costs and expenses
Cost of products sold		1,597,969			1,339,208			4,552,975			4,478,133
Selling, general and administrative		716,365			844,735			2,387,085			2,619,843
Research and development		304,904			251,527			899,853			912,647

Operating costs and expenses		2,619,238			2,435,470			7,839,913			8,010,623

Operating loss		(404,733	)		(360,194	)		(1,222,261	)		(1,666,416	)
Interest expense		(98,262	)		(126,371	)		(277,094	)		(332,302	)

Net loss	$	(502,995	)	$	(486,565	)	$	(1,499,355	)	$	(1,998,718	)

Net loss per share:
Basic and diluted	$	(0.04	)	$	(0.04	)	$	(0.12	)	$	(0.16	)

Shares used in per share calculation
Basic and diluted		13,147,051			12,647,051			12,976,721			12,647,051

See accompanying notes to consolidated financial statements.

WEGENER CORPORATION AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

	June 3, 2011 (Unaudited)			September 3, 2010
Assets

Current assets
Cash	$	465,539		$	231,091
Accounts receivable, net		2,261,504			1,633,971
Inventories, net		1,905,090			3,145,090
Other		170,347			234,986

Total current assets		4,802,480			5,245,138

Property and equipment, net		1,501,105			1,618,015
Capitalized software costs, net		1,281,510			1,263,405
Other assets		207,567			234,944

Total assets	$	7,792,662		$	8,361,502

Liabilities and Capital Deficit

Current liabilities
Line of credit-related party	$	4,250,000		$	3,850,000
Accounts payable		2,103,508			2,142,114
Accrued expenses		2,183,018			1,731,522
Deferred revenue		388,735			529,583
Customer deposits		387,569			239,971

Total current liabilities		9,312,830			8,493,190

Commitments and contingencies

Capital deficit
Preferred stock, $20.00 par value; 250,000 shares authorized; none issued and outstanding		-			-
Common stock, $.01 par value; 30,000,000 shares authorized; 13,147,051 and 12,647,051 shares issued and outstanding		131,471			126,471
Additional paid-in capital		20,112,577			20,006,702
Accumulated deficit		(21,764,216	)		(20,264,861	)

Total capital deficit		(1,520,168	)		(131,688	)

Total liabilities and capital deficit	$	7,792,662		$	8,361,502

See accompanying notes to consolidated financial statements.

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 nine months		-		-		-		(1,998,718	)
BALANCE at May 28, 2010		12,647,051	$	126,471	$	20,006,702	$	(19,950,199	)

Balance at September 3, 2010		12,647,051	$	126,471	$	20,006,702	$	(20,264,861	)
Common stock awards		500,000		5,000		57,500		-
Share-based compensation		-		-		48,375		-
Net loss for the nine months		-		-		-		(1,499,355	)
BALANCE at June 3, 2011		13,147,051	$	131,471	$	20,112,577	$	(21,764,216	)

See accompanying notes to consolidated financial statements.

WEGENER CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine months ended
	June 3, 2011			May 28, 2010

Cash flows from operating activities
Net loss	$	(1,499,355	)	$	(1,998,718	)
Adjustments to reconcile net loss to net cash provided by (used for) operating activities:
Depreciation and amortization		830,432			871,787
Share-based compensation expense		110,875			-
Increase in provision for bad debts		103,000			15,000
Increase in provision for inventory reserves		85,000			65,000
Increase in provision for warranty reserves		112,000			-
Changes in assets and liabilities
Accounts receivable		(730,533	)		276,251
Inventories		1,155,000			976,958
Other assets		65,224			(5,174	)
Accounts payable		(38,606	)		(355,975	)
Accrued expenses		339,496			179,734
Deferred revenue		(140,848	)		(170,633	)
Customer deposits		147,598			(72,195	)

Net cash provided by (used for) operating activities		539,283			(217,965	)

Cash flows from investing activities
Property and equipment expenditures		(33,592	)		(6,593	)
Capitalized software additions		(671,243	)		(637,598	)
License agreement, patent, and trademark expenditures		-			(3,173	)

Net cash used for investing activities		(704,835	)		(647,364	)

Cash flows from financing activities
Net change in borrowings under revolving line of credit		400,000			1,200,912
Proceeds from note payable		-			250,000

Net cash provided by financing activities		400,000			1,450,912

Net increase in cash		234,448			585,583
Cash, beginning of period		231,091			3,476

Cash, end of period	$	465,539		$	589,059

Supplemental disclosure of cash flow information:
Cash paid for interest	$	23,818		$	18,148

See accompanying notes to consolidated financial statements.

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 $21,764,000 at June 3, 2011. We had a working capital deficit of approximately $4,510,000 at June 3, 2011 compared to working capital deficits of $3,248,000 at September 3, 2010 and $1,139,000 at August 28, 2009.

During the first, second and third quarters of fiscal 2011 bookings were approximately $3.2, $0.7 and $1.6 million, respectively, compared to $1.8, $2.1 and $3.0 million, respectively, in the same periods of fiscal 2010. During fiscal 2010 and fiscal 2009 bookings were $8.3 million and $5.5 million, respectively. These bookings 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 $5.2 million at June 3, 2011, compared to $6.0 million at September 3, 2010, and $6.5 million at May 28, 2010. The total multi-year backlog at June 3, 2011 was also approximately $5.2 million, compared to $6.1 million at September 3, 2010 and $7.2 million at May 28, 2010. Approximately $1.4 million of the June 3, 2011 backlog is scheduled to ship during the remainder of fiscal 2011 and $3.7 million is scheduled to ship during fiscal 2012.

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 shippable bookings are currently required to meet our quarterly financial and cash flow projections for the remainder of fiscal 2011 and for fiscal 2012.

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 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.

At June 3, 2011, our primary source of liquidity was a $4,250,000 loan facility, which initially matured 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 a ninety (90) day written notice of termination at any time after April 7, 2011. No assurances may be given that 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 nine months of fiscal 2011 were financed by our line of credit borrowings and our working capital. Our net borrowings under our loan facility increased $400,000 to the maximum credit limit of $4,250,000 at June 3, 2011 from $3,850,000 at September 3, 2010. At July 7, 2011, the outstanding balance on the line of credit remained at $4,250,000 and our cash balances were approximately $356,000.

With our line of credit currently at the maximum limit, our very near term liquidity is dependent on our working capital and primarily on the timely collection of accounts receivable balances and conversion of inventory into receivable balances. During the second and third quarters of fiscal 2011 and continuing to date, the days outstanding of our accounts receivable has increased beyond our expectations, primarily due to a delay in payment from one customer, which has adversely impacted our cash balances. Our low level of bookings has lengthened the cycle of conversion of inventory into receivable balances and then into cash balances.

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 very near term to provide sufficient cash flow from operations to pay our current level of operating expenses, to provide for inventory purchases and to reduce past due amounts owed to vendors and service providers. No assurances may be given that the Company will be able to achieve sufficient levels of new orders in the near term to provide adequate levels of cash flow from operations. Should we be unable to achieve near term profitability and generate sufficient cash flow from operations, we would need to raise additional capital or obtain additional borrowings beyond our existing loan facility. We currently have limited sources of capital, including the public and private placement of equity securities and additional debt financing. No assurances can be given that additional capital or borrowings would be available to allow us to continue as a going concern. If near term shippable bookings are insufficient to provide adequate levels of near term liquidity and any required additional capital or borrowings are unavailable we will likely be forced to enter into federal bankruptcy proceedings.

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 products”), 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. In some cases, particularly with international shipments, customer contracts are fulfilled under terms known as ex-works, in accordance with international commercial terms. In these instances, revenue is recognized upon delivery, which is the date that the goods are made available to the customer as requested by the customer and no further obligations of the Company remain. 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 exists 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.

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 the nine months ended June 3, 2011, approximately $550,000 of revenue 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 nine months of fiscal years 2011 and 2010 both contained thirty-nine weeks. Fiscal year 2011 contains fifty-two weeks while 2010 contained fifty-three weeks.

Note 3 Accounts Receivable

Accounts receivable are summarized as follows:

	June 3, 2011 (Unaudited)			September 3, 2010

Accounts receivable – trade	$	2,494,007		$	1,743,411
Other receivables		10,200			30,253
		2,504,207			1,773,664

Less: allowance for doubtful accounts		(242,703	)		(139,693	)

Accounts receivable, net	$	2,261,504		$	1,633,971

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 (see Note 11). At June 3, 2011, three customers accounted for approximately 31.0%, 11.9% and 11.7%, respectively, of our accounts receivable, while at September 3, 2010, four customers accounted for approximately 24.2%, 18.1%, 14.1% and 10.7%, respectively, of our accounts receivable.

WEGENER CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 4 Inventories

Inventories are summarized as follows:

	June 3, 2011 (Unaudited)			September 3, 2010

Raw materials	$	3,208,626		$	3,641,664
Work-in-process		703,522			703,531
Finished goods		2,479,338			3,275,183
		6,391,486			7,620,378

Less: inventory reserves		(4,486,396	)		(4,475,288	)

Inventories, net	$	1,905,090		$	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 are reasonably possible should our sales efforts not be successful.

Note 5 Accrued Expenses

Accrued expenses consisted of the following:

	June 3,
	2011		September 3,
	(Unaudited)		2010

Vacation	$	572,014	$	538,268
Interest		690,455		436,490
Payroll and related expenses		155,073		101,939
Royalties		171,807		99,212
Warranty		245,547		136,448
Taxes and insurance		133,444		97,810
Commissions		14,592		23,413
Professional fees		155,726		155,238
Other		44,360		142,704

	$	2,183,018	$	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 June 3, 2011, deferred extended service maintenance revenues were $378,000 and are expected to be recognized as revenue in varying amounts throughout the remainder of fiscal 2011 and into fiscal 2012.

WEGENER CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 approximately 8.5% 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. At June 3, 2011, the outstanding balance on the loan facility was at the maximum credit limit of $4,250,000 and accrued unpaid interest amounted to approximately $690,000. At July 7, 2011, the outstanding balance on the line of credit remained at $4,250,000. 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.

The initial term of the amended loan facility matured on April 7, 2011. The loan facility automatically renews for successive twelve (12) month periods provided, however, the Trust may terminate the facility by providing a ninety (90) day written notice of termination at any time after April 7, 2011. Principal and interest shall be payable upon the earlier of the maturity date, an event of default as provided by the loan facility, or 90 days following the date on which the Trust provides written notice to terminate the agreement. 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 amended loan facility’s debt covenants required us to be in compliance with a solvency representation provision which required 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. At June 3, 2011, we were not in compliance with the solvency representation provision, however, on June 29, 2011, the loan facility’s security agreement was amended to remove the solvency representation provision from the debt covenants. In addition, we are required to retain certain executive officers and are precluded from paying dividends.

Note 8 Income Taxes

For the nine months ended June 3, 2011, no income tax benefit was recorded due to an increase in the deferred tax asset valuation allowance. The valuation allowance increased $540,000 in the first nine months of fiscal 2011. At June 3, 2011, net deferred tax assets of $7,990,000 were fully reserved by a valuation allowance.

At June 3, 2011, we had a federal net operating loss carryforward of approximately $15,510,000, 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

2011 Incentive Plan. On February 1, 2011, our stockholders approved the 2011 Incentive Plan (the “2011 Plan”). The effective date of the 2011 Plan was January 1, 2011 and the 2011 Plan has a ten-year term. The Plan provides for awards of up to an aggregate of 1,250,000 shares of common stock which may be represented by (i) incentive or nonqualified stock options, (ii) stock appreciation rights (tandem and free-standing), (iii) restricted stock, (iv) deferred stock, or (v) performance units entitling the holder, upon satisfaction of certain performance criteria, to awards of common stock or cash. The maximum total number of shares of Restricted Stock, Deferred Stock and/or Performance Units that may be granted at full value shall not exceed 500,000 shares. Eligible participants include officers and other key employees, non-employee directors, consultants and advisors to the Company. The exercise price per share in the case of incentive stock options and any tandem stock appreciation rights may not be less than 100% of the fair market value on the date of grant or, in the case of an option granted to a 10% or greater stockholder, not less than 110% of the fair market value on the date of grant. The exercise price for any other option and stock appreciation rights shall be at least 100% of the fair market value on the date of grant. The exercise period for nonqualified stock options may not exceed ten years and one day from the date of the grant, and the exercise period for incentive stock options or stock appreciation rights shall not exceed ten years from the date of the grant (five years for a 10% or greater stockholder). No awards have been granted under the 2011 Plan.

WEGENER CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

On December 6, 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. The aggregate grant date fair value of the total awards was approximately $111,000 which was included in selling, general and administrative expense in the second quarter of fiscal 2011. The weighted-average assumptions used in the Black-Scholes option pricing model for the stock option grants were as follows: expected volatility - the Company’s stock began trading over-the-counter in April 2010, and we believe there is insufficient data to project the Company’s future volatility, as a result, the expected volatility of similar public entities in similar industries was considered in estimating our volatility of 100%; risk free interest rate - .75% based upon observed interest rates appropriate for the expected term of our employee stock options; expected life – 2.5 years because the Company has had minimal experience with the exercise of options for use in determining the expected life for each award, the simplified method was used to calculate an expected life based on the midpoint between the issue (vesting) date and the end of the contractual term of the stock award; expected dividend yield – none because the Company does not currently pay dividends. In addition, tax reimbursement bonuses related to the restricted stock awards were granted in the amount of $32,319 which was recognized as selling, general and administrative 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.

The following table summarizes stock option transactions under the predecessor 1998 Incentive Plan, which expired and terminated effective December 31, 2007 and for the 2010 Incentive Plan for the nine months ended June 3, 2011:

				Range of		Weighted		Aggregate
	Number			Exercise		Average		Intrinsic
	of Shares			Prices		Exercise Price		Value
Outstanding at September 3, 2010		665,375		$	.63 – 2.50	$	1.33
Forfeited or cancelled		(4,000	)		.63		.63
Granted		663,700			.125		.125
Outstanding at June 3, 2011		1,325,075		$	.125 – 2.50	$	.73	$	-

Options exercisable at
June 3, 2011		1,325,075		$	.125 – 2.50	$	.73	$	-
September 3, 2010		665,375		$	.63 – 2.50	$	1.33		-

The weighted average remaining contractual life of options outstanding and exercisable at June 3, 2011, was 3.3 years. The weighted average grant date fair value of options granted during the first nine months of fiscal 2011 was $0.073. There was no intrinsic value of the outstanding and exercisable stock options based on the closing market price of $0.06 at June 3, 2011. The key terms of our 2010 and 1998 Incentive Plans are included in the Company's Annual Report on Form 10-K for the fiscal year ended September 3, 2010.

WEGENER CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 10 Earnings Per Share

The following tables represent required disclosure of the reconciliation of the numerators and denominators of the basic and diluted net earnings per share computations.

	Three months ended
	June 3, 2011								May 28, 2010
						Per								Per
	Earnings			Shares		share			Earnings			Shares		share
	(Numerator)			(Denominator)		amount			(Numerator)			(Denominator)		amount
Net loss	$	(502,995	)						$	(486,565	)

Basic and diluted loss per share:
Net loss available to common shareholders	$	(502,995	)		13,147,051	$	(0.04	)	$	(486,565	)		12,647,051	$	(0.04	)

	Nine months ended
	June 3, 2011								May 28, 2010
						Per								Per
	Earnings			Shares		share			Earnings			Shares		share
	(Numerator)			(Denominator)		amount			(Numerator)			(Denominator)		amount
Net loss	$	(1,499,355	)						$	(1,998,718	)

Basic and diluted loss per share:
Net loss available to common shareholders	$	(1,499,355	)		12,976,721	$	(0.12	)	$	(1,998,718	)		12,647,051	$	(0.16	)

Stock options excluded from the diluted net loss per share calculation due to their anti-dilutive effect are as follows:

Three months ended

Nine months ended

June 3,

May 28,

June 3,

May 28,

2011

2010

2011

2010

Common stock options:

Number of shares

1,325,075

665,375

1,325,075

665,375

Exercise price

$.125 to $2.50

$.63 to $2.50

$.125 to $2.50

$.63 to $2.50

Note 11 Segment Information and Concentrations

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 the Company has three sources of revenues as follows:

	Three months ended				Nine months ended
	June 3,		May 28,		June 3,		May 28,
	2011		2010		2011		2010
Product Line
Direct Broadcast Satellite	$	2,109,133	$	1,980,649	$	6,315,922	$	6,042,171
Analog and Custom Products		-		3,870		-		3,870
Service		105,372		90,757		301,730		298,166
	$	2,214,505	$	2,075,276	$	6,617,652	$	6,344,207

WEGENER CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Concentration of products representing 10% or more of the respective periods’ revenues is as follows:

	Three months ended						Nine months ended
	June 3,			May 28,			June 3,			May 28,
	2011			2010			2011			2010

Product
iPump Media Servers		30.2	%		10.8	%		30.2	%		(a	)
Professional and broadcast receivers		(a	)		(a	)		(a	)		14.8	%
Enterprise media receivers		14.0	%		(a	)		(a	)		10.1	%
Audio broadcast receivers		23.6	%		28.7	%		26.9	%		30.5	%
Network control products		(a	)		(a	)		(a	)		(a	)
Product service repairs		(a	)		(a	)		(a	)		(a	)
Extended maintenance contracts		10.0	%		11.4	%		10.5	%		12.1	%

(a) Revenues for the period were 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				Nine months ended
	June 3,		May 28,		June 3,		May 28,
	2011		2010		2011		2010
Geographic Area
United States	$	2,106,027	$	1,829,100	$	4,730,700	$	5,318,626
Latin America		46,905		45,232		1,321,879		105,107
Canada		21,205		20,113		70,643		44,670
Europe		16,000		106,633		431,670		718,509
Other		24,368		74,198		62,760		157,295
	$	2,214,505	$	2,075,276	$	6,617,652	$	6,344,207

All of the Company’s long-lived assets are located in the United States.

Customers representing 10% or more of the respective period’s revenues are as follows:

	Three months ended						Nine months ended
	June 3,			May 28,			June 3,			May 28,
	2011			2010			2011			2010

Customer 1		24.7	%		24.7	%		10.2	%		(a	)
Customer 2		(a	)		(a	)		18.7	%		(a	)
Customer 3		22.9	%		25.4	%		25.8	%		23.6	%

(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 June 3, 2011, outstanding purchase commitments under this agreement amounted to $655,000.

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 News 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.

WEGENER CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Additionally, we are obligated to indemnify our officers and the members of our Board of Directors pursuant to our bylaws and contractual indemnity agreements.

WEGENER CORPORATION AND SUBSIDIARY

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 nine months 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 WCI, 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 three months ended June 3, 2011 increased $139,000 or 6.7% to $2,214,000 from $2,075,000 for the three months ended May 28, 2010. Revenues for the nine months ended June 3, 2011 increased $274,000 or 4.3% to $6,618,000 from $6,344,000 for the nine months ended May 28, 2010. Operating results for the three and nine month periods ended June 3, 2011, were a net loss of $(503,000) or $(0.04) per share and a net loss of $(1,499,000) or $(0.12) per share, respectively, compared to a net loss of $(487,000) or $(0.04) per share and a net loss of $(1,999,000) or $(0.16) per share for the same periods ended May 28, 2010.

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 AND NINE MONTHS ENDED JUNE 3, 2011 COMPARED TO THREE AND NINE MONTHS ENDED MAY 28, 2010

The following table sets forth, for the periods indicated, the components of the results of operations as a percentage of sales:

	Three months ended						Nine months ended
	June 3, 2011			May 28, 2010			June 3, 2011			May 28, 2010
Revenues		100.0	%		100.0	%		100.0	%		100.0	%
Cost of products sold		72.2			64.5			68.8			70.6
Gross profit margin		27.8			35.5			31.2			29.4
Selling, general, and administrative		32.3			40.7			36.1			41.3
Research and development		13.8			12.1			13.6			14.4
Operating loss		(18.3	)		(17.3	)		(18.5	)		(26.3	)
Interest expense		(4.4	)		(6.1	)		(4.2	)		(5.2	)
Net loss		(22.7	)%		(23.4	)%		(22.7	)%		(31.5	)%

The operating results for the three and nine month periods ended June 3, 2011, were a net loss of $(503,000) or $(0.04) per share and a net loss of $(1,499,000) or $(0.12) per share, respectively, compared to a net loss of $(487,000) or $(0.04) per share and a net loss of $(1,999,000) or $(0.16) per share for the same periods ended May 28, 2010.

Revenues - Revenues for the three months ended June 3, 2011 increased $139,000 or 6.7% to $2,214,000 from $2,075,000 for the three months ended May 28, 2010. Revenues for the nine months ended June 3, 2011 increased $274,000 or 4.3% to $6,618,000 from $6,344,000 for the nine months ended May 28, 2010.

Revenues for the three and nine months ended June 3, 2011, were adversely affected by lower than expected shippable bookings for the periods primarily as a result of customer delays in purchasing decisions and a deferral of project expenditures. Fiscal 2011 third quarter revenues included (i) continued shipments of Encompass LE2 audio receivers to business music provider, Muzak LLC, (ii) ipump® 6420 audio media servers to Salem Communications and to Educational Media Foundation for network expansion projects and (iii) shipments of Unity® 550 receivers to a faith based private network for continued network expansion.. In addition, Unity® 550 receivers were shipped to Microspace to provide digital signage displays to their retail client. Revenues for the first nine months of fiscal 2011 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 as well as continued shipments of Encompass LE2 audio receivers to Muzak LLC.

Fiscal 2010 third quarter and first nine month revenues included continued shipments of Encompass LE2 audio receivers to Muzak LLC., Unity® 4600, Unity® 550 and Unity® 4650 receivers to Roberts Communications Network for network upgrades, shipments of our Unity® 550 for network upgrades to a faith based private network and shipments to MegaHertz for distribution of our products to the U.S. cable market. In addition, revenues included shipments of our network control system and Unity® 202 enterprise audio receivers to a new customer for upgrades to its existing background music network and shipments of iPump® 6420 media servers and Compel® network control software for Educational Media Foundation’s network expansion.

Our revenues and bookings are subject to the timing of significant orders from customers and new product introductions, and as a result revenue levels may fluctuate from quarter to quarter. For the three months ended June 3, 2011, two customers accounted for 24.7% and 22.9% of revenues, respectively. For the nine months ended June 3, 2011, these two customers accounted for 10.2% and 25.8% of revenues, respectively, and one additional customer accounted for 18.7% of revenues. For the three months ended May 28, 2010, two customers accounted for 25.4% and 24.7% of revenues, respectively. For the nine months ended May 28, 2010, one of these customers accounted for 23.6% of revenues. 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 the remainder of fiscal 2011 and beyond. Concentrations of revenue are likely to occur in any one or more of our products in any of our reporting periods. Product revenues are subject to fluctuations from quarter to quarter and year to year as new products and technologies are introduced, new product features and enhancements are added and as customers upgrade or expand their network operations.

Gross Profit Margins - The Company's gross profit margin percentages were 27.8% and 31.2% for the three and nine months ended June 3, 2011, compared to 35.5% and 29.4% for the same periods ended May 28, 2010. Gross profit margin dollars decreased $120,000 or 16.2% for the three month period ended June 3, 2011, compared to the same period ended May 28, 2010. For the first nine months of fiscal 2011 gross profit margins dollars increased $199,000 or 10.6%, compared to the same period in fiscal 2010. The decrease in profit margin percentage and dollars in the third quarter of fiscal 2011 compared to the same period in fiscal 2010 was due to product mix while the increase in the profit margin percentage and dollars in the first nine months of fiscal 2011 compared to the same period in fiscal 2010 was primarily due to the increase in revenues which resulted in lower unit fixed costs.

Cost of products sold in the three and nine month periods of fiscal 2011 included capitalized software amortization expenses of $222,000 and $653,000, respectively, compared to $213,000 and $635,000 for the same periods of fiscal 2010. Inventory reserve charges were $25,000 and $85,000 in the three and nine month periods of fiscal 2011, respectively, compared to $25,000 and $65,000 in the same periods of fiscal 2010. Warranty provisions included in cost of products sold in the third quarter and first nine months of fiscal 2011 were $40,000 and $112,000, respectively, compared to none in the same periods of fiscal 2010.

Selling, General and Administrative - Selling, general and administrative (SG&A) expenses decreased $129,000 or 15.2% to $716,000 for the three months ended June 3, 2011, compared to $845,000 for the same period of fiscal 2010. For the nine months ended June 3, 2011, SG&A expenses decreased $233,000 or 8.9% to $2,387,000 compared to $2,620,000 for the same period of fiscal 2010. Corporate SG&A expenses in the third quarter of fiscal 2011 decreased $5,000, or 3.6%, to $122,000 compared to $127,000 for the same period in fiscal 2010. For the nine months ended June 3, 2011, corporate SG&A expenses increased $55,000, or 12.3%, to $503,000 compared to $448,000 in the same period in fiscal 2010. Corporate SG&A expenses in the nine months ended June 3, 2011 included non-cash share-based compensation expenses of approximately $111,000 for stock option and restricted stock awards compared to none in the same period of fiscal 2010. The increases in share-based compensation expenses were offset by decreases in professional fees of $54,000 for the nine months ended June 3, 2011. WCI’s SG&A expenses decreased $124,000, or 17.2%, to $594,000 from $718,000 and $288,000, or 13.3%, to $1,884,000 from $2,172,000 for the three and nine months ended June 3, 2011, compared to the same periods in fiscal 2010. The decrease in WCI’s SG&A expenses for the three months ended June 3, 2011 was mainly due to decreases in (i) salaries and related payroll costs of $72,000 due to a reduction in headcount, (ii) general overhead costs of $17,000 due to overall cost reduction efforts of overhead expenses, (iii) marketing and travel expenses of $37,000 and (iv) professional fees of $25,000. These decreases were offset by an increase in bad debt provisions of $28,000. WCI’s SG&A severance expenses in the first nine months 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 in the first nine months of fiscal 2011 included (i) salaries and related payroll costs of $95,000 due to a reduction in headcount, (ii) general overhead costs of $82,000 due to the cost reduction efforts of overhead expenses and (iii) professional fees of $66,000. These decreases were offset by an increase in bad debt provisions of $88,000 and marketing and travel expenses of $14,000. As a percentage of revenues, SG&A expenses were 32.3% and 36.1% for the three and nine month periods ended June 3, 2011, respectively, compared to 40.7% and 41.3% for the same periods in fiscal 2010.

Research and Development - Research and development (R&D) expenditures, including capitalized software development costs, increased $64,000, or 13.9%, to $529,000 for the three months ended June 3, 2011, from $465,000 for the three months ended May 28, 2010. For the nine months ended June 3, 2011, R&D expenditures increased $21,000, or 1.4%, to $1,571,000 from $1,550,000 for the same period in 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. The increase in expenditures in the third quarter and first nine months of fiscal 2011 compared to the same period in fiscal 2010 was due to the increase in working hours. For the nine months ended June 3, 2011, the increase in expenditures related to the increase in working hours was partially offset by a reduction in head count compared to the same period in fiscal 2010. Capitalized software development costs amounted to $224,000 and $671,000 for the third quarter and first nine months of fiscal 2011 compared to $213,000 and $638,000 for the same periods of fiscal 2010. Research and development expenses, excluding capitalized software expenditures, were $305,000 or 13.8% of revenues, and $900,000 or 13.6% of revenues, for the three and nine months ended June 3, 2011, respectively, compared to $252,000 or 12.1% of revenues, and $913,000 or 14.4% of revenues, for the same periods of fiscal 2010. The increases in expenses in the three and nine month periods of fiscal 2011 compared to the same periods in fiscal 2010 were due to the increase in working hours discussed above. During the second quarter of fiscal 2011 we added two additional engineers and anticipate one additional hire during the remainder of fiscal 2011 to accomplish research and development activities scheduled during fiscal 2011 and beyond.

Interest Expense - Interest expense decreased $28,000 to $98,000 for the three months ended June 3, 2011, compared to $126,000 for the three months ended May 28, 2010. For the nine months ended June 3, 2011, interest expense decreased $55,000 to $277,000 compared to $332,000 for the same period in fiscal 2010. The decreases were primarily due to a reduction in the annual interest rate from 12% to 8% effective at the beginning of fiscal 2011.

Income Tax Expense – For the nine months ended June 3, 2011, no income tax benefit was recorded due to an increase in the deferred tax asset valuation allowance. The valuation allowance increased $540,000 in the first nine months of fiscal 2011. At June 3, 2011, net deferred tax assets of $7,990,000 were fully reserved by a valuation allowance. At June 3, 2011, we had a federal net operating loss carryforward of approximately $15,510,000, 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

NINE MONTHS ENDED JUNE 3, 2011

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 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 nine months of fiscal 2011, our line of credit net borrowings increased $400,000 to the maximum limit of $4,250,000 at June 3, 2011, from $3,850,000 at September 3, 2010. At July 7, 2011, the outstanding balance on the line of credit remained at $4,250,000 and our cash balances were approximately $356,000. Our cash flow requirements during the first nine months of fiscal 2011 were financed by our line of credit borrowings and our working capital.

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, to provide for inventory purchases and to reduce past due amounts owed to vendors and service providers. No assurances may be given that the Company will be able to achieve sufficient levels of new orders in the near term to provide adequate levels of cash flow from operations. If we are unable to achieve near term profitability and generate sufficient cash flow from operations we would need to raise additional capital or obtain additional borrowings beyond our existing loan facility. We currently have limited sources of capital, including the public and private placement of equity securities and additional debt financing. No assurances can be given that additional capital or borrowings would be available to allow us to continue as a going concern. If near term shippable bookings are insufficient to provide adequate levels of near term liquidity and any required additional capital or borrowings are unavailable we will likely be forced to enter into federal bankruptcy proceedings.

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 8.5% 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. At June 3, 2011, the outstanding balance on the loan facility was at the maximum credit limit of $4,250,000 and accrued unpaid interest amounted to approximately $690,000. At July 7, 2011, the outstanding balance on the line of credit remained at $4,250,000. 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.

Cash Flows

During the first nine months of fiscal 2011, operating activities provided $539,000 of cash. Net loss adjusted for expense provisions and depreciation and amortization (before working capital changes) used $258,000 of cash. Changes in accounts receivable, deferred revenue and customer deposit balances used $724,000 of cash. Changes in accounts payable and accrued expenses provided $301,000 of cash, while changes in inventories and other assets provided $1,220,000 of cash. Cash used by investing activities was $705,000, which consisted of capitalized software additions of $671,000 and equipment additions of $34,000. Financing activities provided $400,000 of cash from line of credit borrowings.

At June 3, 2011, our net inventory balances decreased $1,240,000 to $1,905,000 from $3,145,000 at September 3, 2010 which compared to $4,464,000 at August 28, 2009. The decrease in inventory levels during fiscal 2011 and prior fiscal years has minimized the amount of required inventory purchases during those periods to meet revenue levels. We will need to increase inventory purchases in subsequent quarters in order to have sufficient inventory balances to support revenue levels in fiscal 2012 and beyond. A substantial portion of future inventory purchases will be with our offshore suppliers with whom we have been paying under extended payment terms and credit limits which are beyond normal payment terms and credit limits. In order to have sufficient liquidity available for future inventory purchases it is likely we will need additional credit limits and continued extended payment terms from offshore and domestic suppliers; increased customer deposits from future bookings; additional borrowing capacity and/or additional capital. No assurances may be given that we will be able to generate sufficient liquidity from these or other sources that may be required to support future inventory purchases.

We have one manufacturing and purchasing agreement for certain finished goods inventories. At June 3, 2011, outstanding purchase commitments under this agreement amounted to $655,000.

The Company has never paid cash dividends on its common stock and does not intend to pay cash dividends in the foreseeable future.

A summary of the Company’s contractual obligations as of June 3, 2011 consisted of:

	Payments Due by Period
Contractual Obligations	Total		Fiscal 2011		Fiscal 2012-2013		Fiscal 2014-2015
Operating leases	$	106,000	$	16,000	$	90,000	$	-
Line of credit-related party		4,250,000		4,250,000		-		-
Purchase commitments		655,000		655,000		-		-
Total	$	5,011,000	$	4,921,000	$	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:

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. In some cases, particularly with international shipments, customer contracts are fulfilled under terms known as ex-works, in accordance with international commercial terms. In these instances, revenue is recognized upon delivery, which is the date that the goods are made available to the customer as requested by the customer and no further obligations of the Company remain. 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 exists 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 the nine months ended June 3, 2011, 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 cost, 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 obsolete or slow-moving inventories as necessary to properly reflect inventory value. These reserves are 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 obsolete and slow-moving inventory that is unsaleable or saleable at reduced prices, which could require additional inventory reserve provisions. At June 3, 2011, inventories, net of reserve provisions, amounted to $1,905,000.

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 June 3, 2011, capitalized software costs, net of accumulated amortization, amounted to $1,282,000.

Deferred Tax Asset Valuation Allowance – Deferred tax assets are recognized for deductible temporary differences, net operating loss carryforwards, and tax 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 June 3, 2011, net deferred tax assets of $7,990,000 were fully reserved by a valuation allowance. For the nine months ended June 3, 2011, the valuation allowance was increased by $540,000.

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 June 3, 2011, accounts receivable, net of allowances for doubtful accounts, amounted to $2,262,000.

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 (June 3, 2011). 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, other than as set forth below.

Our lender has the right to terminate our loan facility at any time by providing a ninety (90) day written notice of termination.

The initial term of our loan facility matured on April 7, 2011. The loan facility automatically renews for successive twelve (12) month periods provided, however, the Trust may terminate the facility by providing a ninety (90) day written notice of termination at any time after April 7, 2011. 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.

We may not have sufficient financing to support future inventory purchases.

Our line of credit balance at June 3, 2011 has reached the maximum available credit limit of $4,250,000, as a result, our near term liquidity is dependent on our working capital. Additional capital or borrowings, if needed, may not be available to continue as a going concern.

With our line of credit currently at the maximum limit, our very near term liquidity is dependent on our working capital and primarily on the timely collection of accounts receivable balances and conversion of inventory into receivable balances. During the second quarter of fiscal 2011 and continuing to date, the days outstanding of our accounts receivable has increased beyond our expectations, primarily due to a delay in payment from one customer, which has adversely impacted our cash balances. Our low level of bookings has lengthened the cycle of conversion of inventory into receivable balances and then into cash balances.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

On December 6, 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. 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 July 18, 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. For each such asterisked exhibit there is shown below the description of the prior filing. Exhibits which are not required for this report are omitted.

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)

3.1.2	*	Amendment to Certificate of Incorporation effective January 27, 2009. (4)

3.1.3	*	Amendment to Certificate of Incorporation effective February 1, 2011. (5)

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 Principal Executive Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350 as Adopted 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.+

(4)	Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended August 28, 2009, as filed with the Commission on November 25, 2009.+

(5)	Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended March 4, 2011, as filed with the Commission on April 18, 2011.+

+	SEC file No. 0-11003

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: July 18, 2011	By:	/s/ C. Troy Woodbury, Jr.
	C. Troy Woodbury, Jr.
	President and Chief Executive Officer
	(Principal Executive Officer)

Date: July 18, 2011	By:	/s/ James Traicoff
	James Traicoff
	Treasurer and Chief
	Financial Officer
	(Principal Financial and Accounting Officer)

WEGENER CORP - FORM 10-Q - July 18, 2011

Attached files

WEGENER CORP Reports