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EXCEL - IDEA: XBRL DOCUMENT - RELM WIRELESS CORPFinancial_Report.xls


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
 
R QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2013
 
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 number 001-32644
 
RELM WIRELESS CORPORATION
(Exact name of registrant as specified in its charter)

Nevada
59-3486297
State or other jurisdiction of
(I.R.S. Employer
Incorporation or organization
Identification No.)

7100 Technology Drive
West Melbourne, Florida  32904
(Address of principal executive offices and Zip Code)
 
Registrant’s telephone number, including area code:  (321) 984-1414
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
o
Accelerated filer
o
Non-accelerated filer
þ
Smaller reporting company
o
(Do not check if a smaller reporting company)

               Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o    No þ
 
               There were 13,580,471 shares of common stock, $0.60 par value, of the registrant outstanding at October 27, 2013.
 
 



 
 
 
 

PART I. - FINANCIAL INFORMATION
 
Item 1.                      FINANCIAL STATEMENTS
 
RELM WIRELESS CORPORATION
Condensed Consolidated Balance Sheets
(In thousands, except share data) (Unaudited)
 
 
   
September 30,
   
December 31,
 
   
2013
   
2012
 
ASSETS
           
             
C  Current assets:
           
C    Cash and cash equivalents
 
$
7,630    
$
6,581
 
Tr   Trade accounts receivable (net of allowance for doubtful accounts of $39 at September 30, 2013 and December 31, 2012, respectively)
    3,783       
2,062
  
 n    Inventories, net
    11,444      
13,345
 
   Deferred tax assets     3,372      
4,429
 
   Prepaid expenses and other current assets     1,371      
915
 
Total current assets     27,600      
27,332
 
Property, plant and equipment, net
    1,018      
1,113
 
Deferred tax assets, net
    3,487      
2,978
 
Capitalized software , net     1,731      
2,207
 
Other assets     323      
330
 
Total assets  
$
34,159    
$
33,960
 
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
                 
Current liabilities:
               
Accounts payable
 
$
938
   
$
1,132
 
Accrued compensation and related taxes
   
874
     
1,485
 
Accrued warranty expense
   
281
     
267
 
Accrued other expenses and other current liabilities
   
200
     
166
 
Note payable
   
-
     
18
 
Deferred revenue
   
372
     
627
 
Total current liabilities
   
2,665
     
3,695
 
                 
Deferred revenue
   
124
     
81
 
Total liabilities
 
$
2,789
   
$
3,776
 
Commitments and contingencies
               
Stockholders' equity:
               
     Preferred stock; $1.00 par value; 1,000,000 authorized shares
      none issued or outstanding.
   
-
     
-
 
Common stock; $.60 par value; 20,000,000 authorized shares:
13,580,471 and 13,545,482 issued and outstanding shares at
September 30, 2013 and December 31, 2012, respectively
   
8,148
     
8,127
  
    Additional paid-in capital
   
24,653
     
24,604
  
    Accumulated deficit
   
(1,431
)
   
(2,547
)
Total stockholders' equity
   
31,370
     
30,184
 
Total liabilities and stockholders' equity
 
$
34,159
   
$
33,960
 

 
See notes to condensed consolidated financial statements.

 
2

 

RELM WIRELESS CORPORATION
Condensed Consolidated Statements of Operations
(In thousands, except share data) (Unaudited)
 

 
   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
2013
   
September 30,
2012
   
September 30,
2013
   
September 30,
2012
 
                         
Sales, net
  $ 7,600     $ 8,112     $ 20,864     $ 21,809  
Expenses
                               
Cost of products
    4,328       4,084       11,640       11,473  
Selling, general and administrative
    2,505       2,633       7,580       7,598  
Total expenses
    6,833       6,717       19,220       19,071  
                                 
Operating income
    767       1,395       1,644       2,738  
                                 
Other income (expense):
                               
Net interest expense
    (0 )     (0 )     (0 )     (3 )
Other income (expense)
    0       (3 )     11       (10 )
Total other income (expense)
    0       (3 )     11       (13 )
                                 
 Income before income taxes
    767       1,392       1,655       2,725  
                                 
Income tax expense
    (253 )     (508 )     (539 )     (996 )
                                 
Net income
  $ 514     $ 884     $ 1,116     $ 1,729  
                                 
Net earnings per share-basic:
  $ 0.04     $ 0.07     $ 0.08     $ 0.13  
Net earnings per share-diluted:
  $ 0.04     $ 0.07     $ 0.08     $ 0.13  
Weighted average shares outstanding-basic
    13,580,471       13,545,482       13,563,486       13,541,250  
Weighted average shares outstanding-diluted
    13,648,570       13,549,146       13,619,676       13,543,631  

 
See notes to condensed consolidated financial statements.

 
 
3

 

RELM WIRELESS CORPORATION
Condensed Consolidated Statements of Cash Flows
(In thousands) (Unaudited)
 
   
Nine months Ended
 
   
September 30,
2013
   
September 30,
2012
 
             
Operating activities
           
Net income
  $ 1,116     $ 1,729  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Allowance for doubtful accounts
    -       (5 )
Inventories reserve
    108       6  
       Deferred tax obligation
    548       938  
Depreciation and amortization
    1,119       975  
       Shared-based compensation expense
    36       23  
Changes in operating assets and liabilities:
               
Accounts receivable
    (1,721 )     (449 )
Inventories
    1,793       (174 )
Prepaid expenses and other current assets
    (456 )     (411 )
Other assets
    7       (119 )
Accounts payable
    (194 )     795  
Accrued compensation and related taxes
    (611 )     739  
Accrued warranty expense
    14       (24 )
               Note payable
    (18 )     35  
Deferred revenue
    (212 )     55  
Accrued other expenses and other current liabilities
    34       (87 )
Net cash provided by operating activities
    1,563       4,026  
                 
Investing activities
               
Purchases of property, plant and equipment
    (208 )     (349 )
Capitalized software
    (340 )     (160 )
Net cash used in investing activities
    (548 )     (509 )
                 
Financing activities
               
Proceeds from issuance of common stock
    34       22  
Cash provided by financing activities
    34       22  
                 
Net change in cash and cash equivalents
    1,049       3,539  
Cash and cash equivalents, beginning of period
    6,581       2,693  
Cash and cash equivalents, end of period
  $ 7,630     $ 6,232  
                 
Supplemental disclosure
               
Cash paid for interest
  $ -     $ 3  
Income tax paid
  $ -     $ 62  
Non-cash financing activity
               
Cashless exercise of stock options and related conversion of net shares to stockholders’ equity
  $ 9     $ 4  
 
See notes to condensed consolidated financial statements.

 
4

 
 
Notes to Condensed Consolidated Financial Statements
Unaudited
(in Thousands, Except Share Data and Percentages)
 
1.           Condensed Consolidated Financial Statements
 
The condensed consolidated balance sheets as of September 30, 2013 and December 31, 2012, the condensed consolidated statements of operations for the three and nine months ended September 30, 2013 and 2012 and the condensed consolidated statements of cash flows for the nine months ended September 30, 2013 and 2012 have been prepared by RELM Wireless Corporation (the “Company”), and are unaudited.  In the opinion of management, all adjustments, which include normal recurring adjustments, necessary for a fair presentation have been made.  The condensed consolidated balance sheet at December 31, 2012 has been derived from the Company’s audited consolidated financial statements at that date.
 
Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted.  It is suggested that these condensed consolidated financial statements be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012, as filed with the Securities and Exchange Commission.  The results of operations for the three and nine months ended September 30, 2013 are not necessarily indicative of the operating results for a full year.
 
Recent Accounting Pronouncements
 
There have been no recent accounting pronouncements or changes in accounting pronouncements that impacted the three and nine month periods ended September 30, 2013 and 2012 or which are expected to impact future periods, which were not previously disclosed in prior periods.

2.           Allowance for Doubtful Accounts
 
The allowance for doubtful accounts on trade receivables was approximately $39 on gross trade receivables of $3,822 at September 30, 2013 and $39 on gross receivables of $2,101 at December 31, 2012.  This allowance is used to state trade receivables at a net realizable value or the amount that the Company estimates will be collected of the Company’s gross receivables.
 
3.           Inventories, net
 
The components of inventory, net of reserves for slow-moving, excess or obsolete inventory, consist of the following:
 
   
September 30, 2013
   
December 31,
2012
 
Finished goods
  $ 3,970     $ 4,316  
Work in process
    5,077       6,278  
Raw materials
    2,397       2,751  
    $ 11,444     $ 13,345  

Reserves for slow-moving, excess, or obsolete inventory were approximately $2,940 at September 30, 2013, compared with approximately $2,832 at December 31, 2012. The reserve for slow-moving, excess, or obsolete inventory is used to state the Company’s inventories at the lower of cost or market.
 
4.           Income Taxes
 
Income tax expense totaling approximately $253 and $539 has been recorded for the three and nine months ended September 30, 2013.
 
As of September 30, 2013 and December 31, 2012, the Company’s net deferred tax assets totaled approximately $6,859 and $7,407, respectively, and are primarily composed of net operating loss carry forwards (NOLs).  These NOLs total $8,263 for federal and $15,430 for state purposes, with expirations starting in 2018 through 2030.
 
 
 
5

 
 
Notes to Condensed Consolidated Financial Statements
Unaudited
(in Thousands, Except Share Data and Percentages)
 
In order to fully utilize the net deferred tax assets, the Company will need to generate sufficient taxable income in future years to utilize its NOLs prior to their expiration.  ASC Topic 740, “Income Taxes”, requires the Company to analyze all positive and negative evidence to determine if, based on the weight of available evidence, the Company is more likely than not to realize the benefit of the net deferred tax assets. The recognition of the net deferred tax assets and related tax benefits is based upon the Company’s conclusions regarding, among other considerations, estimates of future earnings based on information currently available, current and anticipated customers, contracts and product introductions, as well as historical operating results and certain tax planning strategies.
 
The Company has evaluated the available evidence and the likelihood of realizing the benefit of its net deferred tax assets.  From its evaluation the Company has concluded that based on the weight of available evidence, it is more likely than not that the Company will not realize a portion of the benefit of its net deferred tax assets recorded at September 30, 2013.  Accordingly, for the nine months ended September 30, 2013, the Company reduced its  valuation allowance by $14 resulting in a total valuation allowance of approximately $366 for the portion of benefit of its net deferred tax assets that more likely than not will not be realized.  The Company cannot presently estimate what, if any, changes to the valuation of its deferred tax assets may be deemed appropriate in the future.  If the Company incurs future losses, it may be necessary to record additional valuation allowance related to the deferred tax assets recognized as of September 30, 2013.
 
5.           Capitalized Software
 
The Company accounts for the costs of software within its products in accordance with ASC Topic 985-20 “Costs of Software to be Sold, Leased or Marketed”, under which certain software costs incurred subsequent to the establishment of technological feasibility are capitalized and amortized over the estimated lives of the related products. The Company determines technological feasibility to be established upon the internal release of a detailed program design as specified by Topic 985-20. Upon the general release of the product to customers, development costs for that product are amortized over periods not exceeding five years, based on current and future revenue of the product. For the three and nine months ended September 30, 2013, the Company recorded capitalized software of $51 and $340, respectively.  For the three and nine months ended September 30, 2013, the Company’s amortization cost was approximately $272 and $816, respectively, compared with $221 and $661 for the same periods last year.  Net capitalized software costs totaled $1,731 and $2,207 as of September 30, 2013 and December 31, 2012, respectively.
 
 
6.           Stockholders’ Equity
 
The changes in consolidated stockholders’ equity for the nine months ended September 30, 2013 are as follows:
 
   
Common Stock Shares
   
Common Stock Amount
   
Additional Paid-In Capital
   
Accumulated Deficit
   
Total
 
                               
Balance at December 31, 2012
    13,545,482     $ 8,127     $ 24,604     $ (2,547 )   $ 30,184  
     Common stock option exercise and issued
    34,989       21       13             34  
    Share-based compensation
      expense
                36             36  
    Net income
                      1,116       1,116  
Balance at September 30, 2013
    13,580,471     $ 8,148     $ 24,653     $ (1,431 )   $ 31,370  

    On March 8, 2013, the Company’s Board of Directors approved up to $2.5 million of share repurchases through December 31, 2013.  The repurchases were authorized to be made from time to time through a variety of methods, including open market repurchases and privately negotiated transactions, and would be funded from available cash.  There can be no assurance as to the amount, timing or prices of repurchases.  The specific timing and amount of repurchases, if any, will vary based upon market conditions, share price and other factors.  The repurchase program may be suspended, modified or terminated by the Board at any time.  During the period ended September 30, 2013, the Company did not repurchase any of its shares.
 
 
 
6

 
 
Notes to Condensed Consolidated Financial Statements
Unaudited
(in Thousands, Except Share Data and Percentages)
 
7.           Income per Share
 
The following table sets forth the computation of basic and diluted income per share:
 
   
Three Months Ended
   
Nine months Ended
 
   
September 30, 2013
   
September 30, 2012
   
September 30, 2013
   
September 30, 2012
 
Numerator:
                       
Net  income (numerator for basic and diluted earnings per share)
  $ 514     $ 884     $ 1,116     $ 1,729  
Denominator:
                               
Denominator for basic earnings per share weighted average shares
    13,580,471       13,545,482       13,563,486       13,541,250  
                                 
Effect of dilutive securities:
                               
       Options
    68,099       3,664       56,190       2,381  
                                 
Denominator
                               
Denominator for diluted earnings per share weighted average shares
    13,648,570       13,549,146       13,619,676       13,543,631  
                                 
                                 
Basic income per share
  $ 0.04     $ 0.07     $ 0.08     $ 0.13  
Diluted income per share
  $ 0.04     $ 0.07     $ 0.08     $ 0.13  

A total of  287,444 shares related to options are not included in the computation of diluted income per share for the three and nine months ended September 30, 2013 because to do so would have been anti-dilutive for these periods.

8.           Non-Cash Share-Based Employee Compensation
 
The Company has employee and non-employee director stock option programs.  Related to these programs, and in accordance with ASC Topic 718, “Compensation-Stock Compensation”, the Company recorded non-cash share-based employee compensation expense of $3 and $36, respectively, for the three and nine months ended September 30, 2013, compared with $5 and $23 for the same periods last year.  The Company considers its non-cash share-based employee compensation expenses as a component of selling, general and administrative expenses ($3 and $36 for the three and nine months ended September 30, 2013, respectively, compared with $5 and $23 for the same periods last year).  There was no non-cash share–based employee compensation expense capitalized as part of capital expenditures or inventory for the periods presented.
 
The Company uses the Black-Scholes-Merton option valuation model to calculate the fair value of a stock option grant.  The non-cash share-based employee compensation expense recorded in the three and nine months ended September 30, 2013 was calculated using certain assumptions.  For a description of such assumptions, reference is made to Note 10 (Share-Based Employee Compensation) of the Company’s Consolidated Financial Statements included in its Annual Report on Form 10-K for the fiscal year ended December 31, 2012.
 
 

 
 
7

 
 
Notes to Condensed Consolidated Financial Statements
Unaudited
(in Thousands, Except Share Data and Percentages)
 
 
A summary of stock option activity under the Company’s stock option plans as of September 30, 2013, and changes during the nine months ended September 30, 2013 are presented below:
 
As of January 1, 2013
 
Stock Options
   
Wgt. Avg. Exercise
Price ($)
Per Share
   
Wgt. Avg. Remaining Contractual Life (Years)
   
Wgt. Avg. Grant Date Fair Value($)
Per Share
   
Aggregate Intrinsic
Value ($)
 
                               
Outstanding
    460,944       3.47       -       2.29       -  
Vested
    435,944       3.55       -       2.38       -  
Nonvested
    25,000       2.03       -       0.68       -  
                                         
Period activity
                                       
Issued
    90,000       2.59       -       0.98       -  
Exercised
    55,000       1.90       -       1.15       -  
Forfeited
    -       -       -       -       -  
Expired
    5,000       4.50       -       2.68       -  
                                         
As of September 30, 2013
                                       
Outstanding
    490,944       3.47       4.47       2.17       159,250  
Vested
    419,275       3.61       4.01       2.39       141,816  
Nonvested
    71,669       2.68       7.15       0.87       17,434  
 
9.           Commitments and Contingencies
 
Legal Proceedings
 
From time to time the Company may be involved in various claims and legal actions arising in the ordinary course of its business. There were no pending material claims or legal matters as of September 30, 2013.
 
Other
 
As of September 30, 2013, the Company had purchase orders to suppliers of approximately $3,195.
 
Significant Customers
 
Sales to United States government agencies represented approximately $2,946 (38.8%) and $7,578 (36.3%) of the Company’s total sales for the three and nine months ended September 30, 2013, respectively, compared with approximately $4,637 (57.2%) and $9,834 (45.1%) for the same periods last year.  Accounts receivable from agencies of the United States government were $927 as of September 30, 2013 compared with approximately $2,256 at the same date last year.
 
10.           Debt
 
The Company has a secured revolving credit facility with Silicon Valley Bank with maximum borrowing availability of $5,000 (subject to a borrowing base) and a maturity date of December 31, 2014.  As of September 30, 2013, the Company was in compliance with all covenants under the loan and security agreement, as amended, governing this revolving credit facility.   For a description of such covenants and the other terms and conditions of the loan and security agreement, as amended, reference is made to Note 6 (Debt) of the Company’s Consolidated Financial Statements included in its Annual Report on Form 10-K for the fiscal year ended December 31, 2012.  As of September 30, 2013, there were no borrowings outstanding under the revolving credit facility and there was approximately $3,672 of borrowing available.
 
 
8

 
 
Item 2.                 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
SPECIAL NOTE CONCERNING
FORWARD-LOOKING STATEMENTS
 
We believe that it is important to communicate our future expectations to our security holders and to the public.  This report, therefore, contains statements about future events and expectations which are “forward-looking statements” within the meaning of Sections 27A of the Securities Act of 1933 and 21E of the Securities Exchange Act of 1934, including the statements about our plans, objectives, expectations and prospects under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”  You can expect to identify these statements by forward-looking words such as “may,” “might,” “could,” “would,” ”will,” “anticipate,” “believe,” “plan,” “estimate,” “project,” “expect,” “intend,” “seek” and other similar expressions.  Any statement contained in this report that is not a statement of historical fact may be deemed to be a forward-looking statement.  Although we believe that the plans, objectives, expectations and prospects reflected in or suggested by our forward-looking statements are reasonable, those statements involve risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements, and we can give no assurance that our plans, objectives, expectations and prospects will be achieved.
 
Important factors that might cause our actual results to differ materially from the results contemplated by the forward-looking statements are contained in the “Risk Factors” section of and elsewhere in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012 and in our subsequent filings with the Securities and Exchange Commission, and include, among others, the following:
 
 
    changes or advances in technology;
     
    the success of our LMR product line;
     
    competition in the land mobile radio industry;
     
    general economic and business conditions, including federal, state and local government budget deficits and spending limitations;
     
    the availability, terms and deployment of capital;
     
    reliance on contract manufacturers and suppliers;
     
    heavy reliance on sales to agencies of the United States government;
     
    our ability to utilize deferred tax assets;
     
    retention of executive officers and key personnel;
     
    our ability to manage our growth;
     
    government regulation;
     
    our business with manufacturers located in other countries;
     
    our inventory and debt levels;
     
    protection of our intellectual property rights;
     
    fluctuation in our operating results;
     
    acts of war or terrorism;
     
    any infringement claims;
     
    provisions in our charter documents and under Nevada law that may discourage a potential takeover;
     
    maintenance of our NYSE MKT listing; and
     
    the effect on our stock price and ability to raise equity capital of future sales of shares of our common stock.
 
               We assume no obligation to publicly update or revise any forward-looking statements made in this report, whether as a result of new information, future events, changes in assumptions or otherwise, after the date of this report.  Readers are cautioned not to place undue reliance on these forward-looking statements.
 
Reported dollar amounts in management’s discussion and analysis are disclosed in millions or as whole dollar amounts.
 
 
9

 
Executive Summary
 
Our financial and operating results for the three and nine months ended September 30, 2013 declined compared with the same periods last year.  Total sales decreased, while costs of products as a percentage of sales increased.  Consequently, we realized lower gross profit margins and operating income for the current year’s third quarter and nine month period, compared with the same periods last year.
 
For the three and nine months ended September 30, 2013, total sales were approximately $7.6 million and $20.9 million, respectively, compared with approximately $8.1 million and $21.8 million, respectively, for the same periods last year.  Sales of P25 digital products for the three and nine months ended September 30, 2013 totaled approximately $5.5 million (71.7% of total sales) and $13.9 million (66.4% of total sales), respectively, compared with approximately $5.1 million (62.9% of total sales) and $14.0 million (64.1% of total sales), respectively, for the same periods last year.
 
Gross margins as a percentage of sales for the three and nine months ended September 30, 2013 were approximately 43.1% and 44.2%, respectively, compared with 49.7% and 47.4%, respectively, for the same periods last year.  The gross margins for the periods reflect a decrease in total sales and lower manufacturing volumes.
 
For the three and nine months ended September 30, 2013, selling, general and administrative expenses (SG&A) totaled approximately $2.5 million (33.0% of sales) and $7.6 million (36.3% of sales), respectively, compared with approximately $2.6 million (32.5% of sales) and $7.6 million (34.8% of sales), respectively, for the same periods last year.
 
Pretax income for the three and nine months ended September 30, 2013 totaled approximately $767,000 and $1.7 million, respectively, compared with approximately $1.4 million and $2.7 million, respectively, for the same periods last year.
 
For the three and nine months ended September 30, 2013, income tax expense totaled approximately $253,000 and $539,000, respectively, compared with $508,000 and $996,000, respectively, for the same periods last year.  Our income tax expense and benefit is largely non-cash due to deferred tax assets derived primarily from our net operating loss carryforwards.
 
Net income for the three and nine months ended September 30, 2013 was approximately $514,000 ($0.04 per basic and diluted share) and $1.1 million ($0.08 per basic and diluted share), respectively, compared with $884,000 ($0.07 per basic and diluted share) and $1.7 million ($0.13 per basic and diluted share), respectively for the same periods last year.
 
As of September 30, 2013, working capital totaled approximately $24.9 million, of which approximately $11.4 million was comprised of cash and trade receivables.  As of December 31, 2012 working capital totaled approximately $23.6 million, of which approximately $8.6 million was comprised of cash and trade receivables.
 
Results of Operations
 
As an aid to understanding our operating results for the periods covered by this report, the following table shows selected items from our condensed consolidated statements of operations expressed as a percentage of sales:
 
   
Percentage of Sales
Three Months Ended
   
Percentage of Sales
Nine months Ended
 
   
September 30,
2013
   
September 30,
2012
   
September30,
2013
   
September 30,
2012
 
                         
Sales
    100.0 %     100.0 %     100.0 %     100.0 %
Cost of products
    (56.9 )     (50.3 )     (55.8 )     (52.6 )
Gross margin
    43.1       49.7       44.2       47.4  
Selling, general and administrative expenses
    (33.0 )     (32.5 )     (36.3 )     (34.9 )
Net interest expense
    (0.0 )     (0.0 )     (0.0 )     (0.0 )
Other income (expense )
    0.0       (0.0 )     0.0       0.0  
Pretax  income
    10.1       17.2       7.9       12.5  
Income tax expense
    (3.3 )     (6.3 )     (2.6 )     (4.6 )
Net income
    6.8 %     10.9 %     5.3 %     7.9 %


 
10

 
 
Net Sales
 
For the third quarter ended September 30, 2013, net sales were approximately $7.6 million compared with approximately $8.1 million for the same quarter last year.  Sales of P25 digital products for the quarter totaled approximately $5.5 million (71.7% of total sales), compared with approximately $5.1 million (64.1% of total sales) for the same quarter last year.
 
For the nine months ended September 30, 2013, net sales were approximately $20.9 million, compared with approximately $21.8 million for the same period last year.  Sales of P25 digital products for the nine months ended September 30, 2013 totaled approximately $13.9 million (66.4% of total sales) compared with approximately $14.0 million (64.1% of total sales) for the same period last year.
 
For the third quarter, we experienced a decline in sales from our legacy and public safety customers with federal and state agencies.  This decline, however, was partially offset by sales gains with military customers.  For the nine month period, last year’s sales benefited from significant new orders in the state and local public safety market, as well as internationally that have not been replicated this year.  We are aggressively pursuing a broad range of sales prospects.  Some sales opportunities have been delayed, however, as the business climate remains uncertain, particularly regarding government operations and budget funding.
 
Cost of Products and Gross Profit Margin
 
Gross margin as a percentage of sales for the third quarter ended September 30, 2013 was 43.1% compared with 49.7% for the same quarter last year.  For the nine months ended September 30, 2013, gross margin as a percentage of sales was 44.2% compared with 47.4% for the same period last year.
 
Our cost of products and gross margins are primarily related to material and labor costs, product mix, manufacturing volumes and pricing.  The cost of products and corresponding gross margins for the three months ended September 30, 2013 reflected lower sales and a less favorable product mix.  Also, manufacturing volumes decreased due to lower sales volumes and inventory reduction initiatives.  Consequently, we did not fully utilize and absorb our base of manufacturing and support expenses.
 
We continue to utilize contract manufacturing relationships to maximize production efficiencies and minimize material and labor costs.  We also regularly consider manufacturing alternatives to improve quality, speed and costs.  We anticipate that our current contract manufacturing relationships or comparable alternatives will be available to us in the future.  We believe leveraging increased sales volumes and P-25 product sales, combined with the aforementioned manufacturing improvements, should yield gross margin improvements.
 
Selling, General and Administrative Expenses
 
Selling, general and administrative (SG&A) expenses consist of marketing, sales, commissions, engineering, product development, management information systems, accounting, headquarters and non-cash share-based employee compensation expenses.
 
SG&A expenses for the third quarter 2013 were approximately $2.5 million (33.0% of sales), compared with $2.6 million (32.5% of sales) for the same quarter last year.  For the nine months ended September 30, 2013, SG&A expenses totaled approximately $7.6 million (36.3% of sales) compared with approximately $7.6 million (34.9% of sales) for the same period last year.
 
Engineering and product development expenses for the third quarter 2013 totaled approximately $910,000 (12.0% of total sales), compared with $960,000 (11.8% of total sales) for the same quarter last year.  For the nine months ended September 30, 2013, engineering and product development expenses totaled approximately $2.7 million (13.1% of total sales) compared with $2.6 million (12.0% of total sales) for the same period last year.  There was a small decline in engineering and product development expenses for the current quarter compared to the same quarter last year as some product initiatives were completed.  The increase for the nine month period compared with the same period last year was attributable primarily to amortization of capitalized software and compensation related expenses.
 
 
11

 
 
Marketing and selling expenses for the third quarter 2013 totaled approximately $903,000 (11.9% of total sales), compared with $996,000 (12.3% of total sales) for the same quarter last year.  For the nine months ended September 30, 2013, sales and marketing expenses totaled approximately $2.7 million (12.8% of total sales), compared with approximately $2.8 million (13.0% of total sales) for the same period last year.  The decrease for the third quarter and nine month periods relates primarily to commissions and incentives, which directly correlate with sales performance.
 
General and administrative expenses for the third quarter 2013 totaled approximately $692,000 (9.1% of total sales), compared with approximately $677,000 (8.4% of total sales) for the same quarter last year.  For the nine months ended September 30, 2013, general and administrative expenses totaled approximately $2.1 million (10.4% of total sales), compared with $2.1 million (9.8% of total sales) for the same period last year.  For both the quarter and nine month periods decreases in compensation expenses were offset by increases in public company related expenses.
 
Operating Income
 
Operating income for the quarter ended September 30, 2013 totaled approximately $767,000 (10.1% of sales), compared with approximately $1.4 million (17.2% of sales) for the same quarter last year.  For the nine months ended September 30, 2013, operating income totaled approximately $1.6 million (7.9% of sales), compared with $2.7 million (12.6% of sales) for the same period last year.  The decline in operating income was primarily the result of lower sales and increased product costs.
 
Net Interest Expense
 
We incurred no net interest expense for the third quarter or nine months ended September 30, 2013.  For the same periods last year we incurred approximately $3,000 of interest expense.  Interest expense may be incurred from time to time on outstanding borrowings under our revolving credit facility and earn interest income on our cash balances.  The interest rate on such revolving credit facility as of September 30, 2013 was 4.00% per annum.  This rate is variable based on the lender’s prime rate and our adjusted quick ratio.
 
Income Taxes
 
We recorded income tax expense of approximately $253,000 and $539,000, respectively for the quarter and nine months ended September 30, 2013, compared with $508,000 and $996,000, respectively for the same periods last year.  Our income tax expense and benefit are primarily non-cash.
 
As of September 30, 2013, our deferred tax assets totaled approximately $6.9 million, and are primarily composed of net operating loss carry forwards (NOLs).  These NOLs total $8.3 million for federal and $15.4 million for state purposes, with expirations starting in 2018 through 2030.
 
In order to fully utilize the net deferred tax assets, we will need to generate sufficient taxable income in future years to utilize our NOLs prior to their expiration.  ASC Topic 740, “Income Taxes”, requires us to analyze all positive and negative evidence to determine if, based on the weight of available evidence, we are more likely than not to realize the benefit of the net deferred tax assets. The recognition of the net deferred tax assets and related tax benefits is based upon our conclusions regarding, among other considerations, estimates of future earnings based on information currently available and current and anticipated customers, contracts and product introductions, as well as historical operating results and certain tax planning strategies.
 
We have evaluated the available evidence and the likelihood of realizing the benefit of our net deferred tax assets.  From our evaluation we have concluded that based on the weight of available evidence, it is more likely than not that we will not realize a portion of the benefit of our net deferred tax assets recorded at September 30, 2013.  Accordingly, as of September 30, 2013, we reduced our valuation allowance by $14,000, resulting in a total valuation allowance of $366,000 for the portion of benefit of our net deferred tax assets that more likely than not will not be realized.  We cannot presently estimate what, if any, changes to the valuation of our deferred tax assets may be deemed appropriate in the future.  If we incur future losses, it may be necessary to record additional valuation allowance related to the deferred tax assets recognized as of September 30, 2013.
 
 
12

 
 
Liquidity and Capital Resources
 
For the first nine months ended September 30, 2013, net cash provided by operating activities totaled approximately $1.6 million, compared with approximately $4.0 million for the same period last year.  Cash provided by operating activities was primarily related to net income of approximately $1.1 million and a decrease in inventory totaling approximately $1.8 million.  These contributors were partially offset by an increase in accounts receivable and decreases in accrued compensation, accounts payable and deferred revenue.  For the nine months ended September 30, 2013, we realized net income of approximately $1.1 million compared with net income totaling approximately $1.7 million for the same period last year.  Net inventories decreased approximately $1.8 million for the nine months ended September 30, 2013 as a result of inventory reduction initiatives that slowed material receipts relative to sales.  For the same period last year inventories increased approximately $174,000.  Accounts receivable increased approximately $1.7 million for the nine months ended September 30, 2013, reflecting sales that were consummated later in the period that have not yet completed their collection cycle.  For the same period last year, accounts receivable increased approximately $0.4 million as a result of increased sales.  Accrued compensation decreased by approximately $611,000, reflecting reductions of incentive compensation.  For the same period last year accrued compensation increased due to improved operating results and earned incentives.  Accounts payable for the period decreased approximately $194,000 primarily due to payments to suppliers.  For the same period last year trade payables increased by approximately $795,000 due to higher business volumes and related material purchases.  Depreciation and amortization totaled approximately $1.1 million for the nine months ended September 30, 2013, compared with approximately $975,000 for the same period last year, as some capitalized software reached the peak of its amortization schedule.  For the first nine months ended September 30, 2013 and 2012, deferred tax assets decreased by approximately $548,000 and $938,000, respectively, due to non-cash tax expense on our pretax income.
 
Cash used in investing activities for the nine months ended September 30, 2013 totaled approximately $548,000, compared with approximately $509,000 for the same period last year.  Cash used in investing activities for the nine months ended September 30, 2013 and 2012 was primarily related to the development of capitalized software and the purchase of manufacturing and engineering equipment.  We anticipate that future capital expenditures will be funded through our existing cash balance and operating cash flow.
 
Cash provided by financing activities for the nine months ended September 30, 2013 and 2012 totaled approximately $34,000 and $22,000, respectively, representing proceeds from the issuance of common stock upon the exercise of employee stock options.
 
We have a secured revolving credit facility with Silicon Valley Bank with maximum borrowing availability of $5 million (subject to the borrowing base) and a maturity date of December 31, 2014.
 
As of September 30, 2013 and the date of this report, we were in compliance with all covenants under the loan and security agreement, as amended, governing the revolving credit facility.   For a description of such covenants and the other terms and conditions of the loan and security agreement, as amended, reference is made to Note 6 (Debt) of our Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012.
 
As of September 30, 2013 and the date of this report, there were no borrowings outstanding under the revolving credit facility.  As of September 30, 2013 and the date of this report, there was approximately $3.7 million and $3.2 million, respectively, of borrowing available under the revolving credit facility.
 
On March 8, 2013 our Board of Directors approved up to $2.5 million of share repurchases through December 31, 2013.  The repurchases were authorized to be made from time to time through a variety of methods, including open market repurchases and privately negotiated transactions, and would be funded from available cash.  There can be no assurance as to the amount, timing or prices of repurchases.  The specific timing and amount of repurchases, if any, will vary based upon market conditions, share price and other factors.  The repurchase program may be suspended, modified or terminated by the Board at any time.  During the nine months ended September 30, 2013 we did not repurchase any of our shares.
 
Our cash balance at September 30, 2013 was approximately $7.6 million.  We believe these funds combined with anticipated cash generated from operations and borrowing availability under our revolving credit facility are sufficient to meet our working capital requirements for the foreseeable future.   However, although we do not anticipate needing additional capital in the near term, the current financial and economic conditions could limit our access to credit and impair our ability to raise capital, if needed, on acceptable terms or at all. We also face other risks that could impact our business, liquidity and financial condition. For a description of these risks, see “Item 1A. Risk Factors” set forth in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012.
 
 
13

 
Critical Accounting Policies
 
In response to the SEC’s financial reporting release, FR-60, Cautionary Advice Regarding Disclosure About Critical Accounting Policies, we have selected for disclosure our revenue recognition process and our accounting processes involving significant judgments, estimates and assumptions.  These processes affect our reported revenues and current assets and are therefore critical in assessing our financial and operating status.  We regularly evaluate these processes in preparing our financial statements.  The processes for revenue recognition, allowance for collection of trade receivables, reserves for excess or obsolete inventory, software development and income taxes involve certain assumptions and estimates that we believe to be reasonable under present facts and circumstances.  These estimates and assumptions, if incorrect, could adversely impact our operations and financial position.  There were no changes to our critical accounting policies during the quarter ended September 30, 2013 as described in Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2012.
 
Item 3.                 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
We may be subject to the risk of fluctuating interest rates in the ordinary course of business for borrowings under our revolving credit facility, which bears interest at a variable rate based on the lender’s prime rate in effect from time to time, and our adjusted quick ratio.  As of September 30, 2013, there were no borrowings outstanding under our revolving credit facility.
 
Item 4.                 CONTROLS AND PROCEDURES
 
Evaluation of Disclosure Controls and Procedures
 
Our Chief Executive Officer and Chief Financial Officer (who serves as our principal financial and accounting officer) have evaluated the effectiveness of our disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 (Securities Exchange Act) Rules 13a-15(e) and 15d-15(e)) as of September 30, 2013.  Based on this evaluation, they have concluded that our disclosure controls and procedures were effective as of September 30, 2013.
 
Changes in Internal Control over Financial Reporting
 
During the nine months ended September 30, 2013, there were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Securities Exchange Act Rules 13a-15 or 15d-15 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
 
14

 
 
PART II- OTHER INFORMATION
 
Item 1.                 LEGAL PROCEEDINGS
 
Reference is made to Note 9 (Legal Proceedings) of the Company’s Condensed Consolidated Financial Statements included elsewhere in this report for the information required by this Item.
 
Item 2.                 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
Issuer Purchases of Equity Securities
 
On March 8, 2013 our Board of Directors approved up to $2.5 million of share repurchases through December 31, 2013.  No repurchases of our common stock were made during the quarter ended September 30, 2013.
 
Period
 
Total Number of Shares Purchased
   
Average
 Price Paid Per Share
   
Total Number of Shares Purchased as
Part of Publicly Announced Plans or Programs
   
Maximum Approximate
 Dollar Value of
 Shares that May Yet Be Purchased Under Publicly Announced Plans or Programs
 
07/01/13 - 07/31/13
                      2,500,000  
08/01/13 - 08/31/13
                      2,500,000  
09/01/13 - 09/30/13
                      2,500,000  
Total
        $           $ 2,500,000  
 

 
 
15

 
 
Item 6.                 EXHIBITS
 
Exhibit 3(i)
 
Articles of Incorporation(1)
Exhibit 3(ii)
 
Certificate of Amendment to Articles of Incorporation(2)
Exhibit 3(iii)
 
Amended and Restated Bylaws(3)
Exhibit 31.1
 
Certification Pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 31.2
 
Certification Pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 32.1
 
Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished pursuant to Item 601(b)(32) of Regulation S-K).
Exhibit 32.2
 
Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished pursuant to Item 601(b)(32) of Regulation S-K).
Exhibit 101.INS
 
XBRL Instance Document*
Exhibit 101.SCH
 
XBRL Taxonomy Extension Schema Document*
Exhibit 101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document*
Exhibit 101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document*
Exhibit 101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document*
Exhibit 101.DEF
 
XBRL Taxonomy Definition Linkbase Document*
 
*
 
Furnished herewith (not filed)
 
(1)
Incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 1997.
 
(2)
Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2001.
 
(3)
Incorporated by reference to the Company's Current Report on Form 8-K filed May 29, 2013.

 
 
16

 
 
SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
RELM WIRELESS CORPORATION
(The “Registrant”)
 
       
Date: November 13, 2013
By:
/s/ David P. Storey     
   
David P. Storey
President and Chief Executive Officer
(Principal executive officer and duly
authorized officer)
 
       
       
Date: November 13, 2013
By:
/s/ William P. Kelly  
   
William P. Kelly
Executive Vice President and
Chief Financial Officer
(Principal financial and accounting
officer and duly authorized officer)
 
       
       

17
 

 
 
Exhibit Index
 

Exhibit
Number
 
Description
     
Exhibit 3(i)
 
Articles of Incorporation(1)
Exhibit 3(ii)
 
Certificate of Amendment to Articles of Incorporation(2)
Exhibit 3(iii)
 
Amended and Restated Bylaws(3)
Exhibit 31.1
 
Certification Pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 31.2
 
Certification Pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 32.1
 
Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished pursuant to Item 601(b)(32) of Regulation S-K).
Exhibit 32.2
 
Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished pursuant to Item 601(b)(32) of Regulation S-K).
Exhibit 101.INS
 
XBRL Instance Document*
Exhibit 101.SCH
 
XBRL Taxonomy Extension Schema Document*
Exhibit 101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document*
Exhibit 101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document*
Exhibit 101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document*
Exhibit 101.DEF
 
XBRL Taxonomy Definition Linkbase Document*
 
*
 
Furnished herewith (not filed)
 
(1)
Incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 1997.
 
(2)
Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2001.
 
(3)
Incorporated by reference to the Company's Current Report on Form 8-K filed May 29, 2013.