Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
———————
FORM
10-K
———————
☒
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2016
OR
☐
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For
the transition period from __________ to __________
———————
RELM WIRELESS CORPORATION
(Exact
name of registrant as specified in its charter)
———————
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Nevada
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001-32644
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59-3486297
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(State
or other jurisdiction ofincorporation or organization)
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(Commissionfile
number)
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(I.R.S.
Employer Identification No.)
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7100
Technology Drive
West Melbourne, Florida 32904
(Address
of principal executive offices) (Zip Code)
Registrant’s
telephone number, including area code: (321) 984-1414
Securities
registered pursuant to Section 12(b) of the Act:
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Title
of Class
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Name of
each Exchange on Which Registered
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Common
Stock, par value $.60
|
NYSE
MKT
|
Securities
registered pursuant to Section 12(g) of the Act:
None
Indicate by check
mark if the registrant is a well-known seasoned issuer, as defined
in Rule 405 of the Securities Act. Yes ☐
No ☒
Indicate by check
mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes ☐
No ☒
Indicate by check
mark whether the registrant: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past
90 days. Yes ☒ No ☐
Indicate by check
mark whether the registrant has submitted electronically and posted
on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of
Regulation S-T (§ 232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files). Yes ☒ No
☐
Indicate by check
mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§ 229.405 of this chapter) is not
contained herein, and will not be contained, to the best of
registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.
☐
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 ☒
|
|
(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 Act). Yes ☐
No ☒
The
aggregate market value of the voting and non-voting common equity
held by non-affiliates of the registrant on June 30, 2016,
based on the closing price of such stock on the NYSE MKT on such
date, was $40,609,053. As of February 24, 2017, 13,754,749 shares
of the registrant’s Common Stock were
outstanding.
Documents Incorporated by Reference:
Portions of the registrant’s definitive proxy statement for
its 2017 annual stockholders’ meeting are incorporated by
reference in Part III of this report. The registrant’s
definitive proxy statement will be filed with the Securities and
Exchange Commission (the “SEC”) within 120 days after
December 31, 2016.
TABLE
OF CONTENTS
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Page
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PART I
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1
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Item
1.
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Business
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1
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Item
1A.
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Risk Factors
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8
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Item
1B.
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Unresolved Staff Comments
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15
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Item
2.
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Properties
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15
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Item
3.
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Legal Proceedings
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15
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Item
4.
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Mine Safety Disclosures
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15
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PART II
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16
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Item 5.
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Market For Registrant’s Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities
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16
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Item
6.
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Selected Financial Data
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17
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Item
7.
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Management’s Discussion and Analysis of Financial Condition
and Results of Operations
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17
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Item
7A.
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Quantitative and Qualitative Disclosures About Market
Risk
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26
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Item
8.
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Financial Statements and Supplementary Data
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26
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Item
9.
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Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
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27
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Item
9A.
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Controls and Procedures
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27
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Item
9B.
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Other Information
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27
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Part III
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28
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Item
10.
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Directors, Executive Officers and Corporate Governance
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28
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Item
11.
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Executive Compensation
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28
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Item
12.
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Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
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28
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Item
13.
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Certain Relationships and Related Transactions, and Director
Independence
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28
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Item
14.
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Principal Accounting Fees and Services
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28
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Part IV
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29
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Item
15.
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Exhibits and Financial Statement Schedules
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29
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Item
16.
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Form 10-K Summary
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29
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SIGNATURES
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30
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General
RELM
Wireless Corporation (“RELM,” the
“Company,” “we” or “us”)
provides two-way radio communications equipment of high quality and
reliability.
In
business for 70 years, RELM (NYSE MKT: RWC) designs, manufactures
and markets wireless communications products consisting of two-way
land mobile radios, repeaters, base stations and related components
and subsystems. Two-way land mobile radios can be units that are
hand-held (portable) or installed in vehicles (mobile). Repeaters
expand the range of two-way land mobile radios, enabling them to
operate over a wider area. Base station components and subsystems
are installed at radio transmitter sites to improve performance by
enhancing the signal and reducing or eliminating signal
interference and enabling the use of one antenna for both
transmission and reception. We employ both analog and digital
technologies in our products.
Our
digital technology is compliant with the Project 25 standard
(“P-25”) for digital land mobile radio equipment. The
P-25 is adopted by representatives from the Association of Public
Safety Communication Officials-International (“APCO”),
the National Association of State Technology Directors
(“NASTD”), the United States (“U.S.”)
Federal Government and other public safety user organizations. Our
P-25 digital products and our analog products function in the very
high frequency (“VHF”) (136MHz – 174MHz),
ultra-high frequency (“UHF”) (380MHz – 470MHz,
450MHz – 520MHz), and 700-800 MHz bands. Our P-25 KNG and
KNG2 Series mobile and portable digital radios have been validated
under the P-25 Compliance Assessment Program (“CAP”) as
being P-25 compliant and interoperable with the communications
network infrastructure of six of our competitors. Since we do not
provide our own communications network infrastructure, we believe
CAP validation provides confidence for federal, state and local
emergency response agencies that our products are a viable and
attractive alternative for use on the infrastructure of our
competitors.
We
offer products under two brand names: BK Radio and RELM. Generally,
BK Radio-branded products serve the government and public safety
market, while RELM-branded products serve the business and
industrial market.
BK
Radio-branded products consist of high-specification land-mobile
radio equipment for professional radio users primarily in
government, public safety and military applications. These products
have more extensive features and capabilities than those offered in
the RELM line. Our P-25 digital products are marketed under the BK
Radio brand, which includes the next-generation KNG and KNG2
product lines. RELM-branded products provide basic yet feature-rich
and reliable two-way communications for commercial and industrial
concerns, such as hotels, construction firms, schools and
transportation services. Typically, these users are not radio
professionals and require easy, fast and affordable communication
among a defined group of users.
We
believe that we provide superior value to a wide array of customers
with demanding requirements, including, for example, emergency
response, public safety, homeland security and military customers
of federal and state government agencies, as well as various
commercial enterprises. Our two-way radio products excel in
applications with harsh and hazardous conditions. They provide
high-specification performance, durability and reliability at a
lower cost relative to comparable offerings.
We were
incorporated under the laws of the State of Nevada on October 24,
1997. We are the resulting corporation from the reincorporation
merger of our predecessor, Adage, Inc., a Pennsylvania corporation,
which reincorporated from Pennsylvania to Nevada effective as of
January 30, 1998. Our principal executive offices are located at
7100 Technology Drive, West Melbourne, Florida 32904 and our
telephone number is (321) 984-1414.
1
Available
Information
Our
Internet website address is www.relm.com. We make available on our
Internet website free of charge our Annual Reports on Form 10-K,
Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy
statements and amendments to these reports as soon as practicable
after we file or furnish such material with or to the SEC. In
addition, our Code of Business Conduct and Ethics, Code of Ethics
for the CEO and Senior Financial Officers, Audit Committee Charter,
Compensation Committee Charter, Nominating and Governance Committee
Charter and other corporate governance policies are available on
our website, under “Resources.” The information
contained on our website is not incorporated by reference in this
report. A copy of any of these materials may be obtained, free of
charge, upon request from our investor relations department. All
reports that the Company files with or furnishes to the SEC also
are available free of charge via the SEC’s website at
http://www.sec.gov. The public may read and copy any materials
filed by us with the SEC at the SEC’s Public Reference Room,
100 F Street, N.E., Washington, D.C. 20549, on official business
days during the hours of 10 a.m. to 3 p.m., or by calling the SEC
at 1-800-SEC-0330.
Significant
Events of 2016
The
Company received awards under the U.S. Department of Homeland
Security (“DHS”) Tactical Communications Contract
totaling approximately $26.2 million for portable radios,
repeaters, accessories and service in September 2015. The awards
were comprised of a one-year base term that concluded on September
28, 2016, and four one-year options. The first option year was
partially exercised immediately, and the remainder of the first
option year was exercised in June 2016. Approximately $15.5
million, or almost 60% of the total amount, was specified in
delivery orders. Shipments under the delivery orders were completed
in 2016. The contract term has been extended for one additional
year to September 27, 2017, but the exercise, if any, of the
subsequent option years is not specified or
guaranteed.
In
February 2016, the Company received an additional order from the
TSA totaling $4.2 million for accessories. This order was fulfilled
as of September 30, 2016.
In May
2016, the Company announced and began implementing a capital return
program that included a stock repurchase program and a quarterly
dividend. Under the program, the Company’s Board of Directors
approved the repurchase of up to 500,000 shares of the
Company’s common stock, from time to time, pursuant to a
stock repurchase plan in conformity with the provisions of Rule
10b5-1 and Rule 10b-18 promulgated under the Securities Exchange
Act of 1934, as amended. The repurchase program does not establish
a termination date. Pursuant to the program, the
Company’s Board of Directors approved two quarterly dividends
of $0.09 per share of the Company’s common stock, one of
which was paid on June 17, 2016 to shareholders of record as of
June 1, 2016, and the other of which was paid on September 16, 2016
to shareholders of record as of September 1, 2016. Also, on
December 7, 2016, the Company’s Board of Directors approved a
quarterly dividend of $0.09 per share of the Company’s common
stock, which was paid on January 13, 2017 to shareholders of record
as of January 3, 2017.
Industry
Overview
Land
mobile radio (“LMR”) communications consist of
hand-held (portable) and vehicle mounted (mobile) two-way radios
commonly used by the public safety sector (e.g., police, fire, and
emergency responders), military and commercial business concerns
(e.g., corporate disaster recovery, hotels, airports, farms,
transportation service providers, and construction firms), and
government agencies within the United States and abroad. LMR
systems are constructed to meet an organization’s specific
communications needs. The cost of a complete system can vary widely
depending on the size and configuration. Likewise, the cost of
radio sets can range from under $100 for a basic analog portable,
to thousands of dollars for a fully featured P-25 digital unit.
Typically, there are no recurring airtime usage charges.
Accordingly, LMR usage patterns are considerably different from
those for cellular and other wireless communications tools. LMR
usage often consists of direct radio-to-radio communications
outside of the range of a communication network with one to many
members of a group. Also, LMR functions with push-to-talk operation
(i.e., no call set-up or dialing a phone number is required). LMR
communications often consist of multiple short (5 second)
transmissions between multiple members of a group. For the public
safety sector, this is known as Mission Critical Voice
(“MCV”). The average useful life of a unit can vary,
depending upon the application in which the unit is deployed and
its handling.
2
LMR
systems are the most widely-used and longest-used form of wireless
dispatch communications in the United States, having been first
placed in service in 1921. LMR was initially used almost
exclusively by law enforcement, and all radio communications were
transmitted in an analog format. Analog transmissions typically
consist of a voice or other signal modulated directly onto a
continuous radio carrier wave. Over time, advances in technology
decreased the cost of LMR products and increased their popularity
and usage by businesses and other agencies. Responding to the
growing usage, additional radio frequency spectrum was allocated by
the Federal Communications Commission (“FCC”) for LMR
use.
More
recently, growth of the LMR industry has slowed, reflecting several
factors:
●
LMR is a mature
industry, having been in existence for over 90 years;
●
some LMR users are
in mature industry segments that have experienced slow growth
rates;
●
funding and budgets
for government and public safety agencies have been constrained;
and
●
limited
availability of radio frequency spectrum, which hinders existing
users in expanding their systems and potential new users from
establishing new systems.
Years
ago, as a result of the limited spectrum availability, the FCC
mandated that new LMR equipment utilize technology that is more
spectrum-efficient. This effectively meant that the industry had to
migrate to digital technology. Responding to the mandate, the APCO,
the NASTD, the U.S. Federal Government and the Telecommunications
Industry Association (“TIA”), in concert with several
LMR manufacturers, including RELM, recommended a standard for
digital LMR devices that would meet the FCC spectrum-efficiency
requirements and provide solutions to several problems experienced
primarily by public safety users. The standard is called P-25. The
primary objectives of P-25 are to: (i) allow effective and reliable
communication among users of compliant equipment, regardless of its
manufacturer, known as interoperability, (ii) maximize radio
spectrum efficiency and (iii) promote competition among LMR
providers through an open system architecture.
Although the FCC
does not require public safety agencies or any radio users to
purchase P-25 equipment or otherwise adopt the standard, compliance
with the standard is a primary consideration for government and
public safety purchasers. Users of nationally available 700 MHz
frequencies designed for interoperability are required to use P-25
equipment. In addition, U.S. Federal Government grant programs that
provide assistance in funding for state and local agencies to
purchase interoperable communications equipment for first
responders strongly encourage compliance to P-25 standards.
Accordingly, although funding for LMR purchases by many government
agencies is limited, we believe that, as users upgrade equipment to
achieve interoperability and comply with FCC narrow-banding
mandates, demand for P-25 equipment will continue to grow.
Additionally, the P-25 standard has also been widely adopted in
other countries. The migration to P-25 equipment is primarily
limited to government and public safety agencies. Radio users in
the business and industrial market utilize alternative digital
technologies (e.g., Digital Mobile Radio) and analog LMR
products.
Presently, the
market is dominated by one supplier, Motorola Solutions, Inc.
However, the open architecture of the P-25 standard is designed to
eliminate the ability of one or more suppliers to lock out
competitors. Formerly, because of proprietary characteristics
incorporated in many LMR systems, a customer was effectively
precluded from purchasing additional LMR products from a supplier
other than the initial supplier of the system. Additionally, the
system infrastructure technology was prohibitive for smaller
suppliers to develop and implement. P-25 provides an environment in
which users will increasingly have a wider selection of LMR
suppliers, including smaller suppliers such as RELM.
Description
of Products and P-25 CAP Compliance
We
design, manufacture, and market wireless communications equipment
consisting of two-way land mobile radios, repeaters, base stations
and related components and subsystems. We do not provide complete,
integrated, communications systems and infrastructure. Two-way land
mobile radios can be units that are hand-held (portable) or
installed in vehicles (mobile). Repeaters expand the range of
two-way land mobile radios, enabling them to communicate over a
wider area. Base station components and subsystems are installed at
radio transmitter sites to improve performance by enhancing the
signal, reducing or eliminating signal interference and enabling
the use of one antenna for both transmission and
reception.
3
We
employ both analog and digital technologies in our products. Our
digital products are compliant with P-25 specifications. Our P-25
digital products and our analog products function in the VHF
(136MHz – 174MHz), UHF (380MHz – 470MHz, 450MHz –
520MHz), and 700-800 MHz.
Our
P-25 KNG and KNG2 Series mobile and portable digital radios have
been validated under the P-25 CAP as being P-25 compliant and
interoperable with the communications network infrastructure of six
of our competitors. Since we do not provide our own communications
network infrastructure, we believe CAP validation provides
confidence for federal, state and local emergency response agencies
that our products are a viable and attractive alternative for use
on the infrastructure of our competitors.
The
P-25 CAP is a voluntary program that allows land mobile radio
equipment suppliers to formally demonstrate their products’
compliance with P-25 requirements. The purpose of the program is to
provide federal, state and local emergency response agencies with
evidence that the communications equipment they are purchasing
satisfies P-25 standards for performance, conformance and
interoperability. The program is a result of legislation passed by
the U.S. Congress to improve communication interoperability for
first responders and is a partnership of the DHS’s Command,
Control and Interoperability Division, the National Institute of
Standards and Technology, radio equipment manufacturers and the
emergency response community.
Description
of Markets
Government and Public Safety Market
The
government and public safety market includes military, fire,
rescue, law enforcement, homeland security and emergency responder
personnel. In most instances, BK Radio-branded products serve this
market and are sold either directly to end-users or through two-way
communications dealers. Government and public safety sales
represented approximately 97%, 90% and 95% of our total sales for
2016, 2015 and 2014, respectively.
Government and
public safety users currently use products that employ either P-25
digital or analog technology. However, public safety users in
federal, state and local government agencies and certain other
countries are migrating to solely using digital P-25 products. The
evolution of the standard and compliant digital products is
explained in the “Industry Overview” section at the beginning of this
report.
Business and Industrial Market
This
market includes enterprises of all sizes that require fast and
affordable push-to-talk communication among a discrete group of
users, such as corporate disaster recovery, hotels, construction
firms, schools and transportation service providers. Users in this
market continue to predominantly utilize analog products. We offer
products to this market under the RELM brand name. Our sales in
this market may be direct to end-users or to dealers and
distributors who then resell the products. Our sales to this market
represented approximately 3%, 10% and 5% of our total sales for
2016, 2015 and 2014, respectively.
Engineering,
Research and Development
Our
engineering and product development activities are conducted by a
team of 27 employees combined with contract engineering resources.
Their primary development focus has been the design of our line of
next- generation P-25 digital products, the KNG and KNG2 Series,
and related capabilities. The first models in the KNG line were
introduced in 2008 and are included on our primary federal contract
vehicles. Subsequently, we added UHF and 700/800MHz products, as
well as P-25 Phase I FDMA (Frequency Division Multiple Access)
trunking and P-25 Phase II TDMA (Time Division Multiple Access)
trunking. The KNG2 Series was introduced in 2016. Our P-25 products
also provide encrypted operation, GPS location services and network
authentication services.
A
segment of our engineering team is responsible for product
specifications based on customer requirements and supervising
quality assurance activities. They also have primary responsibility
for applied engineering, production engineering and the
specification compliance of contract manufacturers.
For
2016, 2015 and 2014, our engineering and development expenses were
approximately $4.1 million, $3.6 million and
$3.7 million, respectively.
4
Intellectual
Property
We
presently have no United States patents in force. We hold several
trademarks related to the names “RELM” and “BK
Radio” and certain product names. We also rely on trade
secret laws and employee and third- party nondisclosure agreements
to protect our intellectual property rights.
Manufacturing
and Raw Materials
Our
manufacturing strategy is to utilize the highest quality and most
cost-effective resources available for every aspect of our
manufacturing. Consistent with that strategy, for many years we
have successfully utilized outside contract arrangements for
different segments of our manufacturing operations. These
arrangements, some of which are with offshore concerns, have been
managed and updated to meet our present requirements, and they
continue to be instrumental in controlling our product costs,
allowing us to be competitive and manage our gross
margins.
Contract
manufacturers produce various subassemblies and products on our
behalf. Generally, the contract manufacturers procure raw materials
from RELM-approved sources and complete manufacturing activities in
accordance with our specifications. Manufacturing agreements and
purchase orders govern the business relationship with the contract
manufacturers. These agreements and purchase orders have various
terms and conditions and may be renewed or modified upon agreement
by both parties. Their scope may also be expanded to include new
products in the future.
We plan
to continue utilizing contract manufacturing where it furthers our
business objectives. This strategy allows us to focus on our core
technological competencies of product design and development, and
to reduce the substantial capital investment required to
manufacture our products. We also believe that our use of
experienced, high-volume manufacturers will provide greater
manufacturing specialization and expertise, higher levels of
flexibility and responsiveness, and faster delivery of product, all
of which contribute toward product cost control. To ensure that
products manufactured by others meet our quality standards, our
production and engineering team works closely with our ISO 9002
industry-qualified contract manufacturers in all key aspects of the
production process. We establish product specifications, select the
components and, in some cases, the suppliers. We retain all
document control. We also work with our contract manufacturers to
improve process control and product design and conduct periodic
on-site inspections.
We rely
upon a limited number of both domestic and foreign suppliers for
several key products and components. Approximately 70% of our
material, subassembly and product procurements in 2016 were sourced
from three suppliers. We place purchase orders from time to time
with these suppliers and have no guaranteed supply arrangements. In
addition, certain components are obtained from single sources.
During 2016, 2015 and 2014, our operations were not materially
impaired due to delays from single-source suppliers. However, the
absence of a single-source component could potentially delay the
manufacture of finished products. We manage the risk of such delays
by securing secondary sources where possible and redesigning
products in response to component shortages or obsolescence. We
strive to maintain strong relationships with all our suppliers. We
anticipate that the current relationships, or others that are
comparable, will be available to us in the future.
Seasonal
Impact
We may
experience seasonality in our quarterly results, in part, due to
governmental customer spending patterns that are influenced by
government fiscal year budgets and appropriations. We may also
experience seasonality in our quarterly results, in part, due to
our concentration of sales to federal and state agencies that
participate in wildland fire-suppression efforts, which are
typically the greatest during the summer season when forest fire
activity is heightened. In some years, these factors may cause an
increase in sales for the second and third quarters compared with
the first and fourth quarters of the same fiscal year. Such
increases in sales may cause quarterly variances in our cash flow
from operations and overall financial results.
Significant
Customers
Sales
to the U.S. Government represented approximately 58%, 36% and 40%
of our total sales for the years ended December 31, 2016, 2015 and
2014, respectively. These sales were primarily to various
government agencies, including those within the DHS, the U.S.
Department of Defense (“DOD”), the U.S. Forest Service
(“USFS”) and the U.S. Department of the Interior
(“DOI”).
5
Backlog
Our
backlog of unshipped customer orders was approximately $6.6 million
and $20.3 million as of December 31, 2016 and 2015,
respectively. The decrease is attributed primarily to fulfillment
of previously announced orders from the DHS.
Competition
We
compete with other domestic and foreign companies primarily in the
North American market, but also internationally. One dominant
competitor, Motorola Solutions, Inc., is estimated to have well in
excess of half the market for LMR products. We compete by
capitalizing on our advantages and strengths, which include price,
product quality and customer responsiveness.
Government Regulation
We are
subject to various international and U.S. federal, state and local
laws affecting our business. Any finding that we have been or
are in noncompliance with such laws could result in, among other
things, governmental penalties. Further, changes in existing
laws or new laws may adversely affect our business and could also
have the effect of limiting capital expenditures by our customers,
which could have a material adverse effect on our business,
financial condition and results of operations.
In
connection with our U.S. government contracts, we are subject to
the U.S. Federal Government procurement regulations that may
provide the buyer with the right to audit and review our
performance, as well as our compliance with applicable laws and
regulations. In addition, our business is subject to
government regulation based on the products we sell that may be
subject to government requirements, such as obtaining an export
license or end-user certificate from the buyer, in certain
circumstances. If a government audit uncovers improper
or illegal activities, or if we are alleged to have violated any
laws or regulations governing the products we sell under our
government contracts, we may be subject to civil and criminal
penalties and administrative sanctions, including termination of
contracts, forfeiture of profits, suspension of payments, fines and
suspension or debarment from doing business with U.S. Federal
Government agencies.
Our
products are regulated by the FCC in the U.S. and similar agencies
in other countries where we offer our products. Consequently,
we and our customers could be positively or negatively affected by
the rules and regulations adopted from time to time by the FCC or
regulatory agencies in other countries. For example, our
wireless communications products, including two-way land mobile
radios, are subject to FCC regulations related to radio frequency
spectrum. As a result of limited spectrum availability, the
FCC has mandated that new land mobile radio equipment utilize
technology that is more spectrum-efficient, which effectively meant
that the industry had to migrate to digital technology. These
types of mandates may provide us with new business opportunities or
may require us to modify all or some of our products so that they
can continue to be manufactured and marketed, which may lead to an
increase in our capital expenditures and research and development
expenses.
As a
public company, we are also subject to regulations of the SEC and
the stock exchange on which we are listed (NYSE MKT).
Some of
our operations use substances regulated under various federal,
state, local and international laws governing the environment and
worker health and safety, including those governing the discharge
of pollutants into the ground, air and water, the management and
disposal of hazardous substances and wastes and the cleanup of
contaminated sites, as well as relating to the protection of the
environment. Certain of our products are subject to various
federal, state, local and international laws governing chemical
substances in electronic products. During 2016, compliance with
these U.S. federal, state and local and international laws did not
have a material effect on our capital expenditures, earnings or
competitive position.
Employees
As of
December 31, 2016, we had 107 full-time employees, most of whom are
located at our West Melbourne, Florida facility; 52 of these
employees are engaged in direct manufacturing or manufacturing
support, 27 in engineering, 18 in sales and marketing and 10 in
headquarters, accounting and human resources activities. Our
employees are not represented by any collective bargaining
agreements, nor has there ever been a labor-related work stoppage.
We believe our relations with our employees are good.
6
Information
Relating to Domestic and Export Sales
The
following table summarizes our sales of LMR products by customer
location:
|
|
2016
|
2015
|
2014
|
|
|
(in
Millions)
|
||
|
United
States
|
$46.3
|
$25.1
|
$30.1
|
|
International
|
4.4
|
4.6
|
0.9
|
|
Total
|
$50.7
|
$29.7
|
$31.0
|
Additional
financial information is provided in the Consolidated Financial
Statements at pages F-1 through F-20.
7
Various portions of this report contain forward-looking statements
that involve risks and uncertainties. Actual results, performance
or achievements could differ materially from those anticipated in
these forward-looking statements as a result of certain risk
factors, including those set forth below and elsewhere in this
report. We undertake no obligation to revise or update any
forward-looking statements contained herein to reflect subsequent
events or circumstances or the occurrence of unanticipated
events.
We depend on the success of our LMR product line
We
currently depend on our LMR products as our sole source of sales. A
decline in the price of and/or demand for LMR products, as a result
of competition, technological change, the introduction of new
products by us or others or a failure to manage product transitions
successfully could have a material adverse effect on our business,
financial condition and results of operations. In addition, our
future success will largely depend on the successful introduction
and sale of new digital LMR products. Even if we successfully
develop these products, the development of which is a complex and
uncertain process requiring innovation and investment, they may not
achieve market acceptance, which could have a material adverse
effect on us.
We are engaged in a highly competitive industry
We face
intense competition from other LMR suppliers, and the failure to
compete effectively could materially and adversely affect our
market share, financial condition and results of operations. The
largest supplier of LMR products in the world, Motorola Solutions,
Inc., currently is estimated to have well in excess of half the
market for LMR products. This supplier is also the world’s
largest supplier of P-25 products. Some of our competitors are
significantly larger and have longer operating histories, greater
name recognition, larger customer bases and significantly greater
financial, technical and marketing resources than we have. Some
also have established reputations for success in developing and
supplying LMR products, including providing complete, integrated,
communications systems and infrastructure. We do not provide
complete, integrated, communications systems and infrastructure.
These advantages may allow them:
●
to be more
attractive to customers who desire a single-source supplier of LMR
products;
●
to respond more
quickly to new or emerging technologies and changes in customer
requirements, which may render our products obsolete or less
marketable;
●
to engage in more
extensive research and development;
●
to undertake more
far-reaching marketing campaigns;
●
to be able to take
advantage of acquisitions and other opportunities;
●
to adopt more
aggressive pricing policies; and
●
to be more
attractive to potential employees and strategic
partners.
Many of
our competitors have established extensive networks of sales
locations and multiple distribution channels that are more
extensive than ours. We may not be able to compete successfully and
competitive pressures may materially and adversely affect our
business, results of operations and financial
condition.
An
increase in the demand for P-25 products could benefit competitors
that are better financed and positioned to meet such demand. P-25
products have been brought to the market by an increasing number of
our competitors. Our first P-25 portable radio was brought to
market in 2003, and in recent years we introduced two new lines of
P-25 products, the KNG and KNG2 Series. Bringing such products to
market and achieving a significant market penetration for them will
continue to require time and expenditures of funds. We may be
unsuccessful in developing and marketing, on a timely basis, fully
functional product enhancements or new products that respond to
these and other technological advances, and our new products may
not be accepted by customers. An inability to successfully develop
and/or market products could have a material adverse effect on our
business, results of operations and financial
condition.
8
Our industry is characterized by rapidly changing technology and
our success is dependent on our ability to adapt to such
changes
Our
business could suffer if we are unable to keep pace with rapid
technological changes and product development in our industry. The
market for our LMR products is characterized by ongoing
technological development, evolving industry standards and frequent
product introductions. The LMR industry is experiencing a
transition from analog LMR products to digital LMR products. In
addition, the APCO P-25 standard is being increasingly adopted. If
we are unable to successfully keep up with these changes, our
business, financial condition and results of operations could be
materially adversely affected.
We depend heavily on sales to the U.S. Government
We are
subject to risks associated with our reliance on sales to the U.S.
Government. For the year ended December 31, 2016, approximately 58%
of our sales were to agencies and departments of the U.S.
Government. These sales were primarily to agencies of the DHS, DOD,
USFS and DOI. We may be unable to maintain this government
business. Our ability to maintain our government business will
depend on many factors outside of our control, including
competitive factors, changes in government personnel making
contract decisions, spending limits and political factors. The loss
of sales to the U.S. Government would have a material adverse
effect on our business, financial condition and results of
operations.
In
addition, most U.S. Government customers award business through a
competitive bidding process, which results in greater competition
and increased pricing pressure. The bidding process involves
significant cost and managerial time to prepare bids for contracts
that may not be awarded to us. Even if we are awarded contracts, we
may fail to accurately estimate the resources and costs required to
fulfill a contract, which could negatively impact the profitability
of any contract award to us. In addition, following a contract
award, we may experience significant expense or delay, contract
modification or contract rescission as a result of customer delay
or our competitors protesting or challenging contracts awarded to
us in competitive bidding. Any of these events could have a
material adverse effect on our business, financial condition and
results of operations.
Our business is heavily dependent on U.S. Government contracts,
which are highly regulated and subject to terminations and
oversight audits by U.S. Government representatives that could
result in adverse findings and negatively impact our
business
Our
U.S. Government business is subject to specific procurement
regulations with numerous compliance requirements. These
requirements, although customary in U.S. Government contracting,
increase our performance and compliance costs. These costs may
increase in the future, thereby reducing our margins, which could
have an adverse effect on our financial condition. Failure to
comply with these regulations could lead to suspension or debarment
from U.S. Government contracting or subcontracting for a period of
time. Among the causes for debarment are violations of various laws
or policies, including those related to procurement integrity, U.S.
Government security regulations, employment practices, protection
of criminal justice data, protection of the environment, accuracy
of records, proper recording of costs, foreign corruption and the
False Claims Act.
Generally, U.S.
Government contracts are subject to oversight audits by U.S.
Government representatives and could result in adjustments to our
contracts. Any costs found to be improperly allocated to a specific
contract or grant may not be allowed, and such costs already
reimbursed to us may have to be refunded. Future audits and
adjustments, if required, may materially reduce our revenues or
profits upon completion and final negotiation of audits. Negative
audit findings could also result in investigations, termination of
a contract, forfeiture of profits or reimbursements, suspension of
payments, fines and suspension or prohibition from doing business
with the U.S. Government. All contracts with the U.S. Government
are subject to cancellation at the convenience of the U.S.
Government.
In
addition, contacts with government officials and participation in
political activities are areas that are tightly controlled by
federal, state, local and international laws. Failure to comply
with these laws could cost us opportunities to seek certain
government sales opportunities or even result in fines,
prosecution, or debarment.
9
Our business is subject to the economic and political risks of
manufacturing products in foreign countries
We
engage in business with manufacturers located in other countries.
Approximately 76.3% of our material, subassembly and product
procurements in 2016 were sourced internationally. Accordingly, we
are subject to special considerations and risks not typically
associated with companies operating solely in the United States.
These include the risks associated with the political, economic and
legal environments, among others, including the recent presidential
and congressional elections in the United States, which have
created uncertainty regarding international trade. Our business,
operating results and financial condition may be materially and
adversely affected by, among other things, changes in the general
political and social conditions in foreign countries in which we
maintain sourcing relationships, unfavorable changes in U.S. trade
legislation and regulations, the imposition of governmental
economic sanctions on countries in which we do business or other
trade barriers, threats of war, terrorism or governmental
instability, labor disruptions, currency controls, fluctuating
exchange rates with respect to contracts not denominated in U.S.
dollars, and unanticipated or unfavorable changes in government
policies with respect to laws and regulations, anti-inflation
measures and method of taxation. If we were unable to navigate
foreign regulatory environments, or if we were unable to enforce
our contract rights in foreign countries, our business could be
adversely impacted. Any of these events could interrupt our
manufacturing process and cause operational disruptions, increase
prices for manufacturing, reduce our sales or otherwise have an
adverse effect on our operating performance.
We carry substantial quantities of inventory, and inaccurate
estimates of necessary inventory could materially harm our
business, operating results and financial condition
We
carry a significant amount of inventory to service customer
requirements in a timely manner. If we are unable to sell this
inventory over a commercially reasonable time, in the future we may
be required to take inventory markdowns, which would reduce our net
sales and/or gross margins. In addition, it is critical to our
success that we accurately predict trends in customer demand,
including seasonal fluctuations, in the future and do not overstock
unpopular products or fail to sufficiently stock popular products.
Both scenarios could materially harm our business, operating
results and financial condition.
We enter into fixed-price contracts that could subject us to losses
in the event we fail to properly estimate our costs or hedge our
risks associated with currency fluctuations
We
sometimes enter into firm fixed-price contracts. If our initial
cost estimates are incorrect, we can lose money on these contracts.
Because certain of these contracts involve new technologies and
applications, require us to engage subcontractors and/or can last
multiple years, unforeseen events, such as technological
difficulties, fluctuations in the price of raw materials, problems
with our subcontractors or suppliers and other cost overruns, can
result in the contract pricing becoming less favorable or even
unprofitable to us and have an adverse impact on our financial
results. In addition, a significant increase in inflation rates or
currency fluctuations could have an adverse impact on the
profitability of longer-term contracts.
Our investment strategy may not be successful, which could
adversely impact our financial condition
We may
invest part of our cash balances in public companies. For example,
as of February 27, 2017, we have invested approximately $3.2
million to purchase approximately 1.8 million shares of the common
stock of Iteris, Inc. (NASDAQ: ITI). These types of investments are
more risky than holding our cash balances as bank deposits or, for
example, such conservative investments as treasury bonds or money
market funds. There can be no assurance that we will be able to
maintain or enhance the value or the performance of the companies
in which we have invested or in which we may invest in the future,
or that we will be able to achieve returns or benefits from these
investments. We may lose all or part of our investment relating to
such companies if their value decreases as a result of their
financial performance or for any other reason. If our interests
differ from those of other investors in companies over which we do
not have control, we may be unable to effect any change at those
companies. We are not required to meet any diversification
standards, and our investments may become concentrated. If our
investment strategy is not successful or we achieve less than
expected returns from these investments, it could have a material
adverse effect on us. The Board of Directors may also change our
investment strategy at any time, and such changes could further
increase our exposure, which could adversely impact
us.
10
Fundamental Global Investors, LLC, with its affiliates, is our
largest stockholder whose interests may differ from the interests
of our other stockholders
The
interests of Fundamental Global Investors, LLC may differ from the
interests of our other stockholders. Fundamental Global and its
affiliates, including Ballantyne Strong, Inc., of which Fundamental
Global is the largest stockholder, together hold approximately
32.9% of the Company’s outstanding shares of common stock.
Kyle Cerminara, Chief Executive Officer, Partner and Manager of
Fundamental Global Investors, LLC and Chairman and Chief Executive
Officer of Ballantyne Strong, Inc., serves on our Board of
Directors and chairs its newly-formed Executive Committee. In
addition, Lewis Johnson, President, Partner and Manager of
Fundamental Global Investors, LLC and a director of Ballantyne
Strong, Inc., serves on our Board of Directors. As a result of its
ownership position and Messrs. Cerminara’s and
Johnson’s positions with the Company, Fundamental Global has
the ability to exert significant influence over our policies and
affairs, including the power to impact the election of our
directors, and approval of any action requiring a stockholder vote,
such as amendments to our articles of incorporation, by-laws,
significant stock issuances, mergers and asset sales. Fundamental
Global may have interests that differ from those of our other
stockholders and may vote in a way with which our other
stockholders disagree and which may be adverse to their interests.
Fundamental Global’s significant ownership may also have the
effect of delaying, preventing or deterring a change of control of
the Company, could deprive our stockholders of an opportunity to
receive a premium for their common stock as part of a sale of the
Company and might ultimately affect the market price of our common
stock.
If we are unable to maintain our brand and reputation, our
business, results of operations and prospects could be materially
harmed
Our
business, results of operations and prospects depend, in part, on
maintaining and strengthening our brand and reputation for
providing high-quality products and services. Reputational value is
based in large part on perceptions. Although reputations may take
decades to build, any negative incidents can quickly erode trust
and confidence, particularly if they result in adverse publicity,
governmental investigations or litigation. If problems with our
products cause operational disruption or other difficulties, or
there are delays or other issues with the delivery of our products
or services, our brand and reputation could be diminished. Damage
to our reputation could also arise from actual or perceived legal
violations, product safety issues, data security breaches, actual
or perceived poor employee relations, actual or perceived poor
service, actual or perceived poor privacy practices, operational or
sustainability issues, actual or perceived ethical issues or other
events within or outside of our control that generate negative
publicity with respect to us. Any event that has the potential to
negatively impact our reputation could lead to lost sales, loss of
new opportunities and retention and recruiting difficulties. If we
fail to promote and maintain our brand and reputation successfully,
our business, results of operations and prospects could be
materially harmed.
We face a number of risks related to challenging economic
conditions
Current
economic conditions in the United States and elsewhere remain
uncertain. These challenging economic conditions could materially
and adversely impact our business, liquidity and financial
condition in a number of ways, including:
●
Potential deferment or
reduction of purchases by customers: Significant deficits
and limited appropriations confronting our federal, state and local
government customers may cause them to defer or reduce purchases of
our products. Furthermore, uncertainty about current and future
economic conditions may cause customers to defer purchases of our
products in response to tighter credit and decreased cash
availability.
●
Negative impact from
increased financial pressures on third-party dealers, distributors
and suppliers: We make sales to certain of our customers
through third-party dealers and distributors. If credit pressures
or other financial difficulties result in insolvencies of these
third parties and we are unable to successfully transition the end
customers to purchase our products from other third parties, or
directly from us, it could materially and adversely impact our
operating results and financial condition. Challenging economic
conditions may also impact the financial condition of one or more
of our key suppliers, which could negatively affect our ability to
secure product to meet our customers’ demands.
●
Limited access by us to
credit and capital: Although we do not anticipate needing
additional capital in the near term, the credit markets may limit
our access to credit and impair our ability to raise capital, if
needed, on acceptable terms or at all.
We depend on a limited number of manufacturers and on a limited
number of suppliers of components to produce our products and the
inability to obtain adequate and timely delivery of supplies and
manufactured products could have a material adverse effect on
us
We
contract with manufacturers to produce portions of our products,
and our dependence on a limited number of contract manufacturers
exposes us to certain risks, including shortages of manufacturing
capacity, reduced control over delivery schedules, quality
assurance, production yield and costs. If any of our manufacturers
terminate production or cannot meet our production requirements, we
may have to rely on other contract manufacturing sources or
identify and qualify new contract manufacturers. The lead-time
required to qualify a new manufacturer could range from
approximately two to six months. Despite efforts to do so, we may
not be able to identify or qualify new contract manufacturers in a
timely and cost-effective manner, and these new manufacturers may
not allocate sufficient capacity to us in order to meet our
requirements. Any significant delay in our ability to obtain
adequate quantities of our products from our current or alternative
contract manufacturers could have a material adverse effect on our
business, financial condition and results of
operations.
In
addition, our dependence on limited and sole source suppliers of
components involves several risks, including a potential inability
to obtain an adequate supply of components, price increases, late
deliveries and poor component quality. Approximately 70% of our
material, subassembly and product procurements in 2016 were sourced
from three suppliers. We place purchase orders from time to time
with these suppliers and have no guaranteed supply arrangements.
Disruption or termination of the supply of these components could
delay shipments of our products. The lead-time required for orders
of some of our components is as much as six months. In addition,
the lead-time required to qualify new suppliers for our components
is as much as six months. If we are unable to accurately predict
our component needs, or if our component supply is disrupted, we
may miss market opportunities by not being able to meet the demand
for our products. This may damage our relationships with current
and prospective customers and, thus, have a material adverse effect
on our business, financial condition and results of
operations.
We may not be able to manage our growth
Acquisitions and
other business transactions may disrupt or otherwise have a
negative impact on our business and results of operations. We do
not have any acquisitions currently pending, and there can be no
assurance that we will complete any future acquisitions or other
business transactions or that any such transactions which are
completed will prove favorable to our business. We intend to seek
stockholder approval for any such transactions only when so
required by applicable law or regulation. Any acquisitions of
businesses and their respective assets also involve the risks that
the businesses and assets acquired may prove to be less valuable
than we expect and we may assume unknown or unexpected liabilities,
costs and problems. We hope to grow rapidly, and the failure to
manage our growth could materially and adversely affect our
business, operations and financial condition. Our business plan
contemplates, among other things, leveraging our products and
technology for growth in our customer base and sales. This growth,
if it materializes, could significantly challenge our management,
employees, operations and financial capabilities. In the event of
this expansion, we have to continue to implement and improve our
operating systems and to expand, train, and manage our employee
base. If we are unable to manage and integrate our expanding
operations effectively, our business, results of operations and
financial condition could be materially and adversely
affected.
Retention of our executive officers and key personnel is critical
to our business
The
efforts of our President, Chief Financial Officer and Chief
Technology Officer, as well as other key executives and employees,
are critical to our success. We do not have employment agreements
with these individuals, and we cannot be sure that we will retain
their services. The loss of services from any of our executive
officers or these other key employees due to any reason whatsoever
could have a material adverse effect on our business, financial
condition and results of operations.
11
Our
success is also dependent upon our ability to hire and retain
qualified operations, development and other personnel. Competition
for qualified personnel in our industry is intense, and we may be
unable to hire or retain necessary personnel. The inability to
attract and retain qualified personnel could have a material
adverse effect on our business, financial condition and results of
operations.
We rely on a combination of contract, trademark and trade secret
laws to protect our intellectual property rights, and failure to
effectively utilize or successfully assert these rights could
negatively impact us
Currently, we hold
no U.S. patents. We hold several trademarks related to the names
“RELM” and “BK Radio” and certain product
names. As part of our confidentiality procedures, we generally
enter into nondisclosure agreements with our employees,
distributors and customers and limit access to and distribution of
our proprietary information. We also rely on trade secret laws to
protect our intellectual property rights. There is a risk that we
may be unable to prevent another party from manufacturing and
selling competing products or otherwise violating our intellectual
property rights. Our intellectual property rights, and any
additional rights we may obtain in the future, may be invalidated,
circumvented or challenged in the future. It may also be
particularly difficult to protect our products and intellectual
property under the laws of certain countries in which our products
are or may be manufactured or sold. Our failure to perfect or
successfully assert intellectual property rights could harm our
competitive position and could negatively impact us.
Rising health care costs may have a material adverse effect on
us
The
costs of employee health care insurance have been increasing in
recent years due to rising health care costs, legislative changes
and general economic conditions. We cannot predict what other
health care programs and regulations ultimately will be implemented
at the federal or state level or the effect of any future
legislation or regulation in the United States on our business and
results of operations. In addition, we cannot predict when or if
Congress will repeal and/or replace certain health care programs
and regulations at the federal level and the impact such changes
would have on our business. A continued increase in health care
costs could have a material adverse effect on us.
The insurance that we maintain may not fully cover all potential
exposures
We
maintain property, business interruption and casualty insurance,
but such insurance may not cover all risks associated with the
hazards of our business and is subject to limitations, including
deductibles and maximum liabilities covered. We are potentially at
risk if one or more of our insurance carriers fail. Additionally,
severe disruptions in the domestic and global financial markets
could adversely impact the ratings and survival of some insurers.
In the future, we may not be able to obtain coverage at current
levels, and our premiums may increase significantly on coverage
that we maintain.
Our stock price is vulnerable to significant fluctuations,
including due to our fluctuating quarterly operating
results
Our
quarterly operating results may fluctuate significantly from
quarter to quarter and may be below the expectations of the
investment community, resulting in volatility for the market price
for our common stock. Other factors affecting the volatility of our
stock price include:
●
future
announcements concerning us or our competitors;
●
the announcement or
introduction of technological innovations or new products by us or
our competitors;
●
changes in product
pricing policies by us or our competitors;
●
changes in earnings
estimates by us or our competitors or by securities
analysts;
●
additions or
departures of our key personnel; and
●
sales of our common
stock.
In
addition, the stock market is subject to price and volume
fluctuations affecting the market price for the stock of many
companies generally, which fluctuations often are unrelated to
operating performance.
12
Natural disasters, acts of war or terrorism and other catastrophic
events beyond our control could have a material adverse effect on
our operations and financial condition
The
occurrence of one or more natural disasters, such as fires,
hurricanes, tornados, tsunamis, floods and earthquakes;
geo-political events, such as civil unrest in a country in which
our suppliers or manufacturers are located, or acts of war or
terrorism (wherever located around the world) or military
activities disrupting transportation, communication or utility
systems or otherwise causing damage to our business, employees,
suppliers, manufacturers and customers; or other highly disruptive
events, such as nuclear accidents, pandemics, unusual weather
conditions or cyber attacks, could have a material adverse effect
on our business, operations and financial condition. Such events
could result, among other things, in operational disruptions,
physical damage to or destruction or disruption of one or more of
our properties or properties used by third parties in connection
with the supply of products or services to us, the lack of an
adequate workforce in parts or all of our operations and
communications and transportation disruptions. These factors could
also cause consumer confidence and spending to decrease or result
in increased volatility in the United States and global financial
markets and economy. Such occurrences could have a material adverse
effect on us and could also have indirect consequences, such as
increases in the costs of insurance, if they result in significant
loss of property or other insurable damage.
The availability of our credit facility is conditioned upon our
being in compliance with certain covenants
We have
a $1.0 million credit facility with Silicon Valley Bank
(“SVB”). As of December 31, 2016 and as of the date of
this report, there were no borrowings outstanding under the
facility. The loan and security agreement, as amended, governing
the credit facility contains certain financial maintenance and
other covenants. Failure to comply with any of these covenants
would constitute an event of default that would permit SVB to
accelerate repayment of any outstanding borrowings at the time of
occurrence. We are currently in compliance with all covenants.
However, there is no assurance that we will be able to comply with
the covenants in the future or, in the event we fail to do so, that
we will be able to either obtain a waiver from SVB or refinance the
credit facility in a timely manner on acceptable terms or at
all.
A security breach or other significant disruption of our
information technology systems, or those of our distributors,
manufacturers, suppliers and other partners, caused by cyber attack
or other means, could have a negative impact on our operations,
sales and results of operations
Our
information technology systems, and those of our distributors,
manufacturers, suppliers and other partners, are potentially
vulnerable to damage, unauthorized access or interruption from a
variety of sources, including, but not limited to, continually
evolving cyber attacks (including social engineering and phishing
attempts), cyber intrusion, computer viruses, security breach,
energy blackouts, natural disasters, terrorism, sabotage, war and
telecommunication failures. Cyber attacks are rapidly evolving and
becoming increasingly sophisticated. It is possible that computer
hackers and others might compromise our security measures, or
security measures of those parties that we do business with now or
in the future, and obtain the personal information of our
customers, employees and partners or our business information. A
cyber attack or other significant disruption involving our
information technology systems or those of our distributors,
manufacturers, suppliers or other partners, could result in the
unauthorized release of proprietary, confidential or sensitive
information of ours or our customers. Such unauthorized access to,
or release of, this information could expose us to data loss, allow
others to unfairly compete with us, subject us to litigation,
government enforcement actions, regulatory penalties and costly
response measures, and could seriously disrupt our operations. Any
resulting negative publicity could also significantly harm our
reputation. Any or all of the foregoing could have a negative
impact on our business, financial condition, results of operations
and cash flow.
13
The risk of noncompliance with U.S. and foreign laws and
regulations applicable to us could materially adversely affect
us
Failure
to comply with government regulations applicable to our business
could result in penalties and reputational damage. Our products are
regulated by the FCC and otherwise subject to a wide range of
global laws. As a public company, we are also subject to
regulations of the SEC and the stock exchange on which we are
listed. These laws and regulations are complex, change frequently,
have tended to become more stringent over time and increase our
cost of doing business. Compliance with existing or future laws
could subject us to future costs or liabilities, impact our
production capabilities, constrict our ability to sell, expand or
acquire facilities, restrict what products and services we can
offer, and generally impact our financial performance. Failure to
comply with or to respond to changes in these requirements and
regulations could result in penalties on us, such as fines,
restrictions on operations or a temporary or permanent closure of
our facility. These penalties could have a material adverse effect
on our business, operating results and financial condition. In
addition, existing or new regulatory requirements or
interpretations could materially adversely impact us.
We may not be able to maintain our NYSE MKT listing
Our
common stock has been listed on the NYSE MKT since 2005. If we are
unable to satisfy the continued listing standards of the NYSE MKT,
which include, among others, minimum stockholders’ equity,
market capitalization, pre-tax income and per share sales price,
our common stock may be delisted. If our common stock is delisted,
we would be forced to list our common stock on the OTC Bulletin
Board or some other quotation medium, depending on our ability to
meet the specific requirements of those quotation systems. In that
case, we may lose some or all of our institutional investors, and
selling our common stock on the OTC Markets would be more difficult
because smaller quantities of shares would likely be bought and
sold and transactions could be delayed. These factors could result
in lower prices and larger spreads in the bid and ask prices for
shares of our common stock. If this happens, we will have greater
difficulty accessing the capital markets to raise any additional
necessary capital.
Any infringement claim against us could have a material adverse
effect on our business, results of operations and financial
condition
As the
number of competing products available in the market increases and
the functions of those products further overlap, the potential for
infringement claims may increase. Any such claims, with or without
merit, may result in costly litigation or require us to redesign
the affected product to avoid infringement or require us to obtain
a license for future sales of the affected product. Any of the
foregoing could damage our reputation and have a material adverse
effect upon our business, results of operations and financial
condition. Any litigation resulting from any such claim could
require us to incur substantial costs and divert significant
resources, including the efforts of our management and engineering
personnel.
We have deferred tax assets that we may not be able to utilize
under certain circumstances
If we
incur future operating losses, we may be required to provide some
or all of our deferred tax assets with a valuation allowance,
resulting in additional non-cash income tax expense. The change in
the valuation may have a material impact on future results. If we
do not achieve sufficient federal taxable income in future years to
utilize all or some of our net operating loss carryforwards
(“NOLs”), they will expire.
14
We may be unable to obtain components and parts that are verified
to be Democratic Republic of Congo (“DRC”)
conflict-free, which could result in reputational
damage
The
Dodd-Frank Wall Street Reform and Consumer Protection Act includes
disclosure requirements regarding the use of tin, tantalum,
tungsten and gold (which are defined as “conflict
minerals”) in our products and whether these materials
originated from the DRC or an adjoining country. The SEC rules
necessitate a complex compliance process and related administrative
expense for a company once it determines a conflict mineral is
necessary to the functionality or production of a product that the
company manufactures or contracts to manufacture. Such companies
must then conduct a reasonable country of origin inquiry to
determine if the conflict minerals originated in the covered
countries and undertake due diligence on the source and chain of
custody in order to file a conflict minerals report with the SEC.
In addition to the increased administrative expense and management
involvement, there is a limited pool of suppliers who can provide
us “conflict-free” components, parts and manufactured
products, particularly since our supply chain is complex and, as a
purchaser of finished components, we are several layers removed
from the mining of any potential conflict minerals that may be
contained in our products. We may not be able to obtain
conflict-free products or supplies in sufficient quantities or at
competitive prices for our operations. We may also continue to be
unable to determine if our products are conflict-free. If we
discover that our products include minerals that have been
identified as “not found to be DRC conflict-free,” or
if we continue to be unable to determine whether such minerals are
included in our products, we may face reputational challenges with
our customers, stockholders and other stakeholders as a
result.
Future sales of shares of our common stock may negatively affect
our stock price and impair our ability to raise equity
capital
Approximately
5.4 million (40%) of our shares of outstanding common stock as
of December 31, 2016 are owned by certain of our executive officers
and directors and their affiliates, and may be resold publicly at
any time, subject to the volume and other restrictions under
Rule 144 of the Securities Act of 1933. Approximately 60% of
our outstanding shares of common stock as of December 31, 2016 are
freely tradable without restriction.
Sales
of substantial amounts of shares of our common stock, or even the
potential for such sales, could lower the market price of our
common stock and impair our ability to raise capital through the
sale of equity securities.
None.
We do
not own any real estate. We lease approximately 54,000 square feet
of industrial space at 7100 Technology Drive in West Melbourne,
Florida. The lease, as amended, has an expiration date of
June 30, 2020. Rental, maintenance and tax expenses for this
facility were approximately $475,000, $457,000 and $470,000 in
2016, 2015 and 2014, respectively. We also lease 8,100 square feet
of office space in Lawrence, Kansas, to accommodate a segment of
our engineering team. The lease has an expiration date of December
31, 2019. Rental, maintenance and tax expenses for this facility
were approximately $108,000 in 2016, $104,000 in 2015, and $100,000
in 2014.
From
time to time we may be involved in various claims and legal actions
arising in the ordinary course of our business. There were no
pending material claims or legal matters as of December 31,
2016.
Not
applicable.
15
Item 5. Market For
Registrant’s Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities
(a)
Market Information.
Our
common stock trades on the NYSE MKT under the symbol
“RWC.” The following tables set forth the high and low
sales price for our common stock for the quarterly periods for the
years ended December 31, 2016 and 2015, as reported by the NYSE
MKT.
Common
Stock
|
|
High
|
Low
|
|
2016
Quarter Ended
|
|
|
|
First
Quarter
|
$5.48
|
$3.70
|
|
Second
Quarter
|
5.81
|
4.26
|
|
Third
Quarter
|
5.83
|
4.74
|
|
Fourth
Quarter
|
5.55
|
4.55
|
|
|
High
|
Low
|
|
2015
Quarter Ended
|
|
|
|
First
Quarter
|
$6.27
|
$4.24
|
|
Second
Quarter
|
6.75
|
4.51
|
|
Third
Quarter
|
5.97
|
2.97
|
|
Fourth
Quarter
|
4.95
|
3.65
|
(b)
Holders.
On
February 24, 2017, there were 857 holders of record of our common
stock.
(c)
Dividends.
In May
2016, we announced and implemented a capital return program that
included a quarterly dividend. Pursuant to the program, our Board
of Directors approved two quarterly dividends of $0.09 per share of
our common stock, one of which was paid on June 17, 2016 to
shareholders of record as of June 1, 2016, and the other of which
was paid on September 16, 2016 to shareholders of record as of
September 1, 2016. Also, on December 7, 2016, our Board of
Directors approved a quarterly dividend of $0.09 per share of our
common stock, which was paid on January 13, 2017 to shareholders of
record as of January 3, 2017. No dividends were paid in 2015. The
declaration and payment of cash dividends, if any, is subject to
the discretion of our Board of Directors. The Board’s final
determination as to whether to declare and pay dividends is based
upon its consideration of our operating results, financial
condition and anticipated capital requirements, as well as such
other factors it may deem relevant. In addition, our credit
facility provides that the payment of cash dividends in any
twelve-month period may not exceed $5.0 million.
16
(d)
Issuer Purchases of Equity Securities.
|
Period
|
Total Number of
Shares Purchased
|
Average Price
Paid Per Share (1)
|
Total Number of
Shares Purchased as Part of Publicly Announced Plans or Programs
(2)
|
Maximum Number
of Shares that May Yet Be Purchased Under Publicly Announced Plans
or Programs (2)
|
|
10/01/16 –
10/31/16
|
3,700
|
$5.40
|
3,700
|
481,200
|
|
11/01/16 –
11/30/16
|
3,800
|
$5.16
|
3,800
|
477,400
|
|
12/01/16 –
12/31/16
|
7,822
|
$4.92
|
7,822
|
469,578
|
|
Total
|
15,322
|
$5.16
|
15,322
|
|
(1)
Average price paid
per share of common stock repurchased is the executed price,
including commissions paid to brokers.
(2)
On May 19, 2016,
the Company announced that on May 18, 2016, its Board of Directors
approved a repurchase program of up to 500,000 shares of the
Company’s common stock, from time to time, pursuant to a
stock repurchase plan in conformity with the provisions of Rule
10b5-1 and Rule 10b-18 promulgated under the Securities Exchange
Act of 1934, as amended. The repurchase program has no termination
date.
Not
required for smaller reporting companies.
Executive
Summary
Our
financial and operating results for 2016 improved significantly
from the prior year. Total sales increased over 70% and sales of
P-25 digital products increased almost 65%, which were the primary
factors that contributed to a comparative increase of 208% in
pre-tax income and positive cash flow from operations. Also, during
the year, we announced and implemented a capital return program. As
part of the program, we paid quarterly dividends of $0.09 per share
in June 2016 and September 2016 and repurchased 30,422 of our
shares. We also paid a dividend of $0.09 per share in January
2017.
Net
sales for 2016 increased 70.5% to approximately $50.7 million,
compared with approximately $29.7 million for 2015. Sales of P-25
digital products for 2016 increased 64.5% to approximately $33.2
million (65.5% of total sales), compared with approximately $20.2
million (68.0% of total sales) in 2015. The increase in both total
sales and sales of digital products was attributable primarily to
our contract with the TSA.
Gross
profit margin as a percentage of sales in 2016 was 33.7%, compared
with 41.3% for 2015. Our gross profit margin is primarily a
reflection of the mix of products sold, manufacturing volumes and
competitive factors. The change in gross profit margin was
attributed primarily to competitive pressures associated with the
TSA contract and delivery orders.
Selling, general
and administrative (“SG&A”) expenses for 2016
totaled approximately $12.8 million, or 25.2% of sales, compared
with $10.9 million, or 36.5% of sales for 2015. The increase was
attributed primarily to selling and engineering
expenses.
Pre-tax
income for 2016 increased 208.2% to approximately $4.3 million,
compared with $1.4 million for 2015. For 2016, we recognized income
tax expense of approximately $1.6 million, compared with $345,000
for 2015. Our income tax expense for both years is largely
non-cash, as a result of deferred items derived primarily from
NOLs.
17
Net
income for 2016 increased 158.3% to approximately $2.7 million
($0.20 per basic share and $0.19 per diluted share), compared with
approximately $1.0 million ($0.08 per basic and diluted share) for
2015.
As of
December 31, 2016, working capital totaled approximately $23.4
million, of which $14.4 million was comprised of cash and cash
equivalents and trade receivables. This compares with working
capital totaling approximately $23.9 million at year end 2015,
which included $8.8 million of cash and cash equivalents and trade
receivables. Also, as of December 31, 2016 and 2015, there were no
borrowings outstanding under our revolving credit
facility.
We may
experience seasonality in our quarterly results, in part, due to
governmental customer spending patterns that are influenced by
government fiscal year-end budgets and appropriations. We may also
experience seasonality in our quarterly results, in part, due to
our concentration of sales to federal and state agencies that
participate in wildland fire-suppression efforts, which are
typically the greatest during the summer season when forest fire
activity is heightened. In some years, these factors may cause an
increase in sales for the second and third quarters compared with
the first and fourth quarters of the same fiscal year. Such
increases in sales may cause quarterly variances in our cash flow
from operations and overall financial condition.
Results
of Operations
As an
aid to understanding our operating results, the following table
shows items from our consolidated statements of income expressed as
a percentage of sales:
|
|
Percent of
Sales
for Years Ended
December 31
|
|
|
|
2016
|
2015
|
|
Sales
|
100.0%
|
100.0%
|
|
Cost of
products
|
(66.3)
|
(58.7)
|
|
Gross
margin
|
33.7
|
41.3
|
|
Selling, general
and administrative expenses
|
(25.3)
|
(36.5)
|
|
Net other
expense
|
(0.0)
|
(0.1)
|
|
Income before
income tax expense
|
8.4
|
4.7
|
|
Income tax
expense
|
(3.1)
|
(1.2)
|
|
Net
income
|
5.3%
|
3.5%
|
Fiscal Year 2016 Compared With Fiscal Year 2015
Sales, net
For
2016, net sales increased 70.5% to approximately $50.7 million,
compared with approximately $29.7 million for 2015. Sales of P-25
digital products in 2016 increased 64.5% to approximately $33.2
million (65.5% of total sales), compared with approximately $20.2
million (68.0% of total sales) for 2015.
The
comparative increase in total sales and sales of digital products
for 2016 was attributed primarily to previously announced orders
from the TSA. Product shipments related to these orders were
completed during the year. Sales to customers other than the TSA
increased approximately 9.6% in 2016, compared with the previous
year. Key contributors to this growth included international sales
and sales to legacy domestic customers that were fueled, in part,
by wildland fire-suppression efforts.
Looking
forward, requests for quotes from prospective new customers and our
funnel of sales prospects is encouraging. We also believe that the
high-profile of the TSA contract award can serve to enhance our
reputation in pursuing other new opportunities. However, the timing
and size of orders from government agencies at all levels can be
unpredictable due to the influence of budgets and other
priorities.
18
Cost of Products and Gross Profit Margin
Cost of
products as a percentage of sales for 2016 was 66.3%, compared
with 58.7% in 2015. Gross profit margin as a percentage of sales
for 2016 was 33.7%, compared with 41.3% for 2015.
Our
cost of products and gross profit margin are derived primarily from
material, labor and overhead costs, product mix, manufacturing
volumes and pricing. The decline in gross profit margins for 2016
compared to the prior year is attributed primarily to competitive
factors associated with the TSA orders, which comprised a
significant portion of our sales for the year. The gross profit
margins realized from our product sales to customers other than TSA
were relatively consistent with the prior year.
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 gross margin
improvements can be realized by leveraging increased sales volumes
and manufacturing efficiencies. We may encounter product cost and
competitive pricing pressures in the future. However, the extent of
their impact on gross margins, if any, is uncertain.
Selling, General and Administrative Expenses
SG&A expenses
consist of marketing, sales, commissions, engineering, product
development, management information systems, accounting,
headquarters expenses and non-cash, share-based employee
compensation expense.
For
2016, SG&A expenses totaled approximately $12.8 million, or
25.3% of sales, compared with approximately $10.9 million, or
36.5% of sales, for 2015.
Engineering and
product development expenses for 2016 totaled approximately $4.1
million (8.1% of total sales), compared with approximately $3.6
million (12.2% of total sales) for the previous year. Additional
staff-related expenses and new product development projects were
partially offset by decreases in amortization of capitalized
software.
Marketing and
selling expenses for 2016 totaled approximately $5.4 million (10.6%
of sales), compared with $4.2 million (14.1% of sales) for the
prior year. The increase for 2016 was attributed primarily to sales
incentive compensation, which correlates to sales performance,
combined with initiatives to capture more new opportunities and
drive sales growth.
General
and administrative expenses for 2016 totaled approximately $3.3
million (6.5% of total sales), compared with approximately $3.0
million (10.2% of total sales) for 2015. The increase for the year
was related primarily to incentive compensation and other
headquarters expenses.
Operating Income
Operating income
for 2016 increased 199.7% to approximately $4.3 million (8.5% of
sales), compared with approximately $1.4 million (4.8% of sales)
for 2015. Increased operating income for the year was primarily the
product of sales growth, as offset by reduced gross profit margins
for the TSA delivery orders.
Interest Income/Expense, net
For
2016, we realized interest income of approximately $9,000 on our
cash balances, compared with approximately $1,000 for the prior
year.
We
incurred no interest expense in 2016 or 2015. Interest expense may
be incurred from time to time on outstanding borrowings under our
revolving credit facility. The interest rate on such revolving
credit facility as of December 31, 2016 was 4.00% per annum. This
rate is variable based on the lender’s prime rate plus 25
basis points. Effective as of December 28, 2016, we entered into a
sixth amendment to our Loan and Security Agreement with Silicon
Valley Bank primarily to extend the maturity date by approximately
a year, to December 27, 2017, and to reduce the maximum facility
amount to $1 million. Our revolving credit facility was not
utilized during 2016 or 2015.
19
Income Tax Expense
We
recorded income tax expense for 2016 of approximately $1.6 million,
compared with $345,000 for 2015. Our income tax expense is
primarily non-cash.
As of
December 31, 2016 and 2015, our net deferred tax assets totaled
approximately $3.4 million and $5.5 million, respectively, and are
primarily composed of NOLs, offset by deferred tax liabilities of
$1.8 million and $671,000, respectively, primarily derived from
depreciation and the unrealized gain on available-for-sale
securities. The NOLs total $1.6 million for federal and $11.9
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. The Company analyzes 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. Based on 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 state net deferred tax
assets recorded at December 31, 2016. Accordingly, we established a
valuation allowance totaling approximately $76,000 for the portion
of state 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 December 31, 2016.
Fiscal Year 2015 Compared With Fiscal Year 2014
Sales, net
For
2015, net sales totaled approximately $29.7 million, compared with
approximately $31.0 million for 2014. Sales of P-25 digital
products in 2015 totaled approximately $20.2 million (68.0% of
total sales), compared with approximately $22.4 million (72.3% of
total sales) for 2014.
The
comparative decline in both total sales and sales of digital
products was primarily attributable to weaker demand over the last
three quarters from federal, state and local public safety
agencies, including our legacy strongholds within the wildland
fire-suppression community. Despite the weaker demand, in September
2015, we received awards from the DHS totaling $26.2 million for
equipment to be deployed by the TSA at over 400 airports inside and
outside of the continental United States. Approximately $15.5
million, or almost 60% of the total amount, is specified in
delivery orders. No equipment under these awards was shipped during
2015 and, consequently, no sales revenue was recorded.
Cost of Products and Gross Profit Margin
Cost of
products as a percentage of sales for 2015 was 58.7%, compared
with 57.4% in 2014. Gross profit margin as a percentage of sales
for 2015 was 41.3%, compared with 42.6% for 2014.
Our
cost of products and gross profit margin are primarily related to
material, labor and overhead costs, product mix, manufacturing
volumes and pricing. In 2015, costs of products and the
corresponding gross margins reflected a less favorable mix of
product sales, including decreased sales of higher margin P-25
digital products. Costs of products and gross profit margins were
also unfavorably impacted by manufacturing volumes, resulting in
suboptimal utilization and absorption of our manufacturing and
support expenses.
We
utilized contract manufacturing relationships to maximize
production efficiencies and minimize material and labor
costs.
20
Selling, General and Administrative Expenses
SG&A expenses
consist of marketing, sales, commissions, engineering, product
development, management information systems, accounting,
headquarters expenses and non-cash, share-based employee
compensation expense.
For
2015, SG&A expenses totaled approximately $10.9 million, or
36.5% of sales, compared with approximately $11.0 million, or
34.4% of sales, for 2014.
Engineering and
product development expenses for 2015 totaled approximately $3.6
million (12.2% of sales), compared with approximately $3.7 million
(11.9% of sales) for 2014. The decrease was attributed primarily to
a decline in the amortization of capitalized software, as certain
projects were fully amortized. This decrease in amortization was
largely offset by additional engineering staff and
resources.
Marketing and
selling expenses for 2015 totaled approximately $4.2 million, or
14.1% of sales, compared with $3.9 million, or 12.5% of sales, for
2014. The increase was driven primarily by expenses associated with
staffing and other sales activities.
General
and administrative expenses for 2015 were materially unchanged,
totaling approximately $3.0 million, or 10.2% of sales, compared
with $3.1 million (10.0% of sales) for 2014.
Operating Income
Operating income
for 2015 totaled approximately $1.4 million (4.8% of sales),
compared with approximately $2.5 million (8.1% of sales) for 2014.
The comparative decrease in operating income for 2015 was primarily
the result of decreased total sales and sales of P-25 digital
products combined with increased SG&A expenses.
Interest Income/Expense, net
For
both 2015 and 2014, we earned approximately $1,000 in interest
income and incurred no interest expense. The interest rate on our
revolving credit facility as of December 31, 2015 was 4.00% per
annum. Effective on December 29, 2015, we entered into a fifth
amendment to our Loan and Security Agreement with Silicon Valley
Bank to, among other things, reduce the variable interest rate on
the revolving credit facility from the lender’s prime rate
plus 50 basis points to the lender’s prime rate. Our
revolving credit facility was not utilized during 2015 or
2014.
Income Tax Expense
We
recorded income tax expense for 2015 of approximately $345,000,
compared with $900,000 for 2014. Our income tax expense is
primarily non-cash.
As of
December 31, 2015, our net deferred tax assets totaled
approximately $5.5 million, and were primarily composed of
NOLs. These NOLs totaled $4.9 million for federal and $12.6
million for state purposes, with expirations starting in 2018
through 2030.
Inflation
There
was no significant impact on our operations as a result of
inflation for the fiscal years ended December 31, 2016 and
2015.
21
Liquidity
and Capital Resources
For the
year ended December 31, 2016, net cash provided by operating
activities totaled approximately $10.7 million, compared with
approximately $2.9 million used in operations for 2015. Cash
provided by operating activities was primarily related to net
income, inventories, prepaid expenses and other current assets,
accrued compensation and related taxes, deferred tax assets, and
depreciation and amortization. For the year ended December 31,
2016, we realized net income of approximately $2.7 million,
compared with approximately $1.0 million last year. Net inventories
and prepaid expenses and other current assets decreased
approximately $2.1 million and $1.7 million, respectively, in 2016,
primarily due to fulfilling the TSA delivery orders, which are
described in “Item 1. Business” of Part I of this
report, under the heading “Significant Events of 2016.”
This compares with increases in inventory and prepaid expenses and
other current assets of approximately $4.2 million and $1.2
million, respectively, for 2015. Accrued compensation and related
taxes for the year ended December 31, 2016 increased approximately
$1.1 million, related primarily to incentive compensation, compared
with a decrease of $110,000 for 2015. Deferred tax assets for 2016
decreased by approximately $1.2 million due to non-cash tax expense
on our pre-tax income, compared with a decrease of $328,000 for
2015. Depreciation and amortization totaled approximately $942,000
for the year ended December 31, 2016, compared with approximately
$914,000 for the previous year.
Cash
used in investing activities for the year ended December 31, 2016
totaled approximately $1.9 million, $481,000 of which was related
to the investment in Iteris common stock (see “Note 7”
to our Consolidated Financial Statements in this report), and $1.4
million that was utilized for the purchase of manufacturing and
engineering equipment. For the same period last year, approximately
$2.8 million was used primarily for the investment in Iteris common
stock, and $1.1 million was utilized for 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.
For the
year ended December 31, 2016, approximately $2.6 million was used
in financing activities, primarily related to the previously
announced capital return program, which included two payments of a
quarterly dividend of $0.09 per share totaling $2.5 million and the
third dividend declared in December of $1.2 million, and stock
repurchases totaling $162,000. We also received approximately
$30,000 provided by the issuance of common stock upon the exercise
of stock options. Last year, approximately $92,000 was provided by
financing activities, representing proceeds from the issuance of
common stock upon the exercise of stock options.
Effective as of
December 28, 2016, our revolving credit facility with Silicon
Valley Bank was amended to provide for borrowing availability of
$1.0 million and a maturity date of December 27, 2017. The Loan and
Security Agreement, as amended, governing the revolving credit
facility contains customary borrowing terms and conditions,
including the accuracy of representations and warranties,
compliance with financial maintenance and restrictive covenants and
the absence of events of default. The amendment to the Loan and
Security Agreement included the following:
●
maximum borrowing
availability was reduced from $2.0 million to $1.0
million;
●
the Company is
permitted to pay cash dividends, the total of which may not exceed
$5.0 million in the aggregate during any twelve-month period, so
long as an event of default does not exist at the time of such
dividend and would not exist after giving effect to such
dividend;
●
the variable rate
at which borrowings under the credit facility bear interest was
modified from the Silicon Valley Bank prime rate to the
Wall Street Journal prime
rate plus 25 basis points; and
●
the maturity date
was extended to December 27, 2017.
We were
in compliance with all covenants under the Loan and Security
Agreement, as amended, and there were no borrowings outstanding
under the revolving credit facility as of December 31,
2016. For additional information about our revolving
credit facility, see “Note 6—Debt” in this
report.
22
Our
cash and cash equivalents balance at December 31, 2016 was
approximately $10.9 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, 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 “Part I—Item 1A.
Risk Factors” in this report.
Off
Balance Sheet Arrangements
We do
not have any off balance sheet arrangements.
Recent
Accounting Pronouncements
In May
2014, the Financial Accounting Standards Board (“FASB”)
issued Accounting Standards Update (“ASU”) 2014-09 on
“Revenue from Contracts with Customers,” which provides
for a single, principles-based model for revenue recognition and
replaces the existing revenue recognition guidance. In August
2015, the FASB issued ASU 2015-14, which delays the effective date
of ASU 2014-09 by one year. The guidance is effective for
annual and interim periods beginning on or after December 15, 2017,
and will replace most existing revenue recognition guidance under
U.S. GAAP when it becomes effective. It permits the use of
either a retrospective or cumulative effect transition method and
early adoption is not permitted. The Company is evaluating
this standard and expects to have its analysis completed by
mid-2017; however, preliminarily, the Company does not expect that
this new guidance will have a material effect on its consolidated
financial statements and related disclosures.
In July
2015, the FASB issued ASU 2015-11, “Simplifying the
Measurement of Inventory,” to simplify the guidance on
the subsequent measurement of inventory, excluding inventory
measured using last-in, first-out or the retail inventory method.
Under the new standard, inventory should be at the lower of cost
and net realizable value. The new accounting guidance is effective
for interim and annual periods beginning after December 15, 2016,
with early adoption permitted. The Company does not anticipate that
the adoption of this new guidance will have a material impact on
its consolidated financial statements and related
disclosures.
In November 2015, the FASB released ASU 2015-17,
“Balance Sheet Classification of Deferred
Taxes,” which will require that deferred tax liabilities
and assets be classified as non-current in a classified statement
of financial position. This is part of the FASB’s
Simplification Initiative. For public business entities, the amendments in this
update are effective for financial statements issued for annual
periods after December 15, 2016, and interim periods within those
annual periods. Earlier application is permitted for all
entities as of the beginning of an interim or annual reporting
period. The Company early adopted this standard as of December 31,
2015.
In
January 2016, the FASB issued ASU 2016-01, “Financial
Instruments,” which amends the guidance in U.S. GAAP on the
classification and measurement of financial instruments. Changes to
the current guidance primarily affect the accounting for equity
investments, financial liabilities under the fair value option, and
the presentation and disclosure requirements for financial
instruments. In addition, the ASU clarifies guidance related to the
valuation allowance assessment when recognizing deferred tax assets
resulting from unrealized losses on available-for-sale debt
securities. The new standard is effective for fiscal years and
interim periods beginning after December 15, 2017, and upon
adoption, an entity should apply the amendments by means of a
cumulative-effect adjustment to the balance sheet at the beginning
of the first reporting period in which the guidance is effective.
Early adoption is not permitted except for the provision to record
fair value changes for financial liabilities under the fair value
option resulting from instrument-specific credit risk in other
comprehensive income. The Company has not yet determined the
potential effects of the adoption of ASU 2016-01 on its
consolidated financial statements.
23
In February 2016, the FASB issued ASU 2016-02,
“Leases,” which amends leasing guidance by requiring
companies to recognize a right-of-use asset and a lease liability
for all operating and capital (finance) leases with lease terms of
greater than twelve months. The lease liability will be equal to
the present value of lease payments. The lease asset will be based
on the lease liability, subject to adjustment, such as for initial
direct costs. For income statement purposes, leases will continue
to be classified as operating or capital (finance), with lease
expense in both cases calculated substantially the same as under
the prior leasing guidance. The updated guidance is effective for
interim and annual periods beginning after December 15, 2018, with
early adoption permitted. The Company expects this will
result in the recognition of right-of-use assets and lease
liabilities not currently recorded on our consolidated financial
statements under existing accounting guidance, but the Company is
still evaluating all of the Company’s contractual
arrangements and the impact that adoption of ASU 2016-02 will have
on the Company’s consolidated financial
statements.
In March 2016, the FASB issued ASU 2016-09,
“Improvements to Employee Share-Based
Payment Accounting.” The guidance will be effective for annual
reporting periods beginning after December 15, 2016 and interim
periods within those fiscal years, with early adoption permitted.
The Company has evaluated the impact of the future adoption of this
standard and the Company does not expect the adoption to have a
material effect on its consolidated financial
statements.
Critical
Accounting Policies and Estimates
Our
revenue recognition process and our more subjective accounting
estimation processes affect our reported revenues and current
assets and are, therefore, critical in assessing our financial and
operating status. The processes for determining the allowance for
collection of trade receivables, allowance for excess or obsolete
inventory, allowance for product warranty, software development and
income taxes involve certain assumptions that, if incorrect, could
create an adverse impact on our operations and financial
position.
Revenue
Sales
revenue is recognized when the earnings process is complete and
collection is reasonably assured. The earnings process is generally
complete when the product is shipped by us or delivered to the
customer, depending upon whether the title to the goods, as well as
the risks and benefits of ownership are transferred to the customer
at point of shipment or point of delivery. However, sales to the
federal government are recognized when the products are delivered.
For extended warranties, sales revenue associated with the warranty
is deferred at the time of sale and later recognized on a
straight-line basis over the extended warranty period. We
periodically review our revenue recognition procedures to assure
that such procedures are in accordance with Accounting Standards
Codification Topic 605, “Revenue
Recognition.”
Allowance for Doubtful Accounts
The
allowance for doubtful accounts was approximately $50,000 on gross
trade receivables of approximately $3.5 million as of December
31, 2016, as compared with $49,000 on gross trade receivables of
approximately $4.2 million as of December 31, 2015. This allowance
is used to state trade receivables at a net realizable value or the
amount that we estimate will be collected on our gross receivables
as of December 31, 2016. Because the amount that we will actually
collect on the receivables outstanding as of December 31, 2016
cannot be known with certainty, we rely on prior experience. Our
historical collection losses have typically been infrequent, with
write-offs of trade receivables being less than 1% of sales during
past years. Accordingly, we have maintained a general allowance of
up to approximately 5% of the gross trade receivables balance in
order to allow for future collection losses that arise from
customer accounts that do not indicate the inability to pay but
turn out to have such an inability. Currently, our general
allowance on trade receivables is approximately 1.4% of gross
receivables. As revenues and total receivables increase, the
allowance balance may also increase. We also maintain a specific
allowance for customer accounts that we know may not be collectible
due to various reasons, such as bankruptcy and other customer
liquidity issues. We analyze our trade receivables portfolio based
on the age of each customer’s invoice. In this way, we can
identify those accounts that are more likely than not to have
collection problems. We may reserve a portion or all of the
customer’s balance. As of December 31, 2016 and 2015, we had
no specific allowance on trade receivables.
24
Excess and Obsolete Inventory
The
allowance for obsolete and slow-moving inventory was approximately
$1.6 million and $1.7 million at December 31, 2016 and 2015,
respectively.
The
allowance for slow-moving, excess, or obsolete inventory is used to
state our inventories at the lower of cost or market. Because the
amount of inventory that we will actually recoup through sales
cannot be known with certainty at any particular time, we rely on
past sales experience, future sales forecasts and our strategic
business plans. Generally, in analyzing our inventory levels, we
classify inventory as having been used or unused during the past
year and establish an allowance based upon several factors,
including, but not limited to, business forecasts, inventory
quantities and historical usage profile.
Supplemental to the
aforementioned analysis, specific inventory items are reviewed
individually by management. Based on the review, considering
business levels, future prospects, new products and technology
changes, management, using its business judgment, may adjust the
valuation of specific inventory items to reflect an accurate
valuation. Management also performs a determination of net
realizable value for all finished goods with a selling price below
cost. For all such items, the inventory is valued at not more than
the selling price less cost, if any, to sell.
Allowance for Product Warranty
We
offer two-year warranties to our customers depending on the
specific product and terms of the customer purchase agreement. Our
typical warranties require us to repair and replace defective
products during the warranty period at no cost to the customer. At
the time the product revenue is recognized, we record a liability
for estimated costs under our warranties. The costs are estimated
based on historical experience. We periodically assess the adequacy
of our recorded liability for product warranties and adjust the
amount as necessary.
Software Development
Certain
software costs incurred subsequent to the establishment of
technological feasibility are capitalized and amortized over the
estimated lives of the related products. We determine technological
feasibility to be established upon the internal release of a
detailed program design. 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. Net capitalized software costs totaled
approximately $176,000 as of December 31, 2016, as compared with
approximately $370,000 as of December 31, 2015.
Income Taxes
We
account for income taxes using the asset and liability method.
Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are
measured using the enacted tax rates expected to apply in the
period in which the deferred tax asset or liability is expected to
be realized. The effect of changes in net deferred tax assets and
liabilities is recognized on our consolidated balance sheets and
consolidated statements of income in the period in which the change
is recognized. Valuation allowances are provided to the extent that
it is more likely than not that some portion, or all, of deferred
tax assets will not be realized. In determining whether a tax asset
is realizable, we consider, among other things, estimates of future
earnings based on information currently available, current and
anticipated customers, contracts and new product introductions, as
well as recent operating results and certain tax planning
strategies. If we fail to achieve the future results anticipated in
the calculation and valuation of net deferred tax assets, we may be
required to adjust the valuation allowance related to our deferred
tax assets in the future.
25
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,” “should,” “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. Forward-looking statements include, but
are not limited to, statements regarding industry trends and
expected impact on us, the impact of general economic conditions,
future product development and the demand for new products,
growth/contraction, general demand, customer spending and resulting
opportunities and challenges, the impact of our strategy, our
dependence on sales to the U.S. Government, the impact from the
loss of key customers, suppliers and manufacturers, our competitive
position, our ability to adapt to technological changes, the
seasonality of the business, the impact of regulatory matters, the
availability of materials and components, the consequences of a
disruption in manufacturing, the consequences of a disruption of
information systems, the impact of maintaining inventory, our
access to capital, our ability to retain our employees, our ability
to adapt to leadership changes, our ability to protect our
intellectual property, adequacy of our insurance and the impact of
natural disasters, acts of war or terrorism and other catastrophic
events beyond our control.
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 “Part I—Item 1A. Risk Factors” and
elsewhere in this report and in our subsequent filings with the
SEC. 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.
Not
required for smaller reporting companies.
See
pages F-1 through F-20.
26
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board
of Directors and Stockholders
RELM Wireless Corporation
West
Melbourne, Florida
We have
audited the accompanying consolidated balance sheets of RELM
Wireless Corporation (the “Company”) as of December 31,
2016 and 2015, and the related consolidated statements of income,
comprehensive income, changes in stockholders’ equity, and
cash flows for the years then ended. These financial statements are
the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We
conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of
material misstatement. The Company is not required to have, nor
were we engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for
the purpose of expressing an opinion on the effectiveness of the
Company’s internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our
opinion.
In our
opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
RELM Wireless Corporation at December 31, 2016 and 2015, and the
results of its operations and its cash flows for the years then
ended, in conformity with accounting principles generally accepted
in the United States of America.
/s/
Moore Stephens Lovelace, P.A.
Miami,
Florida
March 1,
2017
F-1
RELM
WIRELESS CORPORATION
CONSOLIDATED
BALANCE SHEETS
(in Thousands, except share data)
|
|
December 31,
|
|
|
|
2016
|
2015
|
|
ASSETS
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
Cash and cash
equivalents
|
$10,910
|
$4,669
|
|
Trade accounts
receivable (net of allowance for doubtful accounts of $50 and $49
in 2016 and 2015, respectively)
|
3,448
|
4,122
|
|
Inventories,
net
|
13,999
|
16,282
|
|
Prepaid expenses
and other current assets
|
1,410
|
3,081
|
|
Total current
assets
|
29,767
|
28,154
|
|
Property, plant and
equipment, net
|
2,486
|
1,840
|
|
Available-for-sale
securities
|
6,472
|
3,402
|
|
Deferred tax
assets, net
|
3,418
|
5,461
|
|
Capitalized
software, net
|
176
|
370
|
|
Other
assets
|
225
|
222
|
|
Total
assets
|
$42,544
|
$39,449
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
Accounts
payable
|
$1,973
|
$2,285
|
|
Accrued
compensation and related taxes
|
2,193
|
1,136
|
|
Accrued warranty
expense
|
650
|
538
|
|
Accrued other
expenses and other current liabilities
|
169
|
168
|
|
Dividends
payable
|
1,235
|
—
|
|
Deferred
revenue
|
142
|
136
|
|
Total current
liabilities
|
6,362
|
4,263
|
|
Deferred
revenue
|
408
|
366
|
|
Total
liabilities
|
6,770
|
4,629
|
|
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:13,754,749 and 13,730,562
issued and outstanding shares atDecember 31, 2016 and 2015,
respectively
|
8,253
|
8,238
|
|
Additional paid-in
capital
|
25,382
|
24,926
|
|
Retained
earnings
|
240
|
1,259
|
|
Accumulated other
comprehensive income
|
2,061
|
397
|
|
Treasury stock, at
cost, 30,422 shares
|
(162)
|
—
|
|
Total
stockholders’ equity
|
35,774
|
34,820
|
|
Total liabilities
and stockholders’ equity
|
$42,544
|
$39,449
|
See notes to consolidated financial statements.
F-2
RELM
WIRELESS CORPORATION
CONSOLIDATED
STATEMENTS OF INCOME
(in Thousands, except per share data)
|
|
Years Ended
December 31,
|
|
|
|
2016
|
2015
|
|
Sales,
net
|
$50,689
|
$29,722
|
|
Expenses
|
|
|
|
Cost of
products
|
33,612
|
17,440
|
|
Selling, general
and administrative
|
12,792
|
10,852
|
|
|
46,404
|
28,292
|
|
|
|
|
|
Operating
income
|
4,285
|
1,430
|
|
Other income
(expense):
|
|
|
|
Interest
income
|
9
|
1
|
|
Other
expense
|
(22)
|
(45)
|
|
Total other
expense
|
(13)
|
(44)
|
|
Income before
income taxes
|
4,272
|
1,386
|
|
Income tax
expense
|
(1,583)
|
(345)
|
|
Net
income $ 2,689
|
$2,689
|
$1,041
|
|
Net income per
share-basic:
|
$0.20
|
$0.08
|
|
Net income per
share-diluted:
|
$0.19
|
$0.08
|
|
Weighted average
shares outstanding-basic
|
13,735
|
13,706
|
|
Weighted average
shares outstanding-diluted
|
13,823
|
13,848
|
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In
Thousands, except share and per share data)
|
|
Years Ended
December 31,
|
|
|
|
2016
|
2015
|
|
|
|
|
|
Net
income
|
$2,689
|
$1,041
|
|
Unrealized gain on
available-
|
|
|
|
for-sale
securities, net of tax
|
1,664
|
397
|
|
Total comprehensive
income
|
$4,353
|
$1,438
|
See notes to consolidated financial statements.
F-3
RELM
WIRELESS CORPORATION
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(in Thousands, except share data)
|
|
|
|
|
|
Accumulated
|
|
|
|
|
Common
|
Common
|
Additional
|
|
Other
|
|
|
|
|
Stock
|
Stock
|
Paid-In
|
Retained
|
Comprehensive
|
Treasury
|
|
|
|
Shares
|
Amount
|
Capital
|
Earnings
|
Income
|
Stock
|
Total
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2014
|
13,665,087
|
$8,199
|
$24,816
|
$218
|
$-
|
$-
|
$33,233
|
|
|
|
|
|
|
|
|
|
|
Common
stock options exercised
|
|
|
|
|
|
|
|
|
and
issued
|
65,475
|
39
|
53
|
-
|
-
|
-
|
92
|
|
Share-based
compensation
|
|
|
|
|
|
|
|
|
expense
|
-
|
-
|
57
|
-
|
-
|
-
|
57
|
|
Net
income
|
-
|
-
|
-
|
1,041
|
-
|
-
|
1,041
|
|
Unrealized
gain on
|
|
|
|
|
|
|
|
|
available-for-sale
securities
|
-
|
-
|
-
|
-
|
397
|
-
|
397
|
|
Balance
at December 31, 2015
|
13,730,562
|
8,238
|
24,926
|
1,259
|
397
|
-
|
34,820
|
|
Common
stock options exercised
|
|
|
|
|
|
|
|
|
and
issued
|
24,187
|
15
|
15
|
-
|
-
|
-
|
30
|
|
Share-based
compensation
|
|
|
|
|
|
|
|
|
expense
|
-
|
-
|
49
|
-
|
-
|
-
|
49
|
|
Realized
tax benefit from
|
|
|
|
|
|
|
|
|
stock
option exercise
|
-
|
-
|
392
|
-
|
-
|
-
|
392
|
|
Dividends
declared
|
-
|
-
|
-
|
(3,708)
|
-
|
-
|
(3,708)
|
|
Net
income
|
-
|
-
|
-
|
2,689
|
-
|
-
|
2,689
|
|
Unrealized
gain on
|
|
|
|
|
|
|
|
|
available-for-sale
securities
|
-
|
-
|
-
|
-
|
1,664
|
-
|
1,664
|
|
Repurchase
of common stock
|
-
|
-
|
-
|
-
|
-
|
(162)
|
(162)
|
|
Balance
at December 31, 2016
|
13,754,749
|
$8,253
|
$25,382
|
$240
|
$2,061
|
$(162)
|
$35,774
|
See notes to consolidated financial statements.
F-4
RELM
WIRELESS CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(in Thousands, except share data)
|
|
Years
Ended
December 31,
|
|
|
|
2016
|
2015
|
|
Operating
activities
|
|
|
|
Net
income $
|
2,689
|
$1,041
|
|
Adjustments to
reconcile net income to net cash provided by (used in)
|
|
|
|
operating
activities:
|
|
|
|
Allowance for
doubtful accounts
|
17
|
—
|
|
Inventory
reserve
|
180
|
54
|
|
Deferred tax
expense
|
1,118
|
328
|
|
Depreciation and
amortization
|
942
|
914
|
|
Share-based
compensation expense
|
49
|
57
|
|
Realized tax
benefit from stock option exercise
|
392
|
—
|
|
Changes in
operating assets and liabilities:
|
|
|
|
Trade accounts
receivable
|
657
|
(856)
|
|
Inventories
|
2,103
|
(4,224)
|
|
Prepaid expenses
and other current assets
|
1,671
|
(1,160)
|
|
Other
assets
|
(3)
|
34
|
|
Accounts
payable
|
(312)
|
882
|
|
Accrued
compensation and related taxes
|
1,057
|
(110)
|
|
Accrued warranty
expense
|
112
|
154
|
|
Deferred
revenue
|
48
|
(1)
|
|
Accrued other
expenses and other current liabilities
|
1
|
(49)
|
|
Net
cash provided by (used in) operating activities
|
10,721
|
(2,936)
|
|
|
||
|
Investing
activities
|
|
|
|
Purchases of
property, plant and equipment
|
(1,394)
|
(1,089)
|
|
Purchase of
available-for-sale securities
|
(481)
|
(2,761)
|
|
Net
cash used in investing activities
|
(1,875)
|
(3,850)
|
|
|
||
|
Financing
activities
|
|
|
|
Dividends
paid
|
(2,473)
|
—
|
|
Repurchase of
common stock
|
(162)
|
—
|
|
Proceeds from
issuance of common stock
|
30
|
92
|
|
Net
cash (used in) provided by financing activities
|
(2,605)
|
92
|
|
Increase (decrease)
in cash
|
6,241
|
(6,694)
|
|
Cash and cash
equivalents, beginning of year
|
4,669
|
11,363
|
|
Cash and cash
equivalents, end of year
|
$10,910
|
$4,669
|
|
Supplemental
disclosure
|
|
|
|
Cash paid for
interest
|
$—
|
$—
|
|
Cash paid for
income taxes
|
$50
|
$25
|
|
|
|
|
|
Non-cash
financing activity
|
|
|
|
Cashless exercise
of stock options and related conversion of net shares to
stockholders’ equity
|
$4
|
$19
|
See notes to consolidated financial statements.
F-5
RELM
WIRELESS CORPORATION
YEARS
ENDED DECEMBER 31, 2016 AND 2015
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
Thousands, except share data and percentages)
1.
Summary
of Significant Accounting Policies
Description
of Business
The
primary business of RELM Wireless Corporation and its subsidiaries
(collectively, the “Company”) is the designing,
manufacturing and marketing of wireless communications equipment
consisting primarily of two-way land mobile radios and related
products, which are sold in two primary markets: (1) the government
and public safety market and (2) the business and industrial
market. The Company has only one reportable business
segment.
Principles
of Consolidation
The
accounts of the Company have been included in the accompanying
consolidated financial statements. All significant intercompany
balances and transactions have been eliminated in
consolidation.
Inventories
Inventories are
stated at the lower of cost (determined by the average cost method)
or market. Freight costs are classified as a component of cost of
products in the accompanying consolidated statements of
income.
The
allowance for slow-moving, excess, or obsolete inventory is used to
state the Company’s inventories at the lower of cost or
market. Because the amount of inventory that will actually be
recouped through sales cannot be known with certainty at any
particular time, the Company relies on past sales experience,
future sales forecasts, and its strategic business plans.
Generally, in analyzing inventory levels, inventory is classified
as having been used or unused during the past year. The Company
then establishes a reserve based upon several factors, including,
but not limited to, business forecasts, inventory quantities and
historic usage profile.
Supplemental to the
aforementioned analysis, specific inventory items are reviewed
individually by management. Based on the review, considering
business levels, future prospects, new products and technology
changes, management, using its business judgment, may adjust the
valuation of specific inventory items to reflect an accurate
valuation. Management also performs a determination of net
realizable value for all finished goods with a selling price below
cost. For all such items, the inventory is valued at not more than
the selling price less cost, if any, to sell.
Property,
Plant and Equipment
Property, plant and
equipment is carried at cost. Expenditures for maintenance, repairs
and minor renewals are expensed as incurred. When properties are
retired or otherwise disposed of, the related cost and accumulated
depreciation are removed from the respective accounts and the
resulting gain or loss is reflected in operations for the
period.
Depreciation and
amortization are generally computed on the straight-line method
using lives of 3 to 10 years for machinery and equipment and 5 to 6
years for leasehold improvements.
Capitalized
Software Costs
Capitalized
software development costs are those incurred during the
programming, codification and testing phase. Costs incurred during
the design and planning, product definition and product
specification state are accounted for as expenses.
The
amortization of capitalized software costs during a reporting
period is the greater of the amount computed using (a) the ratio
that current gross revenues for a product bear to the total of
current and anticipated future gross revenues for that product and
(b) the straight-line method over the remaining estimated economic
life of the software or the product that they are incorporated
within. As of December 31, 2016 and 2015, the total accumulated
amortization amount was $4,935 and $4,741,
respectively.
F-6
RELM
WIRELESS CORPORATION
YEARS
ENDED DECEMBER 31, 2016 AND 2015
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
Thousands, except share data and percentages)
1.
Summary
of Significant Accounting Policies (Continued)
Impairment
of Long-Lived Assets
Management
regularly reviews long-lived assets and intangible assets for
impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future
undiscounted net cash flows expected to be generated by the asset.
If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount
of the assets exceeds the fair value of the assets which considers
the discounted future net cash flows. No long-lived assets were
considered impaired at December 31, 2016 and 2015.
Cash
Equivalents
The
Company considers all highly liquid investments with an original
maturity of three months or less to be cash
equivalents.
Allowance
for Doubtful Accounts
The
Company records an allowance for doubtful accounts based on
specifically identified amounts that the Company believes to be
uncollectible. The Company also records an additional allowance
based on certain percentages of the Company’s aged
receivables, which are determined
based on historical experience and the Company’s assessment
of the general financial conditions affecting the Company’s
customer base. If the Company’s actual collections experience
changes, revisions to the Company’s allowance may be
required. After all attempts to collect a receivable have failed,
the receivable is written off against the allowance. Based on the
information available, management believes the allowance for
doubtful accounts as of December 31, 2016 and 2015 is
adequate.
Revenue
Recognition
Sales
revenue is recognized when the earnings process is complete and
collection is reasonably assured. The earnings process is generally
complete when the product is shipped or received by the customer,
depending upon whether the title to the goods, as well as the risks
and benefits of ownership, are transferred to the customer at point
of shipment or point of delivery. However, sales to the federal
government are recognized when the products are delivered. For
extended warranties, sales revenue associated with the warranty is
deferred at the time of sale and later recognized on a
straight-line basis over the extended warranty period.
The
Company periodically reviews its revenue recognition procedures to
assure that such procedures are in accordance with accounting
principles generally accepted in the United States of America
(“GAAP”). Surcharges collected on certain sales to
government customers and remitted to governmental agencies are not
included in revenues or in costs and expenses.
F-7
RELM
WIRELESS CORPORATION
YEARS
ENDED DECEMBER 31, 2016 AND 2015
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
Thousands, except share data and percentages)
1.
Summary
of Significant Accounting Policies (Continued)
Income
Taxes
The
Company accounts for income taxes using the asset and liability
method specified by GAAP. Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using the enacted
tax rates expected to apply in the period in which the deferred tax
asset or liability is expected to be realized. The effect of
changes in net deferred tax assets and liabilities is recognized on
the Company’s consolidated balance sheets and consolidated
statements of income in the period in which the change is
recognized. Valuation allowances are provided to the extent that
impairment of tax assets are more likely than not. In determining
whether a tax asset is realizable, the Company considers, among
other things, estimates of future earnings based on information
currently available, current and anticipated customers, contracts
and new product introductions, as well as recent operating results
during 2016 and 2015 and certain tax planning strategies. If the
Company fails to achieve the future results anticipated in the
calculation and valuation of net deferred tax assets, the Company
may be required to adjust the valuation allowance related to its
deferred tax assets in the future.
Concentration
of Credit Risk
The
Company performs periodic credit evaluations of its
customers’ financial condition and generally does not require
collateral. At December 31, 2016 and 2015, accounts receivable from
governmental customers were approximately $1,090 and $142,
respectively. Generally, receivables are due within 30 days. Credit
losses relating to customers have been consistently within
management’s expectations.
The
Company primarily maintains cash balances at one financial
institution. Accounts are insured by the Federal Deposit Insurance
Corporation (“FDIC”) up to $250. From time to time, the
Company has had cash in financial institutions in excess of
federally insured limits. As of December 31, 2016, the Company had
cash and cash equivalents in excess of FDIC limits of
$10,883.
Manufacturing
and Raw Materials
The
Company relies upon a limited number of manufacturers to produce
its products and on a limited number of component suppliers. Some
of these manufacturers and suppliers are in other countries.
Approximately 76.3% of the Company’s material, subassembly
and product procurements in 2016 were sourced internationally, of
which approximately 70% were sourced from three suppliers. For
2015, approximately 68% of the Company’s material,
subassembly and product procurements were sourced internationally,
of which approximately 60.49% were sourced from two suppliers.
Purchase orders denominated in U.S. dollars are placed with these
suppliers from time to time and there are no guaranteed supply
arrangements or commitments.
Use
of Estimates
The
preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities at the date of the
consolidated financial statements and the reported amounts of sales
and expenses during the reporting period. Significant estimates
include accounts receivable allowances, inventory obsolescence
allowance, warranty allowance, capitalized software costs and
income tax accruals. Actual results could differ from those
estimates.
F-8
RELM
WIRELESS CORPORATION
YEARS
ENDED DECEMBER 31, 2016 AND 2015
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
Thousands, except share data and percentages)
1.
Summary
of Significant Accounting Policies (Continued)
Fair
Value of Financial Instruments
The
Company’s financial instruments consist of cash and cash
equivalents, trade accounts receivable, available-for-sale
securities, accounts payable, accrued expenses and other
liabilities. As of December 31, 2016 and 2015, the carrying amount
of cash and cash equivalents, trade accounts receivable, accounts
payable, accrued expenses and other liabilities approximated their
respective fair value due to the short-term nature and maturity of
these instruments. The Company uses observable market data or
assumptions (Level 1 inputs as defined in accounting guidance) that
it believes market participants would use in pricing the
available-for-sale securities. There
were no sales of available-for-sale securities, nor gains or losses
reclassified out of accumulated other comprehensive income as a
result of an other-than-temporary impairment of the
available-for-sale securities. There were no transfers of
available-for-sale securities between Level 1 and Level 2 during
the year ended December 31, 2016.
Available-For-Sale
Securities
Investments
reported on the December 31, 2016 consolidated balance sheet
consist of marketable equity securities of a publicly held company.
As of December 31, 2016 and 2015, the investment cost was $3,242
and $2,761, respectively. Management intends to hold such
securities for a sufficient period in which to realize a reasonable
return, which periods may range between one to several years,
although there is no assurance that positive returns will be
realized or that such securities will not be liquidated in a
shorter-than-expected time frame to accommodate future liquidity
requirements. Accordingly, investments were classified as
non-current and available-for-sale. Investments are marked to
market at each measurement date, with unrealized gains or losses
presented as adjustments to accumulated other comprehensive income
or loss.
Shipping
and Handling Costs
Shipping and
handling costs are classified as a part of cost of products in the
accompanying consolidated statements of income for the years ended
December 31, 2016 and 2015. Amounts billed to a customer, if any,
for shipping and handling are reported as a revenue.
Advertising
and Promotion Costs
The
cost for advertising and promotion is expensed as incurred.
Advertising and promotion expenses are classified as part of
selling, general and administrative (“SG&A”)
expenses in the accompanying consolidated statements of income. For
the years ended December 31, 2016 and 2015, such expenses totaled
$334 and $290, respectively.
Engineering,
Research and Development Costs
Included in
SG&A expenses for the years ended December 31, 2016 and 2015
are engineering, research and development costs of $4,123 and
$3,613, respectively.
Share-Based
Compensation
The
Company accounts for share-based arrangements in accordance with
GAAP, which requires a public entity to measure the cost of
employee services received in exchange for an award of equity
instruments based on the grant-date fair value of the award (with
limited exceptions). That cost will be recognized over the period
during which the employee is required to provide service in
exchange for the award requisite service period (usually the
vesting period). No compensation cost is recognized for equity
instruments for which employees do not render the requisite
service. Employee share purchase plans will not result in
recognition of compensation cost if certain conditions are
met.
F-9
RELM
WIRELESS CORPORATION
YEARS
ENDED DECEMBER 31, 2016 AND 2015
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
Thousands, except share data and percentages)
1.
Summary
of Significant Accounting Policies (Continued)
Earnings
Per Share
Earnings per share
amounts are computed and presented for all periods in accordance
with GAAP.
Other
Comprehensive Income
Other
comprehensive income consists of net income and unrealized gain on
available-for-sale securities, net of taxes.
Product
Warranty
The
Company offers two-year warranties to its customers depending on
the specific product and terms of the customer purchase agreement.
The Company’s typical warranties require it to repair and
replace defective products during the warranty period at no cost to
the customer. At the time the product revenue is recognized, the
Company records a liability for estimated costs under its
warranties. The costs are estimated based on historical experience.
The Company periodically assesses the adequacy of its recorded
liability for product warranties and adjusts the amount as
necessary.
Recent
Accounting Pronouncements
In May 2014,
the Financial Accounting Standards Board (“FASB”)
issued Accounting Standards Update (“ASU”) 2014-09 on
“Revenue from Contracts with Customers,” which provides
for a single, principles-based model for revenue recognition and
replaces the existing revenue recognition guidance. In August 2015,
the FASB issued ASU 2015-14, which delays the effective date of ASU
2014-09 by one year. The guidance is effective for annual and
interim periods beginning on or after December 15, 2017, and will
replace most existing revenue recognition guidance under U.S. GAAP
when it becomes effective. It permits the use of either a
retrospective or cumulative effect transition method and early
adoption is not permitted. The Company is evaluating this standard
and expects to have its analysis completed by mid-2017; however,
preliminarily, the Company does not expect that this new guidance
will have a material effect on its consolidated financial
statements and related disclosures.
In July
2015, the FASB issued ASU 2015-11, “Simplifying the Measurement of
Inventory,” to
simplify the guidance on the subsequent measurement of inventory,
excluding inventory measured using last-in, first-out or the retail
inventory method. Under the new standard, inventory should be at
the lower of cost and net realizable value. The new accounting
guidance is effective for interim and annual periods beginning
after December 15, 2016, with early adoption permitted. The Company
does not anticipate that the adoption of this new guidance will
have a material impact on its consolidated financial statements and
related disclosures.
In
November 2015, the FASB released ASU 2015-17, “Balance Sheet
Classification of Deferred Taxes,” which will require that
deferred tax liabilities and assets be classified as non-current in
a classified statement of financial position. This is part of the
FASB’s Simplification Initiative. For public business
entities, the amendments in this update are effective for financial
statements issued for annual periods after December 15, 2016, and
interim periods within those annual periods. Earlier application is
permitted for all entities as of the beginning of an interim or
annual reporting period. The Company early adopted this standard as
of December 31, 2015.
In
January 2016, the FASB issued ASU 2016-01 “Financial
Instruments,” which amends the guidance in U.S. GAAP on the
classification and measurement of financial instruments. Changes to
the current guidance primarily affect the accounting for equity
investments, financial liabilities under the fair value option, and
the presentation and disclosure requirements for financial
instruments. In addition, the ASU clarifies guidance related to the
valuation allowance assessment when recognizing deferred tax assets
resulting from unrealized losses on available-for-sale debt
securities. The new standard is effective for fiscal years and
interim periods beginning after December 15, 2017, and upon
adoption, an entity should apply the amendments by means of a
cumulative-effect adjustment to the balance sheet at the beginning
of the first reporting period in which the guidance is effective.
Early adoption is not permitted except for the provision to record
fair value changes for financial liabilities under the fair value
option resulting from instrument-specific credit risk in other
comprehensive income. The Company has not yet determined the
potential effects of the adoption of ASU 2016-01 on its
consolidated financial statements.
F-10
RELM
WIRELESS CORPORATION
YEARS
ENDED DECEMBER 31, 2016 AND 2015
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
Thousands, except share data and percentages)
1.
Summary
of Significant Accounting Policies (Continued)
In
February 2016, the FASB issued ASU 2016-02, “Leases,”
which amends leasing guidance by requiring companies to recognize a
right-of-use asset and a lease liability for all operating and
capital (finance) leases with lease terms of greater than twelve
months. The lease liability will be equal to the present value of
lease payments. The lease asset will be based on the lease
liability, subject to adjustment, such as for initial direct costs.
For income statement purposes, leases will continue to be
classified as operating or capital (finance), with lease expense in
both cases calculated substantially the same as under the prior
leasing guidance. The updated guidance is effective for interim and
annual periods beginning after December 15, 2018, with early
adoption permitted. The Company
expects this will result in the recognition of right-of-use assets
and lease liabilities not currently recorded on our consolidated
financial statements under existing accounting guidance, but the
Company is still evaluating all of the Company’s contractual
arrangements and the impact that adoption of ASU 2016-02 will have
on the Company’s consolidated financial
statements.
In
March 2016, the FASB issued ASU 2016-09, “Improvements to
Employee Share-Based Payment Accounting.” The guidance will
be effective for annual reporting periods beginning after December
15, 2016 and interim periods within those fiscal years with early
adoption permitted. The Company has evaluated the impact of the
future adoption of this standard and the Company does not expect
the adoption to have a material effect on its consolidated
financial statements.
2.
Inventories,
net
Inventories, which
are presented net of allowance for obsolete and slow-moving
inventory, consisted of the following:
|
|
December 31,
|
|
|
|
2016
|
2015
|
|
|
|
|
|
Finished
goods
|
$3,216
|
$4,029
|
|
Work in
process
|
6,612
|
8,497
|
|
Raw
materials
|
4,171
|
3,756
|
|
|
$13,999
|
$16,282
|
Changes
in the allowance for obsolete and slow-moving inventory are as
follows:
|
|
Years Ended
December 31,
|
|
|
|
2016
|
2015
|
|
|
|
|
|
Balance, beginning
of year
|
$1,685
|
$1,703
|
|
Charged to cost of
sales
|
180
|
54
|
|
Disposal of
inventory
|
(258)
|
(72)
|
|
Balance, end of
year
|
$1,607
|
$1,685
|
During
the years ended December 31, 2016 and 2015, the Company disposed of
obsolete inventory that had been fully reserved previously. There
was no material impact to the Company’s consolidated balance
sheets or consolidated statements of income as a result of this
transaction.
F-11
RELM
WIRELESS CORPORATION
YEARS
ENDED DECEMBER 31, 2016 AND 2015
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
Thousands, except share data and percentages)
3.
Allowance
for Doubtful Accounts
Changes
in the allowance for doubtful accounts are composed of the
following:
|
|
Years Ended
December 31,
|
|
|
|
2016
|
2015
|
|
|
|
|
|
Balance, beginning
of year
|
$49
|
$49
|
|
Provision for
doubtful accounts
|
17
|
—
|
|
Uncollectible
accounts written off
|
(16)
|
—
|
|
Balance, end of
year
|
$50
|
$49
|
4.
Property,
Plant and Equipment, net
Property, plant and
equipment, net include the following:
|
|
December 31,
|
|
|
|
2016
|
2015
|
|
|
|
|
|
Leasehold
improvements
|
$392
|
$369
|
|
Machinery and
equipment
|
8,548
|
7,184
|
|
Less accumulated
depreciation and amortization
|
(6,454)
|
(5,713)
|
|
Property, plant and
equipment, net
|
$2,486
|
$1,840
|
Depreciation and
amortization expense relating to property, plant and equipment for
the years ended December 31, 2016 and 2015 was approximately $748
and $531, respectively.
5.
Accounting
for Software Costs
The
Company accounts for the costs of software within its products
whereby 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
ASC 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. Net capitalized software costs totaled $176
and $370 as of December 31, 2016 and 2015, respectively. For the
years ended December 31, 2016 and 2015, the Company’s
amortization expense for capitalized software was approximately
$194 and $383, respectively.
F-12
RELM
WIRELESS CORPORATION
YEARS
ENDED DECEMBER 31, 2016 AND 2015
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
Thousands, except share data and percentages)
6.
Debt
The
Company has a revolving credit facility with Silicon Valley Bank
(“SVB”). Effective as of December 28, 2016, the
Company, RELM Communications, Inc., the Company’s
wholly-owned subsidiary, and SVB entered into a Sixth Amendment to
the Loan and Security Agreement dated as of October 23, 2008, as
amended by the First Amendment thereto dated as of October 20,
2010, the Second Amendment thereto dated as of June 22, 2011, the
Third Amendment thereto dated as of December 18, 2012, the Fourth
Amendment thereto dated as of January 28, 2015 (effective as of
December 31, 2014) (as amended, the “Loan and Security
Agreement”), and the Fifth Amendment thereto dated as of
December 29, 2015. The Loan and Security Agreement, as amended,
governing the revolving credit facility contains customary
borrowing terms and conditions, including the accuracy of
representations and warranties, compliance with financial
maintenance and restrictive covenants and the absence of events of
default. Under the Sixth Amendment, the existing collateralized
revolving credit facility was amended as follows:
●
maximum borrowing
availability was reduced from $2.0 million to $1.0
million;
●
the Company is
permitted to pay cash dividends, the total of which may not exceed
$5.0 million in the aggregate during any twelve-month period, so
long as an event of default does not exist at the time of such
dividend and would not exist after giving effect to such
dividend;
●
the variable rate
at which borrowings under the credit facility bear interest has
been changed from the Silicon Valley Bank prime rate (4.00% as of
December 31, 2015) to the Wall
Street Journal prime rate plus 25 basis points (4.00% as of
December 31, 2016); and
●
the maturity date
was extended to December 27, 2017.
The
financial maintenance covenants, required to be maintained at all
times and tested quarterly (or, for the “quick ratio”
covenant, monthly, if any obligations are outstanding), include:
(1) a ratio of “quick assets to current liabilities”
minus “deferred revenue” (all as defined in the Loan
and Security Agreement) of at least 1.25:1.00 and (2)
“maximum total leverage” (as defined in the Loan and
Security Agreement) of no greater total indebtedness than 3 times
adjusted EBITDA. The Company’s obligations are collateralized
by substantially all of the Company’s assets, principally
accounts receivable and inventory.
The
Company was in compliance with all covenants under the Loan and
Security Agreement, as amended, as of December 31, 2016. The
Company had no borrowings outstanding under the credit facility as
of December 31, 2016, and $1.0 million was available for
borrowing.
7.
Investment
in Securities
As
of December 31, 2016, the Company, through its wholly-owned
subsidiary, had purchased approximately 1.8 million shares of
Iteris (NASDAQ: ITI), which represented approximately 5.5% of
Iteris’s outstanding shares. At December 31, 2016,
the corresponding unrealized gain of approximately $1,664, net of
tax of $924, is included in accumulated other comprehensive income
as a separate component of stockholders’ equity. There
was no impact to the Company’s consolidated statements of
income.
On
July 29, 2016, the Company, one of the Company’s significant
stockholders, and certain of their affiliates entered into an
agreement with Iteris. Pursuant to the agreement, a Director of the
Company, who is an executive, co-founder and partner of the
significant stockholder that is party to the agreement, was
appointed to the Board of Directors of Iteris. As of December
31, 2016, the Company and the significant stockholder of the
Company beneficially own in the aggregate 2,600,194 shares of
Iteris, which represents approximately 8.1% of Iteris’s
outstanding shares.
F-13
RELM
WIRELESS CORPORATION
YEARS
ENDED DECEMBER 31, 2016 AND 2015
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
Thousands, except share data and percentages)
8.
Leases
The
Company leases approximately 54,000 square feet of industrial space
in West Melbourne, Florida, under a non-cancellable operating
lease. The original lease, which expired on June 30, 2005, was
renewed for an additional five years. In December 2008 and
September 2013, the Company executed the first and second
amendments, respectively, to the lease, each of which reduced the
amount of the monthly base rent payment. The second amendment
extended the expiration date of the lease to June 30, 2020.
Rental, maintenance and tax expenses for this facility were
approximately $475 and $457 in 2016 and 2015, respectively. The
Company also leases 8,100 square feet of office space in Lawrence,
Kansas, under a non-cancellable operating lease, to accommodate a
portion of the Company’s engineering team. The lease was
amended on May 1, 2014 to extend the expiration date from December
31, 2014 to December 31, 2019. Rental, maintenance and tax expenses
for this facility were approximately $108 and $104 in 2016 and
2015, respectively.
The
following table summarizes future minimum rental payments under
these leases as of December 31, 2016:
|
2017
|
$577
|
|
2018
|
577
|
|
2019
|
577
|
|
2020
|
234
|
|
Thereafter
|
—
|
|
|
$1,965
|
9.
Income
Taxes
The
income tax expense is summarized as follows:
|
|
Years Ended
December 31,
|
|
|
|
2016
|
2015
|
|
Current:
|
|
|
|
Federal
|
$61
|
$18
|
|
State
|
11
|
—
|
|
|
72
|
18
|
|
Deferred:
|
|
|
|
Federal
|
1,296
|
289
|
|
State
|
215
|
38
|
|
|
1,511
|
327
|
|
|
$1,583
|
$345
|
A
reconciliation of the statutory U.S. income tax rate to the
effective income tax rate follows:
|
|
Years Ended
December 31,
|
|
|
|
2016
|
2015
|
|
|
|
|
|
Statutory U.S.
income tax rate
|
34.00%
|
34.00%
|
|
States taxes, net
of federal benefit
|
2.33%
|
1.84%
|
|
Non-deductible
item
|
0.54%
|
3.54%
|
|
Change in valuation
allowance
|
1.78%
|
0.00%
|
|
Change in net
operating loss carryforwards and
|
|
|
|
tax
credits
|
(1.65)%
|
(13.08)%
|
|
Other
|
0.13%
|
(1.33)%
|
|
|
|
|
|
Effective income
tax rate
|
37.13%
|
24.97%
|
F-14
RELM
WIRELESS CORPORATION
YEARS
ENDED DECEMBER 31, 2016 AND 2015
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
Thousands, except share data and percentages)
9.
Income
Taxes (Continued)
The
components of the deferred income tax assets (liabilities) are as
follows:
|
|
Years Ended
December 31,
|
|
|
|
2016
|
2015
|
|
Deferred tax
assets:
|
|
|
|
Operating
loss carryforwards
|
$1,035
|
$2,263
|
|
R&D
Tax Credit
|
1,310
|
1,195
|
|
AMT Tax
Credit
|
364
|
303
|
|
Section
263A costs
|
502
|
552
|
|
R&D
costs
|
690
|
861
|
|
Amortization
|
34
|
33
|
|
|
|
|
|
Asset
reserves:
|
|
|
|
Bad
debts
|
18
|
18
|
|
Inventory
allowance
|
574
|
601
|
|
|
|
|
|
Accrued
expenses:
|
|
|
|
Non-qualified
stock options
|
86
|
78
|
|
Compensation
|
261
|
240
|
|
Warranty
|
415
|
368
|
|
Deferred tax
assets
|
5,289
|
6,512
|
|
|
|
|
|
Less state
valuation allowance
|
(76)
|
—
|
|
Less APIC pool
allowance
|
—
|
(380)
|
|
Total deferred tax
assets
|
5,213
|
6,132
|
|
|
|
|
|
Deferred tax
liabilities:
|
|
|
|
Depreciation
|
(626)
|
(426)
|
|
Unrealized
gain
|
(1,169)
|
(245)
|
|
Total deferred tax
liabilities
|
(1,795)
|
(671)
|
|
|
|
|
|
Net deferred tax
assets
|
$3,418
|
$5,461
|
As of
December 31, 2016, the Company’s net deferred tax asset is
primarily composed of net operating loss carryforwards
(“NOLs”), research and development costs and tax
credits, and a reserve for inventory. The NOLs total $1,629 for
federal and $11,899 for state purposes, with expirations starting
in 2018. Included in the Company’s NOLs as of December 31,
2015 was approximately $1,009 from the exercise of stock options.
The benefit from utilization of this portion of the NOL was
realized in 2016, thereby eliminating the prior valuation allowance
with no impact to the effective tax rate.
During
2016 and 2015, the Company utilized $3,145 and $1,516,
respectively, of its NOLs. The deferred tax asset amounts are based
upon management’s conclusions regarding, among other
considerations, the Company’s current and anticipated
customer base, contracts, and product introductions, certain tax
planning strategies, and management’s estimates of future
earnings based on information currently available, as well as
recent operating results during 2016, 2015, and 2014. GAAP requires
that all positive and negative evidence be analyzed to determine
if, based on the weight of available evidence, the Company is more
likely than not to realize the benefit of the deferred tax
asset.
F-15
RELM
WIRELESS CORPORATION
YEARS
ENDED DECEMBER 31, 2016 AND 2015
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
Thousands, except share data and percentages)
9.
Income
Taxes (Continued)
Based
on the management’s analysis of all available evidence, both
positive and negative, the Company’s management has concluded
that the Company does not have the ability to generate sufficient
taxable income in the necessary period to utilize the entire
benefit for the deferred tax asset. Management asserts that it is
more likely than not that approximately $76 of the Company’s
deferred tax asset will not be realized due to the inability to
generate sufficient Florida taxable income in the necessary period
to fully utilize its Florida NOLs.
Should
the factors underlying management’s analysis change, future
valuation adjustments to the Company’s net deferred tax asset
may be necessary. If future losses are incurred, it may be
necessary to record an additional valuation allowance related to
the Company’s net deferred tax asset recorded as of December
31, 2016. It cannot presently be estimated what, if any, changes to
the valuation of our deferred tax asset may be deemed appropriate
in the future. The 2016 federal and state NOL and tax credit
carryforwards could be subject to limitation if, within any
three-year period prior to the expiration of the applicable
carryforward period, there is a greater than 50% change in
ownership of the Company.
For the
years ended December 31, 2016 and 2015, the Company incurred $61
and $36, respectively, in alternative minimum tax expense in
connection with the federal limitation on alternative
NOLs.
As a
result of the implementation of FIN 48, the Company performed a
comprehensive review of its portfolio of uncertain tax positions in
accordance with recognition standards established by FIN 48. In
this regard, an uncertain tax position represents the
Company’s expected treatment of a tax position taken in a
filed tax return or planned to be taken in a future tax return that
has not been reflected in measuring income tax expense for
financial reporting purposes. As a result of this review on January
1, 2017, the Company is not aware of any uncertain tax positions
that would require additional liabilities or which such
classification would be required. The amount of unrecognized tax
positions did not change as of December 31, 2016, and the Company
does not believe there will be any material changes in its
unrecognized tax positions over the next twelve
months.
There
were no material amounts of penalties and tax-related interest
expenses for the year ended December 31, 2016.
The
Company files federal income tax returns, as well as multiple state
and local jurisdiction tax returns. A number of years may elapse
before an uncertain tax position is audited and finally resolved.
While it is often difficult to predict the final outcome or the
timing of resolution on any particular uncertain tax position, the
Company believes that its allowances for income taxes reflect the
most probable outcome. The Company adjusts these allowances, as
well as the related interest, in light of changing facts and
circumstances. The resolution of a matter would be recognized as an
adjustment to the provision for income taxes and the effective tax
rate in the period of resolution. The calendar years 2013, 2014 and
2015 are still open to Internal Revenue Service examination under
the statute of limitations. The last Internal Revenue Service
examination on the Company’s 2007 calendar year was closed
with no change.
F-16
RELM
WIRELESS CORPORATION
YEARS
ENDED DECEMBER 31, 2016 AND 2015
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
Thousands, except share data and percentages)
10.
Income
Per Share
The
following table sets forth the computation of basic and diluted
income per share:
|
|
Years Ended
December 31,
|
|
|
|
2016
|
2015
|
|
Numerator:
|
|
|
|
Net
income from continuing operations numerator for basic and diluted
earnings per share
|
$2,689
|
$1,041
|
|
Denominator:
|
|
|
|
Denominator
for basic earnings per share weighted average shares
|
13,734,873
|
13,705,825
|
|
Effect
of dilutive securities:
|
|
|
|
Stock
options
|
88,118
|
141,732
|
|
Denominator
for diluted earnings per share weighted average shares
|
13,822,991
|
13,847,557
|
|
Basic
income per share
|
$0.20
|
$0.08
|
|
Diluted
income per share
|
$0.19
|
$0.08
|
Approximately
90,000 and 47,936 stock options for the years ended December 31,
2016 and 2015, respectively, were excluded from the calculation
because they were anti-dilutive.
11.
Share-Based
Employee Compensation
The
Company has employee and non-employee director stock option
programs. Related to these programs, the Company recorded $49 and
$57 of share-based employee compensation expense during the years
ended December 31, 2016 and 2015, respectively, which is included
as a component of cost of products and SG&A expenses in the
accompanying consolidated statements of income. No amount of
share-based employee compensation expense was capitalized as part
of capital expenditures or inventory for the years
presented.
The
Company uses the Black-Scholes-Merton option valuation model to
calculate the fair value of a stock option grant. The share-based
employee compensation expense recorded in the years ended December
31, 2016 and 2015 was calculated using the assumptions noted in the
following table. Expected volatilities are based on the historical
volatility of the Company’s common stock over the period of
time commensurate with the expected life of the stock options. The
dividend yield assumption is based on the Company’s
expectations of dividend payouts at the grant date. In 2016, the
Company paid dividends on June 17th and September
16th. The
Company has estimated its future stock option exercises. The
expected term of option grants is based upon the observed and
expected time to the date of post vesting exercises and forfeitures
of options by the Company’s employees. The risk-free interest
rate is derived from the average U.S. Treasury rate for the period,
which approximates the rate at the time of the stock option
grant.
|
|
FY
2016
|
FY 2015
|
|
Expected
Volatility
|
60.7%
|
52.7%
|
|
Expected
Dividends
|
2.0%
|
0.0%
|
|
Expected Term (in
years)
|
3.0-6.5
|
3.0
|
|
Risk-Free
Rate
|
1.35%
|
0.98%
|
|
Estimated
forfeitures
|
0.0%
|
0.0%
|
F-17
RELM
WIRELESS CORPORATION
YEARS
ENDED DECEMBER 31, 2016 AND 2015
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
Thousands, except share data and percentages)
11.
Share-Based
Employee Compensation (Continued)
A
summary of stock option activity under the Company’s stock
option plans as of December 31, 2016, and changes during the year
ended December 31, 2016, are presented below:
|
As
of January 1, 2016
|
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
|
291,936
|
4.07
|
—
|
2.68
|
—
|
|
Vested
|
276,936
|
4.00
|
—
|
2.72
|
—
|
|
Nonvested
|
15,000
|
5.35
|
—
|
1.93
|
—
|
|
|
|
|
|
|
|
|
Period
activity
|
|
|
|
|
|
|
Issued
|
80,000
|
4.01
|
—
|
1.93
|
—
|
|
Exercised
|
28,000
|
1.81
|
—
|
0.99
|
—
|
|
Forfeited
|
—
|
—
|
—
|
—
|
—
|
|
Expired
|
32,936
|
11.40
|
—
|
9.16
|
—
|
| As of December 31, 2016 |
|
|
|
|
|
|
Outstanding
|
311,000
|
3.48
|
4.20
|
1.96
|
403,610
|
|
Vested
|
231,000
|
3.30
|
2.89
|
1.97
|
344,410
|
|
Nonvested
|
80,000
|
4.01
|
7.96
|
1.93
|
59,200
|
|
Outstanding:
|
|
|
|
|
|
|
|
Range of
Exercise Prices
($) Per Share
|
Stock
Options
Outstanding
|
Wgt.
Avg.Exercise
Price ($) Per
Share
|
Wgt. Avg.
Remaining Contractual
Life
(Years)
|
|
|
|
|
1.75
|
2.23
|
86,000
|
1.92
|
2.68
|
|
|
|
3.44
|
5.70
|
225,000
|
4.08
|
4.78
|
|
|
|
|
|
311,000
|
3.48
|
4.20
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable:
|
|
|
|
|
|
|
|
Range
of Exercise Prices
($) Per Share
|
Stock
Options
Exercisable
|
Wgt.
Avg.Exercise
Price
($)
|
|
|
|
|
|
1.75
|
2.23
|
86,000
|
1.92
|
|
|
|
|
3.44
|
5.70
|
145,000
|
4.12
|
|
|
|
|
|
|
231,000
|
3.30
|
|
|
|
The
weighted-average grant-date fair value per option granted during
the years ended December 31, 2016 and 2015 was $1.93 and $5.53,
respectively. The aggregate intrinsic value of stock options
exercised during the years ended December 31, 2016 and 2015 was
approximately $82 and $105, respectively.
12.
Significant
Customers
Sales
to the U.S. Government represented approximately 58% and 36% of the
Company’s total sales for the years ended December 31, 2016
and 2015, respectively. These sales were primarily to the various
government agencies, including those within the United States
Department of Defense, the United States Forest Service, the United
States Department of Interior, and the United States Department of
Homeland Security.
F-18
RELM
WIRELESS CORPORATION
YEARS
ENDED DECEMBER 31, 2016 AND 2015
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
Thousands, except share data and percentages)
13.
Retirement
Plans
The
Company sponsors a participant contributory retirement (401(k))
plan, which is available to all employees. The Company’s
contribution to the plan is either a percentage of the
participant’s contribution (50% of the participant’s
contribution up to a maximum of 6%) or a discretionary amount. For
the years ended December 31, 2016 and 2015, total contributions
made by the Company were $121 and $104, respectively.
14.
Commitments
and Contingencies
Royalty
Commitment
In
2002, the Company entered into a technology license related to its
development of digital products. Under this agreement, the Company
is obligated to pay a royalty for each product sold that utilizes
the technology covered by this agreement. The Company paid $243 and
$109 for the years ended December 31, 2016 and 2015, respectively.
The agreement has an indefinite term, and can be terminated by
either party under certain conditions.
Purchase
Commitments
The
Company has purchase commitments for inventory totaling $4,574 as
of December 31, 2016.
Self-Insured
Health Benefits
The
Company maintains a self-insured health benefit plan for its
employees. This plan is administered by a third party. As of
December 31, 2016, the plan had a stop-loss provision insuring
losses beyond $80 per employee per year and an aggregate stop-loss
of $1,810. As of December 31, 2016 and 2015, the Company recorded
an accrual for estimated claims in the amount of approximately $172
and $140, respectively, in accrued other expenses and other current
liabilities of the Company’s consolidated balance
sheets. This amount
represents the Company’s estimate of incurred but not
reported claims as of December 31, 2016 and 2015.
Liability
for Product Warranties
Changes
in the Company’s liability for its standard two-year product
warranties during the years ended December 31, 2016 and 2015 are as
follows:
|
|
Balance at
Beginning of Year
|
Warranties
Issued
|
Warranties
Settled
|
Balance at End
of Year
|
|
2016
|
$538
|
$709
|
$(597)
|
$650
|
|
2015
|
$384
|
$538
|
$(384)
|
$538
|
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 December 31,
2016.
15.
Capital
Program
In May
2016, the Company implemented a capital return program that
included a stock repurchase program and a quarterly dividend.
Under the program, the Company’s Board of Directors approved
the repurchase of up to 500,000 shares of the Company's common
stock pursuant to a stock repurchase plan in conformity with the
provisions of Rule 10b5-1 and Rule 10b-18 promulgated under the
Securities Exchange Act of 1934, as amended. The repurchase
program has no termination date. Pursuant to the program, the
Company’s Board of Directors approved three quarterly
dividends of $0.09 per share of the Company's common stock.
The dividends were paid on June 17, 2016, September 16, 2016 and
January 13, 2017 to shareholders of record as of June 1, 2016,
September 1, 2016 and January 3, 2017,
respectively.
F-19
RELM
WIRELESS CORPORATION
YEARS
ENDED DECEMBER 31, 2016 AND 2015
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(in
Thousands, except share data and percentages)
16.
Subsequent
Event
In January 2017, the Company's
Board of Directors appointed new Principal Executive Officer, and a
new director joined the Board. The Board of Directors also created
an Executive Committee of the Board of Directors, which will review
and consider strategic investments and carry out the functions of
the Board between regular Board meetings.
F-20
Item
9.
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
None.
Evaluation
of Disclosure Controls and Procedures
Our
President (who serves as our principal 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 (the “Exchange Act”) Rules
13a-15(e) and 15d-15(e)) as of December 31, 2016. Based on that
evaluation, the President and Chief Financial Officer have
concluded that our disclosure controls and procedures were
effective as of December 31, 2016.
Management’s
Report on Internal Control over Financial Reporting
Our
management is responsible for establishing and maintaining adequate
internal control over financial reporting, as such term is defined
in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. Our internal
control system was designed to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes, in
accordance U.S. GAAP. Because of inherent limitations, a system of
internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become
inadequate due to a change in conditions, or that the degree of
compliance with the policies or procedures may
deteriorate.
An
internal control material weakness is a significant deficiency, or
combination of significant deficiencies, that results in more than
a remote likelihood that a material misstatement of the financial
statements will not be prevented or detected.
Our
management, including our principal executive officer and principal
financial officer, conducted an evaluation of the effectiveness of
our internal control over financial reporting as of December 31,
2016, and concluded that our internal controls over financial
reporting were effective as of December 31, 2016. In making the
assessment of internal control over financial reporting, management
used the criteria established in Internal Control –Integrated
Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission (“COSO”) in
Internal Control-Integrated Framework.
Changes
in Internal Control over Financial Reporting
There
were no changes in our internal control over financial reporting
identified in connection with the evaluation required by paragraph
(d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during the
fourth fiscal quarter covered by this report that have materially
affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
None.
27
Information about
our Directors and Executive Officers will be contained in the
“Proposal 1: Election of Directors” section of
RELM’s definitive proxy statement, to be filed in connection
with RELM’s 2017 annual meeting of stockholders, and is
incorporated herein by reference.
The
disclosure of delinquent filers under Section 16(a) of the Exchange
Act will be contained in the “Miscellaneous—Section
16(a) Beneficial Ownership Reporting Compliance” section of
RELM’s definitive proxy statement, to be filed in connection
with RELM’s 2017 annual meeting of stockholders, and is
incorporated herein by reference.
We have
a separately-designated standing audit committee. Information about
our audit committee and the audit committee financial expert will
be contained in the “Corporate Governance—Meetings and
Committees of the Board of Directors” section of RELM’s
definitive proxy statement, to be filed in connection with
RELM’s 2017 annual meeting of stockholders, and is
incorporated herein by reference.
We have
adopted the Code of Business Conduct and Ethics (the “Code of
Conduct”) that applies to all of our directors, officers and
employees, including our principal executive officer, principal
financial officer and principal accounting officer, and the Code of
Ethics for the CEO and Senior Financial Officers (the “Code
of Ethics”) containing additional specific policies. The Code
of Conduct and the Code of Ethics are posted on our Internet
website, www.relm.com, under the “Resources” tab, and
are available free of charge, upon request to Corporate Secretary,
7100 Technology Drive, West Melbourne, Florida 32904; telephone
number: (321) 984-1414. Any amendment to, or waiver from, the codes
applicable to our directors and executive officers will be
disclosed in a current report on Form 8-K within four business days
following the date of the amendment or waiver unless the rules of
the NYSE MKT then permit website posting of such amendments and
waivers, in which case we would post such disclosures on our
Internet website.
The
information required by this item will be contained in the
“Director Compensation for 2016,” “Summary
Compensation Table for 2015-2016,” “Outstanding Equity
Awards at Fiscal Year-End for 2016,” “Retirement
Benefits for 2016,” “Potential Payments Upon
Termination in Connection With a Change in Control” and
“Corporate Governance—Meetings and Committees of the
Board of Directors—Compensation Committee” sections of
RELM’s definitive proxy statement, to be filed in connection
with RELM’s 2017 annual meeting of stockholders, and is
incorporated herein by reference.
Item 12. Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
The
information required by this item will be contained in the
“Security Ownership of Certain Beneficial Owners and
Management” and “Equity Compensation Plan
Information” sections of RELM’s definitive proxy
statement, to be filed in connection with RELM’s 2017 annual
meeting of stockholders, and is incorporated herein by
reference.
The
information required by this item will be contained in the
“Transactions with Related Persons” and
“Corporate Governance—Board of Directors
Independence” sections of RELM’s definitive proxy
statement, to be filed in connection with RELM’s 2017 annual
meeting of stockholders, and is incorporated herein by
reference.
The
information required by this item will be contained in the
“Fees Paid to Our Independent Registered Public Accounting
Firm” and “Corporate Governance—Meetings and
Committees of the Board of Directors—Audit Committee”
sections of RELM’s definitive proxy statement, to be filed in
connection with RELM’s 2017 annual meeting of stockholders,
and is incorporated herein by reference.
28
(a)
The following
documents are filed as a part of this report:
|
1. Consolidated Financial Statements listed
below:
|
Page
|
|
Report
of Independent Registered Public Accounting Firm
|
F-1
|
|
Consolidated
Balance Sheets
|
|
|
as
of December 31, 2016 and 2015
|
F-2
|
|
Consolidated
Statements of Income and Comprehensive Income
|
|
|
-
years ended December 31, 2016 and 2015
|
F-3
|
|
Consolidated
Statements of Changes in Stockholders’ Equity
|
|
|
-
years ended December 31, 2016 and 2015
|
F-4
|
|
Consolidated
Statements of Cash Flows
|
|
|
-
years ended December 31, 2016 and 2015
|
F-5
|
|
Notes
to Consolidated Financial Statements
|
F-6
|
(b)
Exhibits: Exhibits
required to be filed by Item 601 of Regulation S-K are listed in
the Exhibit Index attached hereto, which is incorporated herein by
this reference.
(c)
Consolidated
Financial Statement Schedules:
All
schedules have been omitted because they are inapplicable or not
material, or the information called for thereby is included in the
Consolidated Financial Statements and notes thereto.
None.
29
Pursuant to the
requirements of Section 13 or 15(d) 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
in the City of West Melbourne, Florida, on the 1st day of
March 2017.
|
|
RELM WIRELESS CORPORATION
|
|
|
|
|
|
|
|
|
Date
|
By:
|
/s/
Timothy
A. Vitou
|
|
|
|
|
Timothy A.
Vitou
|
|
|
|
|
President
|
|
POWER
OF ATTORNEY
Each
person whose signature appears below hereby constitutes and
appoints Timothy A. Vitou and William P. Kelly and each of them,
his attorneys-in-fact, each with the power of substitution, for him
and in his name, place and stead, in any and all capacities, to
sign this annual report on Form 10-K and any and all amendments to
this report on Form 10-K, and to file the same, with all
exhibits thereto and all documents in connection therewith, with
the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them full power and
authority to do and perform each and every act and all intents and
purposes as he might or could do in person, hereby ratifying and
confirming all that such attorneys-in-fact and agents or any of
them or his or their substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.
Pursuant to the
requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates
indicated.
|
SIGNATURE
|
|
TITLE
|
|
DATE
|
|
/s/
Timothy O’Neil
Timothy
O’Neil
|
|
Chairman
of the Board
|
|
March 1,
2017
|
|
/s/
Timothy A. Vitou
Timothy
A. Vitou
|
|
President
(Principal Executive Officer)
|
|
March 1,
2017
|
|
/s/
William P. Kelly
William
P. Kelly
|
|
Executive
Vice President – Finance and Chief Financial Officer
(Principal Financial Officer and Principal Accounting
Officer)
|
|
March 1,
2017
|
|
/s/ D.
Kyle Cerminara
D. Kyle
Cerminara
|
|
Director
|
|
March 1,
2017
|
|
/s/ E.
Gray Payne
E. Gray
Payne
|
|
Director
|
|
March 1,
2017
|
|
/s/
Lewis Johnson
Lewis
Johnson
|
|
Director
|
|
March
1, 2017
|
|
|
|
|
|
|
|
|
|
|
|
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30
INDEX
TO EXHIBITS
|
Number
|
Exhibit
|
|
|
3.1
|
Articles of Incorporation (incorporated by reference from Exhibit
3(i) to the Company’s Annual Report on Form 10-K for the
year ended December 31, 1997)
|
|
|
3.2
|
Certificate of Amendment to Articles of Incorporation (incorporated
by reference from Exhibit 10.3 to the Company’s Quarterly
Report on Form 10-Q for the quarter ended September 30,
2001)
|
|
|
3.3
|
Amended and Restated ByLaws (incorporated by reference from Exhibit
3(iii) to the Company’s Current Report on Form 8-K filed May
29, 2013)
|
|
|
3.4
|
Amendment to Bylaws dated December 9, 2015 (incorporated by
reference from Exhibit 3.1 to the Company’s Current Report on
Form 8-K filed December 10, 2015)
|
|
|
+10.1
|
2007 Non-Employee Directors’ Stock Option Plan (incorporated
by reference from Annex F to the Company’s Definitive Proxy
Statement on Schedule 14A filed April 5, 2007, relating to the 2007
annual stockholders’ meeting)
|
|
|
+10.2
|
Form of 2007 Non-Employee Directors’ Stock Option Agreement
(incorporated by reference from Exhibit 10.6 to the Company’s
Annual Report on Form 10-K for the year ended December 31,
2012)
|
|
|
+10.3
|
2007 Incentive Compensation Plan (incorporated by reference from
Annex G to the Company’s Definitive Proxy Statement on
Schedule 14A filed April 5, 2007, relating to the 2007 annual
stockholders’ meeting)
|
|
|
+10.4
|
Form of 2007 Incentive Compensation Plan Stock Option Agreement
(incorporated by reference from Exhibit 10.15 to the
Company’s Annual Report on Form 10-K for the year ended
December 31, 2012)
|
|
|
10.5
|
Manufacturing Agreement, dated as of September 11, 2001, by and
between Shenzhen Hyt Science & Technology Company, LTD. and
RELM Wireless Corporation (incorporated by reference from Exhibit
10.2 to the Company’s Quarterly Report on Form 10-Q for the
quarter ended September 30, 2001)
|
|
|
10.6
|
Loan and Security Agreement, dated as of October 23, 2008, by
and among Silicon Valley Bank, RELM Wireless Corporation and RELM
Communications, Inc. (incorporated by reference from Exhibit 10.1
to the Company’s Current Report on Form 8-K filed October 28,
2008)
|
|
|
10.7
|
First Amendment to Loan and Security Agreement, dated as of
October 20, 2010, by and among Silicon Valley Bank, RELM
Wireless Corporation and RELM Communications, Inc. (incorporated by
reference from Exhibit 10.1 to the Company’s Current Report
on Form 8-K filed on October 20, 2010)
|
|
|
10.8
|
Second Amendment to Loan and Security Agreement, dated as of
June 22, 2011, by and among Silicon Valley Bank, RELM Wireless
Corporation and RELM Communications, Inc. (incorporated by
reference from Exhibit 10.1 to the Company’s Current Report
on Form 8-K filed on June 22, 2011)
|
|
|
10.9
|
Third Amendment to Loan and Security Agreement, dated as of
December 18, 2012, by and among Silicon Valley Bank, RELM Wireless
Corporation and RELM Communications, Inc. (incorporated by
reference from Exhibit 10.1 to the Company’s Current Report
on Form 8-K filed on December 19, 2012)
|
|
|
10.10
|
Fourth Amendment to Loan and Security Agreement, dated as of
January 28, 2015 and effective as of December 31, 2014, by and
among Silicon Valley Bank, RELM Wireless Corporation and RELM
Communications, Inc. (incorporated by reference from Exhibit 10.1
to the Company’s Current Report on Form 8-K filed on January
28, 2015)
|
|
31
| Number | Exhibit | |
|
10.11
|
Fifth Amendment to Loan and Security Agreement, dated as of
December 29, 2015, by and among Silicon Valley Bank, RELM Wireless
Corporation and RELM Communications, Inc. (incorporated by
reference from Exhibit 10.1 to the Company’s Current Report
on Form 8-K filed on December 30, 2015)
|
|
|
10.12
|
Sixth Amendment to Loan and Security Agreement, dated as of January
17, 2017 and effective as of December 28, 2016, by and among
Silicon Valley Bank, RELM Wireless Corporation and RELM
Communications, Inc. (incorporated by reference from Exhibit 10.1
to the Company’s Current Report on Form 8-K filed on January
18, 2017)
|
|
|
10.13
|
Agreement, dated as of March 2, 2015, by and among RELM Wireless
Corporation and Fundamental Global Investors, LLC (incorporated by
reference from Exhibit 10.1 to the Company’s Current Report
on Form 8-K filed on March 2, 2015)
|
|
|
+10.14
|
Executive Change of Control Agreement, dated and effective as of
February 24, 2016, by and between RELM Wireless Corporation and
Timothy A. Vitou*
|
|
|
+10.15
|
Executive Change of Control Agreement, dated and effective as of
February 24, 2016, by and between RELM Wireless Corporation and
David P. Storey (incorporated by reference from Exhibit 10.1 to the
Company’s Current Report on Form 8-K filed February 25,
2016)
|
|
|
+10.16
|
Executive Change of Control Agreement, dated and effective as of
February 24, 2016, by and between RELM Wireless Corporation and
William P. Kelly (incorporated by reference from Exhibit 10.2 to
the Company’s Current Report on Form 8-K filed February 25,
2016)
|
|
|
+10.17
|
Executive Change of Control Agreement, dated and effective as of
February 24, 2016, by and between RELM Wireless Corporation and
James E. Gilley (incorporated by reference from Exhibit 10.3 to the
Company’s Current Report on Form 8-K filed February 25,
2016)
|
|
|
+10.18
|
2015 Executive Incentive Bonus Plan (incorporated by reference to
the Current Report on Form 8-K filed February 27,
2015)
|
|
|
+10.19
|
Separation and Release Agreement, executed February 3, 2017, by and
between RELM Wireless Corporation and David P. Storey (incorporated
by reference from Exhibit 10.1 to the Company’s Current
Report on Form 8-K filed February 6, 2017)
|
|
|
21
|
Subsidiaries of the Company*
|
|
|
23.1
|
Consent
of Moore Stephens Lovelace, P.A. (relating to RELM Wireless
Corporation’s Registration Statements on Form S-8)
(Registration No. 333-112446 and Registration
No. 333-147354)*
|
|
|
24
|
Power of Attorney (included on signature page)
|
|
|
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*
|
|
|
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*
|
|
|
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)**
|
|
|
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)**
|
|
|
101.INS
|
XBRL Instance Document*
|
|
|
101.SCH
|
XBRL Taxonomy Extension Schema Document*
|
|
|
101.CAL
|
XBRL Taxonomy Extension Calculation Linkbase Document*
|
|
|
101.LAB
|
XBRL Taxonomy Extension Label Linkbase Document*
|
|
|
101.PRE
|
XBRL Taxonomy Extension Presentation Linkbase
Document*
|
|
|
101.DEF
|
XBRL
Taxonomy Definition Linkbase Document*
|
|
*
Included
with this filing
**
Furnished
herewith (not filed)
+
Each management contract or compensatory plan or
arrangement.
32