UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
FORM 10 - Q
-----------------------
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2008
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________________
000-18122
---------
(Commission File Number)
ARC Wireless Solutions, Inc.
----------------------------
(Exact name of registrant as specified in its charter)
Utah 87-0454148
---- ----------
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation)
10601 West 48th Avenue
Wheat Ridge, Colorado, 80033-2660
---------------------------------
(Address of principal executive offices including zip code)
(303) 421-4063
--------------
(Registrant's telephone number, including area code)
Not Applicable
--------------
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
the definitions of " large accelerated filer", "accelerated filer" and "small
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ ]
Smaller reporting company [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of November 1, 2008, the Registrant had 3,091,350 shares outstanding of its
$.0005 par value common stock.
2
ARC Wireless Solutions, Inc.
Quarterly Report on FORM 10-Q For The Period Ended
September 30, 2008
TABLE OF CONTENTS
-----------------
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 2008
(unaudited) and December 31, 2007...................................4
Condensed Consolidated Statements of Operations for the Three
Months and Nine Months Ended September 30, 2008 and 2007
(unaudited).........................................................5
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 2008 and 2007 (unaudited)................6
Notes to Consolidated Financial Statements............................7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................15
Item 3. Quantitative and Qualitative Disclosures About Market Risk...........17
Item 4. Controls and Procedures..............................................18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings....................................................19
Item 1A. Risk Factors.........................................................19
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds..........19
Item 4. Submission of Matters to a Vote of Security Holders..................19
Item 5. Other Information.....................................................19
Item 6. Exhibits ............................................................20
Signatures....................................................................20
Exhibit 31.1..................................................................21
Exhibit 31.2..................................................................22
Exhibit 32.1..................................................................23
3
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
ARC Wireless Solutions, Inc.
Condensed Consolidated Balance Sheets
September 30, December 31,
2008 2007
(unaudited) *
------------ ------------
Assets
Current assets:
Cash and equivalents $ 14,725,000 $ 14,941,000
Accounts receivable - trade, net 992,000 1,173,000
Inventory, net 1,034,000 1,179,000
Other current assets 84,000 109,000
------------ ------------
Total current assets 16,835,000 17,402,000
------------ ------------
Property and equipment, net 416,000 365,000
Other assets:
Intangible assets, net 124,000 106,000
Deposits 33,000 39,000
------------ ------------
Total assets $ 17,408,000 $ 17,912,000
============ ============
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 607,000 $ 631,000
Bank debt - current 1,170,000 1,436,000
Accrued expenses 297,000 286,000
Current portion of capital lease obligations 88,000 56,000
------------ ------------
Total current liabilities 2,162,000 2,409,000
Capital lease obligations, less current portion 89,000 83,000
------------ ------------
Total liabilities 2,251,000 2,492,000
------------ ------------
Commitments
Stockholders' equity:
Preferred stock, $.001 par value, 2,000,000 authorized, none
issued and outstanding --
Common stock, $.0005 par value, 250,000,000 authorized,
3,091,000 and 3,090,000 issued in 2008 and 2007, respectively. 2,000 2,000
Additional paid-in capital 20,725,000 20,696,000
Accumulated deficit (5,570,000) (5,278,000)
------------ ------------
Total stockholders' equity 15,157,000 15,420,000
------------ ------------
Total liabilities and stockholders' equity $ 17,408,000 $ 17,912,000
============ ============
* These numbers were derived from the audited financial statements for the year ended December
31, 2007. See accompanying notes.
4
ARC Wireless Solutions, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
2008 2007 2008 2007
----------- ----------- ----------- -----------
Sales, net $ 2,284,000 $ 1,986,000 $ 5,905,000 $ 5,656,000
Cost of sales 1,485,000 1,362,000 3,730,000 3,822,000
----------- ----------- ----------- -----------
Gross profit 799,000 624,000 2,175,000 1,834,000
Operating expenses:
Selling, general and administrative expenses 857,000 1,012,000 2,727,000 2,767,000
----------- ----------- ----------- -----------
Loss from operations (58,000) (388,000) (552,000) (933,000)
Other income (expense):
Interest expense (10,000) (5,000) (41,000) (16,000)
Other income 79,000 220,000 301,000 584,000
----------- ----------- ----------- -----------
Total other income (expense) 69,000 215,000 260,000 568,000
----------- ----------- ----------- -----------
Income (loss) before income taxes 11,000 (173,000) (292,000) (365,000)
Provision for income taxes -- -- -- --
----------- ----------- ----------- -----------
Net income (loss) $ 11,000 $ (173,000) $ (292,000) $ (365,000)
=========== =========== =========== ===========
Net income (loss) per share - basic and diluted -- $ (.06) $ (.09) $ (.12)
=========== =========== =========== ===========
Weighted average shares - basic 3,091,000 3,089,000 3,091,000 3,089,000
=========== =========== =========== ===========
Weighted average shares - diluted 3,091,000 3,089,000 3,091,000 3,089,000
See accompanying notes.
5
ARC Wireless Solutions, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended September 30,
2008 2007
------------ ------------
Operating activities
Net loss $ (292,000) $ (365,000)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization 147,000 122,000
Non-cash expense for issuance of stock and options 26,000 27,000
Provision for doubtful accounts 57,000 --
Changes in operating assets and liabilities:
Accounts receivable, trade 124,000 (490,000)
Inventory 145,000 (379,000)
Prepaids and other current assets 25,000 (136,000)
Other assets 6,000 (3,000)
Accounts payable and accrued expenses (10,000) 182,000
------------ ------------
Net cash provided by (used in) operating activities 228,000 (1,042,000)
------------ ------------
Investing activities
Patent acquisition costs (30,000) (10,000)
Purchase of plant and equipment (83,000) (85,000)
------------ ------------
Net cash used in investing activities (113,000) (95,000)
------------ ------------
Financing activities
Advances from line of credit 3,304,000 3,306,000
Repayment of line of credit and capital lease obligations (3,635,000) (2,817,000)
------------ ------------
Net cash provided by (used in) financing activities (331,000) 489,000
------------ ------------
Net change in cash (216,000) (648,000)
Cash and cash equivalents, beginning of period 14,941,000 15,720,000
------------ ------------
Cash and cash equivalents, end of period $ 14,725,000 $ 15,072,000
============ ============
Supplemental cash flow information:
Cash paid for interest $ 41,000 $ 16,000
Issuance of stock for accrued fees $ 3,000 --
Acquisition of property and equipment through capital lease $ 103,000 $ 135,000
See accompanying notes.
6
ARC Wireless Solutions, Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2008
Note 1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and pursuant to the rules and
regulations of the Securities and Exchange Commission. Accordingly, they do not
include all of the information and footnotes required by accounting principles
generally accepted in the United States for complete financial statements. In
the opinion of management, the accompanying unaudited consolidated financial
statements contain all of the normal recurring adjustments necessary to present
fairly the financial position of the Company as of September 30, 2008, the
results of its operations and its cash flows for the three and nine months then
ended. For further information, refer to the financial statements and footnotes
thereto included in the Company's Annual Report on Form 10-K for the year ended
December 31, 2007.
During the periods presented in the unaudited condensed consolidated financial
statements, the Company operated in two business segments which are identified
as Manufacturing and Cable offering a wide variety of wireless component and
network solutions to service providers, systems integrators, value added
resellers, businesses and consumers, primarily in the United States.
Operating results for the three and nine months ended September 30, 2008 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2008 or any future period.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of ARC
Wireless Solutions, Inc. ("ARC"), and its wholly-owned subsidiary corporations,
Starworks Wireless Inc. ("Starworks") and ARC Wireless Hong Kong Limited,
("ARCHK"), since their respective acquisition dates. All material intercompany
accounts, transactions, and profits have been eliminated in consolidation.
Basis of Presentation
The Company has experienced recurring losses, and has accumulated a deficit of
approximately $5.6 million since inception in 1987. There can be no assurance
that the Company will achieve the desired result of net income and positive cash
flow from operations in future years. Management believes that current working
capital, which includes $14.7 million in cash and cash equivalents at September
30, 2008, and available borrowings on the Company's existing bank line of credit
will be sufficient to allow the Company to maintain its operations through
December 31, 2008.
Use of Estimates
The preparation of the Company's consolidated financial statements in accordance
with generally accepted accounting principles of the United States of America
requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results
could differ from these estimates.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents. From time to
time the Company has cash balances in excess of federally insured amounts. As of
September 30, 2008, the cash balance exceeded the Federal Deposit Insurance
Corporation ("FDIC") limitation for coverage of $100,000 by approximately
$14,500,000 and as of December 31, 2007, the balance exceeded the FDIC
7
limitation for coverage of $100,000 by approximately $14,800,000. The Company
reduces its exposure to credit risk by maintaining such balances with financial
institutions that have high credit ratings. On October 3, 2008, FDIC deposit
insurance temporarily increased from $100,000 to $250,000 per depositor through
December 31, 2009.
Fair Value of Financial Instruments
The Company's short-term financial instruments consist of cash, money market
accounts, accounts receivable, accounts payable, accrued expenses and bank debt.
The carrying amounts of these financial instruments approximate fair value
because of their short-term maturities. Financial instruments that potentially
subject the Company to a concentration of credit risk consist principally of
cash and accounts receivable.
The Company does not hold or issue financial instruments for trading purposes
nor does it hold or issue interest rate or leveraged derivative financial
instruments.
Accounts Receivable
Trade receivables consist of uncollateralized customer obligations due under
normal trade terms requiring payment usually within 30 days of the invoice date.
Management reviews trade receivables periodically and reduces the carrying
amount by a valuation allowance that reflects management's best estimate of the
amount that may not be collectible. The allowance for doubtful accounts was
$510,000 and $453,000 at September 30, 2008 and December 31, 2007, respectively.
Bad debt expense was $28,000 and $0 for the three months ended September 30,
2008 and 2007, respectively and $57,000 and $0 for the nine months ended
September 30, 2008 and 2007, respectively.
Income Taxes
The Company accounts for income utilizing the asset and liability method of
computing deferred income taxes. The objective of the asset and liability method
is to establish deferred tax assets and liabilities for the temporary
differences between the financial reporting basis and the tax basis of the
Company's assets and liabilities at enacted tax rates expected to be in effect
when such amounts are realized or settled. The current and deferred tax
provision is allocated among the members of the consolidated group on the
separate income tax return basis.
Effective January 1, 2007, we adopted the provisions of FASB Interpretation No.
48, Accounting for Uncertainty in Income Taxes -- An Interpretation of FASB
Statement No. 109, or "FIN 48". FIN 48 provides detailed guidance for the
financial statement recognition, measurement and disclosure of uncertain tax
positions recognized in the financial statements in accordance with SFAS No.
109. Tax positions must meet a "more-likely-than-not" recognition threshold at
the effective date to be recognized upon the adoption of FIN 48 and in
subsequent periods. Upon the adoption of FIN 48, we had no unrecognized tax
positions. During the three months and nine months ended September 30, 2008 and
2007, we recognized no adjustments for uncertain tax positions.
We recognize interest and penalties related to uncertain tax positions in income
tax expense. No interest and penalties related to uncertain tax positions were
accrued at September 30, 2008 and December 31, 2007.
The tax years 2003 through 2006 remain open to examination by the major taxing
jurisdictions in which we operate. We expect no material changes to unrecognized
tax positions within the next twelve months.
8
Reclassifications
Certain balances in the prior year consolidated financial statements have been
reclassified in order to conform to the current year presentation. The
reclassifications had no effect on financial condition, gross profit, or net
loss.
Note 2: Share-Based Compensation
On January 1, 2006, the Company adopted Statement of Financial Accounting
Standards No. 123(R) ("SFAS 123(R)") related to accounting for share-based
payments and, accordingly, the Company is now recording compensation expense for
share-based awards based upon an assessment of the grant date fair value for
stock options and restricted stock awards.. We usED the modified prospective
method of adoption, which allows us to apply SFAS 123(R) on a going-forward
basis rather than restating prior periods.
Stock compensation expense for stock options is recognized on a straight-line
basis over the vesting period of the award. The Company accounts for stock
options as equity awards.
The following table summarizes share-based compensation expense recorded in
general and administrative expenses during each period presented:
Three Months Ended
---------------------------------------
September 30, 2008 September 30, 2007
------------------ ------------------
Stock options $8,000 $4,000
------ ------
Total share-based compensation expense $8,000 $4,000
====== ======
Nine Months Ended
---------------------------------------
September 30, 2008 September 30, 2007
------------------ ------------------
Stock options $26,000 $15,000
------- -------
Total share-based compensation expense $26,000 $15,000
======= =======
Stock option activity was as follows:
Number of Weighted Average
Shares Exercise Price ($)
------- ------------------
Balance at January 1, 2008 54,500 $ 5.56
Granted --
Exercised --
Forfeited or expired (7,000) $ 6.79
------- --------
Balance at September 30, 2008 47,500 $ 5.38
======= ========
The following table presents information regarding options outstanding as of
September 30, 2008:
Weighted average contractual remaining term - options outstanding 7.7
Aggregate intrinsic value - options outstanding -
Options exercisable 14,000
Weighted average exercise price - options exercisable $5.34
Aggregate intrinsic value - options exercisable -
Weighted average contractual remaining term - options exercisable 5.4
There were no options granted or exercised during the nine months ended
September 30, 2008.
9
Note 2: Share-Based Compensation, continued
The following weighted average assumptions were used:
Three and Nine Months
Ended September, 2007
---------------------
Volatility .52
Expected life of options (in years) 4.25
Dividend yield 0.00%
Risk free interest rate 4.64%
Per share value of options granted $1.59
As of September 30, 2008, future compensation costs related to non-vested stock
options was $102,000. Management anticipates that this cost will be recognized
over a weighted average period of approximately 4 years.
Note 3. Earnings Per Share
SFAS 128 provides for the calculation of Basic and Dilutive earnings (loss) per
share. Basic earnings (loss) per share includes no dilution and is computed by
dividing income available to common stockholders by the weighted average number
of common shares outstanding for the period. Diluted earnings (loss) per share,
reflects the potential dilution of securities that could share in the earnings
of the entity. For periods where the Company has incurred a net loss, stock
options and stock warrants were not included in the computation of diluted loss
per share because their effect was anti-dilutive, therefore, basic and fully
diluted loss per share are the same for those periods.
The following table represents a reconciliation of the shares used to calculate
basic and diluted earnings per share for the respective periods indicated:
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
2008 2007 2008 2007
--------- ----------- ---------- -----------
Numerator: Net Income (loss) $ 11,000 $ (173,000) $ (292,000) $ (365,000)
========= =========== ========== ===========
Denominator:
Denominator for basic earnings per
share - weighted average shares 3,091,000 3,089,000 3,091,000 3,089,000
Effect of dilutive securities
Employee stock options (**) -- -- -- --
--------- ----------- ---------- -----------
Denominator for diluted earnings per
share - adjusted weighted average
shares and assumed conversion 3,091,000 3,089,000 3,091,000 3,089,000
========= =========== ========== ===========
Basic loss per share -- $ (.06) $ (.09) $ (.12)
========= =========== ========== ===========
Diluted loss per share -- $ (.06) $ (.09) $ (.12)
========= =========== ========== ===========
** There are no dilutive shares used in the calculation of diluted earnings per
share, for the three months September 30, 2007 and the nine months ended
September 30, 2008 and 2007, since the Company had net losses for those periods.
For the three months ended September 30, 2008 there were no dilutive shares in
the calculation of diluted earnings per share since there were no in the money
options.
10
Note 4. Inventory
Inventory is valued at the lower of cost or market using standard costs that
approximate average cost. Inventories are reviewed periodically and items
considered to be slow-moving or obsolete are reduced to estimated net realizable
value through an appropriate reserve. Inventory consists of the following:
September 30, December 31,
2008 2007
----------- -----------
Raw materials $ 886,000 $ 963,000
Work in progress 94,000 105,000
Finished goods 818,000 815,000
----------- -----------
1,798,000 1,883,000
Inventory reserve (764,000) (704,000)
----------- -----------
Net inventory $ 1,034,000 $ 1,179,000
=========== ===========
Note 5. Revolving Bank Loan Agreements
On May 10, 2005, the Company entered into a $1.5 million revolving
line-of-credit agreement (the "Credit Facility") with Citywide Banks. The Credit
Facility has an annual maturity and is currently due May 1, 2009, with interest
at 1.5% over prime (6.5% at September 30, 2008), contains covenants to maintain
certain financial statement ratios, and is collateralized by essentially all of
the assets of ARC and its wholly-owned subsidiary, Starworks, but excluding ARC
Hong Kong. The borrowing base is calculated on a percentage of trade receivables
and inventory for ARC combined. The balance outstanding on the revolving line of
credit at September 30, 2008 and December 31, 2007 was $1,170,000 and
$1,436,000, respectively.
Note 6. Equity Transactions
On February 9, 2007, the Company announced a one-for-fifty reverse stock split
of its issued and outstanding common stock to be effective as of February 12,
2007 (the "Effective Date"). Pursuant to the reverse stock split, each fifty
shares of the Company's issued and outstanding common stock were reclassified
and combined into one share of the Company's common stock as of the Effective
Date. The number of shares of the Company's common stock authorized remained at
250 million shares, without any change in par value per common share, and the
number of shares of the Company's preferred stock authorized remained at 2
million.
As of the Effective Date, the exercise or conversion price, as well as the
number of shares issuable under each of the Company's outstanding stock option
agreements, were proportionately adjusted to reflect the reverse stock split. In
addition, the number of shares authorized for issuance under the Company's
equity compensation plans, were proportionately reduced as of the Effective Date
to reflect the reverse stock split.
Stockholders' equity, common stock, and stock option activity for all periods
presented have been restated to give retroactive recognition to the reverse
stock split. In addition, all references in the accompanying consolidated
financial statements, to the weighted average shares, per share amounts, and
market prices of the Company's common stock have been restated to give
retroactive recognition to the reverse stock split.
11
Note 6. Equity Transactions, continued
During the nine months ended September 30, 2008, the Company recorded the
issuance of 707 shares of common stock to a director for outstanding obligations
for accrued directors' fees in the amount of $3,000.
During the nine months ended September 30, 2007, the Company recorded the
issuance of 2,409 shares of common stock to a director for outstanding
obligations for accrued directors' fees in the amount of $12,000.
Note 7. Recent Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
("SFAS 157"), which enhances existing guidance for measuring assets and
liabilities using fair value. SFAS 157 provides a single definition of fair
value, together with a framework for measuring it, and requires additional
disclosure about the use of fair value to measure assets and liabilities. SFAS
157 also emphasizes that fair value is a market-based measurement, not an
entity-specific measurement, and sets out a fair value hierarchy with the
highest priority being quoted market prices in active markets. Under the
standard, fair value measurements would be separately disclosed by level within
the fair value hierarchy. SFAS 157 is effective for financial statements issued
for fiscal years beginning after November 15, 2007, and interim periods within
those fiscal years. SFAS 157 does not require any new fair value measurements
for existing assets and liabilities on the Company's balance sheet as of the
date of adoption. The adoption of SFAS 157 on January 1, 2008 did not have an
impact on our consolidated financial position or consolidated results of
operations.
In February 2008, the FASB issued FASB Staff Position FAS 157-2, Effective Date
of FASB Statement No. 157 ("FSP FAS 157-2"). FSP FAS 157-2 delays the effective
date of SFAS 157 to fiscal years beginning after November 15, 2008 for all
nonfinancial assets and nonfinancial liabilities, except those that are
recognized or disclosed at fair value in the financial statements on a recurring
basis, at least annually. FSP FAS 157-2 is effective for our fiscal year
beginning January 1, 2009. The adoption of FSP FAS 157-2 is not expected to have
a material impact on our Consolidated Financial Statements.
In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans--an amendment of FASB
Statements No. 87, 88, 106, and 132(R)" ("SFAS 158"), which requires the
recognition of the funded status of benefit plans in the balance sheet. SFAS 158
also requires certain gains and losses that are deferred under current pension
accounting rules to be recognized in accumulated other comprehensive income, net
of tax effects. These deferred costs (or income) will continue to be recognized
as a component of net periodic pension cost, consistent with current recognition
rules. For entities with no publicly traded equity securities, the effective
date for the recognition of the funded status is for fiscal years ending after
June 15, 2007. In addition, the ability to measure the plans' benefit
obligations, assets and net period cost at a date prior to the fiscal year-end
date is eliminated for fiscal years ending after December 15, 2008. The adoption
of the recognition element of SFAS 158 had no effect on the Company's financial
statements. The adoption of the measurement date element of SFAS 158 is not
expected to have a material impact on the Company's financial statements.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities--including an amendment of FASB
Statement No. 115" ("SFAS 159"). SFAS 159 expands the use of fair value
accounting but does not affect existing standards which require assets and
liabilities to be carried at fair value. Under SFAS 159, a company may elect to
use fair value to measure accounts and loans receivable, available-for-sale and
held-to-maturity securities, equity method investments, accounts payable,
guarantees, issued debt and other eligible financial instruments. SFAS 159 is
effective for fiscal years beginning after November 15, 2007. The Company has
elected not to adopt SFAS 159.
12
Note 7. Recent Accounting Pronouncements, continued
In December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business
Combinations" ("SFAS 141R"), which replaces SFAS 141. SFAS 141R establishes
principles and requirements for how an acquirer recognizes and measures in its
financial statements the identifiable assets acquired, the liabilities assumed,
any non-controlling interest in the acquiree and the goodwill acquired in
connection with a business combination. The Statement also establishes
disclosure requirements that will enable users to evaluate the nature and
financial effect of the business combination. SFAS 141R applies prospectively to
business combinations for which the acquisition date is on or after the
beginning of an entity's first fiscal year that begins after December 15, 2008.
The Company is currently evaluating the potential impact, if any, of the
adoption of SFAS 141R on the Company's financial statements.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in
Consolidated Financial Statements--an amendment of ARB No. 51" ("SFAS 160").
SFAS 160 requires that accounting and reporting for minority interests will be
recharacterized as noncontrolling interests and classified as a component of
equity. SFAS 160 also establishes reporting requirements that provide sufficient
disclosures that clearly identify and distinguish between the interests of the
parent and the interests of the noncontrolling owners. This Statement is
effective as of the beginning of an entity's first fiscal year beginning after
December 15, 2008. The Company has not yet determined the impact, if any, that
SFAS 160 will have on its financial statements.
On March 19, 2008, The Financial Accounting Standards Board (FASB) issued FASB
Statement No. 161, Disclosures about Derivative Instruments and Hedging
Activities. The new standard is intended to improve financial reporting about
derivative instruments and hedging activities by requiring enhanced disclosures
to enable investors to better understand their effects on an entity's financial
position, financial performance, and cash flows. It is effective for financial
statements issued for fiscal years and interim periods beginning after November
15, 2008, with early application encouraged. The Company has not yet determined
the impact, if any, that SFAS 161 will have on its financial statements.
In June 2008, the FASB issued FASB Staff Position EITF 03-6-1 "Determining
Whether Instruments Granted in Share-Based Payment Transactions are
Participating Securities" ("FSP EITF 03-6-1"). FSP EITF 03-6-1 addresses whether
instruments granted in share-based payment transactions are participating
securities prior to vesting and, therefore, need to be included in the earnings
allocation in computing earnings per share ("EPS") under the two-class method
described in paragraphs 60 and 61 of SFAS No. 128, "Earnings Per Share". FSP
EITF 03-6-1 is effective for fiscal years and interim periods beginning after
December 15, 2008 and requires retrospective adjustment for all comparable prior
periods presented. We do not expect adoption of FSP EITF 03-6-1 to have a
material effect on our EPS calculations or disclosures.
Note 8. Concentration of Credit Risk
One customer accounted for approximately 10% of the Company's net sales for the
nine months ended September 30, 2008. One customer accounted for approximately
16% of the Company's net sales for the nine months ended September 30, 2007. In
November 2007, the customer who accounted for 16% of our revenues in 2007 filed
for bankruptcy reorganization. The Company expects sales related to this
customer to continue in 2008 (a) at a lower volume than in previous quarters in
2007 and (b) at a more unpredictable and irregular rate as in previous quarters.
The Company's management also believes that orders related to this customer will
continue at least through Q2 of 2009 but will not continue at historical levels
during that period.
13
Note 9. Industry Segment Information
SFAS No. 131 "Disclosure about Segments of an Enterprise and Related
Information" requires that the Company disclose certain information about its
operating segments where operating segments are defined as components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. Generally, financial
information is required to be reported on the basis that is used internally for
evaluating segment performance and deciding how to allocate resources to
segments.
The Company has two reportable segments that are separate business units that
offer different products as follows: antenna manufacturing and cable products.
Each segment consists of a single operating unit and the accounting policies of
the reporting segments are the same as those described in the summary of
significant accounting policies. Intersegment sales and transfers are recorded
at cost plus an agreed upon intercompany profit on intersegment sales and
transfers.
Financial information regarding the Company's two continuing operating segments
(which include segment eliminations) for the three months ended September 30,
2008 and 2007 are as follows:
Manufacturing Cable Corporate Total
------------- ----- --------- -----
Net sales 2008 $ 2,270,000 $ 14,000 $ 2,284,000
2007 1,976,000 10,000 -- 1,986,000
Net income (loss) 2008 173,000 (13,000) (149,000) 11,000
2007 (42,000) 49,000 (180,000) (173,000)
Income (Loss) before income taxes 2008 173,000 (13,000) (149,000) 11,000
2007 (42,000) 49,000 (180,000) (173,000)
Identifiable assets 2008 3,961,000 74,000 13,373,000 17,408,000
2007 4,872,000 122,000 13,449,000 18,443,000
Financial information regarding the Company's two continuing operating segments
(which include segment eliminations) for the nine months ended September 30,
2008 and 2007 are as follows:
Manufacturing Cable Corporate Total
------------- ----- --------- -----
Net sales 2008 $ 5,877,000 $ 25,000 $ 5,905,000
2007 5,561,000 95,000 -- 5,656,000
Net income (loss) 2008 276,000 (28,000) (540,000) (292,000)
2007 14,000 47,000 (426,000) (365,000)
Income (Loss) before income taxes 2008 276,000 (28,000) (540,000) (292,000)
2007 14,000 47,000 (426,000) (365,000)
Identifiable assets 2008 3,961,000 74,000 13,373,000 17,408,000
2007 4,872,000 122,000 13,449,000 18,443,000
Corporate represents the operations of the parent Company, excluding segment
eliminations.
14
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Continuing Operations for the Three Months Ended September 30, 2008
and 2007
Total revenues were $2,284,000 and $1,986,000 for the three month periods ended
September 30, 2008 and September 30, 2007, respectively. The $298,000 increase
in revenues during the three months ended September 30, 2008 compared to the
three months ended September 30, 2007 is attributable to a $294,000 increase in
revenues from our Wireless Communications Solutions Division and an increase of
$4,000 in revenues from our Starworks subsidiary. The 15% increase in revenue
from the Wireless Communications Solutions Division is primarily attributable to
an increase in new customers.
Gross profit margins were 35% for the three months ended September 30, 2008 and
31% for the three months ended September 30, 2007. The increase in the gross
margin is primarily the result of lower operating costs resulting from our
efforts in successfully transitioning most of our production to China through
our Hong Kong subsidiary, ARCHK, as well as reducing overhead from our U.S.
operations.
Selling, general and administrative expenses (SG&A) decreased by $155,000 for
the three months ended September 30, 2008 compared to the three months ended
September 30, 2007. Most of the decrease is attributable to the write off of old
trade payables of approximately $100,000. While bad debt expense increased
$18,000 and director compensation increased $9,000 in 2008 compared to 2007,
this was offset by decreases in outside services, $48,000, and group medical,
$5,000. SG&A as a percent of total revenues decreased from 51% for the three
months ended September 30, 2007 to 38% for the three months ended September 30,
2008, primarily due to a 15% increase in sales and a reduction in SG&A of
$155,000. Salaries and wages, including commissions, remains the largest
component of SG&A costs, constituting 62% and 50% of the total SG&A costs for
the three months ended September 30, 2008 and September 30, 2007, respectively.
Net interest expense was $10,000 for the three months ended September 30, 2008
compared to $5,000 for the three months ended September 30, 2007, primarily
related to capital lease obligations which increased $239,000 from September 30,
2007.
Other income in 2008 and 2007 represents interest income on funds invested from
the sale of Winncom. The decline in interest income from 2007 to 2008 is due
primarily to a decline in the interest rates from 5% in 2007 to 2.68% in 2008.
There is no provision for income taxes for the three months ended September 30,
2008 despite net income of $11,000 because of net losses in the first two
quarters of 2008 offsetting that net income. There is no provision for income
taxes for the three months ended September 30, 2007 due to net losses.
The Company had net income of $11,000 for the three months ended September 30,
2008 as compared to a net loss of $173,000 for the three months ended September
30, 2007. The change from net loss in 2007 to net income in 2008 was primarily
due to a 15% increase in revenues, an increase in gross profit, and a decrease
in SG&A of $155,000, partially offset by a decrease of $141,000 in interest
income.
Results of Continuing Operations for the Nine Months Ended September 30, 2008
and 2007
Total revenues were $5,905,000 and $5,656,000 for the nine month periods ended
September 30, 2008 and September 30, 2007, respectively. The 4% increase in
revenues during the nine months ended September 30, 2008 compared to the nine
months ended September 30, 2007 is attributable our Wireless Communications
Solutions Division partially offset by a decrease of $70,000 in revenues from
our Starworks subsidiary. The increase in revenues in 2008 is attributable to
both increased sales to existing customers and sales to new customers.
Gross profit margins were 37% and 32% for the nine months ended September 30,
2008 and September 30, 2007, respectively. The increase in gross margin is
primarily the result of lower operating costs resulting from our efforts in
successfully transitioning most of our production to China through our Hong Kong
subsidiary, ARCHK, as well as reducing overhead from our U.S. operations.
15
Selling, general and administrative expenses (SG&A) decreased by $40,000 for the
nine months ended September 30, 2008 compared to the nine months ended September
30, 2007, primarily due to a write-off of old trade payables of approximately
$100,000, and decreases in employee benefits $18,000, and in outside services of
$73,000, all of which are partially by increases in salaries and wages $83,000,
and bad debt expense, $55,000. SG&A as a percent of total revenues decreased
from 49% for the nine months ended September 30, 2007 to 46% for the nine months
ended September 30, 2008. Salaries and wages, including commissions, remains the
largest component of SG&A costs, constituting 55% of the total SG&A costs for
the nine months ended September 30, 2008 and 51% for the nine months ended
September 30, 2007.
Net interest expense was $41,000 for the nine months ended September 30, 2008
compared to $16,000 for the nine months ended September 30, 2007, primarily
related to capital lease obligations which increased $239,000 from June 30,
2007.
Other income in 2008 and 2007 represents interest income on funds invested from
the sale of Winncom. The decline in interest income from 2007 to 2008 is
primarily due to a decline in the interest rates from 5% in 2007 to 2.68% in
2008.
There is no provision for income taxes for the nine months ended September 30,
2008 and 2007, due to net losses.
The Company had a net loss of $292,000 for the nine months ended September 30,
2008 as compared to a net loss of $365,000 for the nine months ended September
30, 2007. The decrease in the net loss, $73,000, from 2007 to 2008, is primarily
due to an increase in revenues, and an increase in gross margin, $341,000,
partially offset by a reduction in interest income, $283,000.
Financial Condition
The net cash provided by operating activities was $228,000 for the nine months
ended September 30, 2008 compared to net cash used in operating activities of
$1,042,000 for the nine months ended September 30, 2007.
The primary reasons for the change is a $73,000 reduction in the net loss
comparing 2008 to 2007, a reduction in accounts receivable, trade and inventory
of $269,000, an increase in non cash expenses of $81,000 partially offset by a
decrease in accounts payable and accrued expenses of $10,000. In 2007, there
were substantial increases in inventory, $490,000, trade accounts receivable,
$379,000, prepaid expenses, $136,000, partially offset by increases in accounts
payable and accrued expense of $182,000, which were primarily due to increased
sales in 2007 and an increase in open customer purchase orders which would be
fulfilled by December 31, 2007
The net cash used in investing activities from was $113,000 for the nine months
ended September 30, 2008 compared to $95,000 for the nine months ended September
30, 2007, primarily the result of expenditures for patents and equipment.
Net cash used in financing activities for the nine months ended September 30,
2008 was $331,000 compared to net cash provided by financing activities of
$489,000 for the nine months ended September 30, 2007. This change is primarily
the result of repayments on the Company's line of credit.
The Company's working capital at September 30, 2008 was $14,673,000 compared to
$14,993,000 at December 31, 2007. The decrease as of September 30, 2008 is due
primarily to the funding of the net loss.
16
On May 10, 2005, the Company entered into a $1.5 million revolving
line-of-credit agreement (the "Credit Facility") with Citywide Banks. The Credit
Facility has an annual maturity and is currently due May 1, 2009, with interest
at 1.5% over prime (6.5% at September 30, 2008), contains covenants to maintain
certain financial statement ratios, and is collateralized by essentially all of
the assets of ARC and its wholly-owned subsidiary, Starworks, but excluding ARC
Hong Kong. The borrowing base is calculated on a percentage of trade receivables
and inventory for ARC combined. The balance outstanding on the revolving line of
credit at September 30, 2008 and December 31, 2007 was $1,170,000 and
$1,436,000, respectively
Effective October 31, 2006, the Company completed the sale of Winncom. In
connection with the sale, we received $17,000,000 in cash on November 1, 2006.
Management believes that the remaining proceeds from the sale of Winncom,
current working capital and available borrowings on existing bank lines of
credit will be sufficient to allow the Company to maintain its operations
through December 31, 2008 and into the foreseeable future.
Forward-Looking Statements
This Quarterly Report on Form 10-Q includes "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. All statements
other than statements of historical fact included in this Quarterly Report,
including "Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations", regarding our financial position, business strategy,
plans and objectives of our management for future operations and capital
expenditures, and other matters, other than historical facts, are
forward-looking statements. Although we believe that the expectations reflected
in such forward-looking statements and the assumptions upon which the
forward-looking statements are based are reasonable, we can give no assurance
that such expectations will prove to have been correct.
Additional statements concerning important factors that could cause actual
results to differ materially from our expectations were disclosed in Item 1A,
"Risk Factors" on our Annual Report on Form 10-K for the year ended December 31,
2007. There have been no material changes to the Company's risk factors from
those disclosed in the Company's 2007 Annual Report on Form 10-K. The words
"believe", "may", "will", "when", "estimate", "continue", "anticipate",
"intend", "expect" and similar expressions, as they relate to ARC, our business
or our management, are intended to identify forward-looking statements. All
written and oral forward-looking statements attributable to us or persons acting
on our behalf subsequent to the date of this Quarterly Report are expressly
qualified in their entirety by the Risk Factors set forth in our Form 10-K.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We have not used derivative financial instruments.
We are exposed to market risk through interest rates related to our line of
credit which has variable interest rates equal to the existing bank prime rate
(5.0% as of September 30, 2008) plus one and one-half percent and to a lesser
degree our capitalized lease obligations. The prime interest rate decreased from
7.75% at September 30, 2007 to 5.0% at September 30, 2008. A decrease in the
bank's prime interest rate on our line of credit would not have a material
effect due to the fact that the line of credit is rarely used due to our
significant cash and cash equivalents.
In addition, we are exposed to market risk on interest rates earned on excess
funds from the proceeds from the sale of Winncom. The excess funds are invested
in short term money market securities and a reduction in the interest rate of 1%
would reduce our interest income by $150,000 based on the average amount
invested during the year ended September 30, 2008. Our management believes that
fluctuation in interest rates in the near term will not materially affect our
consolidated operating results, financial position or cash flow.
17
Critical Accounting Policies
The consolidated financial statements of the Company are prepared in conformity
with accounting principles generally accepted in the United States of America
("GAAP"). The preparation of these consolidated financial statements requires
the Company's management to make estimates and assumptions about future events
that affect the amounts reported in the financial statements and related notes.
Future events and their effects cannot be determined with absolute certainty.
Therefore, the determination of estimates requires the exercise of judgment. The
Company's significant accounting policies are summarized in Note 1 to the
consolidated financial statements contained in its Annual Report on Form 10-K
filed for the year ended December 31, 2007. Since December 31, 2007, there have
been no significant changes to our critical accounting estimates and policies.
Item 4T. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, we carried out an
evaluation, under the supervision and with the participation of our management,
including our Chief Executive Officer ("CEO") and our Chief Financial Officer
("CFO"), of the effectiveness of the design and operation of our disclosure
controls and procedures, or "disclosure controls" pursuant to Exchange Act Rule
13a-15(b). Disclosure controls are controls and procedures designed to
reasonably ensure that information required to be disclosed in our reports filed
under the Exchange Act, such as this quarterly report, is recorded, processed,
summarized and reported within the time periods specified in the U.S. Securities
and Exchange Commission's rules and forms. Disclosure controls include, without
limitation, controls and procedures designed to ensure that information required
to be disclosed in our reports filed under the Exchange Act is accumulated and
communicated to our management, including our CEO and CFO, or persons performing
similar functions, as appropriate, to allow timely decisions regarding required
disclosure. Our disclosure controls include some, but not all, components of our
internal control over financial reporting. Based upon that evaluation, the
Company's management, including our CEO and CFO concluded that as of September
30, 2008 our disclosure controls and procedures are effective such that the
information relating to us required to be disclosed in our Securities and
Exchange Commission ("SEC") reports (i) is recorded, processed, summarized and
reported within the time periods specified in SEC rules and forms, and (ii) is
accumulated and communicated to our management, including our CEO and CFO, as
appropriate to allow timely decisions regarding required disclosure.
This quarterly report does not include an attestation report of the Company's
registered public accounting firm regarding internal control over financial
reporting. Management's report was not subject to attestation by the Company's
registered public accounting firm pursuant to temporary rules of the Securities
and Exchange Commission that permit the Company to provide only management's
report in this quarterly report.
Change in Internal Control over Financial Reporting
The Company's management is responsible for establishing and maintaining an
adequate system of internal control over financial reporting (as defined in
Exchange Act Rule 13a-15(f)). Our internal control over financial reporting is a
process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements in accordance
with generally accepted accounting principles in the United States. Because of
its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Therefore, even those systems determined to be
effective can provide only reasonable assurance of achieving their control
objectives. In evaluating the effectiveness of our internal control over
financial reporting, our management used the criteria set forth by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO) in Internal
Control - Integrated Framework.
18
There have not been any changes in our internal control over financial reporting
during the quarter ended September 30, 2008, that have materially affected, or
are reasonably likely to materially affect, our internal control over financial
reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company and its subsidiaries are involved in various legal proceedings of a
nature considered normal in the course of its operations. These are principally
trade accounts receivable collections. While it is not feasible to predict or
determine the final outcome of these proceedings, management has reserved as an
allowance for doubtful accounts for that portion of the trade accounts
receivable it estimates will be uncollectible.
Item 1A. Risk Factors
Additional statements concerning important factors that could cause actual
results to differ materially from our expectations were disclosed in Item 1A,
"Risk Factors" of our Form 10-K for the fiscal year ended December 31, 2007.
There have been no material changes from the risk factors previously disclosed
in our Form 10-K for the fiscal year ended December 31, 2007.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None.
19
Item 6. Exhibits
EXHIBIT INDEX
Exhibit Number Description
-------------- -----------
3.1 Amended and Restated Articles of Incorporation dated October
11, 2000 (1)
3.2 Bylaws of the Company as amended and restated on June 30,
2008 (2)
10.2 Stock Purchase Agreement, by and among Bluecoral Limited,
Winncom Technologies Corp. and the Company dated as of July
28, 2006 (3)
10.3 Escrow Agreement, dated July 28, 2006, by and among the
Company, Bluecoral Limited and Consumer Title Services, LLC
(3)
10.4 Employment Agreement effective January 31, 2008 between the
Company and Randall P. Marx (4)
10.5 Employment Agreement effective November 1, 2007 between the
Company and Monty R. Lamirato (5)
10.6 Employment Agreement effective November 1, 2007 between the
Company and Steve C. Olson (5)
10.7 Employment Agreement effective November 1, 2007 between the
Company and Richard L. Anderson (5)
31.1 Officers' Certifications of Periodic Report pursuant to
Section 302 of Sarbanes-Oxley Act of 2002
32.1 Officers' Certifications of Periodic Report pursuant to
Section 906 of Sarbanes-Oxley Act of 2002
99.1 Nominating Policies and Procedures
----------
(1) Incorporated by reference from the Company's Form 10-KSB for December 31,
2000 filed on April 2, 2001.
(2) Incorporated by reference from the Company's Form 8-K filed on July 8,
2008.
(3) Incorporated by reference from the Company's Form 8-K/A filed on August 2,
2006.
(4) Incorporated by reference from the Company's Form 8-K filed on February 7,
2008.
(5) Incorporated by reference from the Company's Form 8-K filed on November 8,
2007.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ARC WIRELESS SOLUTIONS, INC.
Date: November 12, 2008 By: /s/ Randall P. Marx
-----------------------
Randall P. Marx
Chief Executive Officer
Date: November 12, 2008 By: /s/ Monty R. Lamirato
-------------------------
Monty R. Lamirato
Chief Financial Officer
20