================================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------
FORM 10 - Q
-------------------
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2007
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, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of Exchange Act. (Check one):
Large Accelerated Filer [ ] Accelerated Filer [ ] Non-Accelerated Filer [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 May 1, 2007, the Registrant had 3,088,741 shares outstanding of its $.0005
par value common stock.
================================================================================
2
ARC Wireless Solutions, Inc.
Quarterly Report on FORM 10-Q For The Period Ended
March 31, 2007
TABLE OF CONTENTS
-----------------
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 2007
(unaudited) and December 31, 2006................................ 4
Condensed Consolidated Statements of Operations for the
Three Months Ended March 31, 2007 and 2006 (unaudited)........... 5
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 2007 and 2006 (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............................................. 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................... 18
Item 1A. Risk Factors........................................................ 18
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds......... 18
Item 4. Submission of Matters to a Vote of Security Holders................. 18
Item 6. Exhibits ........................................................... 18
Signatures................................................................... 19
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
March 31, December 31,
2007 2006
(unaudited) (audited) *
------------ ------------
Assets
------
Current assets:
Cash and equivalents $ 15,229,000 $ 15,720,000
Accounts receivable - trade, net 864,000 620,000
Inventory, net 818,000 788,000
Other current assets 498,000 416,000
------------ ------------
Total current assets 17,409,000 17,544,000
------------ ------------
Property and equipment, net 286,000 297,000
Other assets:
Intangible assets, net 97,000 98,000
Deposits 35,000 36,000
------------ ------------
Total assets $ 17,827,000 $ 17,975,000
============ ============
Liabilities and stockholders' equity
------------------------------------
Current liabilities:
Accounts payable $ 964,000 $ 790,000
Bank debt - current 831,000 830,000
Accrued expenses 187,000 213,000
Current portion of capital lease obligations 32,000 32,000
------------ ------------
Total current liabilities 2,014,000 1,865,000
Capital lease obligations, less current portion 11,000 23,000
------------ ------------
Total liabilities 2,025,000 1,888,000
------------ ------------
Commitments (Notes 8 and 10)
Stockholders' equity:
Preferred stock, $001 par value, 2,000,000 authorized, none -- --
issued and outstanding
Common stock, $.0005 par value, 250,000,000 authorized, 2,000 2,000
3,088,000 and 3,126,000 issued in 2007 and 2006, respectively
Additional paid-in capital 20,673,000 21,855,000
Treasury stock, at cost, 39,000 shares in 2006 -- (1,195,000)
Accumulated deficit (4,873,000) (4,575,000)
------------ ------------
Total stockholders' equity 15,802,000 16,087,000
------------ ------------
Total liabilities and stockholders' equity $ 17,827,000 $ 17,975,000
============ ============
* These numbers were derived from the audited financial statements for the year
ended December 31, 2006 and adjusted for discontinued operations. See
accompanying notes.
4
ARC Wireless Solutions, Inc.
Condensed Consolidated Statements of Operations
Three Months Ended March 31,
2007 2006
----------- -----------
(unaudited)
Sales, net $ 1,581,000 $ 1,549,000
Cost of sales 1,170,000 1,129,000
----------- -----------
Gross profit 411,000 420,000
Operating expenses:
Selling, general and administrative expenses 868,000 726,000
----------- -----------
Loss from operations (457,000) (306,000)
Other income (expense):
Interest expense, net (6,000) (27,000)
Other income 165,000 --
----------- -----------
Total other income (expense) 159,000 (27,000)
----------- -----------
Loss from continuing operations before income taxes (298,000) (333,000)
Benefit for income taxes -- 54,000
----------- -----------
Loss from continuing operations (298,000) (279,000)
Discontinued Operations (Note 2)
Income from operations of the discontinued component
-- 322,000
Provision for income taxes, discontinued component
-- (13,000)
----------- -----------
Net income (loss) $ (298,000) $ 30,000
=========== ===========
Net income (loss) per share - continuing operations
- basic and diluted $ (.10) $ (.09)
=========== ===========
Net income per share - discontinued operations
- basic and diluted -- $ .10
=========== ===========
Net income (loss) per share - basic and diluted
$ (.10) --
=========== ===========
Weighted average shares - basic 3,088,000 3,086,000
=========== ===========
Weighted average shares - diluted 3,088,000 3,087,000
=========== ===========
See accompanying notes.
5
ARC Wireless Solutions, Inc.
Condensed Consolidated Statements of Cash Flows
Three Months Ended March 31,
2007 2006
------------ ------------
(unaudited)
Operating activities
--------------------
Loss from continuing operations $ (298,000) $ (279,000)
Adjustments to reconcile loss from continuing operations to
net cash used in continuing operating activities:
Depreciation and amortization 37,000 37,000
Non-cash expense for issuance of stock and options 12,000 5,000
Deferred taxes -- (58,000)
Changes in operating assets and liabilities:
Accounts receivable, trade (244,000) 176,000
Inventory (30,000) (90,000)
Prepaids and other current assets (82,000) (42,000)
Other assets 1,000 --
Accounts payable and accrued expenses 148,000 55,000
------------ ------------
Net cash used in continuing operations (456,000) (196,000)
Net cash provided by discontinued operations -- 324,000
------------ ------------
Net cash provided by (used in) operating activities (456,000) 128,000
------------ ------------
Investing activities
--------------------
Patent acquisition costs (3,000) (8,000)
Purchase of plant and equipment (22,000) (39,000)
------------ ------------
Net cash used in investing activities, continuing operations (25,000) (47,000)
------------ ------------
Purchase of plant and equipment, discontinued operations -- (13,000)
------------ ------------
Net cash used in investing activities, discontinued operations -- (13,000)
------------ ------------
Net cash used in investing activities (25,000) (60,000)
------------ ------------
Financing activities
--------------------
Net advances from line of credit 1,000 129,000
Net repayment of line of credit and capital lease obligations (11,000) (20,000)
------------ ------------
Net cash (used in) provided by financing activities, continuing
operations (10,000) 109,000
------------ ------------
Net repayment of line of credit and bank debt, discontinued
operations -- (208,000)
------------ ------------
Net cash used in financing activities, discontinued operations -- (208,000)
------------ ------------
Net cash used in financing activities (10,000) (99,000)
------------ ------------
Net change in cash (491,000) (31,000)
Cash, beginning of period 15,720,000 64,000
------------ ------------
Cash, end of period $ 15,229,000 $ 33,000
============ ============
Supplemental cash flow information:
Cash paid for interest, continuing operations $ 6,000 $ 27,000
Cash paid for interest, discontinued operations -- $ 38,000
See accompanying notes.
6
ARC Wireless Solutions, Inc.
Notes to Condensed Consolidated Financial Statements
March 31, 2007
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, all adjustments considered necessary for a fair
presentation have been included. 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 ending December 31, 2006.
During the periods presented in the unaudited condensed consolidated financial
statements, the Company operated in three business segments which are identified
as Distribution, 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. The
Distribution segment is classified as a discontinued operation, see Note 2, as
it was sold effective October 31, 2006.
Operating results for the three months ended March 31, 2007 are not necessarily
indicative of the results that may be expected for the year ended December 31,
2007 or any future period.
Income Taxes
Our income taxes are computed using the asset and liability method of
accounting. Under the asset and liability method, a deferred tax asset or
liability is recognized for estimated future tax effects attributable to
temporary differences and carryforwards. The measurement of deferred income tax
assets is adjusted by a valuation allowance, if necessary, to recognize future
tax benefits only to the extent, based on available evidence; it is more likely
than not such benefits will be realized. Our deferred tax assets were fully
reserved at March 31, 2007 and December 31, 2006.
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
benefits. During the first quarter of 2007, we recognized no adjustments for
uncertain tax benefits.
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 March 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.
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, income
(loss) from operations or net income.
7
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates and such
differences may be material to the financial statements.
Consolidation Policy
The accompanying unaudited condensed consolidated financial statements include
the accounts of ARC Wireless Solutions, Inc. ("ARC" or the "Company") and its
wholly-owned subsidiary corporations, Winncom Technologies Corp. ("Winncom"),
until the date of its sale, which was October 31, 2006, Starworks Wireless Inc.
("Starworks") and ARC Wireless Hong Kong Limited ("ARCHK"), since their
respective acquisition dates, after elimination of all material intercompany
accounts, transactions, and profits.
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. Prior to 2006, share based
compensation was accounted for in accordance with Accounting Principles Board
Opinion No. 25. We are using 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
-------------------------------
March 31, 2007 March 31, 2006
-------------- --------------
Stock options $8,000 $4,000
------ ------
Total share-based compensation expense $8,000 $4,000
====== ======
Prior to January 1, 2006, the Company followed APB Opinion No. 25 and related
interpretations in accounting for its stock options and grants because the
alternative fair market value accounting provided for under Statement of
Financial Accounting Standards (SFAS) No. 123 ("SFAS No. 123") required use of
grant valuation models that were not developed for use in valuing employee stock
options and grants. Under APB Opinion No. 25, if the exercise price of the
Company's stock grants and options equals or exceeds the fair value of the
underlying stock on the date of grant, no compensation expenses are recognized.
8
Stock option activity was as follows:
Number of Weighted Average
Shares Exercise Price ($)
------- ------------------
Balance at January 1, 2007 52,000 $ 7.50
Granted 2,500 $ 4.80
Exercised --
Forfeited or expired (20,000) $ 9.00
------- --------
Balance at March 31, 2007 34,500 $ 6.15
======= ========
The following table presents information regarding options outstanding as of
March 31, 2007:
Weighted average contractual remaining term - options outstanding .55 year
Aggregate intrinsic value - options outstanding -
Options exercisable 32,500
Weighted average exercise price - options exercisable $6.15
Aggregate intrinsic value - options exercisable -
Weighted average contractual remaining term - options exercisable .55 year
There was no intrinsic value for options outstanding or options exercisable
because no options were exercised during the three months ended March 31, 2007.
The following weighted average assumptions were used:
Three Months Ended Three Months Ended
March 31, 2007 March 31, 2006
-------------- --------------
Volatility .536 1.024
Expected life of options (in years) 2 2
Dividend yield 0.00% 0.00%
Risk free interest rate 5.25% 4.00%
Per share value of options granted $1.59 $4.50
As of March 31, 2007, future compensation costs related to nonvested stock
options was $3,200. Management anticipates that this cost will be recognized
over a weighted average period of one year.
Note 2. Discontinued Operations
On July 28, 2006, ARC Wireless Solutions, Inc (the "Company") executed a Stock
Purchase Agreement ("Purchase Agreement") with Bluecoral Limited ("Bluecoral"),
an Irish company, for the sale of the Company's wholly-owned subsidiary, Winncom
Technologies Corp. ("Winncom") to Bluecoral for $17 million in cash, which was
being held in escrow per the terms of the Purchase Agreement.
On October 31, 2006, the shareholders of the Company approved the sale of
Winncom and the remaining conditions under the Purchase Agreement were
satisfied. The Company received the $17,000,000 from the escrow agent on
November 1, 2006.
This business segment, Distribution, has been accounted for as a discontinued
operation, as an asset held for sale, and accordingly the net assets and
liabilities have been segregated from continuing operations in the accompanying
consolidated balance sheets for all periods presented and the results of
operations have been excluded from continuing operations in the accompanying
consolidated financial statements of operations and cash flows for all periods
presented.
9
Note 2. Discontinued Operations, continued
There were no discontinued operations for the three months ended March 31, 2007.
Information related to the discontinued operations for the three months ended
March 31, 2006 are as follows:
Sales, net $ 7,400,000
Contract revenue 2,803,000
------------
Total revenue 10,203,000
------------
Cost of sales 6,363,000
Cost of contract revenue 2,593,000
------------
Total cost of goods sold 8,956,000
------------
Gross profit 1,247,000
Operating expenses:
Selling, general and administrative expenses 965,000
------------
Income from operations 282,000
Other income (expense):
Interest expense, net (38,000)
Other income 78,000
------------
Total other income (expense) 40,000
------------
Income before income taxes 322,000
Provision for income taxes (13,000)
------------
Net income $ 309,000
============
On October 1, 2003, the Company's subsidiary, Winncom, executed a new $4,000,000
line-of-credit agreement with a bank with interest at prime plus .5% (8.75% at
March 31, 2007) due April 30, 2007 and converted $500,000 of the balance
outstanding under the line of credit at September 30, 2003 into a 36-month term
loan with monthly principal payments of $13,888 plus interest at prime plus .75%
(8.5% at March 31, 2006). The term loan became due on October 26, 2006 and was
paid in full. Substantially all of the assets of Winncom were collateral on the
line of credit and the term loan.
The October 1, 2003 line of credit agreement contained several covenants, which,
among other things, required that Winncom maintain certain financial ratios as
defined in the agreement. In addition, the agreement limited the payment of
management fees by Winncom to the Company, and also limited dividends and the
purchase of property and equipment. As of October 31, 2006, Winncom was in
compliance with these covenants.
10
Note 2. Discontinued Operations, continued
In September 2005, Winncom entered into a one-year Line of Credit Agreement with
Kazkommertsbank for $2.3 million with an annual interest rate of 13% for the
purpose of funding a small portion of the Kazakhtelecom project, specifically
project engineering, laying of fiber optic cable and telecommunication equipment
purchases necessary to be completed before winter to avoid project delays. The
Line of Credit Agreement was entered into only after Kazakhtelecom agreed to
fully guarantee the repayment of Winncom's borrowings under the Line of Credit
Agreement. The Line of Credit Agreement is collateralized only by the guarantee
of Kazakhtelecom. Kazakhtelecom intends to repay the Line of Credit borrowings
either from the proceeds of the permanent project financing or from its own
capital. In September 2005, Winncom was advanced $1,334,000 under the Line of
Credit Agreement and a portion of that balance still remained at March 31, 2006.
March 31,
-----------
2006
-----------
Bank line of credit - Winncom $ 968,000
Foreign bank line of credit - Winncom 1,334,000
Bank term loan - Winncom 84,000
-----------
2,386,000
Less current portion (1,418,000)
-----------
Long-term portion $ 968,000
===========
In October 2004, Winncom entered into a "Frame" Agreement (Agreement of
Understanding) with Joint Stock Company Kazakhtelecom ("Kazakhtelecom"),
Kazakhstan's national telecommunications operator for the Republic of
Kazakhstan, that gives Winncom the right, subject to Winncom obtaining 100%
financing for the project upon terms and conditions acceptable to Kazakhtelecom,
and subject to a number of other matters, to undertake, on a turnkey basis,
development of a modern telecommunications infrastructure to be located on the
left bank of the City of Astana, Kazakhstan. With several competing bids,
Winncom was awarded the contract after several months of negotiations. The total
cost of the project is approximately $55,000,000.
The Company follows the percentage-of-completion method of accounting for long
term contract revenue. Contracts are considered complete upon completion of all
essential contract work, including support for integrated testing and customer
acceptance.
Under the percentage-of-completion method, income is recognized on contracts as
work progresses based on the relationship between total contract revenues and
total estimated contract costs. The percentage of work completed is determined
by comparing the accumulated labor costs incurred to date with management's
current estimate of total labor costs to be incurred at contract completion.
Revenue is recognized based on applying the percentage against the total
contract amount. The uninstalled portion of equipment was excluded from the
calculation of accumulated costs in measuring contract progress and recognizable
contract revenue.
Contract costs include all direct material and equipment, subcontractor costs,
and labor costs and those indirect costs related to contract performance.
Revisions in profit estimates during the period of a contract are reflected in
the accounting period in which the revised estimates are made on the basis of
the stage of completion at the time. If estimated total costs on a contract
indicate a loss, the entire amount of the estimated loss is provided for
currently.
Billings in excess of costs and estimated earnings on uncompleted contracts
represents billings to customers in excess of earned revenue and advances on
contracts.
11
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
--------------------------------
March 31, 2007 March 31, 2006
-------------- --------------
Numerator: Net loss from continuing
operations $(298,000) $ (279,000)
========= ==========
Numerator: Net income from discontinued
operations -- $ 309,000
========= ==========
Denominator:
Denominator for basic earnings per share
- weighted average shares 3,088,000 3,086,000
Effect of dilutive securities
Employee stock options (**) -- 1,000
--------- ----------
Denominator for diluted earnings per
share - adjusted weighted average shares
and assumed conversion 3,088,000 3,087,000
========= ==========
Basic earnings loss per share, continuing
operations $ (.10) $ (.09)
========= ==========
Diluted earnings (loss) per share,
continuing operations $ (.10) $ (.09)
========= ==========
Basic earnings per share, discontinued
operations -- $ .10
========= ==========
Diluted earnings per share, discontinued
operations -- $ .10
========= ==========
** There are no dilutive shares used in the calculation of diluted earnings per
share, continuing operations for the three months ended March 31, 2007 and 2006,
since the Company had net losses from continuing operations for those periods.
Dilutive shares are used in the calculation of diluted earnings per share,
discontinued operations for the three months ended March 31, 2006, since the
Company had net income from discontinued operations for that period.
12
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:
March 31, December 31,
----------- -----------
2007 2006
----------- -----------
Raw materials $ 901,000 $ 900,000
Work in progress 106,000 128,000
Finished goods 506,000 454,000
----------- -----------
1,513,000 1,482,000
Inventory reserve (695,000) (694,000)
----------- -----------
Net inventory $ 818,000 $ 788,000
=========== ===========
Note 5. Revolving Bank Loan Agreements
On May 10, 2005, the Company entered into a new $1.5 million revolving
line-of-credit agreement (the "Credit Facility") with Citywide Banks. The
current Credit Facility has an annual maturity, was currently due May 10, 2007,
with interest at 1.75% over prime (10% at March 31, 2007), 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 Winncom. The borrowing base is calculated on a percentage of trade
accounts receivable and inventory for ARC and Starworks combined. On May 4,
2007, the Credit Facility was extended to May 10, 2008 and the interest rate was
reduced to prime plus 1.5%. As of March 31, 2007 and December 31, 2006, ARC was
in compliance with these covenants. The balance outstanding on the revolving
line of credit at March 31, 2007 and December 31, 2006 was $831,000 and
$830,000, 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.
During the quarter ended March 31, 2007, the Company recorded the issuance of
800 shares of common stock to a director for outstanding obligations for accrued
directors' fees in the amount of $4,000.
13
Note 7. Recent Accounting Pronouncements
Fair Value Option - In February 2007, the FASB issued FAS No. 159, The Fair
Value Option for Financial Assets and Financial Liabilities (FAS 159). FAS 159
permits an entity to irrevocably elect fair value on a contract-by-contract
basis as the initial and subsequent measurement attribute for many financial
assets and liabilities and certain other items including insurance contracts.
Entities electing the fair value option would be required to recognize changes
in fair value in earnings and to expense upfront cost and fees associated with
the item for which the fair value option is elected. FAS 159, is effective for
fiscal years beginning after November 15, 2007. Early adoption is permitted as
of the beginning of a fiscal year that begins on or before November 15, 2007,
provided the entity also elects to apply the provisions of FAS No. 157, Fair
Value Measurements. The Company is currently evaluating the impact, if any, of
adopting FAS 159 on its financial condition or results of operations.
Note 8. 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. Due to the sale of Winncom at on October 31, 2006, which is the
Distribution segment, distribution is no longer classified as an operating
segment but is classified as discontinued operations in the accompanying
consolidated financial statements.
Financial information regarding the Company's two continuing operating segments
(which include segment eliminations) for the three months ended March 31, 2007
and 2006 are as follows:
Manufacturing Cable Corporate Total
------------- ------------ ------------ ------------
Net sales 2007 $ 1,519,000 $ 62,000 $ -- $ 1,581,000
2006 1,456,000 93,000 $ 1,549,000
Net loss from continuing operations 2007 (149,000) (18,000) (131,000) (298,000)
2006 (45,000) (4,000) (230,000) (279,000)
Loss from continuing operations 2007 (149,000) (18,000) (131,000) (298,000)
before income taxes 2006 (99,000) (4,000) (230,000) (333,000)
Identifiable assets 2007 3,527,000 123,000 14,177,000 17,827,000
2006 2,779,000 179,000 -- 2,958,000
Corporate represents the operations of the parent Company, excluding segment
eliminations.
14
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Results of Continuing Operations for the Three Months Ended March 31, 2007 and
2006
Total revenues were $1,581,000 and $1,549,000 for the three month periods ended
March 31, 2007 and March 31, 2006, respectively. The $32,000 increase in
revenues during the three months ended March 31, 2007 compared to the three
months ended March 31, 2006 is attributable to 1) a $122,000 increase in
revenues from our Wireless Communications Solutions Division; and 2) a decrease
of $90,000 in revenues from our subsidiary, Starworks. Approximately 20% of our
first quarter 2007 revenues resulted from sales to a customer that has incurred
significant historical losses. We have implemented procedures to minimize credit
and inventory risk, however, should this customer default, not receive
additional financing, or otherwise discontinue doing business with us, it is
possible that it will have a negative impact on our projected revenues in the
latter part of 2007.
Gross profit margins were 26% and 27% for the three months ended March 31, 2007
and March 31, 2006, respectively. The decrease in gross margin is primarily the
result of lower margins at Starworks on cable sales. Starworks purchased from a
supplier cable that did not meet our specifications and the cable has been or
will be sold at a discount to our normal selling price or the cable will be
scrapped. Subsequent to March 31, 2007, Starworks has negotiated a settlement
with the supplier for a credit for the cable that did not meet our
specifications as well as other related costs.
Selling, general and administrative expenses (SG&A) increased by $142,000 for
the three months ended March 31, 2007 compared to the three months ended March
31, 2006. Approximately $38,000 was due to increased costs (salaries and rent)
associated with the organization of ARC Wireless Hong Kong Limited, $25,000
represents a reduction in allocated overhead due to the sale of Winncom in 2006,
whereby those costs were not allocated in 2007. Other increases in SG&A costs
comparing 2007 to 2006 include audit fees ($6,000) and legal fees ($25,000),
travel and entertainment ($8,000), 401(k) employer contribution ($12,000) and
outside engineering services ($4,000). SG&A as a percent of total revenues
increased from 47% for the three months ended March 31, 2006 to 55% for the
three months ended March 31, 2007. Salaries and wages, including commissions,
which were consistent from 2006 to 2007, remains the largest component of SG&A,
constituting 50% and 60% of the total SG&A for the three months ended March 31,
2007 and March 31, 2006, respectively.
Net interest expense was $6,000 for the three months ended March 31, 2007
compared to $27,000 for the three months ended March 31, 2006 primarily due to a
decrease in the average balance outstanding on the line of credit and capital
lease obligations despite an increase in the prime interest rate from 7.50% for
the three months ended March 31, 2006 to 8.25% for the three months ended March
31, 2007. With the sale of Winncom on October 31, 2006 for $17 million in cash,
the need to use our available line of credit was significantly reduced.
Other income in 2007, represent interest income on funds invested from the sale
of Winncom. No such income was earned in 2006.
The benefit for income taxes in 2006 represents an increase in deferred income
taxes for which there was no comparable benefit in 2007.
The Company had a net loss from continuing operations of $298,000 for the three
months ended March 31, 2007 as compared to a net loss from continuing operations
of $279,000 for the three months ended March 31, 2006. The increase in the net
loss from 2006 to 2007 was primarily due to the 2006 loss from continuing
operations including a $54,000 benefit for income taxes for which there was none
in 2007 In addition, from 2006 to 2007 there was a $142,000 increase in SG&A
expenses, offset by an increase in interest income of $165,000.
Results of Discontinued Operations for the Three Months Ended March 31, 2006
(See Note 2, Discontinued Operations for the detailed operating results of the
discontinued operations).
15
Financial Condition
The net cash used in operating activities from continuing operations was
$456,000 for the three months ended March 31, 2007 compared to $196,000 for the
three months ended March 31, 2006. The net cash used in operating activities
from continuing operations in 2007 was primarily due to the net loss of $298,000
for the three months ended March 31, 2007, an increase in current assets of
approximately $356,000 (which uses net cash) offset by an increase in current
liabilities of $148,000 (which provides net cash) and adjustments of non-cash
expenses of $49,000. The net cash used in continuing operations for the three
months ended March 31, 2006 was primarily due to the net loss of $279,000 for
the three months ended March 31, 2006, a decrease in current assets of
approximately $44,000, an increase in current liabilities of $55,000, both of
which reduce net cash used in operating activities, and a net non-cash gain of
$16,000.
The net cash used in investing activities from continuing operations was $25,000
for the three months ended March 31, 2007 compared to $47,000 for the three
months ended March 31, 2006, primarily the result of expenditures for patents
and equipment. The net cash used in investing activities from discontinued
operations was $13,000 for the three months ended March 31, 2006, primarily the
result of expenditures for equipment.
For the three months ended March 31, 2007, net cash used in financing activities
for continuing operations was the result of the repayment of capital lease
obligations. For the three months ended March 31, 2006, net cash provided by
financing activities from continuing operations was the result of advances from
the line of credit. For the three months ended March 31, 2006, the net cash used
in financing activities for discontinued operations was the result of net income
from discontinued operations which provided excess working capital which was
used to reduce bank lines of credit of the discontinued operations.
The Company's working capital at March 31, 2007, was $15,395,000 compared to
$15,679,000 at December 31, 2006. The decrease as of March 31, 2007 is due
primarily to the net loss from continuing operations.
On May 10, 2005, the Company entered into a new $1.5 million revolving
line-of-credit agreement (the "Credit Facility") with Citywide Banks. The new
Credit Facility has an annual maturity, is currently due May 10, 2007, with
interest at 1.75% over prime (10% at March 31, 2007), 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 Winncom. On May 4, 2007, the Credit Facility was extended to May
10, 2008 and the interest rate was reduced to prime plus 1.5% The borrowing base
is calculated on a percentage of trade accounts receivable and inventory for ARC
and Starworks combined. As of March 31, 2007 and December 31, 2006, ARC was in
compliance with these covenants. The balance outstanding on the revolving line
of credit at March 31, 2007 and December 31, 2006 was $831,000 and $830,000,
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 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,
2007 and into the foreseeable future.
16
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,
2006. There have been no material changes to the Company's risk factors from
those disclosed in the Company's 2006 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 variable interest rates related to our
notes payable to the banks, each of which has a variable interest rate equal to
the existing bank prime rate (8.25% as of March 31, 2007) plus 1.75%. The prime
interest rate increased from 7.25% to 8.25% between January 1, 2006 and December
31, 2006. An increase in the bank's prime interest rates on the various notes
payable by 1% would increase our yearly interest expense by approximately
$5,000, assuming borrowed amounts remain outstanding at the average balance for
the three months ended March 31, 2007. Management believes that fluctuation in
interest rates in the near term will not materially affect our consolidated
operating results, financial position or cash flow.
Item 4. Controls and Procedures
The Company maintains a set of disclosure controls and procedures that are
designed to ensure that information required to be disclosed in the reports
filed by the Company under the Securities Exchange Act of 1934, as amended, is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms. As of the end of the quarterly period covered by
this report, the Company carried out an evaluation, under the supervision of the
Chief Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures pursuant to Rule
13a-15 of the Exchange Act. Based on that evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls and
procedures are effective.
There have been no significant changes in the Company's internal controls over
financial reporting or other factors that have materially affected, or are
reasonably likely to materially affect, those controls subsequent to the date of
their evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
17
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
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 that portion of the 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 ending December 31, 2006.
There have been no material changes from the risk factors previously disclosed
in our Form 10-K for the fiscal year ended December 31, 2006.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On April 3, 2007, the Company recorded the issuance of 800 shares of common
stock to Mr. Robert E. Wade, a director, for outstanding obligations for accrued
director's fees in the amount of $4,000. These shares were issued pursuant to
exemptions from registration set forth in Section 4(2) of the Securities Act of
1933, as amended, and Regulation D promulgated thereunder.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None.
Item 6. Exhibits
EXHIBIT INDEX
Exhibit
Number Description
------ -----------
3.1a Articles of Incorporation of Westcliff Corporation, now known as
Antennas America, Inc. (the "Company"), are incorporated herein
by reference from the Company's Form S-18 Registration Statement
dated December 1, 1987 (File No. 33-18854-D).
3.1b Articles of Amendment of the Company dated January 26, 1988 are
incorporated herein by reference from the Company's
Post-Effective Amendment No. 3 to Form S-18 Registration
Statement dated December 5, 1989 (File No. 33-18854-D).
3.1c Articles and Agreement of Merger between the Company and Antennas
America, Inc., a Colorado corporation, dated March 22, 1989, are
incorporated herein by reference from the Company's
Post-Effective Amendment No. 3 to Form S-18 Registration
Statement dated December 5, 1989 (File No. 33-18854-D).
3.1d Amended and Restated Articles of Incorporation dated October 11,
2000 (1)
3.2 Bylaws of the Company as amended and restated on March 25, 1998.
(2)
18
10.1 Agreement between and among Winncom Technologies Inc., Winncom
Technologies Corp. and the Company dated May 24, 2000. (3)
10.2 Employment Agreement effective January 2, 2004 between the
Company and Randall P. Marx. (4)
10.3 Employment Agreement effective October 1, 2004 between Winncom
Technologies Corp. and Gregory E. Raskin. (4)
10.4 Employment Agreement effective July 1, 2005 between the Company
and Monty R. Lamirato.(5)
10.5 Stock Purchase Agreement, dated as of July 28, 2006, by and among
the Company, Winncom Technologies Corp. and Bluecoral Limited.
(6)
10.6 Escrow Agreement, dated as of July 28, 2006, by and among the
Company, Bluecoral Limited and Consumer Title Services, LLC. (6)
14.1 Amended and Restated Code of Ethics (7)
21 Subsidiaries of the Registrant (8)
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 (8)
----------
(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 10-KSB for December 31,
1997 filed on March 31, 1998.
(3) Incorporated by reference from Exhibit 2.1 of the Company's Form 8-K filed
on June 8, 2000.
(4) Incorporated by reference from the Company's Form 10-K for December 31,
2004 filed on March 30, 2005.
(5) Incorporated by reference from the Company's Form 10-K for December 31,
2005 filed on March 20, 2006.
(6) Incorporated by reference from the Company's Form 8-K/A filed on August 2,
2006.
(7) Incorporated by reference from the Company's Form 8-K filed on November 10,
2006.
(8) Incorporated by reference from the Company's Form 10-K for December 31,
2006 filed on April 2, 2007
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
ARC WIRELESS SOLUTIONS, INC.
Date: May 11, 2007 By: /s/ Randall P. Marx
-------------------
Randall P. Marx
Chief Executive Officer
Date: May 11, 2007 By: /s/ Monty R. Lamirato
---------------------
Monty R. Lamirato
Chief Financial Officer
19
EXHIBIT INDEX
Exhibit
Number Description
------ -----------
3.1a Articles of Incorporation of Westcliff Corporation, now known as
Antennas America, Inc. (the "Company"), are incorporated herein
by reference from the Company's Form S-18 Registration Statement
dated December 1, 1987 (File No. 33-18854-D).
3.1b Articles of Amendment of the Company dated January 26, 1988 are
incorporated herein by reference from the Company's
Post-Effective Amendment No. 3 to Form S-18 Registration
Statement dated December 5, 1989 (File No. 33-18854-D).
3.1c Articles and Agreement of Merger between the Company and Antennas
America, Inc., a Colorado corporation, dated March 22, 1989, are
incorporated herein by reference from the Company's
Post-Effective Amendment No. 3 to Form S-18 Registration
Statement dated December 5, 1989 (File No. 33-18854-D).
3.1d Amended and Restated Articles of Incorporation dated October 11,
2000 (1)
3.2 Bylaws of the Company as amended and restated on March 25, 1998.
(2)
10.1 Agreement between and among Winncom Technologies Inc., Winncom
Technologies Corp. and the Company dated May 24, 2000. (3)
10.2 Employment Agreement effective January 2, 2004 between the
Company and Randall P. Marx. (4)
10.3 Employment Agreement effective October 1, 2004 between Winncom
Technologies Corp. and Gregory E. Raskin. (4)
10.4 Employment Agreement effective July 1, 2005 between the Company
and Monty R. Lamirato.(5)
10.5 Stock Purchase Agreement, dated as of July 28, 2006, by and among
the Company, Winncom Technologies Corp. and Bluecoral Limited.
(6)
10.6 Escrow Agreement, dated as of July 28, 2006, by and among the
Company, Bluecoral Limited and Consumer Title Services, LLC. (6)
14.1 Amended and Restated Code of Ethics (7)
21 Subsidiaries of the Registrant (8)
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 (8)
----------
(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 10-KSB for December 31,
1997 filed on March 31, 1998.
(3) Incorporated by reference from Exhibit 2.1 of the Company's Form 8-K filed
on June 8, 2000.
(4) Incorporated by reference from the Company's Form 10-K for December 31,
2004 filed on March 30, 2005.
(5) Incorporated by reference from the Company's Form 10-K for December 31,
2005 filed on March 20, 2006.
(6) Incorporated by reference from the Company's Form 8-K/A filed on August 2,
2006.
(7) Incorporated by reference from the Company's Form 8-K filed on November 10,
2006.
(8) Incorporated by reference from the Company's Form 10-K for December 31,
2006 filed on April 2, 2007
20