================================================================================
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, 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, 80033-2885
---------------------------------
(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 November 1, 2007, the registrant had 3,090,131 shares outstanding of its
$.0005 par value common stock.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
================================================================================
2
ARC Wireless Solutions, Inc.
Quarterly Report on Form 10-Q For The Period Ended
September 30, 2007
TABLE OF CONTENTS
-----------------
PART I. FINANCIAL INFORMATION
Page No.
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 2007
(unaudited) and December 31, 2006......................................4
Condensed Consolidated Statements of Operations for the Three Months
and Nine Months Ended September 30, 2007 and 2006 (unaudited)..........5
Condensed Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 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..................................................16
Item 3. Quantitative and Qualitative Disclosures About Market Risk...............19
Item 4. Controls and Procedures..................................................19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................................20
Item 1A. Risk Factors.............................................................20
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds..............20
Item 3. Defaults Upon Senior Securities..........................................20
Item 4. Submission of Matters to a Vote of Security Holders......................21
Item 5. Other Information........................................................21
Item 6. Exhibits ................................................................22
Signatures........................................................................22
Exhibit 31.1......................................................................24
Exhibit 31.2......................................................................25
Exhibit 32.1......................................................................26
3
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
ARC Wireless Solutions, Inc.
Condensed Consolidated Balance Sheets
September 30, December 31,
2007 2006
(unaudited) (audited)
------------ ------------
Assets
Current assets:
Cash and equivalents $ 15,072,000 $ 15,720,000
Accounts receivable - trade, net 1,110,000 620,000
Inventory, net 1,167,000 788,000
Other current assets 552,000 416,000
------------ ------------
Total current assets 17,901,000 17,544,000
------------ ------------
Property and equipment, net 406,000 297,000
Other assets:
Intangible assets, net 97,000 98,000
Deposits 39,000 36,000
------------ ------------
Total assets $ 18,443,000 $ 17,975,000
============ ============
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 834,000 $ 790,000
Bank debt - current 1,358,000 830,000
Accrued expenses 350,000 213,000
Current portion of capital lease obligations 71,000 32,000
------------ ------------
Total current liabilities 2,613,000 1,865,000
Capital lease obligations, less current portion 80,000 23,000
------------ ------------
Total liabilities 2,693,000 1,888,000
------------ ------------
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,
3,088,000 and 3,126,000 issued and outstanding in 2007
and 2006, respectively. 2,000 2,000
Additional paid-in capital 20,688,000 21,855,000
Treasury stock, at cost, 39,000 shares in 2006 -- (1,195,000)
Accumulated deficit (4,940,000) (4,575,000)
------------ ------------
Total stockholders' equity 15,750,000 16,087,000
------------ ------------
Total liabilities and stockholders' equity $ 18,443,000 $ 17,975,000
============ ============
See accompanying notes.
4
ARC Wireless Solutions, Inc.
Condensed Consolidated Statements of Operations
Three Months Ended Nine Months Ended
September 30, September 30,
2007 2006 2007 2006
----------- ----------- ----------- -----------
(unaudited) (unaudited)
Sales, net $ 1,986,000 $ 1,837,000 $ 5,656,000 $ 5,210,000
Cost of sales 1,362,000 1,369,000 3,822,000 3,928,000
----------- ----------- ----------- -----------
Gross profit 624,000 468,000 1,834,000 1,282,000
Operating expenses:
Selling, general and administrative expenses 1,012,000 813,000 2,767,000 2,343,000
----------- ----------- ----------- -----------
Loss from operations (388,000) (345,000) (933,000) (1,061,000)
Other income (expense):
Interest expense, net (5,000) (36,000) (16,000) (96,000)
Other income 220,000 1,000 584,000 2,000
----------- ----------- ----------- -----------
Total other income (expense) 215,000 (35,000) 568,000 (94,000)
----------- ----------- ----------- -----------
Income (loss) from continuing operations before
income taxes (173,000) (380,000) (365,000) (1,155,000)
Benefit (provision) for income taxes 49,000 -- 227,000
----------- ----------- ----------- -----------
Income (loss) from continuing operations (173,000) (331,000) (365,000) (928,000)
----------- ----------- ----------- -----------
Discontinued operations (Note 2)
Income from operations of the discontinued component
-- 80,000 -- 994,000
Provision for income taxes, discontinued component
-- 61,000 -- (176,000)
----------- ----------- ----------- -----------
Income from discontinued operations -- 141,000 -- 818,000
----------- ----------- ----------- -----------
Net income (loss) $ (173,000) $ (190,000) $ (365,000) $ (110,000)
=========== =========== =========== ===========
Net income (loss) per share - continuing operations
- basic and diluted $ (.06) $ (.11) $ (.12) $ (.30)
=========== =========== =========== ===========
Net income per share - discontinued operations
- basic and diluted -- $ .05 -- $ .27
=========== =========== =========== ===========
Net income (loss) per share - basic and diluted $ (.06) $ (.06) $ (.12) $ (.03)
=========== =========== =========== ===========
Weighted average shares - basic 3,089,000 3,086,000 3,089,000 3,086,000
=========== =========== =========== ===========
Weighted average shares - diluted 3,089,000 3,086,000 3,089,000 3,086,000
=========== =========== =========== ===========
See accompanying notes.
5
ARC Wireless Solutions, Inc.
Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 30,
2007 2006
------------ ------------
(unaudited)
Operating activities
Loss from continuing operations $ (365,000) $ (928,000)
Adjustments to reconcile loss from continuing operations
to net cash used in continuing operating activities:
Depreciation and amortization 122,000 110,000
Non-cash expense for issuance of stock and options 27,000 15,000
Deferred taxes -- (232,000)
Changes in operating assets and liabilities:
Accounts receivable, trade (490,000) (125,000)
Inventory (379,000) 84,000
Prepaids and other current assets (136,000) (74,000)
Other assets (3,000) (8,000)
Accounts payable and accrued expenses 182,000 609,000
------------ ------------
Net cash used in continuing operations (1,042,000) (549,000)
Net cash provided by discontinued operations -- 1,501,000
------------ ------------
Net cash used in operating activities (1,042,000) 952,000
------------ ------------
Investing activities
Patent acquisition costs (10,000) (10,000)
Purchase of plant and equipment (85,000) (76,000)
------------ ------------
Net cash used in investing activities, continuing operations (95,000) (86,000)
Net cash used in investing activities, discontinued operations,
purchase of equipment -- (58,000)
------------ ------------
Net cash used in investing activities (95,000) (144,000)
------------ ------------
Financing activities
Net advances from line of credit 528,000 632,000
Net repayment of line of credit and capital lease obligations (39,000) (59,000)
------------ ------------
Net cash provided by financing activities, continuing operations 489,000 573,000
Net cash used in financing activities, discontinued operations,
net advances of line of credit and bank debt -- (1,404,000)
------------ ------------
Net cash provided by (used in) financing activities 489,000 (831,000)
------------ ------------
Net change in cash (648,000) (23,000)
Cash, beginning of period 15,720,000 64,000
------------ ------------
Cash, end of period $ 15,072,000 $ 41,000
============ ============
Supplemental cash flow information:
Cash paid for interest, continuing operations $ 16,000 $ 96,000
Cash paid for interest, discontinued operations -- $ 97,000
Cash paid for taxes, discontinued operations -- $ 170,000
Acquisition of property and equipment through capital lease $ 135,000 $ 22,000
See accompanying notes.
6
ARC Wireless Solutions, Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 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 notes thereto included in the Company's Annual Report on Form
10-K for the year ended December 31, 2006.
During the nine months ended September 30, 2007, 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. During the
nine months ended September 30, 2006, the Company operated in three business
segments, Distribution, Manufacturing and Cable. The Distribution segment has
been classified as a discontinued operation, see Note 2, as it was sold
effective October 31, 2006.
Operating results for the nine months ended September 30, 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 carry-forwards. 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 September 30, 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
positions. During the nine months ended September 30, 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, 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
ARC Wireless Solutions, Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2007
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
selling, general and administrative expenses during each period presented:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2007 2006 2007 2006
------- ------- ------- -------
Stock options $ 4,000 $ 3,000 $15,000 $ 7,000
------- ------- ------- -------
Total share-based compensation expense $ 4,000 $ 3,000 $15,000 $ 7,000
======= ======= ======= =======
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
ARC Wireless Solutions, Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2007
Stock option activity was as follows:
Number of Weighted Average
Shares Exercise Price ($)
------- ------------------
Balance at January 1, 2007 52,000 $ 7.50
Granted 47,500 $ 5.40
Exercised --
Forfeited or expired (42,500) $ 7.50
------- --------
Balance at September 30, 2007 57,000 $ 5.55
======= ========
The following table presents information regarding options outstanding as of
September 30, 2007:
Weighted average contractual remaining term - options outstanding 7.26 year
Aggregate intrinsic value - options outstanding -
Options exercisable 23,500
Weighted average exercise price - options exercisable $5.55
Aggregate intrinsic value - options exercisable -
Weighted average contractual remaining term - options exercisable 4.27 year
There was no intrinsic value for options outstanding or options exercisable
because no options were exercised during the nine months ended September 30,
2007.
The following weighted average assumptions were used:
Three and Nine Three and Nine
Months Ended Months Ended
September 30, 2007 September 30, 2006
------------------ ------------------
Volatility .52 1.024
Expected life of options (in years) 4.25 2
Dividend yield 0.00% 0.00%
Risk free interest rate 4.64% 4.00%
As of September 30, 2007, future compensation costs related to nonvested stock
options was $105,000. Management anticipates that this cost will be recognized
over a weighted average period of 4.25 years.
Note 2. Discontinued Operations
On July 28, 2006, 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 to be held in
escrow per the terms of the Purchase Agreement.
On October 31, 2006, the stockholders 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.
9
ARC Wireless Solutions, Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2007
Note 2. Discontinued Operations, continued
This business segment, Distribution, has been accounted for as a discontinued
operation, as an asset held for sale. 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.
There were no discontinued operations for the three and nine months ended
September 30, 2007. Information related to the discontinued operations for the
three and nine months ended September 30, 2006 are as follows:
Three Months Ended Nine Months Ended
September 30, 2006 September 30, 2006
------------------ ------------------
Sales, net $ 9,637,000 $ 25,710,000
Contract revenue 7,392,000 17,482,000
------------ ------------
Total revenue 17,029,000 43,192,000
------------ ------------
Cost of sales 8,578,000 22,438,000
Cost of contract revenue 7,008,000 16,378,000
------------ ------------
Total cost of goods sold 15,586,000 38,816,000
------------ ------------
Gross profit 1,443,000 4,376,000
Operating expenses:
Selling, general and administrative expenses 1,357,000 3,413,000
------------ ------------
Income from operations 86,000 963,000
Other income (expense):
Interest expense, net (32,000) (97,000)
Other income 26,000 128,000
------------ ------------
Total other income (expense) (6,000) 31,000
------------ ------------
Income before income taxes 80,000 994,000
Provision for income taxes 61,000 (176,000)
------------ ------------
Net income $ 141,000 $ 818,000
============ ============
10
ARC Wireless Solutions, Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2007
Note 2. Discontinued Operations, continued
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. This Agreement of Understanding gave 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 was 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 when
known.
11
ARC Wireless Solutions, Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2007
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,
----------------------- ------------------------
2007 2006 2007 2006
---------- ---------- ---------- -----------
Numerator: Net income (loss) from
continuing operations $ (173,000) $ (331,000) $ (365,000) $ (928,000)
========== ========== ========== ===========
Numerator: Net income from discontinued
operations -- $ 141,000 -- $ 818,000
========== ========== ========== ===========
Denominator:
Denominator for basic earnings per share
- weighted average shares 3,089,000 3,088,000 3,089,000 3,086,000
Effect of dilutive securities
Employee stock options (**) -- -- -- --
---------- ---------- ---------- -----------
Denominator for diluted earnings per
share - adjusted weighted average shares
and assumed conversion 3,089,000 3,088,000 3,089,000 3,086,000
========== ========== ========== ===========
Basic earnings (loss) per share, continuing
operations $ (.06) $ (.11) $ (.12) $ (.30)
========== ========== ========== ===========
Diluted earnings (loss) per share,
continuing operations $ (.06) $ (.11) $ (.12) $ (.30)
========== ========== ========== ===========
Basic earnings per share, discontinued
operations -- $ .05 -- $ .25
========== ========== ========== ===========
Diluted earnings per share, discontinued
operations -- $ .05 -- $ .25
========== ========== ========== ===========
** There are no dilutive shares used in the calculation of diluted earnings per
share, continuing operations for the three months and nine months ended
September 30, 2007 and 2006, since the Company had net losses from continuing
operations for those periods. Potential dilutive shares totaled 2,000 for the
nine months ended September 30, 2007 and 2006 and 1,000 for the three months
ended September 30, 2007 and 2006.
12
ARC Wireless Solutions, Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2007
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,
2007 2006
----------- -----------
Raw materials $ 1,148,000 $ 900,000
Work in progress 116,000 128,000
Finished goods 608,000 454,000
----------- -----------
1,872,000 1,482,000
Inventory reserve (705,000) (694,000)
----------- -----------
Net inventory $ 1,167,000 $ 788,000
=========== ===========
Note 5. Revolving Bank Loan Agreements
On May 4, 2007, the Company renewed its $1.5 million revolving line-of-credit
agreement (the "Credit Facility") with Citywide Banks. The current Credit
Facility has an annual maturity, which is currently due May 10, 2008, accrues
interest at 1.5% over prime (9.75% at September 30, 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.
The borrowing base is calculated on a percentage of trade accounts receivable
and inventory for ARC and Starworks combined. As of September 30, 2007 and
December 31, 2006, ARC was in compliance with these covenants. The balance
outstanding on the revolving line of credit at September 30, 2007 and December
31, 2006 was $1,358,000 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 shares.
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.
13
ARC Wireless Solutions, Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2007
Note 6. Equity Transactions, continued
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 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
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 costs 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.
ARC Wireless Solutions, Inc.
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 effective October 31, 2006, which
constituted the Company's Distribution segment, distribution is no longer
classified as an operating segment but is classified as discontinued operations
in the accompanying consolidated financial statements for the periods ended
September 30, 2006.
14
ARC Wireless Solutions, Inc.
Notes to Condensed Consolidated Financial Statements
September 30, 2007
Note 8. Industry Segment Information, continued
Financial information regarding the Company's two continuing operating segments
(which include the elimination of intersegment sales) for the three months ended
September 30, 2007 and 2006 are as follows:
Manufacturing Cable Corporate Total
------------- ----- --------- -----
Net sales 2007 $ 1,976,000 $ 10,000 - $ 1,986,000
2006 $ 1,753,000 $ 84,000 - $ 1,837,000
Income (loss) from continuing 2007 (42,000) 49,000 (180,000) (173,000)
operations before income taxes 2006 (90,000) (26,000) (264,000) (380,000)
Net income (loss) from continuing 2007 (42,000) 49,000 (180,000) (173,000)
operations 2006 (41,000) (26,000) (264,000) (331,000)
Identifiable assets 2007 4,872,000 122,000 13,449,000 $18,443,000
2006 3,990,000 142,000 (837,000) $ 3,295,000
Corporate represents the operations of the parent Company, excluding segment
eliminations.
Financial information regarding the Company's two continuing operating segments
(which include the elimination of intersegment sales) for the nine months ended
September 30, 2007 and 2006 are as follows:
Manufacturing Cable Corporate Total
------------- ----- --------- -----
Net sales 2007 $ 5,561,000 $ 95,000 - $ 5,656,000
2006 $ 4,886,000 $ 324,000 - $ 5,210,000
Income (loss) from continuing 2007 14,000 47,000 (426,000) (365,000)
operations before income taxes 2006 (405,000) (25,000) (725,000) (1,155,000)
Net income (loss) from continuing 2007 14,000 47,000 (426,000) (365,000)
operations 2006 (178,000) (25,000) (725,000) (928,000)
Identifiable assets 2007 4,872,000 122,000 13,449,000 $18,443,000
2006 3,990,000 142,000 (837,000) $ 3,295,000
Corporate represents the operations of the parent Company, excluding segment
eliminations.
15
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Results of Continuing Operations for the Three Months Ended September 30, 2007
and 2006
Total revenues were $1,986,000 and $1,837,000 for the three month periods ended
September 30, 2007 and September 30, 2006, respectively. The 8% increase in
revenues during the three months ended September 30, 2007 compared to the three
months ended September 30, 2006 is primarily attributable to a $223,000 increase
in revenues from our Wireless Communications Solutions Division partially offset
by a decrease of $74,000 in revenues from our subsidiary, Starworks. For the
foreseeable future, management has determined to minimize efforts to sell cable
through its Starworks subsidiary so that it can focus on higher margin products
through its Wireless Communications Products Division. However, the Company will
continue to purchase cable through its cable subsidiary for its own use while it
is seeking a suitable overseas cable manufacturer for its cable distribution
business.
Gross profit margins were 31% and 25% for the three months ended September 30,
2007 and September 30, 2006, respectively. The 24% increase in gross margin is
primarily the result of lower operating costs resulting from our efforts in
successfully transitioning some 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) increased by $199,000 for
the three months ended September 30, 2007 compared to the three months ended
September 30, 2006. Approximately $42,000 was due to increased costs (salaries
and rent) associated with the cost of operating our ARC Wireless Hong Kong
Limited subsidiary, $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, except for those of ARC
Wireless Hong Kong Limited, include; salaries, payroll taxes and fringe benefits
($71,000), audit fees ($6,000), 401(k) employer contribution ($20,000), and
outside services. SG&A as a percent of total revenues was 51% and 44% for the
three months ended September 30, 2007 and 2006, respectively. Salaries and
wages( including commissions), payroll taxes and fringe benefits which increased
$42,000 from 2006 to 2007, primarily due to additional sales and engineering
staff, remains the largest component of SG&A, constituting 56% and 62% of the
total SG&A for the three months ended September 30, 2007 and September 30, 2006,
respectively.
Net interest expense was $5,000 for the three months ended September 30, 2007
compared to $36,000 for the three months ended September 30, 2006. The decease
is due to the Company's available cash during 2007 significantly reducing the
need to use our available line of credit. Most of the interest expense for 2007
related to capitalized leases.
Other income for the three months ended September 30, 2007 primarily represents
interest income on funds invested from the sale of Winncom of $163,000 and gain
on debt settlements of $55,000. No such income was earned in 2006.
There was no provision for income taxes as we currently have a net operating
loss and have net operating loss carry-forwards from prior years.
The Company had a net loss from continuing operations of $173,000 for the three
months ended September 30, 2007 as compared to a net loss from continuing
operations of $331,000 for the three months ended September 30, 2006. The
primary reasons for the improvement are 1) an increase in sales of $149,000, 2)
an increase in the gross margin of $156,000, and 3) interest income of $172,000
from the invested proceeds from the sale of Winncom and 4) gain on debt
settlements of $55,000, partially offset by an increase in SG&A of $199,000.
16
Results of Discontinued Operations for the Three Months Ended September 30, 2006
(See Note 2, Discontinued Operations for the detailed operating results of the
discontinued operations).
Results of Continuing Operations for the Nine Months Ended September 30, 2007
and 2006
Total revenues were $5,656,000 and $5,210,000 for the nine months ended
September 30, 2007 and September 30, 2006, respectively. The 9% increase in
revenues during the nine months ended September 30, 2007 compared to the nine
months ended September 30, 2006 is attributable to a $675,000 increase in
revenues from our Wireless Communications Solutions Division partially offset by
a decrease of $229,000 in revenues from our subsidiary, Starworks. For the
foreseeable future, management has determined to minimize efforts to sell cable
through its Starworks subsidiary so that it can focus on higher margin products
through its Wireless Communications Products Division. However, the Company will
continue to purchase cable through its cable subsidiary for its own use while it
is seeking a suitable overseas cable manufacturer for its cable distribution
business.
Gross profit margins were 32% and 25% for the nine months ended September 30,
2007 and September 30, 2006, respectively. The 28% increase in gross margin is
primarily the result of lower operating costs resulting from our efforts in
successfully transitioning some 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) increased by $424,000 for
the nine months ended September 30, 2007 compared to the nine months ended
September 30, 2006. Approximately $79,000 was due to increased costs (salaries
and rent) associated with the cost of operating our ARC Wireless Hong Kong
Limited subsidiary, and $75,000 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, except for those of ARC
Wireless Hong Kong Limited, include; salaries and benefits ($46,000), audit fees
($18,000) and legal fees ($8,000), outside consulting services ($74,000), 401(k)
employer contribution ($44,000), research and development, ($19,000), and stock
listing and shareholder meeting costs ($52,000). SG&A as a percent of total
revenues increased from 45% for the nine months ended September 30, 2006 to 49%
for the nine months ended September 30, 2007. Salaries and wages and fringe
benefits, including commissions, remains the largest component of SG&A,
constituting 59% and 68% of the total SG&A for the nine months ended September
30, 2007 and September 30,2006, respectively.
Net interest expense was $16,000 for the nine months ended September 30, 2007
compared to $96,000 for the nine months ended September 30, 2006. The decrease
is due to the Company's available cash significantly reduced the need to use our
available line of credit. Most of the interest expense for 2006 related to
capitalized leases.
Other income for the nine months ended September 30, 2007 primarily represents
interest income on funds invested from the sale of Winncom of $500,000 and gain
on debt settlements of$82,000. 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 $365,000 for the nine
months ended September 30, 2007 as compared to a net loss from continuing
operations of $928,000 for the nine months ended September 30, 2006. The primary
reasons for the reduction in the net loss are; 1) an increase in sales of
$446,000, 2) an increase in gross margin of $552,000, 3) interest income of
$500,000 realized from the proceeds from the sale of Winncom and 4) $82,000 gain
on debt settlements.
Results of Discontinued Operations for the Nine Months Ended September 30, 2006
(See Note 2, Discontinued Operations for the detailed operating results of the
discontinued operations).
17
Financial Condition
The net cash used in operating activities from continuing operations was
$1,056,000 for the nine months ended September 30, 2007 compared to $549,000 for
the nine months ended September 30, 2006. The increase in the net cash used in
operating activities from continuing operations in 2007 was primarily due to an
increase in trade accounts receivables and inventory partially offset by a
reduction in the net loss from continuing operations. The increase in inventory
is to meet the increase in demand as a result of increased sales and also a need
to stock more finished goods for standard products to satisfy customer
expectations of wanting to consummate sales with shorter lead times. The
increase in trade accounts receivable is the result of the increased sales and
the time frames in which they occurred and does not reflect a slowdown in the
average collection period. Net sales were approximately $1.3 million for the
quarter ended December 31, 2006 compared to sales of approximately $2.0 million
for the quarter ended September 30, 2007. The net cash used in continuing
operations for the nine months ended September 30, 2006 was primarily due to the
net loss from continuing operations of $928,000, an increase in trade
receivables of approximately $125,000, an increase in deferred taxes of
$232,000, partially offset by an increase in trade payables and other accrued
expenses of $609,000.
The net cash used in investing activities from continuing operations was $95,000
for the nine months ended September 30, 2007 compared to $86,000 for the nine
months ended September 30, 2006, primarily the result of expenditures for
patents and equipment. The net cash used in investing activities from
discontinued operations was $58,000 for the nine months ended September 30,
2006, primarily the result of expenditures for equipment.
For the nine months ended September 30, 2007, net cash provided by financing
activities for continuing operations was the result of advances from the
revolving line of credit. For the nine months ended September 30, 2006, net cash
provided by financing activities from continuing operations was also the result
of advances from the line of credit. For the nine months ended September 30,
2006, the net cash used in financing activities for discontinued operations was
the result of net payments on lines of credit.
The Company's working capital at September 30, 2007 was $15,288,000, compared to
$15,679,000 at December 31, 2006. The decrease of $391,000 as of September 30,
2007 is due primarily to the net loss from continuing operations for the nine
months ended September 30, 2007.
On May 4, 2007, the Company renewed its $1.5 million revolving line-of-credit
agreement (the "Credit Facility") with Citywide Banks. The current Credit
Facility has an annual maturity, which is currently due May 10, 2008, accrues
interest at 1.5% over prime (9.75% at September 30, 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.
The borrowing base is calculated on a percentage of trade accounts receivable
and inventory for ARC and Starworks combined. As of September 30, 2007 and
December 31, 2006, ARC was in compliance with these covenants. The balance
outstanding on the revolving line of credit at September 30, 2007 and December
31, 2006 was $1,358,000 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.
18
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 2006 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 September 30, 2007) plus 1.50%. 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 nine months ended September 30, 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.
19
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 ended 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, except as noted
below.
Approximately 30% of our revenues for the nine months ended September 30, 2007
resulted from sales to a customer that has incurred significant historical
losses and the customer has announced that it is in its best interests to
actively pursue the sale of their Company and/or its assets. We have implemented
procedures to minimize credit and inventory risk, however, should this customer
default, or not be successful in selling its business and/or its assets, or
otherwise discontinue doing business with us, it could have a negative impact on
our results of operations for the fourth quarter 2007 and for 2008.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On July 10, 2007, the Company recorded the issuance of 809 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. This issuance
qualified for exemption from registration because (i) the securities were issued
to a single accredited investor, (ii) the Company did not engage in any general
solicitation or advertising in connection with the issuance and (iii) Mr. Wade
received "restricted securities."
Item 3. Defaults Upon Senior Securities
None.
20
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its annual meeting of shareholders on September 17, 2007,
and 2,867,114 shares were represented at the meeting. The following are the
results of the voting on matters submitted to the shareholders, all of which
were approved:
(1) For election of the following nominees as directors:
Name Number of Shares For Withheld
---- -------------------- --------
Sigmund A. Balaban 2,809,082 58,032
Donald A. Huebner 2,700,761 166,353
Randall P. Marx 2,700,731 166,383
Robert E. Wade 2,833,302 33,812
(2) Proposal to approve the Company's 2007 Stock Incentive Plan
Number of Shares:
1,663,735 (For) 34,227 (Against) 1,765 (Abstain) 1,167,387 (Not Voting)
(3) Proposal to ratify the selection of HEIN + Associates, LLP as the Company's
independent registered public accounting firm.
Number of Shares:
2,859,114 (For) 6,804 (Against) 1,196 (Abstain) 0 (Not Voting)
(4) In their discretion, the Proxies as authorized to vote upon such as other
business as may properly come before the meeting.
Number of Shares:
2,688,363 (For) 174,024 (Against) 4,727 (Abstain) 0 (Not Voting)
Item 5. Other Information
None.
21
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)
31.1 CEO Certification of Periodic Report pursuant to Section 302 of
Sarbanes-Oxley Act of 2002
31.2 CFO Certification 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
----------
(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.
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: November 9, 2007 By: /s/ Randall P. Marx
-------------------
Randall P. Marx
Chief Executive Officer
Date: November 9, 2007 By: /s/ Monty R. Lamirato
---------------------
Monty R. Lamirato
Chief Financial Officer
22
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)
31.1 CEO Certification of Periodic Report pursuant to Section 302 of
Sarbanes-Oxley Act of 2002
31.2 CFO Certifications of Periodic Report pursuant to Section 302 of
Sarbanes-Oxley Act of 2002
32.1 Officers' Certification of Periodic Report pursuant to Section
906 of Sarbanes-Oxley Act of 2002
----------
(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.
23