UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 2, 2012

 

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ______________________________to_____________________________

 

Commission file No. 0-11003

WEGENER CORPORATION

 

(Exact name of registrant as specified in its charter)

Delaware		81–0371341
(State or other jurisdiction		(I.R.S. Employer
of incorporation or organization)		Identification No.)

 

11350 Technology Circle, Johns Creek, Georgia		30097-1502
(Address of principal executive offices)		(Zip Code)

 

Registrant's telephone number, including area code: (770) 623-0096

 

Registrant’s web site: HTTP://WWW.WEGENER.COM

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes x No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer ¨

Accelerated filer ¨

Non-accelerated filer ¨

Smaller reporting company x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

 

Common Stock, $.01 par value		13,147,051 Shares
Class		Outstanding at March 30, 2012

 

 

WEGENER CORPORATION AND SUBSIDIARY

Form 10-Q For the Quarter Ended March 2, 2012

 

INDEX

 

PART I.  Financial Information
	Item 1.	Financial Statements
		Introduction	3
		Consolidated Statements of Operations (Unaudited) - Three and Six Months Ended March 2, 2012 and March 4, 2011	4
		Consolidated Balance Sheets – March 2, 2012 (Unaudited)  and September 2, 2011	5
		Consolidated Statements of Capital Deficit (Unaudited) - Six Months Ended March 2, 2012 and March 4, 2011	6
		Consolidated Statements of Cash Flows (Unaudited) - Six Months Ended March 2, 2012 and March 4, 2011	7
		Notes to Consolidated Financial Statements (Unaudited)	8
	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	14
	Item 4.	Controls and Procedures	20
PART II. Other Information
	Item 1A.	Risk Factors	21
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	21
	Item 4.	Submission of Matters to a Vote of Security Holders	21
	Item 6.	Exhibits	22
		Signatures	23

 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

INTRODUCTION - CONSOLIDATED FINANCIAL STATEMENTS

 

The consolidated financial statements of Wegenerä Corporation (the “Company”, “Wegener”, “we”, “our” or “us”) included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. The consolidated statements of operations for the three and six months ended March 2, 2012, and March 4, 2011; the consolidated balance sheet as of March 2, 2012; the consolidated statements of capital deficit for the six months ended March 2, 2012, and March 4, 2011; and the consolidated statements of cash flows for the six months ended March 2, 2012, and March 4, 2011, have been prepared without audit. The consolidated balance sheet as of September 2, 2011 has been audited by independent registered public accountants. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures herein are adequate to make the information presented not misleading. It is suggested that these unaudited consolidated financial statements be read in conjunction with the audited financial statements and the notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended September 2, 2011, File No. 0-11003. These consolidated financial statements include the accounts of Wegener Communications, Inc. (WCI), our wholly-owned subsidiary.

 

In the opinion of the Company, the statements for the unaudited interim periods presented include all adjustments, which were of a normal recurring nature, necessary to present a fair statement of the results of such interim periods. The results of operations for the interim periods presented are not necessarily indicative of the results of operations for the entire year. 

 

 

WEGENER CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

		Three months ended								Six months ended
		March 2, 2012				March 4, 2011				March 2, 2012				March 4, 2011
Revenues, net		$	2,368,844			$	1,432,800			$	3,751,426			$	4,403,147
Operating costs and expenses
Cost of products sold			1,607,281				1,139,617				2,818,492				2,955,006
Selling, general and administrative			643,522				869,323				1,234,195				1,670,720
Research and development			394,625				303,152				738,819				594,949
Operating costs and expenses			2,645,428				2,312,092				4,791,506				5,220,675
Operating loss			(276,584	)			(879,292	)			(1,040,080	)			(817,528	)
Interest expense			(87,118	)			(91,292	)			(180,254	)			(178,832	)
Net loss		$	(363,702	)		$	(970,584	)		$	(1,220,334	)		$	(996,360	)
Net loss per share:
Basic and diluted		$	(0.03	)		$	(0.07	)		$	(0.09	)		$	(0.08	)
Shares used in per share calculation
Basic and diluted			13,147,051				13,136,062				13,147,051				12,891,556

 

See accompanying notes to consolidated financial statements.

 

 

WEGENER CORPORATION AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

 

		March 2, 2012 (Unaudited)				September 2, 2011
Assets
Current assets
Cash		$	69,638			$	475,548
Accounts receivable, net			1,270,044				2,056,339
Inventories, net			1,713,506				1,530,366
Other			148,020				268,092
Total current assets			3,201,208				4,330,345
Property and equipment, net			1,392,916				1,469,206
Capitalized software costs, net			1,263,754				1,287,638
Other assets			177,068				197,400
Total assets		$	6,034,946			$	7,284,589
Liabilities and Capital Deficit
Current liabilities
Line of credit-related party		$	4,250,000			$	4,250,000
Accounts payable			1,578,983				1,813,493
Accrued expenses			2,228,991				2,069,636
Deferred revenue			484,116				401,480
Customer deposits			200,414				237,204
Total current liabilities			8,742,504				8,771,813
Commitments and contingencies
Capital deficit
Preferred stock, $20.00 par value; 250,000 shares authorized; none issued and outstanding			-				-
Common stock, $.01 par value; 100,000,000 and 30,000,000 shares authorized; 13,147,051 shares issued and outstanding			131,471				131,471
Additional paid-in capital			20,112,577				20,112,577
Accumulated deficit			(22,951,606	)			(21,731,272	)
Total capital deficit			(2,707,558	)			(1,487,224	)
Total liabilities and capital deficit		$	6,034,946			$	7,284,589

 

See accompanying notes to consolidated financial statements.

 

 

WEGENER CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CAPITAL DEFICIT

(Unaudited)

 

										Additional
		Common Stock								Paid-in				Accumulated
		Shares				Amount				Capital				Deficit
Balance at September 3, 2010			12,647,051			$	126,471			$	20,006,702			$	(20,264,861	)
Common stock awards			500,000				5,000				57,500				-
Share-based compensation			-				-				48,375				-
Net loss for the six months			-				-				-				(996,360	)
BALANCE at March 4, 2011			13,147,051			$	131,471			$	20,112,577			$	(21,261,221	)
Balance at September 2, 2011			13,147,051			$	131,471			$	20,112,577			$	(21,731,272	)
Net loss for the six months			-				-				-				(1,220,334	)
BALANCE at March 2, 2012			13,147,051			$	131,471			$	20,112,577			$	(22,951,606	)

 

See accompanying notes to consolidated financial statements.

 

 

 

WEGENER CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

		Six months ended
		March 2, 2012				March 4, 2011
Cash flows from operating activities
Net loss		$	(1,220,334	)		$	(996,360	)
Adjustments to reconcile net loss to cash provided by operating activities:
Depreciation and amortization			563,201				552,727
Share-based compensation expense			-				110,875
Increase in provision for bad debts			15,000				75,000
Increase in provision for inventory reserves			40,000				60,000
Increase in provision for warranty reserves			24,900				72,000
Changes in assets and liabilities
Accounts receivable			771,295				(560,326	)
Inventories			(223,140	)			964,141
Other assets			120,072				(77,457	)
Accounts payable			(234,510	)			(239,973	)
Accrued expenses			134,454				212,203
Deferred revenue			82,636				(33,014	)
Customer deposits			(36,790	)			103,819
Net cash provided by operating activities			36,784				243,635
Cash flows from investing activities
Property and equipment expenditures			(9,145	)			(5,021	)
Capitalized software additions			(433,549	)			(447,048	)
Net cash used for investing activities			(442,694	)			(452,069	)
Cash flows from financing activities
Change in borrowings under revolving line of credit			-				400,000
Net cash provided by financing activities			-				400,000
(Decrease) increase in cash			(405,910	)			191,566
Cash, beginning of period			475,548				231,091
Cash, end of period		$	69,638			$	422,657
Supplemental disclosure of cash flow information:
Cash paid for interest		$	11,262			$	8,694

 

See accompanying notes to consolidated financial statements.

 

 

WEGENER CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 1 Liquidity and Going Concern

The accompanying consolidated financial statements have been prepared on a going concern basis which contemplates the realization of assets and liquidation of liabilities in the normal course of business and do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the possible inability of the Company to continue as a going concern.

 

We have experienced recurring net losses from operations, which have caused an accumulated deficit of approximately $22,952,000 at March 2, 2012. We had a working capital deficit of approximately $5,541,000 at March 2, 2012 compared to $4,441,000 at September 2, 2011.

 

Our backlog scheduled to ship within eighteen months was approximately $2.6 million at March 2, 2012, compared to $3.5 million at September 2, 2011, and $5.9 million at March 4, 2011. Approximately $778,000 of the March 2, 2012 backlog is scheduled to ship during the third quarter of fiscal 2012 and approximately $586,000 during the fourth quarter of fiscal 2012.

 

Our bookings and revenues to date in fiscal 2012 and during the prior fiscal year have been insufficient to attain profitable operations and to provide adequate levels of cash flow from operations. During the first and second quarters of fiscal 2012 bookings were approximately $900,000 and $987,000, respectively, compared to $3.2 million and $700,000, respectively, in the same periods of fiscal 2011. During all of fiscal year 2011 bookings were $6.4 million. These bookings were well below our expectations primarily as a result of customer delays in purchasing decisions, deferral of project expenditures and general adverse economic and credit conditions. Subsequent to March 2, 2012, additional bookings through April 6, 2012, were approximately $298,000 all of which are scheduled to ship during the third and fourth quarters of fiscal 2012. The amount of orders scheduled to ship during the third and fourth quarters of fiscal 2012 from the March 2, 2012 backlog, along with bookings subsequent to March 2, 2012, are insufficient to provide adequate levels of liquidity during those periods. Significant fiscal 2012 shippable bookings are currently required to meet our quarterly financial and cash flow projections for the remainder of fiscal 2012. There can be no assurances that the Company will be able to achieve its projected level of bookings and revenues in 2012 and beyond.

 

Our ability to continue as a going concern is dependent on generating sufficient new orders and revenues in the very near term to provide sufficient cash flow from operations to pay our current level of operating expenses, to provide for inventory purchases and to reduce past due amounts owed to vendors and service providers. No assurances may be given that the Company will be able to achieve sufficient levels of new orders in the near term to provide adequate levels of cash flow from operations. Should we be unable to achieve near term profitability and generate sufficient cash flow from operations, we would need to raise additional capital or obtain additional borrowings beyond our existing loan facility. We currently have limited sources of capital, including the public and private placement of equity securities and additional debt financing. No assurances can be given that additional capital or borrowings would be available to allow us to continue as a going concern. If near term shippable bookings are insufficient to provide adequate levels of near term liquidity and any required additional capital or borrowings are unavailable, we will likely be forced to significantly curtail or restructure our operations during the remainder of fiscal 2012 and beyond, which would have a material adverse effect on our ability to continue as a going concern and as a result may require the Company to enter into bankruptcy proceedings or cease operations.

 

Our cash flow requirements during the first six months of fiscal 2012 were financed by our working capital as the outstanding balance of our loan facility was at the maximum limit of $4,250,000 throughout the first six months of fiscal 2012. At April 6, 2012, the outstanding balance on the line of credit remained at the maximum limit of $4,250,000 and our cash balances were approximately $263,000. With our line of credit currently at the maximum limit, our very near term liquidity is dependent on our working capital and booking sufficient levels of near term shippable orders to provide adequate levels of operating cash.

 

During prior fiscal years and continuing to date, due to insufficient cash flow from operations and the borrowing limitations under our loan facility, we negotiated extended payment terms with our two offshore vendors and have been extending other vendors well beyond normal payment terms. Until such vendors are paid within normal payment terms, no assurances can be given that required services and materials needed to support operations will continue to be provided. In addition, no assurances can be given that vendors will not pursue legal means to collect past due balances owed. Any interruption of services or materials or initiation of legal means to collect balances owed would likely have an adverse impact on our operations and could impact our ability to continue as a going concern.

 

 

WEGENER CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 2 Significant Accounting Policies

The significant accounting policies followed by the Company are set forth in Note 2 to our audited consolidated financial statements included in the Annual Report on Form 10-K for the year ended September 2, 2011. The following are updates to those policies.

 

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Examples include valuation allowances for deferred tax assets, and provisions for bad debts, inventory obsolescence and accrued expenses. Actual results could differ from these estimates.

 

Fiscal Year

We use a fifty-two, fifty-three week year. The fiscal year ends on the Friday closest to August 31. The first six months of fiscal years 2012 and 2011 both contained twenty-six weeks. Fiscal years 2012 and 2011 contain fifty-two weeks.

 

Note 3 Accounts Receivable

Accounts receivable are summarized as follows:

 

		March 2, 2012 (Unaudited)				September 2, 2011
Accounts receivable – trade		$	1,550,085			$	2,321,372
Less: allowance for doubtful accounts			(280,041	)			(265,033	)
Accounts receivable, net		$	1,270,044			$	2,056,339

 

Sales to a relatively small number of major customers have typically comprised a majority of our revenues and that trend is expected to continue throughout fiscal 2012 and beyond (see Note 9). At March 2, 2012, four customers accounted for approximately 28.6%, 21.3%, 16.1% and 10.7%, respectively, of our accounts receivable. At September 2, 2011, four customers accounted for approximately 28.1%, 15.5%, 14.0% and 10.1%, respectively, of our accounts receivable.

 

Note 4 Inventories

Inventories are summarized as follows:

 

		March 2,
		2012				September 2,
		(Unaudited)				2011
Raw materials		$	2,440,206			$	2,317,852
Work-in-process			650,455				649,384
Finished goods			2,481,425				2,450,746
			5,572,086				5,417,982
Less inventory reserves			(3,858,580	)			(3,887,616	)
Inventories, net		$	1,713,506			$	1,530,366

 

Our inventory reserve is to provide for items that are potentially slow-moving, excess or obsolete. Changes in market conditions, lower than expected customer demand and rapidly changing technology could result in additional slow moving, excess or obsolete inventory that is unsaleable or saleable at reduced prices.

 

 

WEGENER CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 5 Accrued Expenses

Accrued expenses consist of the following:

 

		March 2, 2012 (Unaudited)				September 2, 2011
Vacation		$	572,176			$	573,212
Interest			946,581				777,589
Payroll and related expenses			104,394				109,889
Royalties			220,574				194,671
Warranty			147,538				122,638
Taxes and insurance			51,266				34,757
Commissions			34,279				31,529
Professional fees			119,234				195,476
Other			32,949				29,875
		$	2,228,991			$	2,069,636

 

Note 6 Finance Arrangements

Revolving Line of Credit

 

Our revolving line of credit (“loan facility”), amended and effective October 8, 2009, is provided by The David E. Chymiak Trust Dated December 15, 1999 (the “Trust”). The Trust is controlled by David E. Chymiak who is a beneficial owner of approximately 8.5% of our outstanding common stock. The loan facility provides a maximum credit limit of $4,250,000 excluding any accrued unpaid interest and bears interest at the rate of eight percent (8.0%) per annum. At March 2, 2012, the outstanding balance on the loan facility was at the maximum credit limit of $4,250,000 and accrued unpaid interest amounted to approximately $943,000. At April 6, 2012, the outstanding balance on the line of credit remained at $4,250,000. The loan facility is secured by a first lien on substantially all of WCI’s assets, including land and buildings, and is guaranteed by Wegener Corporation.

 

The loan facility matured on April 7, 2012, and automatically renews for successive twelve (12) month periods provided, however, the Trust may terminate the loan facility by providing a ninety (90) day written notice of termination at any time subsequent to April 7, 2012. Principal and interest shall be payable upon the earlier of the maturity date, an event of default as provided by the loan facility, or 90 days following the date on which the Trust provides written notice to terminate the agreement. In the event of a ninety day notice of termination of our loan facility, we would need to obtain additional credit facilities or raise additional capital to continue as a going concern and to execute our business plan. There is no assurance that such financing would be available or, if available, that we would be able to complete financing on satisfactory terms.

 

Under the terms of the facility’s debt covenants we are required to retain certain executive officers and we are precluded from paying dividends. At March 2, 2012, we were in compliance with the debt covenants.

 

Note 7 Income Taxes

For the six months ended March 2, 2012, no income tax benefit was recorded due to an increase in the deferred tax asset valuation allowance. The valuation allowance increased $439,000 in the first six months of fiscal 2012. At March 2, 2012, net deferred tax assets of $8,417,000 were fully reserved by a valuation allowance.

 

At March 2, 2012, we had a federal net operating loss carryforward of approximately $16,839,000, which expires beginning fiscal 2021 through fiscal 2032. Additionally, we had an alternative minimum tax credit of $134,000 which was fully offset by the valuation allowance.

 

 

WEGENER CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 8 Share-Based Compensation Plans

During the six months ended March 2, 2012, stock options for 228,375 shares of common stock, granted under the 1998 Incentive Plan, at an exercise price of $1.00 per share were forfeited. At March 2, 2012, stock options for 1,080,500 shares of common stock granted under all Incentive Plans remained outstanding. Exercise prices range from $.125 to $2.50 per share.

 

Note 9 Earnings Per Share

Basic and diluted net loss per share was computed in accordance with ASC Topic 260 “Earnings Per Share.” Basic net loss per share is computed by dividing net loss (numerator) by the weighted average number of common shares outstanding (denominator) during the period and excludes the dilutive effect of stock options. Because the Company reported a net loss in the second quarter and first six months of fiscal 2012 and fiscal 2011, common stock equivalents, which consisted of stock options, were anti-dilutive; therefore, the amounts reported for basic and dilutive loss per share were the same. 

 

		Three months ended
		March 2, 2012												March 4, 2011
		Earnings (Numerator)				Shares (Denominator)				Per share amount				Earnings (Numerator)				Shares (Denominator)				Per share amount
Net loss		$	(363,702	)										$	(970,584	)
Basic and diluted loss per share:
Net loss available to common shareholders		$	(363,702	)			13,147,051			$	(0.03	)		$	(970,584	)			3,136,062			$	(0.07	)

 

		Six months ended
		March 2, 2012												March 4, 2011
		Earnings (Numerator)				Shares (Denominator)				Per share amount				Earnings (Numerator)				Shares (Denominator)				Per share amount
Net loss		$	(1,220,334	)										$	(996,360	)
Basic and diluted loss per share:
Net loss available to common shareholders		$	(1,220,334	)			13,147,051			$	(0. 09	)		$	(996,360	)			12,891,556			$	(0. 08	)

 

Stock options excluded from the diluted net loss per share calculation due to their anti-dilutive effect are as follows:

 

Three months ended

Six months ended

March 2,

March 4,

March 2,

March 4,

2012

2011

2012

2011

Common stock options:

Number of shares

1,080,500

1,325,075

1,080,500

1,325,075

Exercise price

$.125 to $2.50

$.125 to $2.50

$.125 to $2.50

$.125 to $2.50

 

Note 10 Segment Information and Concentrations

In accordance with ASC Topic 280 “Segment Reporting,” we operate within a single reportable segment, the manufacture and sale of satellite communications equipment.

 

 

WEGENER CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

In this single operating segment we have two sources of revenues as follows:

 

		Three months ended								Six months ended
		March 2,				March 4,				March 2,				March 4,
		2012				2011				2012				2011
Product Line
Direct Broadcast Satellite		$	2,247,499			$	1,352,822			$	3,509,408			$	4,206,788
Service			121,345				79,978				242,018				196,359
		$	2,368,844			$	1,432,800			$	3,751,426			$	4,403,147

 

Concentration of revenues for the respective periods’ revenues are as follows:

 

		Three months ended								Six months ended
		March 2,  2012				March 4,  2011				March 2,  2012				March 4,  2011
Product
iPump Media Servers			20.2	%				(a)			15.3	%			20.9	%
Professional video receivers				(a)				(a)				(a)			21.7	%
Enterprise media receivers			16.8	%				(a)			17.3	%			10.1	%
Network control software products				(a)				(a)				(a)			12.5	%
Audio broadcast receivers			26.9	%			37.3	%			30.4	%			31.4	%
Product service repairs				(a)				(a)				(a)				(a)
Extended maintenance contracts				(a)			16.6	%			11.3	%			10.7	%

 

(a) Revenues for the period were less than 10% of total revenues.

 

Products representing 10% or more of annual revenues are subject to fluctuations from quarter to quarter as new products and technologies are introduced, new product features and enhancements are added and as customers upgrade or expand their network operations.

 

Revenues by geographic area are as follows:

 

		Three months ended								Six months ended
		March 2,  2012				March 4,  2011				March 2,  2012				March 4,  2011
Geographic Area
United States		$	1,520,987			$	1,279,441			$	2,728,820			$	2,624,673
Latin America			701,018				77,030				801,587				1,274,974
Canada			15,518				7,912				21,663				49,438
Europe			62,339				41,894				93,219				415,669
Other			68,982				26,523				106,137				38,393
		$	2,368,844			$	1,432,800			$	3,751,426			$	4,403,147

 

All of the Company’s long-lived assets are located in the United States.

 

 

WEGENER CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Customers representing 10% or more of the respective periods’ revenues are as follows:

 

				Three months ended								Six months ended
				March 4, 2011				March 4, 2011				March 4, 2011				March 4, 2011
Customer 1					25.0	%			36.7	%			29.2	%			27.3	%
Customer 2					15.7	%				(a)			13.2	%				(a)
Customer 3					22.9	%				(a)			15.4	%				(a)
Customer 4						(a)			10.1	%				(a)				(a)
Customer 5						(a)				(a)				(a)			27.9	%

(a) Revenues for the period were less than 10% of total revenues.

 

Note 11 Commitments

We have two manufacturing and purchasing agreements for certain finished goods inventories. At March 2, 2012, outstanding purchase commitments under these agreements amounted to $324,000.

 

Note 12 Indemnifications

We routinely sell products with limited intellectual property indemnification included in the terms of sale or in certain contractual arrangements. The scope of these indemnities varies, but in some instances includes indemnification for costs, damages and expenses (including reasonable attorneys’ fees) finally awarded in any suit by a third party against the purchaser to the extent based upon a finding the design or manufacture of the purchased item infringes the proprietary rights of such third party. Certain requests for indemnification have been received by us pursuant to these arrangements. (See Note 14 to our audited consolidated financial statements included in the Annual Report on Form 10-K for the year ended September 2, 2011.)

 

To date, there have been no findings related to these matters that our products and/or services have infringed upon the proprietary rights of others. Although it is reasonably possible a liability may be incurred in the future related to these indemnification claims, at this point, any possible range of loss cannot be reasonably estimated.

 

Additionally, we are obligated to indemnify our officers and the members of our Board of Directors pursuant to our bylaws and contractual indemnity agreements.

 

 

 

ITEM 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

This information should be read in conjunction with the consolidated financial statements and the notes thereto included in Item 1 of this Quarterly Report and the audited consolidated financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations for the year ended September 2, 2011 contained in the Company’s 2011 Annual Report on Form 10-K.

 

Certain statements contained in this filing are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, and the Company intends that such forward-looking statements are subject to the safe harbors created thereby.  Forward-looking statements may be identified by words such as "believes," "expects," "projects," "plans," "anticipates," and similar expressions, and include, for example, statements relating to expectations regarding  future sales, income and cash flows. Forward-looking statements are based upon the Company’s current expectations and assumptions, which are subject to a number of risks and uncertainties including, but not limited to:  the Company’s ability to continue as a going concern, customer acceptance and effectiveness of recently introduced products; development of additional business for the Company’s digital video and audio transmission product lines; effectiveness of the sales organization; the successful development and introduction of new products in the future; delays in the conversion by private and broadcast networks to next generation digital broadcast equipment; acceptance by various networks of standards for digital broadcasting; the Company’s liquidity position and capital resources; general market and industry conditions which may not improve during fiscal year 2012  and beyond; and success of the Company’s research and development efforts aimed at developing new products. Additional potential risks and uncertainties include, but are not limited to, economic conditions, customer plans and commitments, product demand, government regulation, rapid technological developments and changes, intellectual property disputes, performance issues with key suppliers and subcontractors, delays in product development and testing, availability of raw materials, new and existing well-capitalized competitors, and other risks and uncertainties detailed from time to time in the Company’s periodic Securities and Exchange Commission filings, including the Company’s most recent Annual Report on Form 10-K. Such forward-looking statements are subject to risks, uncertainties and other factors and are subject to change at any time, which could cause actual results to differ materially from future results expressed or implied by such forward-looking statements. Forward-looking statements speak only as of the date the statement was made.  The Company does not undertake any obligation to update any forward-looking statements.

 

OVERVIEW

 

We believe the continued global economic downturn and resulting adverse economic and credit conditions have adversely affected our business, financial condition and results of operations in prior fiscal years and into the first six months of fiscal 2012.

 

Revenues for the three months ended March 2, 2012, increased $936,000 or 65.3% to $2,369,000 from $1,433,000 for the same period in fiscal 2011. Revenues for the six months ended March 2, 2012 decreased $652,000 or 14.8% to $3,751,000 from $4,403,000 for the same period in fiscal 2011. The operating results for the three and six months ended March 2, 2012 were a net loss of $(364,000) or $(0.03) per share and a net loss of $(1,220,000) or $(0.09) per share, respectively, compared to a net loss of $(971,000) or $(0.07) per share and a net loss of $(996,000) or $(0.08) per share, respectively, for the three and six months ended March 4, 2011.

 

The accompanying consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the possible inability of the Company to continue as a going concern. The audit report relating to the Consolidated Financial Statements for the years ended September 2, 2011 contained explanatory paragraphs regarding the Company’s ability to continue as a going concern. (See the Liquidity and Capital Resources section for further discussion.)

 

 

RESULTS OF OPERATIONS

THREE AND SIX MONTHS ENDED MARCH 2, 2012 COMPARED TO THREE AND SIX MONTHS ENDED MARCH 4, 2011

 

The following table sets forth, for the periods indicated, the components of our results of operations as a percentage of net revenues:

 

		Three months ended								Six months ended
		March 2,				March 4,				March 2,				March 4,
			2012				2011				2012				2011
Revenues, net			100.0	%			100.0	%			100.0	%			100.0	%
Cost of products sold			67.8				79.5				75.1				67.1
Gross profit margin			32.2				20.5				24.9				32.9
Selling, general and administrative			27.2				60.7				32.9				37.9
Research and development			16.7				21.2				19.7				13.5
Operating loss			(11.7	)			(61.4	)			(27.7	)			(18.6	)
Interest expense			(3.7	)			(6.4	)			(4.8	)			(4.1	)
Net loss			(15.4	)%			(67.8	)%			(32.5	)%			(22.7	)%

 

The operating results for the three and six months ended March 2, 2012 were a net loss of $(364,000) or $(0.03) per share and a net loss of $(1,220,000) or $(0.09) per share, respectively, compared to a net loss of $(971,000) or $(0.07) per share and a net loss of $(996,000) or $(0.08) per share, respectively, for the three and six months ended March 4, 2011. The second quarter and first six month operating results of fiscal 2011 included non-cash share-based compensation expenses of approximately $111,000 for stock option and restricted stock awards and cash tax reimbursement expenses of approximately $32,000 compared to none in the same periods of fiscal 2012.

 

Revenues - Revenues for the three months ended March 2, 2012, increased $936,000 or 65.3% to $2,369,000 from $1,433,000 for the same period in fiscal 2011. Revenues for the six months ended March 2, 2012 decreased $652,000 or 14.8% to $3,751,000 from $4,403,000 for the same period in fiscal 2011.

 

The decrease in revenues in the first six months of fiscal 2012 was primarily due to customer delays in placing orders that were expected to book and ship. Revenues and order backlog are subject to the timing of significant orders from customers and remain difficult to forecast. As a result, we expect future revenue levels and operating results to continue to fluctuate from quarter to quarter.

 

Fiscal 2012 second quarter and first six month revenues included shipments of Encompass LE2 audio receivers to business music provider Muzak LLC, shipments of Unity^® 550 receivers to a faith-based private network for continued network expansion and ipump^® 6400 media server equipment to Comtelsat.

 

Fiscal 2011 second quarter revenues included continued shipments of Encompass LE2 audio receivers to Muzak LLC, and shipments of Nave IIc^® encoders. Revenues for the first six months of fiscal 2011 included ipump^® 562 enterprise media receivers for an international satellite digital signage project, ipump^® 6400 media server equipment for an international health and education network as well as continued shipments of Encompass LE2 audio receivers to Muzak LLC.

 

For the three months ended March 2, 2012, three customers accounted for 25.0%, 22.9% and 15.7% of revenues, respectively. For the six months ended March 2, 2012, these same customers accounted for 29.2%, 15.4% and 13.2% of revenues, respectively. For the three months ended March 4, 2011, two customers accounted for 36.7% and 10.1% of revenues, respectively. For the six months ended March 4, 2011, one of these customers accounted for 27.3% of revenues and one other customer accounted for 27.9% of revenues. Sales to a relatively small number of major customers have typically comprised a majority of our revenues and that trend is expected to continue throughout fiscal 2012 and beyond.

 

Our backlog is comprised of undelivered, firm customer orders which are scheduled to ship within eighteen months. The backlog was approximately $2.6 million at March 2, 2012 compared to $3.5 million at September 2, 2011, and $5.9 million at March 4, 2011. Three customers accounted for approximately 47.5%, 14.5% and 12.1%, respectively, of the backlog at March 2, 2012. Approximately $778,000 of the March 2, 2012 backlog is scheduled to ship during the third quarter of fiscal 2012 and approximately $586,000 during the fourth quarter of fiscal 2012.

 

Gross Profit Margin - The Company's gross profit margin percentages were 32.2% and 24.9% for the three and six month periods ended March 2, 2012, compared to 20.5% and 32.9 % for the three and six month periods ended March 4, 2011. Gross profit margin dollars increased $468,000 for the three months ended March 2, 2012, compared to the same period in fiscal 2011. The increases in margin percentages and dollars were mainly due to the increase in revenues which resulted in lower unit fixed costs. For the first six months of fiscal 2012 gross profit margin dollars decreased $515,000 compared to the same period in fiscal 2011. The decreases in margin percentages and dollars were mainly due to the lower revenues resulting in higher unit fixed costs and a product mix with higher material costs.

 

 

Cost of products sold in the second quarter and first six months of fiscal 2012 included inventory reserve charges of $25,000 and $40,000, respectively, compared to $25,000 and $60,000, respectively, for the same periods in fiscal 2011. Warranty provisions included in cost of products sold in the second quarter and first six months of fiscal 2012 were $25,000 for both periods compared to $52,000 and $72,000, respectively, in the same periods of fiscal 2011. Capitalized software amortization expenses included in cost of products sold for the three and six months ended March 2, 2012, were $229,000 and $457,000, respectively, compared to $207,000 and $431,000, respectively, for the same periods in fiscal 2011.

 

Selling, General and Administrative - Selling, general and administrative (SG&A) expenses decreased $225,000, or 26.0%, to $644,000 for the three months ended March 2, 2012, from $869,000 for the three months ended March 4, 2011. For the six months ended March 2, 2012, SG&A expenses decreased $437,000, or 26.1%, to $1,234,000 from $1,671,000 for the same period ended March 4, 2011. Corporate SG&A expenses in the second quarter of fiscal 2012 decreased $169,000, or 62.0%, to $103,000 from $272,000 for the same period in fiscal 2011. For the six months ended March 2, 2012, corporate SG&A expenses decreased $173,000, or 45.6%, to $207,000 from $380,000 in the same period in fiscal 2011. Corporate SG&A expenses in the three and six months ended March 4, 2011 included non-cash share-based compensation expenses of approximately $111,000 for stock option and restricted stock awards compared to none in the same periods of fiscal 2012. In addition professional fees decreased $48,000 and $49,000 for the three and six months ended March 2, 2012, respectively. WCI’s SG&A expenses for the three months ended March 2, 2012 decreased $57,000, or 9.6%, to $540,000 from $597,000 and for the six months ended March 2, 2012, decreased $263,000, or 20.4%, to $1,027,000 from $1,290,000 compared to the same periods in fiscal 2011. Decreases in WCI’s SG&A expenses for the three months ended March 2, 2012 included (i) salaries and related payroll costs of $55,000 due to a reduction in headcount and severance costs; (ii) general overhead costs of $28,000 due to cost reduction efforts of overhead expenses and (iii) bad debt expense of $5,000. These decreases were offset by increases in marketing expenses of $15,000 primarily for digital signage products and in-house commission expense of $11,000 due to the increase in revenues in the second quarter of fiscal 2012 compared to fiscal 2011. For the first six months of fiscal 2012 decreases in SG&A expenses included (i) salaries and related payroll costs of $144,000 due to the reduction in headcount and severance costs; (ii) general overhead costs of $62,000 due to the cost reduction efforts of overhead expenses; (iii) bad debt expense of $60,000 and (iv) in-house commission expense of $20,000 due to the low level of bookings in the first six months of fiscal 2012. These decreases were offset by an increase in marketing expenses of $47,000 primarily for digital signage products. As a percentage of revenues, SG&A expenses were 27.2% and 32.9% for the three and six month periods ended March 2, 2012, compared to 60.7% and 37.9% in the same periods in fiscal 2011.

 

Research and Development - Research and development (R&D) expenditures, including capitalized software development costs, increased $81,000, or 15.5%, to $609,000 for the three months ended March 2, 2012, from $528,000 for the three months ended March 4, 2011. For the six months ended March 2, 2012, R&D expenditures increased $130,000, or 12.5%, to $1,172,000 from $1,042,000 for the same period in fiscal 2011. The increase in expenditures in the second quarter and first six months of fiscal 2012 compared to the same period of fiscal 2011 was mainly due to increases in consulting expenses, proto-type parts expenses and salaries and related personnel costs. Capitalized software development costs amounted to $215,000 and $434,000 for the second quarter and first six months of fiscal 2012, respectively, compared to $224,000 and $447,000 for the same periods in fiscal 2011, respectively. R&D expenses, excluding capitalized software expenditures, were $395,000, or 16.7% of revenues, and $739,000, or 19.7% of revenues, for the three and six months ended March 2, 2012, compared to $303,000, or 21.2% of revenues, and $595,000, or 13.5%, of revenues, in the same periods of fiscal 2011.

 

Interest Expense - Interest expense decreased $4,000 to $87,000 for the three months ended March 2, 2012, from $91,000 for the three months ended March 4, 2011. For the six months ended March 2, 2012, interest expense decreased $1,000 to $180,000 from $179,000 for the same period ended March 4, 2011.

 

Income Tax Expenses - For the six months ended March 2, 2012, no income tax benefit was recorded due to an increase in the deferred tax asset valuation allowance. The valuation allowance increased $439,000 in the first six months of fiscal 2012. At March 2, 2012, net deferred tax assets of $8,417,000 were fully reserved by a valuation allowance. At March 2, 2012, we had a federal net operating loss carryforward of approximately $16,839,000, which expires beginning fiscal 2021 through fiscal 2032. Additionally, we had an alternative minimum tax credit of $134,000 which was fully offset by the valuation allowance.

 

 

LIQUIDITY AND CAPITAL RESOURCES

 

We have experienced recurring net losses from operations, which have caused an accumulated deficit of approximately $22,952,000 at March 2, 2012. We had a working capital deficit of approximately $5,541,000 at March 2, 2012 compared to $4,441,000 at September 2, 2011.

 

Our bookings and revenues to date in fiscal 2012 and during the prior fiscal year have been insufficient to attain profitable operations and to provide adequate levels of cash flow from operations. During the first and second quarters of fiscal 2012 bookings were approximately $900,000 and $987,000, respectively, compared to $3.2 million and $700,000, respectively, in the same periods of fiscal 2011. Fiscal 2011 bookings were $6.4 million. These bookings were well below our expectations primarily as a result of customer delays in purchasing decisions, deferral of project expenditures and general adverse economic and credit conditions. Subsequent to March 2, 2012, additional bookings through April 6, 2012, were approximately $298,000 all of which are scheduled to ship during the third and fourth quarters of fiscal 2012. The amount of orders scheduled to ship during the third and fourth quarters of fiscal 2012 from the March 2, 2012 backlog, along with bookings subsequent to March 2, 2012, are insufficient to provide adequate levels of liquidity during those periods. Significant fiscal 2012 shippable bookings are currently required to meet our quarterly financial and cash flow projections for the remainder of fiscal 2012.

 

Our ability to continue as a going concern is dependent on generating sufficient new orders and revenues in the very near term to provide sufficient cash flow from operations to pay our current level of operating expenses, to provide for inventory purchases and to reduce past due amounts owed to vendors and service providers. No assurances may be given that the Company will be able to achieve sufficient levels of new orders in the near term to provide adequate levels of cash flow from operations. Should we be unable to achieve near term profitability and generate sufficient cash flow from operations, we would need to raise additional capital or obtain additional borrowings beyond our existing loan facility. We currently have limited sources of capital, including the public and private placement of equity securities and additional debt financing. No assurances can be given that additional capital or borrowings would be available to allow us to continue as a going concern. If near term shippable bookings are insufficient to provide adequate levels of near term liquidity and any required additional capital or borrowings are unavailable, we will likely be forced to significantly curtail or restructure our operations during the remainder of fiscal 2012 and beyond, which would have a material adverse effect on our ability to continue as a going concern and as a result may require the Company to enter into bankruptcy proceedings or cease operations.

 

Our cash flow requirements during the first six months of fiscal 2012 were financed by our working capital as the outstanding balance of our loan facility was at the maximum limit of $4,250,000 throughout the first six months of fiscal 2012. At April 6, 2012, the outstanding balance on the line of credit remained at the maximum limit of $4,250,000 and our cash balances were approximately $263,000. With our line of credit currently at the maximum limit, our very near term liquidity is dependent on our working capital and booking sufficient levels of near term shippable orders to provide adequate levels of operating cash.

 

During prior fiscal years and continuing to date, due to insufficient cash flow from operations and borrowing limitations under our loan facility, we negotiated extended payment terms with our two offshore vendors and have been extending other vendors well beyond normal payment terms. Until such vendors are paid within normal payment terms, no assurances can be given that required services and materials needed to support operations will continue to be provided. In addition, no assurances can be given that vendors will not pursue legal means to collect past due balances owed. Any interruption of services or materials or initiation of legal means to collect balances owed would likely have an adverse impact on our operations and could impact our ability to continue as a going concern.

 

Financing Agreements

 

WCI’s revolving line of credit (“loan facility”), amended and effective October 8, 2009, is provided by The David E. Chymiak Trust Dated December 15, 1999 (the “Trust”). The Trust is controlled by David E. Chymiak who is a beneficial owner of approximately 8.5% of our outstanding common stock. The loan facility provides a maximum credit limit of $4,250,000 excluding any accrued unpaid interest and bears interest at the rate of eight percent (8.0%) per annum. At March 2, 2012, the outstanding balance on the loan facility was at the maximum credit limit of $4,250,000 and accrued unpaid interest amounted to approximately $943,000. At April 6, 2012, the outstanding balance on the line of credit remained at $4,250,000. All principal and interest shall be payable in U.S. dollars or, upon mutual agreement of the parties decided in good faith at the time payment is due, other good and valuable consideration. The loan facility is secured by a first lien on substantially all of WCI’s assets, including land and buildings, and is guaranteed by Wegener Corporation.

 

 

The loan facility matured on April 7, 2012, and automatically renews for successive twelve (12) month periods provided, however, the Trust may terminate the facility by providing a ninety (90) day written notice of termination at any time. Principal and interest shall be payable upon the earlier of the maturity date, an event of default as provided by the loan facility, or 90 days following the date on which the Trust provides written notice to terminate the agreement. In the event of a ninety day notice of termination of our loan facility, we would need to obtain additional credit facilities or raise additional capital to continue as a going concern and to execute our business plan. There is no assurance that such financing would be available or, if available, that we would be able to complete financing on satisfactory terms.

 

Under the terms of the loan facility’s debt covenants we are required to retain certain executive officers and we are precluded from paying dividends. At March 2, 2012, we were in compliance with the debt covenants.

 

Cash Flows

 

During the first six months of fiscal 2012, operating activities provided $37,000 of cash. Net loss adjusted for expense provisions and depreciation and amortization (before working capital changes) used cash of $577,000, while changes in accounts receivable, deferred revenue and customer deposit balances provided $817,000 of cash. Changes in accounts payable and accrued expenses used $100,000 of cash, while changes in inventories and other assets used $103,000 of cash. Cash used by investing activities was $443,000, which consisted of capitalized software additions of $434,000 and equipment additions of $9,000. No cash was provided or used by financing activities.

 

At March 2, 2012, our net inventory balances were $1,714,000 compared to $1,530,000 at September 2, 2011. We will need to increase inventory purchases in subsequent quarters in order to have sufficient inventory balances to support anticipated revenue levels in fiscal 2012 and beyond. A substantial portion of future inventory purchases will be with offshore suppliers whom we have been paying under extended payment terms and credit limits which are beyond normal payment terms and credit limits. During the first six months of fiscal 2012, an offshore vendor’s outstanding accounts payable balance, plus amounts of scheduled deliveries during the third quarter under our open purchase commitments, exceeded our current credit limit. As a result, we were required to make accelerated payments in the amounts of $127,000 in November 2011, $339,000 in December 2011, $216,000 in January 2012 and $105,000 in March 2012. An additional accelerated payment of $105,000 will be required on or before April 20, 2012. Under our extended payment term arrangement, these payments would have been made during the remainder of fiscal 2012. In order to have sufficient liquidity available for future inventory purchases it is likely we will need continued and possible additional credit limits as well as continued extended payment terms from offshore and domestic suppliers; increased customer deposits from future bookings; additional borrowing capacity and/or additional capital. No assurances may be given that we will be able to generate sufficient liquidity from these or other sources that may be required to support future inventory purchases.

 

With our credit line at the maximum limit of $4,250,000, our near term cash flow requirements will likely be dependent on our ability to manage our working capital as well as generate additional bookings. During the first six months of fiscal 2012, a significant source of our cash flow from operations came from customer deposits, primarily from one customer’s order prepayment in the amount of $648,000. In exchange for the prepayment, we offered a price discount of approximately $37,000. In addition, in the first six months of fiscal 2012, we offered 2% 10 net 30 day terms to two customers related to their receivable balances. During the first six months of fiscal 2012 approximately $343,000 was received utilizing the discounted payment terms. Subsequent to March 2, 2012, approximately $459,000 was received utilizing the discounted payment terms. We expect to continue to pursue customer deposits on larger new orders and offer early payment discounts to larger customer receivable balances. No assurance may be given that we will be successful in these efforts.

 

Contractual Obligations

 

We have two manufacturing and purchasing agreements for certain finished goods inventories. At March 2, 2012, outstanding purchase commitments under this agreement amounted to $324,000.

 

 

The Company’s long-term contractual obligations as of March 2, 2012 consisted of:

 

		Payments Due by Period
						Fiscal				Fiscal				Fiscal
Contractual Obligations		Total				2012				2013-2014				2015-2016
Operating leases		$	61,000			$	32,000			$	29,000			$	-
Line of credit-related party			4,250,000				4,250,000				-				-
Purchase commitments			324,000				324,000				-				-
Total		$	4,635,000			$	4,606,000			$	29,000			$	-

 

CRITICAL ACCOUNTING POLICIES

 

The accounting policies and related estimates that we believe are the most critical to understanding our consolidated financial statements, financial condition and results of operations and those that require management judgment and assumptions, or involve uncertainties are as follows:

 

Revenue Recognition – Our principal sources of revenue are from the sale of satellite communications equipment and network control software products and product repair services, extended maintenance contracts and installation and training services. Historically, product repair services, maintenance contracts and installation and training services are less than 10% of our net revenues. Our revenue recognition policies are in compliance with FASB Accounting Standards Codification (ASC) Topic 605 “Revenue Recognition.” Revenue is recognized when persuasive evidence of an agreement with the customer exists, delivery has occurred or services have been provided, the sales price is fixed or determinable, collectability is reasonably assured, and risk of loss and title have transferred to the customer. Revenue from hardware products is recognized when risk of loss and title has transferred which is generally upon shipment. In some cases, particularly with international shipments, customer contracts are fulfilled under terms known as ex-works, in accordance with international commercial terms. In these instances, revenue is recognized upon delivery, which is the date that the goods are made available to the customer as requested by the customer and no further obligations of the Company remain. Hardware products are typically sold on a stand-alone basis but may include hardware maintenance contracts. Embedded in our hardware products is internally developed software of varying applications that function together with the hardware to deliver the product's essential functionality. The embedded software is not sold separately, is not a significant focus of the marketing effort and we do not provide post-contract customer support specific to embedded software. The functionality that the software provides is marketed as part of the overall product. Service revenues are recognized at the time of performance. Extended maintenance contract revenues are recognized ratably over the term of the arrangement, which is typically one year. For network control software products we recognize revenue in accordance with the applicable software revenue recognition guidance. Typical deliverables in a software arrangement may include network control software, extended software maintenance contracts, training and installation. Provisions for returns, discounts and trade-ins, based on historical experience, have not been material.

 

When arrangements contain multiple elements, the deliverables are separated into more than one unit of accounting when the following criteria are met: (i) the delivered element(s) has value to the customer on a stand-alone basis, and (ii) if a general right of return exists relative to the delivered item, delivery or performance of the undelivered element(s) is probable and substantially in the control of the Company. We allocate revenue to all deliverables based on their relative selling prices. In such circumstances, we use a hierarchy to determine the selling price to be used for allocating revenue to deliverables: (i) vendor-specific objective evidence of selling price (“VSOE”), (ii) third-party evidence of selling price (“TPE”), and (iii) management’s best estimate of the selling price (“BESP”). VSOE generally exists only when we sell the deliverable separately and is the price actually charged by the Company for that deliverable. The objective of BESP is to determine the price at which the Company would transact a sale if the product or service were sold on a stand-alone basis. We determine the BESP for a product or service by considering multiple factors including, but not limited to, geographies, market conditions, competitive landscape, internal costs, gross margin objectives, and pricing practices. If a delivered element does not meet the criteria in the applicable accounting guidance to be considered a separate unit of accounting, revenue is deferred until the undelivered elements are fulfilled. Accordingly, the determination of BESP can impact the timing of revenue recognition for an arrangement.

 

 

We recognize revenue in certain circumstances before delivery has occurred (commonly referred to as “bill and hold” transactions). In such circumstances, among other things, risk of ownership has passed to the buyer, the buyer has made a written fixed commitment to purchase the finished goods, the buyer has requested the finished goods be held for future delivery as scheduled and designated by them, and no additional performance obligations by the Company exist. For these transactions, the finished goods are segregated from inventory and normal billing and credit terms are granted. No bill and hold transactions were recorded in the first six months of fiscal 2012.

 

These policies require management, at the time of the transaction, to assess whether the amounts due are fixed or determinable, collection is reasonably assured, and to perform an evaluation of arrangements containing multiple elements, including management’s estimate of the selling price. These assessments are based on the terms of the arrangement with the customer, past history and creditworthiness of the customer. If management determines that collection is not reasonably assured or undelivered elements are unfulfilled, revenue recognition is deferred until these conditions are satisfied.

 

Inventory Reserves - Inventories are valued at the lower of cost (at standard cost, which approximates actual cost on a first-in, first-out basis) or market. Inventories include the cost of raw materials, labor and manufacturing overhead. We make inventory reserve provisions for obsolete or slow-moving inventories as necessary to properly reflect inventory value. These reserves are to provide for items that are potentially slow-moving, excess or obsolete. Changes in market conditions, lower than expected customer demand and rapidly changing technology could result in additional obsolete and slow-moving inventory that is unsaleable or saleable at reduced prices, which could require additional inventory reserve provisions. At March 2, 2012, inventories, net of reserve provisions, amounted to $1,714,000.

 

Capitalized Software Costs - Software development costs are capitalized subsequent to establishing technological feasibility. Capitalized costs are amortized based on the larger of the amounts computed using (a) the ratio that current gross revenues for each product bears to the total of current and anticipated future gross revenues for that product, or (b) the straight-line method over the remaining estimated economic life of the product. Expected future revenues and estimated economic lives are subject to revisions due to market conditions, technology changes and other factors resulting in shortfalls of expected revenues or reduced economic lives, which could result in additional amortization expense or write-offs. At March 2, 2012, capitalized software costs, net of accumulated amortization, amounted to $1,264,000.

 

Impairment of Long-lived Assets – Long-lived assets, including property and equipment and intangible assets are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. If the sum of the expected future undiscounted cash flows is less than the carrying amount of the asset, or asset group, an impairment loss is recognized in the amount that the carrying amount of the asset or asset group exceeds its fair value.  Fair value is determined based on discounted future net cash flows associated with the use of the asset or asset group. Our impairment analysis contains uncertainties due to judgment in assumptions and estimates surrounding undiscounted future cash flows of the long-lived asset, including forecasting useful lives of assets and selecting the discount rate that reflects the risk inherent in future cash flows to determine fair value.

 

Deferred Tax Asset Valuation Allowance – Deferred tax assets are recognized for deductible temporary differences, net operating loss carryforwards, and credit carryforwards if it is more likely than not that the tax benefits will be realized. Realization of our deferred tax assets depends on generating sufficient future taxable income prior to the expiration of the loss and credit carryforwards. At March 2, 2012, net deferred tax assets of $8,417,000 were fully reserved by a valuation allowance. For the six months ended March 2, 2012, the valuation allowance was increased by $439,000.

 

Accounts Receivable Valuation – We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances would be required. At March 2, 2012, accounts receivable, net of allowances for doubtful accounts, amounted to $1,270,000.

 

ITEM 4. CONTROLS AND PROCEDURES

 

The Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (CEO) and the Chief Financial Officer (CFO), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this report (March 2, 2012). Based upon that evaluation, the Company’s CEO and CFO have concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended) are effective. There has been no change in the Company’s internal control over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

 

PART II. OTHER INFORMATION

 

ITEM 1A. RISK FACTORS

 

Our operations and financial results are subject to various risks and uncertainties that could adversely affect our business, financial condition, results of operations, and the market price for our Common Stock. Part I, Item 1A, “Risk Factors,” contained in our Annual Report on Form 10-K for the year ended September 2, 2011, includes a detailed discussion of these factors which have not changed materially from those included in the Form 10-K.

 

ITEM 2.   UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

On December 6, 2010, pursuant to our 2010 Incentive Plan, the Compensation Committee authorized the issuance to all eligible employees of the Company common stock options to purchase an aggregate of 563,700 shares of common stock and issued equally to the four non-employee members of the Board common stock options to purchase an aggregate of 100,000 shares of common stock. Stock options for 638,700 shares of common stock are exercisable at $0.125 and one stock option for 25,000 shares of common stock, issued to a 10% or greater stockholder and executive officer, is exercisable at $0.1375. The options vest upon issuance and expire five years from the date of issuance. In addition, 500,000 shares of restricted common stock were granted to two executive officers. Such shares may not be sold until a six-month restricted period expires. The issuances of the restricted stock were made in reliance upon an exemption from securities registration afforded by the provisions of Section 4(2) of the Securities Act of 1933, as amended, and the provisions of Regulation D promulgated thereunder.

 

As of April 16, 2012, a registration statement for the 2010 Incentive Plan has not been filed, although the Company expects to file a Form S-8 Registration Statement. Therefore, all of the foregoing securities are deemed restricted securities for purposes of the Securities Act.

 

Item 4.   Submission of Matters to a Vote of Security Holders

 

The annual meeting of stockholders of Wegener Corporation, a Delaware corporation (the “Company”), was held on January 31, 2012.  Matters voted upon and the final voting results were as follows:

 

(1.)

The shareholders approved the election of the following class II director nominees to the Board of Directors to hold office until the 2015 annual meeting of stockholders or until their successors shall have been elected and qualified with the voting as follows:

 

Nominee		For		Withheld		Broker non-votes
Jeffrey J. Haas		6,117,921		313,349		5,862,845
Robert A. Placek		5,511,529		919,741		5,862,845

 

(2.)

An amendment to the Company’s Certificate of Incorporation to increase the number of authorized shares of the Company’s capital stock from 30,250,000 shares to 100,250,000 shares and to increase the number of shares designated as common stock from 30,000,000 shares to 100,000,000 shares was approved with the voting as follows:

 

For		Against		Abstain
9,156,553		3,118,643		18,919

 

(3.)

The advisory resolution on executive compensation was approved with the voting as follows:

 

For		Against		Abstain		Broker non-votes
5,515,790		889,424		26,056		5,862,845

 

 

(4.)

The appointment of Habif, Arogeti & Wynne, LLP to serve as the Company’s independent registered public accounting firm for fiscal 2012 was ratified with the voting as follows:

 

For		Against		Abstain
11,236,686		1,056,909		520

 

Item 6. Exhibits

 

The following documents are filed as exhibits to this report. An asterisk identifies those exhibits previously filed and incorporated herein by reference. For each such asterisked exhibit there is shown below the description of the prior filing. Exhibits which are not required for this report are omitted.

 

Exhibit No.				Description of Exhibit
3.1	*			Certificate of Incorporation as amended through May 4, 1989. (1)
3.1.1	*			Amendment to Certificate of Incorporation. (2)
3.1.2	*			Amendment to Certificate of Incorporation effective January 27, 2009 (4)
3.1.3	*			Amendment to Certificate of Incorporation effective  February 1, 2011
3.1.4				Amendment to Certificate of Incorporation effective  January 31, 2012
3.2	*			By-laws of the Company, as Amended and Restated May 17, 2006. (3)
31.1				Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2				Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1				Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2				Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

(1)

Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended September 1, 1989, as filed with the Commission on November 30, 1989.+

(2)

Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended May 30, 1997, as filed with the Commission on June 30, 1997.+

(3)

Incorporated by reference to the Company's Current Report on Form 8-K, dated May 17, 2006, as filed with the Commission on May 22, 2006.+

(4)

Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended August 28, 2009, as filed with the Commission on November 25, 2009.+

+

SEC file No. 0-11003

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

WEGENER CORPORATION

	________________________
	(Registrant)

 

Date: April 16, 2012

By:

/s/ C. Troy Woodbury, Jr.

	C. Troy Woodbury, Jr.
	President and Chief Executive Officer
	(Principal Executive Officer)

 

Date: April 16, 2012

By:

/s/ James Traicoff

	James Traicoff
	Treasurer and Chief
	Financial Officer
	(Principal Financial and Accounting Officer)