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EX-31.1 - EXHIBIT 31.1 - WEGENER CORPv318744_ex31-1.htm
EX-32.1 - EXHIBIT 32.1 - WEGENER CORPv318744_ex32-1.htm
EX-32.2 - EXHIBIT 32.2 - WEGENER CORPv318744_ex32-2.htm
EX-31.2 - EXHIBIT 31.2 - WEGENER CORPv318744_ex31-2.htm

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 June 1, 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes 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 July 13, 2012  

 

 

 
 

 

 

 

 

 

WEGENER CORPORATION

Form 10-Q For the Quarter Ended June 1, 2012

 

 

INDEX

 

PART I. Financial Information

 

Item 1. Financial Statements  
     
  Introduction 3
     
  Consolidated Statements of Operations  
  (Unaudited) - Three and Nine Months Ended  
  June 1, 2012 and June 3, 2011 4
     
  Consolidated Balance Sheets – June 1,  
  2012 (Unaudited) and September 2, 2011 5
     
  Consolidated Statements of Capital Deficit  
  (Unaudited) - Nine Months Ended June 1,  
  2012 and June 3, 2011 6
     
  Consolidated Statements of Cash Flows  
  (Unaudited) - Nine Months Ended June 1,  
  2012 and June 3, 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 6. Exhibits  22
  Signatures 23

 

2
 

  

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 nine months ended June 1, 2012, and June 3, 2011; the consolidated balance sheet as of June 1, 2012; the consolidated statements of (capital deficit) shareholders' equity as of June 1, 2012, and June 3, 2011; and the consolidated statements of cash flows for the nine months ended June 1, 2012, and June 3, 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. 

 

3
 

 

WEGENER CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

   Three months ended   Nine months ended 
   June 1,   June 3,   June 1,   June 3, 
   2012   2011   2012   2011 
Revenue, net  $1,913,078   $2,214,505   $5,664,504   $6,617,652 
Operating costs and expenses                    
     Cost of products sold   1,727,579    1,597,969    4,546,071    4,552,975 
     Selling, general and administrative   700,521    716,365    1,934,716    2,387,085 
     Research and development   519,995    304,904    1,258,814    899,853 
                     
Operating costs and expenses   2,948,095    2,619,238    7,739,601    7,839,913 
                     
Operating loss   (1,035,017)   (404,733)   (2,075,097)   (1,222,261)
     Interest expense   (92,813)   (98,262)   (273,067)   (277,094)
                     
Net loss  $(1,127,830)  $(502,995)  $(2,348,164)  $(1,499,355)
                     
Net loss per share:                    
     Basic and diluted  $(0.09)  $(0.04)  $(0.18)  $(0.12)
                     
Shares used in per share calculation                    
     Basic and diluted   13,147,051    13,147,051    13,147,051    12,976,721 

 

See accompanying notes to consolidated financial statements.

 

 

4
 

 

WEGENER CORPORATION AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

 

   June 1,
2012
(Unaudited)
   September 2,
2011
 
Assets        
Current assets        
     Cash  $394,314   $475,548 
     Accounts receivable, net   968,473    2,056,339 
     Inventories, net   1,552,745    1,530,366 
     Other   214,725    268,092 
           
          Total current assets   3,130,257    4,330,345 
           
Property and equipment, net   1,363,027    1,469,206 
Capitalized software costs, net   785,587    1,287,638 
Other assets   166,900    197,400 
           
 Total assets  $5,445,771   $7,284,589 
           
Liabilities and Capital Deficit          
           
Current liabilities          
     Line of credit-related party  $4,250,000   $4,250,000 
     Accounts payable   1,989,402    1,813,493 
     Accrued expenses   2,465,364    2,069,636 
     Deferred revenue   329,027    401,480 
     Customer deposits   247,366    237,204 
           
         Total current liabilities   9,281,159    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   (24,079,436)   (21,731,272)
           Total capital deficit   (3,835,388)   (1,487,224)
 Total liabilities and capital deficit  $5,445,771   $7,284,589 

 

See accompanying notes to consolidated financial statements.

5
 

 

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 nine months   -    -    -    (1,499,355)
BALANCE at June 3, 2011   13,147,051   $131,471   $20,112,577   $(21,764,216)
                     
Balance at September 2, 2011   13,147,051   $131,471   $20,112,577   $(21,731,272)
     Net loss for the nine months   -    -    -    (2,348,164)
BALANCE at June 1, 2012   13,147,051   $131,471   $20,112,577   $(24,079,436)

 

See accompanying notes to consolidated financial statements.

6
 

 

WEGENER CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

    Nine months ended  
    June 1,
2012
    June 3,
2011
 
Cash flows from operating activities            
Net loss   $ (2,348,164 )   $ (1,499,355 )
Adjustments to reconcile net loss to net
           cash provided by operating activities:
               
     Depreciation and amortization     1,215,484       830,432  
     Share-based compensation expense     -       110,875  
     Increase in provision for bad debts     25,000       103,000  
     Increase in provision for inventory reserves     65,000       85,000  
     Increase in provision for warranty reserves     24,900       112,000  
Changes in assets and liabilities                
     Accounts receivable     1,062,866       (730,533 )
     Inventories     (87,379 )     1,155,000  
     Other assets     53,367       65,224  
     Accounts payable     175,909       (38,606 )
     Accrued expenses     370,828       339,496  
     Deferred revenue     (72,453 )     (140,848 )
Customer deposits     10,162       147,598  
Net cash provided by operating activities     495,520       539,283  
                 
Cash flows from investing activities                
     Property and equipment expenditures     (22,151 )     (33,592 )
     Capitalized software additions     (554,603 )     (671,243 )
                 
Net cash used for investing activities     (576,754)       (704,835)  
                 
Cash flows from financing activities                
     Net change in borrowings under revolving line of credit     -       400,000  
     Net cash  provided by financing activities     -       400,000  

(Decrease) increase in cash
    (81,234 )     234,448  
Cash, beginning of period     475,548       231,091  
Cash, end of period $ 394,314   $ 465,53
Supplemental disclosure of cash flow information:                
     Cash paid for interest   $ 13,975     $ 23,818  

 

See accompanying notes to consolidated financial statements.

 

7
 

 

WEGENER CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

Note 1 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 $24,079,000 at June 1, 2012. We had a working capital deficit of approximately $6,151,000 at June 1, 2012 compared to $4,441,000 at September 2, 2011.

 

Our cash flow requirements during the first nine 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 nine months of fiscal 2012. At July 13, 2012, the outstanding balance on the line of credit remained at the maximum limit of $4,250,000 and our cash balances were approximately $220,000.

 

Our backlog scheduled to ship within eighteen months was approximately $1.8 million at June 1, 2012, compared to $3.5 million at September 2, 2011, and $5.2 million at June 3, 2011. Approximately $607,000 of the June 1, 2012 backlog is scheduled to ship during the fourth quarter of fiscal 2012 and approximately $307,000 during the first quarter of fiscal 2013.

 

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, second and third quarters of fiscal 2012 bookings were approximately $900,000, $987,000 and $947,000, respectively, compared to $3.2 million, $700,000 and $1.6 million, 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 June 1, 2012, additional bookings through July 13, 2012, were approximately $454,000. The amount of orders scheduled to ship during the fourth quarter of fiscal 2012 and first quarter of fiscal 2013 from the June 1, 2012 backlog, along with bookings subsequent to June 1, 2012, are insufficient to provide adequate levels of liquidity during those periods. Significant fiscal 2012 and fiscal 2013 shippable bookings are currently required to meet our quarterly financial and cash flow projections for the remainder of fiscal 2012 and for the first quarter of fiscal 2013 and beyond. 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 day to day liquidity during the third quarter of fiscal 2012 and continuing to date has been adversely impacted by our low level of revenues and bookings. We currently believe our expected levels of revenues over the next two quarters are insufficient to provide adequate levels of internally generated liquidity during those periods. As a result, we believe we will need to raise additional capital or obtain additional borrowings as supplemental funding to provide adequate liquidity to pay our current level of operating expenses, to provide for anticipated inventory purchases which will be required for our current level of anticipated revenues during the next two fiscal quarters and to reduce past due amounts owed to vendors and service providers.

 

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 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.

 

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. During the third quarter and continuing to date, due to limited availability of cash, we further delayed payments to vendors and service providers in order to preserve cash balances. We currently expect we will need to further defer scheduled fiscal 2012 fourth quarter payments to an offshore vendor. 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.

8
 

 

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.

 

Research and Development/Capitalized Software Costs.

We expense research and development costs, including expenditures related to development of our software products that do not qualify for capitalization. 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. This has resulted in amortization periods ranging from two to three years. 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. In accordance with current accounting guidance, FASB Accounting Standards Codification (ASC) Topic 985-20 “Costs of Software to Be Sold, Leased, or Marketed”, we evaluated the recoverability and our estimate of net realizable value of net capitalized software costs at June 1, 2012. This evaluation considered our current near term liquidity and risks of obtaining addition required financing, declining levels of bookings and backlog, historical revenue forecast accuracy and historical losses, as well as estimated future revenues, cost of completion and disposal of the asset. During the three and nine months ended June 1, 2012, amortization expense included in cost of revenues amounted to $599,000 and $1,057,000, respectively, which included an additional amortization expense charge of $375,000 to reduce the net capitalized software costs asset balance to our estimate of net realizable value at June 1, 2012. Software development costs capitalized in the third quarter were limited to $121,000 based on our evaluation of the net realizable value at June 1, 2012. For the nine months ended June 1, 2012, capitalized amounts were $555,000. At June 1, 2012, capitalized software costs, net of accumulated amortization of $8,406,000, amounted to $786,000. At September 2, 2011, capitalized software costs, net of accumulated amortization of $7,349,000, amounted to $1,288,000.

 

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 nine months of fiscal years 2012 and 2011 both contained thirty-nine weeks. Fiscal years 2012 and 2011 contain fifty-two weeks.

 

Note 3 Accounts Receivable

Accounts receivable are summarized as follows:

 

   June 1,
2012
(Unaudited)
   September 2,
2011
 
         
Accounts receivable – trade
  $1,258,513   $2,321,372 
Less: allowance for doubtful accounts   (290,039)   (265,033)
 
Accounts receivable, net
  $968,473   $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 10). At June 1, 2012, four customers accounted for approximately 27.2%, 19.6%, 18.1% and 17.2%, 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.

9
 

 

WEGENER CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

Note 4 Inventories

Inventories are summarized as follows:

 

   June 1,     
   2012   September 2, 
   (Unaudited)   2011 
         
Raw materials  $2,162,047   $2,317,852 
Work-in-process   615,351    649,384 
Finished goods   2,636,092    2,450,746 
    5,413,490    5,417,982 
           
Less inventory reserves   (3,860,745)   (3,887,616)
           
Inventories, net  $1,552,745   $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.

 

Note 5 Accrued Expenses

Accrued expenses consisted of the following:

 

   June 1,
2012
(Unaudited)
   September 2,
2011
 
         
Vacation  $582,852   $573,212 
Interest   1,036,682    777,589 
Payroll and related expenses   149,845    109,889 
Royalties   248,418    194,671 
Warranty   122,538    122,638 
Taxes and insurance   71,372    34,757 
Commissions   34,279    31,529 
Professional fees   162,604    195,476 
Other   56,774    29,875 
   $2,465,364   $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 $1,029,000. At July 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.

10
 

 

WEGENER CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

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 June 1, 2012, we were in compliance with the debt covenants.

 

Note 7 Income Taxes

For the nine months ended June 1, 2012, no income tax benefit was recorded due to an increase in the deferred tax asset valuation allowance. The valuation allowance increased $845,000 in the first nine months of fiscal 2012. At June 1, 2012, net deferred tax assets of $8,823,000 were fully reserved by a valuation allowance.

 

At June 1, 2012, we had a federal net operating loss carryforward of approximately $16,472,000, 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.

 

Note 8 Share-Based Compensation

During the nine months ended June 1, 2012, stock options for 228,375 and 60,000 shares of common stock, granted under the 1998 Incentive Plan, at exercise prices of $1.00 and $.84, respectively, per share were forfeited. At June 1, 2012, stock options for 1,020,500 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

The following tables represent required disclosure of the reconciliation of the numerators and denominators of the basic and diluted net earnings per share computations.

 

   Three months ended 
   June 1, 2012   June 3, 2011 
   Earnings
(Numerator)
   Shares
(Denominator)
   Per
share
amount
   Earnings (Numerator)   Shares (Denominator)   Per
share
amount
 
Net loss  $(1,127,830)            $(502,995)          
Basic and diluted loss per share:                              
     Net loss available
          to common shareholders
  $(1,127,830)   13,147,051   $(0.09)  $(502,995)   13,147,051   $(0.04)

 

 

   Nine months ended 
   June 1, 2012   June 3, 2011 
   Earnings
(Numerator)
   Shares
(Denominator)
   Per
share
amount
   Earnings (Numerator)   Shares (Denominator)   Per
share
amount
 
Net loss  $(2,348,164)            $(1,499,355)          
Basic and diluted loss per share:                              

     Net loss available
          to common shareholders
  $(2,348,164)   13,147,051   $(0.18)  $(1,499,355)   12,976,721   $(0.12)

 

 

 

11
 

  

WEGENER CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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

 

   Three months ended   Nine months ended 
   June 1,   June 3,   June 1,   June 3, 
   2012   2011   2012   2011 
Common stock options:                
Number of shares   1,020,075    1,325,075    1,020,075    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.

 

In this single operating segment the Company has two sources of revenues as follows:

 

   Three months ended   Nine months ended 
   June 1,   June 3,   June 1,   June 3, 
   2012   2011   2012   2011 
                 
Direct Broadcast Satellite  $1,768,153   $2,109,133   $5,277,560   $6,315,922 
Service   144,925    105,372    386,943    301,730 
   $1,913,078   $2,214,505   $5,664,503   $6,617,652 

  

 

Concentration of products representing 10% or more of the respective period’s revenues is as follows:

 

   Three months ended   Nine months ended 
   June 1,
2012
   June 3,
2011
   June 1,
2012
   June 3,
2011
 
Product                
     iPump Media Servers   46.0%   30.2%   25.6%   30.2%
     Enterprise media receivers   27.7%   14.0%   20.8%   (a)
     Audio broadcast receivers   (a)    23.6%   20.8%   26.9%
     Extended maintenance contracts   (a)    10.0%   10.7%   10.5%

 

(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.

 

12
 

  

WEGENER CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

Revenues by geographic area are as follows:

 

   Three months ended   Nine months ended 
   June 1,
2012
   June 3,
2011
   June 1,
2012
   June 3,
2011
 
Geographic Area                
     United States  $1,268,664   $2,106,027   $3,997,484   $4,730,700 
     Latin America   606,208    46,905    1,407,795    1,321,879 
     Canada   8,595    21,205    30,257    70,643 
     Europe   -    16,000    93,219    431,670 
     Other   29,611    24,368    135,748    62,760 
   $1,913,078   $2,214,505   $5,664,503   $6,617,652 

 

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

 

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

 

  Three months ended Nine months ended
 

June 1,

2012

June 3,

2011

June 1,

2012

June 3,

2011

         
Customer 1

 24.9%

 (a)

 17.2%

 (a)

Customer 2 19.7% (a) 11.0% (a)
Customer 3

14.4% 

(a) 

15.1%

(a) 

Customer 4

(a)

24.7% 

(a) 

10.2% 

Customer 5

18.6% (a)

(a) 

18.7% 

Customer 6

 

(a)

22.9%

19.9%

25.8%

 

  

(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 June 1, 2012, outstanding purchase commitments under this agreement amounted to $92,000.

 

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.

13
 

 

 

WEGENER CORPORATION AND SUBSIDIARY

 

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 nine months of fiscal 2012.

 

Revenues for the three months ended June 1, 2012 decreased $301,000 or 13.6% to $1,913,000 from $2,214,000 for the three months ended June 3, 2011. Revenues for the nine months ended June 1, 2012 decreased $953,000 or 14.4% to $5,565,000 from $6,618,000 for the nine months ended June 3, 2011. Operating results for the three and nine month periods ended June 1, 2012, were a net loss of $(1,128,000) or $(0.09) per share and a net loss of $(2,348,000) or $(0.18) per share, respectively, compared to a net loss of $(503,000) or $(0.04) per share and a net loss of $(1,499,000) or $(0.12) per share for the same periods ended June 3, 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 year ended September 2, 2011 contained an explanatory paragraph 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 NINE MONTHS ENDED JUNE 1, 2012 COMPARED TO THREE AND NINE MONTHS ENDED JUNE 3, 2011

 

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

14
 

 

   Three months ended   Nine months ended 
   June 1,
2012
   June 3,
2011
   June 1,
2012
   June 3,
2011
 
                 
Revenues   100.0%   100.0%   100.0%   100.0%
Cost of products sold   90.3    72.2    80.3    68.8 
Gross profit margin   9.7    27.8    19.7    31.2 
Selling, general, and administrative   36.6    32.3    34.1    36.1 
Research and development   27.2    13.8    22.2    13.6 
Operating loss   (54.1)   (18.3)   (36.6)   (18.5)
Interest expense   (4.9)   (4.4)   (4.8)   (4.2)
Net loss   (59.0)%   (22.7)%   (41.4)%   (22.7)%

  

The operating results for the three and nine month periods ended June 1, 2012, were a net loss of $(1,128,000) or $(0.09) per share and a net loss of $(2,348,000) or $(0.18) per share, respectively, compared to a net loss of $(503,000) or $(0.04) per share and a net loss of $(1,499,000) or $(0.12) per share for the same periods ended June 3, 2011.

 

Revenues - Revenues for the three months ended June 1, 2012 decreased $301,000 or 13.6% to $1,913,000 from $2,214,000 for the three months ended June 3, 2011. Revenues for the nine months ended June 1, 2012 decreased $953,000 or 14.4% to $5,565,000 from $6,618,000 for the nine months ended June 3, 2011.

 

Revenues for the three and nine months ended June 1, 2012, were adversely affected by lower than expected shippable bookings for the periods primarily as a result of customer delays in purchasing decisions and a deferral of project expenditures. 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 third quarter and first nine month revenues included (i) shipments of Unity® 550 receivers to a faith based private network for continued network expansion, (ii) ipump® 6420 audio media servers to Dial Global for its radio network and (iii) shipments of ipump® 562 enterprise media receivers to Comtelsat and SSL Digital S.A. for continued network expansion. Revenues for the first nine months of fiscal 2012 included shipments of Encompass LE2 audio receivers to Muzak LLC.

 

Fiscal 2011 third quarter revenues included (i) continued shipments of Encompass LE2 audio receivers to business music provider, Muzak LLC, (ii) ipump® 6420 audio media servers to Salem Communications and to Educational Media Foundation for network expansion projects and (iii) shipments of Unity® 550 receivers to a faith based private network for continued network expansion. In addition, Unity® 550 receivers were shipped to Microspace to provide digital signage displays to their retail client. Revenues for the first nine 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 June 1, 2012, four customers accounted for 24.9%, 19.6%, 18.6% and 14.4% of revenues, respectively. For the nine months ended June 1, 2012, three of these customers accounted for 17.2%, 15.1% and 11.0% of revenues, respectively, and one additional customer accounted for 19.9% of revenues. For the three months ended June 3, 2011, two customers accounted for 24.7% and 22.9% of revenues, respectively. For the nine months ended June 3, 2011, these two customers accounted for 10.2% and 25.8% of revenues, respectively, and one additional customer accounted for 18.7% 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 the remainder of fiscal 2012 and beyond. Concentrations of revenue are likely to occur in any one or more of our products in any of our reporting periods. Product revenues are subject to fluctuations from quarter to quarter and year to year as new products and technologies are introduced, new product features and enhancements are added and as customers upgrade or expand their network operations.

 

Our backlog scheduled to ship within eighteen months was approximately $1.8 million at June 1, 2012, compared to $3.5 million at September 2, 2011, and $5.2 million at June 3, 2011. Three customers accounted for approximately 54.3%, 13.8% and 8.8%, respectively, of the backlog at June 1, 2012. Approximately $607,000 of the June 1, 2012 backlog is scheduled to ship during the fourth quarter of fiscal 2012, $307,000 during the first quarter of fiscal 2013 and $848,000 is scheduled to ship in the remaining three quarters of fiscal 2013.

15
 

 

Gross Profit Margins - The Company's gross profit margin percentages were 9.7% and 19.7% for the three and nine months ended June 1, 2012, compared to 27.8% and 31.2% for the same periods ended June 3, 2011. Gross profit margin dollars decreased $431,000 or 69.9% for the three month period ended June 1, 2012, compared to the same period ended June 3, 2011. For the first nine months of fiscal 2012 gross profit margins dollars decreased $946,000 or 45.8%, compared to the same period in fiscal 2011. The decrease in the profit margin percentage and dollars in the three and nine month periods of fiscal 2012 compared to the same period in fiscal 2011 was primarily due to an increase in capitalized software amortization expenses and the decrease in revenues which resulted in higher unit fixed costs.

 

Cost of products sold in the three and nine month periods of fiscal 2012 included capitalized software amortization expenses of $599,000 and $1,057,000, respectively, compared to $222,000 and $653,000 for the same periods of fiscal 2011. The increase in capitalized software amortization expenses in the three and nine month periods of fiscal 2012 was due to an additional charge of $375,000 to reduce the capitalized software costs asset balance to our estimate of net realizable value at June 1, 2012. (See Note 2 to the Consolidated Financial Statements). Inventory reserve charges were $25,000 and $65,000 in the three and nine month periods of fiscal 2012, respectively, compared to $25,000 and $85,000 in the same periods of fiscal 2011. Warranty provisions included in cost of products sold in the third quarter and first nine months of fiscal 2012 were none and $25,000, respectively, compared to $40,000 and $112,000, respectively, in the same periods of fiscal 2011.

 

Selling, General and Administrative - Selling, general and administrative (SG&A) expenses decreased $15,000 or 2.2% to $701,000 for the three months ended June 1, 2012, compared to $716,000 for the same period of fiscal 2011. For the nine months ended June 1, 2012, SG&A expenses decreased $452,000 or 19.0% to $1,935,000 compared to $2,387,000 for the same period of fiscal 2011. Corporate SG&A expenses in the third quarter of fiscal 2012 increased $2,000, or 1.5%, to $124,000 compared to $122,000 for the same period in fiscal 2011. For the nine months ended June 3, 2011, corporate SG&A expenses decreased $172,000, or 34.2%, to $331,000 compared to $503,000 in the same period in fiscal 2011. Corporate SG&A expenses in the nine months ended June 3, 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 period of fiscal 2012. In addition, professional and director fees decreased $44,000 and $13,000, respectively, for the nine months ended June 1, 2012. WCI’s SG&A expenses decreased $18,000, or 3.0%, to $576,000 from $594,000 and $281,000, or 14.9%, to $1,604,000 from $1,885,000 for the three and nine months ended June 1, 2012, compared to the same periods in fiscal 2011. Decreases in WCI’s SG&A expenses for the three months ended June 1, 2012 included (i) salaries and related payroll costs of $38,000 due to a reduction in headcount; (ii) general overhead costs of $27,000 due to cost reduction efforts of overhead expenses and (iii) bad debt expense of $18,000. These decreases were offset by increases in marketing expenses of $65,000 primarily for digital signage products. For the first nine months of fiscal 2012 decreases in WCI’s SG&A expenses included (i) salaries and related payroll costs of $181,000 due to the reduction in headcount and severance costs; (ii) general overhead costs of $89,000 due to the cost reduction efforts of overhead expenses; (iii) bad debt expense of $78,000 and (iv) in-house commission expense of $20,000 due to the low level of bookings and revenues in the first nine months of fiscal 2012. These decreases were offset by an increase in marketing expenses of $88,000 primarily for digital signage products. As a percentage of revenues, SG&A expenses were 36.6% and 34.2% for the three and nine month periods ended June 1, 2012, respectively, compared to 32.3% and 36.1% for the same periods in fiscal 2011.

 

Research and Development - Research and development (R&D) expenditures, including capitalized software development costs, increased $112,000, or 21.1%, to $641,000 for the three months ended June 1, 2012, from $529,000 for the three months ended June 3, 2011. For the nine months ended June 1, 2012, R&D expenditures increased $242,000, or 15.4%, to $1,813,000 from $1,571,000 for the same period in fiscal 2011. The increase in expenditures in the third quarter and first nine 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 $121,000 and $555,000 for the third quarter and first nine months of fiscal 2012 compared to $224,000 and $671,000 for the same periods of fiscal 2011. The decrease in capitalized software development costs in the three and nine month periods of fiscal 2012 was due to our assessment of the net realizable value of these additions in conjunction with our evaluation of net realizable value of the net capitalized software costs asset balance at June 1, 2012, as discussed above and in Note 2 to the Consolidated Financial Statements. R&D expenses, excluding capitalized software expenditures, were $520,000 or 27.2% of revenues, and $1,259,000 or 22.2% of revenues, for the three and nine months ended June 1, 2012, respectively, compared to $305,000 or 13.8% of revenues, and $900,000 or 13.6% of revenues, for the same periods of fiscal 2011, respectively. The increases in R&D expenses for the third quarter and first nine months of fiscal 2012 are due to the reductions in capitalized software development costs and the increase in expenditures during the periods as discussed above.

 

Interest Expense - Interest expense decreased $5,000 to $93,000 for the three months ended June 1, 2012, compared to $98,000 for the three months ended June 3, 2011. For the nine months ended June 1, 2012, interest expense decreased $4,000 to $273,000 compared to $277,000 for the same period in fiscal 2011.

16
 

 

Income Tax Expense - For the nine months ended June 1, 2012, no income tax benefit was recorded due to an increase in the deferred tax asset valuation allowance. The valuation allowance increased $674,000 in the first nine months of fiscal 2012. At June 1, 2012, net deferred tax assets of $8,652,000 were fully reserved by a valuation allowance. At June 1, 2012, we had a federal net operating loss carryforward of approximately $16,472,000, 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

NINE MONTHS ENDED JUNE 1, 2012

 

We have experienced recurring net losses from operations, which have caused an accumulated deficit of approximately $24,079,000 at June 1, 2012. We had a working capital deficit of approximately $6,151,000 at June 1, 2012 compared to $4,441,000 at September 2, 2011.

 

Our cash flow requirements during the first nine 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 nine months of fiscal 2012. At July 13, 2012, the outstanding balance on the line of credit remained at the maximum limit of $4,250,000 and our cash balances were approximately $220,000.

 

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, second and third quarters of fiscal 2012 bookings were approximately $900,000, $987,000 and $947,000 respectively, compared to $3.2 million, $700,000 and $1.6 million 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 June 1, 2012, additional bookings through July 13, 2012, were approximately $454,000. The amount of orders scheduled to ship during the fourth quarter of fiscal 2012 and first quarter of fiscal 2013 from the June 1, 2012 backlog, along with bookings subsequent to June 1, 2012, are insufficient to provide adequate levels of liquidity during those periods. Significant fourth quarter fiscal 2012 and fiscal 2013 shippable bookings are currently required to meet our quarterly financial and cash flow projections for the remainder of fiscal 2012 and for the first quarter of fiscal 2013 and beyond.

 

Our day to day liquidity during the third quarter of fiscal 2012 and continuing to date has been adversely impacted by our low level of revenues and bookings. We currently believe our expected levels of revenues over the next two quarters are insufficient to provide adequate levels of internally generated liquidity during those periods. As a result, we believe we will need to raise additional capital or obtain additional borrowings as supplemental funding to provide adequate liquidity to pay our current level of operating expenses, to provide for anticipated inventory purchases which will be required for our current level of anticipated revenues during the next two fiscal quarters and to reduce past due amounts owed to vendors and service providers.

 

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 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.

 

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. During the third quarter and continuing to date, due to limited availability of cash, we further delayed payments to vendors and service providers in order to preserve cash balances. We currently expect we will need to further defer scheduled fiscal 2012 fourth quarter payments to an offshore vendor (see “Cash Flows” discussion below). 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.

17
 

 

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 June 1, 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 $1,029,000. At July 8, 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 June 1, 2012, we were in compliance with the debt covenants.

 

Cash Flows

 

During the first nine months of fiscal 2012, operating activities provided $496,000 of cash. Net loss adjusted for expense provisions and depreciation and amortization (before working capital changes) used $1,018,000 of cash while changes in accounts receivable, deferred revenue and customer deposit balances provided $1,001,000 of cash. Changes in accounts payable and accrued expenses provided $547,000 of cash, while changes in inventories and other assets used $34,000 of cash. Cash used by investing activities was $577,000, which consisted of capitalized software additions of $555,000 and equipment additions of $22,000. No cash was provided or used by financing activities.

 

At June 1, 2012, our net inventory balances were $1,553,000 compared to $1,530,000 at September 2, 2011. As discussed above, we will need to increase inventory purchases beginning in the next two fiscal quarters in order to have sufficient inventory balances to support anticipated revenue levels beginning in the first quarter of fiscal 2013 and beyond which will require additional capital or additional borrowings as supplemental funding to provide for the anticipated level of inventory purchases. In addition, it is likely during the next two fiscal quarters we will need continued and possible additional credit limits as well as continued extended payment terms from offshore and domestic suppliers; and increased customer deposits from future bookings. 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. If we are unable to increase inventory purchases in the next two fiscal quarters, it would have a material adverse impact on revenue levels for those periods and beyond which would have a material adverse effect on our operating results and likely impact our ability to continue as a going concern.

 

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 nine months of fiscal 2012, an offshore vendor’s outstanding accounts payable balance, plus amounts of scheduled deliveries of 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, $105,000 in March 2012 and $105,000 in April 2012. We currently expect we will need to request a further deferral of scheduled fiscal 2012 fourth quarter payments of approximately $384,000 to this offshore vendor. No assurance may be given that we will be granted the additional extension.

 

During the first nine 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 nine months of fiscal 2012, we offered 2%-10; net-30 day terms to two customers related to their receivable balances. During the first nine months of fiscal 2012 approximately $765,000 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.

18
 

 

We have two manufacturing and purchasing agreements for certain finished goods inventories. At June 1, 2012, outstanding purchase commitments under this agreement amounted to $92,000.

 

The Company’s long-term contractual obligations as of June 1, 2012 consisted of:

 

   Payments Due by Period 
Contractual Obligations  Total   Fiscal
2012
   Fiscal
2013-2014
   Fiscal
2015-2016
 
Operating leases  $45,000   $16,000   $29,000   $- 
Line of credit-related party   4,250,000    4,250,000    -    - 
Purchase commitments   92,000    92,000    -    - 
Total  $4,387,000   $4,358,000   $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 product sales 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.

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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 to be held for future delivery as scheduled and designated by the buyer, 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 nine 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 ReservesInventories 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 June 1, 2012, inventories, net of reserve provisions, amounted to $1,553,000.

 

Capitalized Software CostsSoftware 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. In accordance with current accounting guidance (ASC Topic 985-20 “Costs of Software to Be Sold, Leased, or Marketed”), we evaluated the recoverability and our estimate of net realizable value of net capitalized software costs at June 1, 2012. This evaluation considered our current near term liquidity and risks of obtaining addition required financing, declining levels of bookings and backlog, historical revenue forecast accuracy and historical losses, as well as estimated future revenues, cost of completion and disposal of the asset. During the three and nine months ended June 1, 2012 amortization expense included in cost of revenues amounted to $599,000 and $1,057,000, respectively, which included an additional amortization expense charge of $375,000 to reduce the net capitalized software costs asset balance to our estimate of net realizable value at June 1, 2012. Software development costs capitalized in the third quarter were limited to $121,000 based on our evaluation of the net realizable value at June 1, 2012. For the nine months ended June 1, 2012, capitalized amounts were $555,000. At June 1, 2012, capitalized software costs, net of accumulated amortization of $8,406,000, amounted to $786,000. At September 2, 2011, capitalized software costs, net of accumulated amortization of $7,349,000, amounted to $1,288,000.

 

Deferred Tax Asset Valuation Allowance – Deferred tax assets are recognized for deductible temporary differences, net operating loss carryforwards, and tax 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 June 1, 2012, net deferred tax assets of $8,823,000 were fully reserved by a valuation allowance. For the nine months ended June 1, 2012, the valuation allowance was increased by $845,000.

 

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 June 1, 2012, accounts receivable, net of allowances for doubtful accounts, amounted to $968,000.

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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 (June 1, 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 other than as set forth below.

 

We may not have sufficient capital to continue as a going concern.

 

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. We have experienced recurring net losses from operations, which have caused an accumulated deficit of approximately $24,079,000 at June 1, 2012. We had a working capital deficit of approximately $6,151,000 at June 1, 2012 compared to $4,441,000 at September 2, 2011. Our day to day liquidity during the third quarter of fiscal 2012 and continuing to date has been adversely impacted by our low level of revenues and bookings. We currently believe our expected levels of revenues over the next two quarters are insufficient to provide adequate levels of internally generated liquidity during those periods. As a result, we believe we will need to raise additional capital or additional borrowings as supplemental funding to provide adequate liquidity to pay our current level of operating expenses, to provide for anticipated inventory purchases which will be required for our current level of anticipated revenues during the next two fiscal quarters and to reduce past due amounts owed to vendors and service providers. 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 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.

 

We may not have sufficient financing to support future inventory purchases.

 

At June 1, 2012, our net inventory balances were $1,553,000 compared to $1,530,000 at September 2, 2011. As discussed above, we will need to increase inventory purchases beginning in the next two fiscal quarters in order to have sufficient inventory balances to support anticipated revenue levels beginning in the first quarter of fiscal 2013 and beyond which will require additional capital or additional borrowings as supplemental funding to provide for the anticipated level of inventory purchases. In addition, it is likely during the next two fiscal quarters we will need continued and possible additional credit limits as well as continued extended payment terms from offshore and domestic suppliers; and increased customer deposits from future bookings. 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. If we are unable to increase inventory purchases in the next two fiscal periods, it would have a material adverse impact on revenue levels for those periods and beyond which would have a material adverse effect on our operating results likely impact our ability to continue as a going concern.

 

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. 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.

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As of July 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 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. (5)
         
3.1.4 *     Amendment to Certificate of Incorporation effective January 31, 2012. (6)
         
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 Principal Executive Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
         
32.2       Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350 as Adopted 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.+

(5)

 

(6)

 

Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended March 4, 2011, as filed with the Commission on April 18, 2011.+

Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended March 2, 2012, as filed with the Commission on April 16, 2012.+

+   SEC file No. 0-11003
         

 

 

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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:  July 18, 2012 By:      /s/ C. Troy Woodbury, Jr.                     
    C. Troy Woodbury, Jr.
    President and Chief Executive Officer
    (Principal Executive Officer)
     
     
     
Date: July 18, 2012 By:     /s/ James Traicoff                                    
    James Traicoff
    Treasurer and Chief
    Financial Officer
    (Principal Financial and Accounting Officer)

 

 

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