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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
R QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2012
 
OR
 
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _________  to _________
 
Commission file number 001-32644
 
RELM WIRELESS CORPORATION
(Exact name of registrant as specified in its charter)

Nevada
 
59-3486297
State or other jurisdiction of Incorporation or organization
 
(I.R.S. Employer Identification No.)

7100 Technology Drive
West Melbourne, Florida  32904
(Address of principal executive offices and Zip Code)
 
Registrant’s telephone number, including area code:  (321) 984-1414
 
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 R 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 R 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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
o
Accelerated filer
o
Non-accelerated filer
þ
Smaller reporting company
o
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes £    No R
 
There were 13,545,482 shares of common stock, $0.60 par value, of the registrant outstanding at October 27, 2012.
 
 
 

 
 
PART I. - FINANCIAL INFORMATION
 
ITEM 1.  FINANCIAL STATEMENTS
 
RELM WIRELESS CORPORATION
Condensed Consolidated Balance Sheets
(In thousands, except share data) (Unaudited)
 
 
September 30,
 
December 31,
 
 
2012
 
2011
 
ASSETS
           
             
Current assets:
           
Cash and cash equivalents
  $ 6,232     $ 2,693  
Trade accounts receivable (net of allowance for doubtful accounts of  $39 and $44 at September 30, 2012 and December 31, 2011, respectively)
    4,609       4,155  
Inventories, net
    12,316       12,148  
Deferred tax assets
    2,520       3,458  
Prepaid expenses and other current assets
    937       526  
Total current assets
    26,614       22,980  
Property, plant and equipment, net
    1,193       1,158  
Deferred tax assets, net
    4,712       4,712  
Capitalized software, net
    2,277       2,778  
Other assets
    338       219  
Total assets
  $ 35,134     $ 31,847  
     
LIABILITIES AND STOCKHOLDERS' EQUITY
               
                 
Current liabilities:
               
Accounts payable
  $ 2,551     $ 1,756  
Accrued compensation and related taxes
    1,546       807  
Accrued warranty expense
    223       247  
Accrued other expenses and other current liabilities
    231       318  
      Note payable
    35       -  
    Deferred revenue
    593       385  
Total current liabilities
    5,179       3,513  
                 
Deferred revenue
    112       265  
Long-term debt
    -       -  
Total liabilities
  $ 5,291     $ 3,778  
Commitments and contingencies
               
Stockholders' equity:
               
Preferred stock; $1.00 par value; 1,000,000 authorized shares none issued or outstanding.
    -       -  
Common stock; $.60 par value; 20,000,000 authorized shares: 13,545,482 and 13,519,323 issued and outstanding shares at September 30, 2012 and December 31, 2011, respectively
    8,127       8,111  
Additional paid-in capital
    24,599       24,570  
Accumulated deficit
    (2,883 )     (4,612 )
Total stockholders' equity
    29,843       28,069  
Total liabilities and stockholders' equity
  $ 35,134     $ 31,847  
 
See notes to condensed consolidated financial statements.
 
 
2

 
 
RELM WIRELESS CORPORATION
Condensed Consolidated Statements of Operations
(In thousands, except share data) (Unaudited)
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
2012
   
September 30,
2011
   
September 30,
2012
   
September 30,
2011
 
                         
Sales, net
  $ 8,112     $ 6,976     $ 21,809     $ 18,361  
Expenses
                               
Cost of products
    4,084       3,467       11,473       10,594  
Selling, general and administrative
    2,633       2,541       7,598       8,273  
Total expenses
    6,717       6,008       19,071       18,867  
                                 
Operating income (loss)
    1,395       968       2,738       (506 )
                                 
Other expense:
                               
Net interest expense
    -       (27 )     (3 )     (89 )
Other expense
    (3 )     (2 )     (10 )     (8 )
Total other expense
    (3 )     (29 )     (13 )     (97 )
                                 
 Income (loss) before income taxes
    1,392       939       2,725       (603 )
                                 
Income tax expense
    (508 )     (25 )     (996 )     (25 )
                                 
Net income (loss)
  $ 884     $ 914     $ 1,729     $ (628 )
                                 
Net earnings (loss) per share-basic:
  $ 0.07     $ 0.07     $ 0.13     $ (0.05 )
Net earnings (loss) per share-diluted:
  $ 0.07     $ 0.07     $ 0.13     $ (0.05 )
Weighted average shares outstanding-basic
    13,545,482       13,518,638       13,541,250       13,512,125  
Weighted average shares outstanding-diluted
    13,549,146       13,525,082       13,543,631       13,512,125  
 
See notes to condensed consolidated financial statements.
 
 
3

 
 
RELM WIRELESS CORPORATION
Condensed Consolidated Statements of Cash Flows
(In thousands) (Unaudited)
 
   
Nine Months Ended
 
   
September 30,
2012
   
September 30,
2011
 
             
Operating activities
           
Net income (loss)
  $ 1,729     $ (628 )
Adjustments to reconcile net loss to net cash  provided by operating activities:
               
Allowance for doubtful accounts
    (5 )     -  
Inventories reserve
    6       107  
       Deferred tax obligation
    938       -  
Depreciation and amortization
    975       1,059  
       Shared-based compensation expense
    23       131  
Changes in operating assets and liabilities:
               
Accounts receivable
    (449 )     633  
Inventories
    (174 )     (385 )
Prepaid expenses and other current assets
    (411 )     198  
Other assets
    (119 )     34  
Accounts payable
    795       (1,279 )
Accrued compensation and related taxes
    739       61  
Accrued warranty expense
    (24 )     31  
               Note payable
    35       -  
Deferred revenue
    55       226  
Accrued other expenses and other current liabilities
    (87 )     59  
Net cash  provided by operating activities
    4,026       247  
                 
Investing activities
               
Purchases of property, plant and equipment
    (349 )     (198 )
Capitalized software
    (160 )     -  
Net cash used in investing activities
    (509 )     (198 )
                 
Financing activities
               
Proceeds from issuance of common stock
    22       -  
Increase in revolving line of credit
    -       1,500  
Decrease in revolving line of credit
    -       (1,700 )
Cash provided by (used in) financing activities
    22       (200 )
                 
Net change in cash and cash equivalents
    3,539       (151 )
Cash and cash equivalents, beginning of period
    2,693       5,050  
Cash and cash equivalents, end of period
  $ 6,232     $ 4,899  
                 
Supplemental disclosure
               
Cash paid for interest
  $ 3     $ 90  
Income tax paid
  $ 62     $ -  
Non-cash financing activity
               
Cashless exercise of stock options and related conversion of net shares to stockholders’ equity
  $ 4     $ 6  
 
See notes to condensed consolidated financial statements.
 
 
4

 
 
Notes to Condensed Consolidated Financial Statements
Unaudited
(in Thousands, Except Share Data and Percentages)
 
1.           Condensed Consolidated Financial Statements
 
The condensed consolidated balance sheets as of September 30, 2012 and December 31, 2011, the condensed consolidated statements of operations for the three and nine months ended September 30, 2012 and 2011 and the condensed consolidated statements of cash flows for the nine months ended September 30, 2012 and 2011 have been prepared by RELM Wireless Corporation (the Company), and are unaudited.  In the opinion of management, all adjustments, which include normal recurring adjustments, necessary for a fair presentation have been made.  The condensed consolidated balance sheet at December 31, 2011 has been derived from the Company’s audited consolidated financial statements at that date.
 
Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted.  It is suggested that these condensed consolidated financial statements be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011, as filed with the Securities and Exchange Commission.  The results of operations for the three and nine months ended September 30, 2012 are not necessarily indicative of the operating results for a full year.
 
Recent Accounting Pronouncements
 
There have been no recent accounting pronouncements or changes in accounting pronouncements that impacted the quarterly or nine month periods ended September 30, 2012 and 2011, or which are expected to impact future periods, which were not previously disclosed in prior periods.

2.           Allowance for Doubtful Accounts
 
The allowance for doubtful accounts on trade receivables was approximately $39 on gross trade receivables of $4,648 at September 30, 2012 and $44 on gross receivables of $4,199 at December 31, 2011.  This allowance is used to state trade receivables at a net realizable value or the amount that the Company estimates will be collected of the Company’s gross receivables.
 
3.           Inventories, net
 
The components of inventory, net of reserves for slow-moving, excess or obsolete inventory, consist of the following:
 
   
September 30, 2012
   
December 31, 2011
 
Finished goods
  $ 3,207     $ 3,981  
Work in process
    6,200       4,671  
Raw materials
    2,909       3,496  
    $ 12,316     $ 12,148  

Reserves for slow-moving, excess, or obsolete inventory were approximately $2,771 at September 30, 2012, compared with approximately $2,765 at December 31, 2011. The reserve for slow-moving, excess, or obsolete inventory is used to state the Company’s inventories at the lower of cost or market.
 
4.           Income Taxes
 
Income tax expense totaling approximately $508 and $996 has been recorded for the three and nine months ended September 30, 2012.
 
As of September 30, 2012 and December 31, 2011, the Company’s net deferred tax assets totaled approximately $7,232 and $8,170, respectively, and are primarily composed of net operating loss carry forwards (NOLs).  These NOLs total $10,716 for federal and $18,829 for state purposes, with expirations starting in 2017 through 2030.
 
 
5

 
 
Notes to Condensed Consolidated Financial Statements
Unaudited
(in Thousands, Except Share Data and Percentages)
 
In order to fully utilize the net deferred tax assets, the Company will need to generate sufficient taxable income in future years to utilize its NOLs prior to their expiration.  ASC Topic 740, “Income Taxes”, requires the Company to analyze all positive and negative evidence to determine if, based on the weight of available evidence, the Company is more likely than not to realize the benefit of the net deferred tax assets. The recognition of the net deferred tax assets and related tax benefits is based upon the Company’s conclusions regarding, among other considerations, estimates of future earnings based on information currently available, current and anticipated customers, contracts and product introductions, as well as historical operating results and certain tax planning strategies.
 
The Company has evaluated the available evidence and the likelihood of realizing the benefit of its net deferred tax assets.  From its evaluation the Company has concluded that based on the weight of available evidence, it is more likely than not that the Company will not realize a portion of the benefit of its net deferred tax assets recorded at September 30, 2012.  Accordingly, for the nine months ended September 30, 2012, the Company maintained its valuation allowance totaling approximately $250 for the portion of benefit of its federal and state deferred tax assets that more likely than not will not be realized.  The Company cannot presently estimate what, if any, changes to the valuation of its deferred tax assets may be deemed appropriate in the future.  If the Company incurs future losses, it may be necessary to record additional valuation allowance related to the deferred tax assets recognized as of September 30, 2012.
 
5.           Capitalized Software
 
The Company accounts for the costs of software within its products in accordance with ASC Topic 985-20 “Costs of Software to be Sold, Leased or Marketed”, under which certain software costs incurred subsequent to the establishment of technological feasibility are capitalized and amortized over the estimated lives of the related products. The Company determines technological feasibility to be established upon the internal release of a detailed program design as specified by Topic 985-20. Upon the general release of the product to customers, development costs for that product are amortized over periods not exceeding five years, based on current and future revenue of the product. For the three and six months ended September 30, 2012, the Company recorded capitalized software of $160.  For the three and nine months ended September 30, 2012, the Company’s amortization cost was approximately $221 and $661, respectively, compared with $250 and $750 for the same periods last year.  Net capitalized software costs totaled $2,277 and $2,778 as of September 30, 2012 and December 31, 2011, respectively.
 
6.           Stockholders’ Equity
 
The changes in consolidated stockholders’ equity for the nine months ended September 30, 2012 are as follows:
 
   
Common Stock
Shares
   
Common Stock
Amount
   
Additional Paid-In Capital
   
Accumulated
Deficit
   
Total
 
                               
Balance at December 31, 2011
    13,519,323     $ 8,111     $ 24,570     $ (4,612 )   $ 28,069  
Common stock option exercise and issued
    26,159       16       6             22  
Share-based compensation expense
                23             23  
Net income
                      1,729       1,729  
Balance at September 30, 2012
    13,545,482     $ 8,127     $ 24,599     $ (2,883 )   $ 29,843  

 
6

 
 
Notes to Condensed Consolidated Financial Statements
Unaudited
(in Thousands, Except Share Data and Percentages)
 
7.           Income (Loss) per Share
 
The following table sets forth the computation of basic and diluted income (loss) per share:
 
   
Three Months Ended
   
Nine months Ended
 
   
September 30, 2012
   
September 30, 2011
   
September 30, 2012
   
September 30, 2011
 
Numerator:
                       
Net  income (loss) (numerator for basic and diluted earnings per share)
  $ 884     $ 914     $ 1,729     $ (628 )
Denominator:
                               
Denominator for basic earnings per share weighted average shares
    13,545,482       13,518,638       13,541,250       13,512,125  
                                 
Effect of dilutive securities:
                               
       Options
    3,664       2,719       2,381       -  
                                 
Denominator
                               
Denominator for diluted earnings per share weighted average shares
    13,549,146       13,521,357       13,543,631       13,512,125  
                                 
                                 
Basic income (loss) per share
  $ 0.07     $ 0.07     $ 0.13     $ (0.05 )
Diluted income (loss) per share
  $ 0.07     $ 0.07     $ 0.13     $ (0.05 )

A total of  988,812 shares related to options are not included in the computation of diluted loss per share for the three and nine months ended September 30, 2011 because to do so would have been anti-dilutive for these periods.

8.           Non-Cash Share-Based Employee Compensation
 
The Company has employee and non-employee director stock option programs.  Related to these programs, and in accordance with ASC Topic 718, “Compensation-Stock Compensation”, the Company recorded non-cash share-based employee compensation expense of $5 and $23, respectively, for the three and nine months ended September 30, 2012, compared with $40 and $131 for the same periods last year.  The Company considers its non-cash share-based employee compensation expenses as a component of cost of products ($0 and $0 for the three and nine months ended September 30, 2012, respectively, compared with $4 and $11 for the same periods last year) and selling, general and administrative expenses ($5 and $23 for the three and nine months ended September 30, 2012, respectively, compared with $36 and $120 for the same periods last year).  There was no non-cash share–based employee compensation expense capitalized as part of capital expenditures or inventory for the periods presented.
 
The Company uses the Black-Scholes-Merton option valuation model to calculate the fair value of a stock option grant.  The non-cash share-based employee compensation expense recorded in the three and nine months ended September 30, 2012 was calculated using certain assumptions.  For a description of such assumptions, reference is made to Note 10 (Share-Based Employee Compensation) of the Company’s Consolidated Financial Statements included in its Annual Report on Form 10-K for the fiscal year ended December 31, 2011.
 
 
7

 
 
Notes to Condensed Consolidated Financial Statements
Unaudited
(in Thousands, Except Share Data and Percentages)
 
A summary of stock option activity under the Company’s stock option plans as of September 30, 2012, and changes during the three months ended September 30, 2012 are presented below:
 
As of July 1, 2012
 
Stock Options
   
Wgt. Avg. Exercise
Price ($)
Per Share
   
Wgt. Avg. Remaining Contractual Life (Years)
   
Wgt. Avg. Grant Date Fair Value($)
Per Share
   
Aggregate Intrinsic
Value ($)
 
                               
Outstanding
    495,944       3.43       -       2.24       -  
Vested
    470,944       3.51       -       2.33       -  
Nonvested
    25,000       2.03       -       0.68       -  
                                         
Period activity
                                       
Issued
    -       -       -       -       -  
Exercised
    -       -       -       -       -  
Forfeited
    -       -       -       -       -  
Expired
    35,000       2.91       -       1.67       -  
                                         
As of September 30, 2012
                                       
Outstanding
    460,944       3.47       4.34       2.29       9,750  
Vested
    435,944       3.55       4.33       2.38       9,750  
Nonvested
    25,000       2.03       4.64       0.68       -  
 
9.           Commitments and Contingencies
 
Legal Proceedings
 
From time to time the Company may be involved in various claims and legal actions arising in the ordinary course of its business. There were no pending material claims or legal matters as of September 30, 2012.
 
Other
 
As of September 30, 2012, the Company had purchase orders to suppliers of approximately $4,029.
 
Significant Customers
 
Sales to United States government agencies represented approximately $4,637 (57.2%) and $9,834 (45.1%) of the Company’s total sales for the three and nine months ended September 30, 2012, respectively, compared with approximately $4,722 (67.7%) and $9,822 (53.5%) for the same periods last year.  Accounts receivable from agencies of the United States government were approximately $2,256 as of September 30, 2012 compared with approximately $2,074 at the same date last year.
 
10.         Debt
 
The Company has a secured revolving credit facility with Silicon Valley Bank with maximum borrowing availability of $5,000 (subject to a borrowing base) and a maturity date of December 31, 2012.  As of September 30, 2012, the Company was in compliance with all covenants under the loan and security agreement, as amended, governing this revolving credit facility.   For a description of such covenants and the other terms and conditions of the loan and security agreement, as amended, reference is made to Note 6 (Debt) of the Company’s Consolidated Financial Statements included in its Annual Report on Form 10-K for the fiscal year ended December 31, 2011.  As of September 30, 2012, there were no borrowings outstanding under the revolving credit facility and there was approximately $3,758 of borrowing available under the revolving credit facility.
 
 
8

 
 
ITEM 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
SPECIAL NOTE CONCERNING
FORWARD-LOOKING STATEMENTS
 
We believe that it is important to communicate our future expectations to our security holders and to the public.  This report, therefore, contains statements about future events and expectations which are “forward-looking statements” within the meaning of Sections 27A of the Securities Act of 1933 and 21E of the Securities Exchange Act of 1934, including the statements about our plans, objectives, expectations and prospects under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”  You can expect to identify these statements by forward-looking words such as “may,” “might,” “could,” “would,” ”will,” “anticipate,” “believe,” “plan,” “estimate,” “project,” “expect,” “intend,” “seek” and other similar expressions.  Any statement contained in this report that is not a statement of historical fact may be deemed to be a forward-looking statement.  Although we believe that the plans, objectives, expectations and prospects reflected in or suggested by our forward-looking statements are reasonable, those statements involve risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements, and we can give no assurance that our plans, objectives, expectations and prospects will be achieved.
 
Important factors that might cause our actual results to differ materially from the results contemplated by the forward-looking statements are contained in the “Risk Factors” section of and elsewhere in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011 and in our subsequent filings with the Securities and Exchange Commission, and include, among others, the following:
 
  
changes or advances in technology;

  
the success of our LMR product line;

  
competition in the land mobile radio industry;

  
general economic and business conditions, including federal, state and local government budget deficits and spending limitations;

  
the availability, terms and deployment of capital;

  
reliance on contract manufacturers and suppliers;

  
heavy reliance on sales to agencies of the United States government;

  
our ability to utilize deferred tax assets;

  
retention of executive officers and key personnel;

  
our ability to manage our growth;

  
government regulation;

  
our business with manufacturers located in other countries;

  
our inventory and debt levels;

  
protection of our intellectual property rights;

  
acts of war or terrorism; and

  
any infringement claims.

 
9

 
 
We assume no obligation to publicly update or revise any forward-looking statements made in this report, whether as a result of new information, future events, changes in assumptions or otherwise, after the date of this report.  Readers are cautioned not to place undue reliance on these forward-looking statements.
 
Reported dollar amounts in management’s discussion and analysis are disclosed in millions or as whole dollar amounts.
 
Executive Summary
 
Our financial and operating results for the three and nine months ended September 30, 2012 improved significantly compared with the same periods last year.  To date, total sales and sales of P25 digital products both increased, while costs of products and operating expenses declined.  These improvements combined to yield operating income for both the three and nine month periods ended September 30, 2012.
 
For the three and nine months ended September 30, 2012, total sales were approximately $8.1 million and $21.8 million, respectively, compared with approximately $7.0 million and $18.4 million for the same periods last year.  Sales of P25 digital products for the third quarter of 2012 totaled approximately $5.1 million (62.9% of total sales) compared with approximately $4.3 million (62.3% of total sales) for the same quarter last year.  For the nine months ended September 30, 2012, sales of P25 digital products totaled approximately $14.0 million (64.1% of total sales) compared with approximately $11.4 million (62.0% of total sales) for the same period last year.
 
Gross margins as a percentage of sales for the third quarter ended September 30, 2012 were approximately 49.7% compared with 50.3% for the same quarter last year.  For the nine months ended September 30, 2012, gross margins as a percentage of sales were 47.4% compared with 42.3% for the same period in 2011.  The gross margins for both periods reflect significant P25 digital product sales and an increase in total sales, which fueled higher manufacturing volumes.
 
For the three months ended September 30, 2012, selling, general and administrative expenses (SG&A) totaled approximately $2.6 million (32.5% of sales) compared with approximately $2.5 million (36.4% of sales) for the same period last year.  For the nine months ended September 30, 2012, selling, general and administrative expenses totaled approximately $7.6 million (34.8% of sales) compared with approximately $8.3 million (45.1% of sales) for the same period last year.  SG&A expenses for the third quarter and nine months ended September 30, 2012 include expense reductions that were initially implemented in May 2011.
 
Pretax income for the quarter ended September 30, 2012 totaled approximately $1.4 million, compared with approximately $939,000 for the same quarter last year.  For the nine months ended September 30, 2012, pretax income totaled approximately $2.7 million, compared with a pretax loss of approximately $603,000 for the same period last year.
 
For the three and nine months ended September 30, 2012, income tax expense totaled approximately $508,000 and $996,000, respectively, compared with $25,000, respectively, for each of the same periods last year.  Our income tax expense is largely non-cash due to deferred tax assets derived primarily from our net operating loss carryforwards.
 
Net income for the three months ended September 30, 2012 was approximately $884,000 ($0.07 per basic and diluted share), compared with approximately $914,000 ($0.07 per basic share) for the same period last year.  For the nine months ended September 30, 2012 net income was approximately $1.7 million ($0.13 per basic and diluted share), compared with a net loss of approximately $628,000 ($0.05 per basic share) for the same period last year.
 
As of September 30, 2012, working capital totaled approximately $21.4 million, of which approximately $10.8 million was comprised of cash and trade receivables.  As of December 31, 2011 working capital totaled approximately $19.5 million, of which approximately $6.8 million was comprised of cash and trade receivables.
 
 
10

 
 
Results of Operations
 
As an aid to understanding our operating results for the periods covered by this report, the following table shows selected items from our condensed consolidated statements of operations expressed as a percentage of sales:
 
   
Percentage of Sales
Three Months Ended
   
Percentage of Sales
Nine months Ended
 
   
September 30,
2012
   
September 30,
2011
   
September 30,
2012
   
September 30,
2011
 
                         
Sales
    100.0 %     100.0 %     100.0 %     100.0 %
Cost of products
    (50.3 )     (49.7 )     (52.6 )     (57.7 )
Gross margin
    49.7       50.3       47.4       42.3  
Selling, general and administrative expenses
    (32.5 )     (36.4 )     (34.9 )     (45.1 )
Net interest -expense-
    (0.0 )     (0.4 )     (0.0 )     (0.0 )
Other expense-
    (0.0 )     0.0       (0.0 )     (0.0 )
Pretax income (loss)
    17.2       13.5       12.5       (3.3 )
Income tax expense
    (6.3 )     (0.4 )     (4.6 )     (0.1 )
Net income (loss)
    10.9 %     13.1 %     7.9 %     (3.4 )%

Net Sales
 
For the third quarter ended September 30, 2012, net sales were approximately $8.1 million compared with approximately $7.0 million for the same quarter last year.  Sales of P25 digital products for the quarter totaled approximately $5.1 million (64.1% of total sales), compared with approximately $4.3 million (62.3% of total sales) for the same quarter last year.
 
For the nine months ended September 30, 2012, net sales were approximately $21.8 million, compared with approximately $18.4 million for the same period last year.  Sales of P25 digital products for the nine months ended September 30, 2012 totaled approximately $14.0 million (64.1% of total sales) compared with approximately $11.4 million (62.0% of total sales) for the same period last year.
 
Continuing the improvement initiated in the second quarter, net sales and sales of P25 digital products for the third quarter increased compared to the same quarter last year.  Also consistent with the preceding quarter, the improvement was comprised of a broad mix of new customers and products, combined with business from our legacy federal customers and products.
 
Cost of Products and Gross Margin
 
Gross margin as a percentage of sales for the third quarter ended September 30, 2012 was 49.7% compared with 50.3% for the same quarter last year.  For the nine months ended September 30, 2012, gross margin as a percentage of sales was 47.4% compared with 42.3% for the same period last year.
 
Our cost of products and gross margins are primarily related to material and labor costs, product mix, manufacturing volumes and pricing.  The cost of products and corresponding gross margins for the three and nine months ended September 30, 2012 reflected a favorable mix of product sales weighted toward P25 digital products, building on a similar mix from the second quarter 2012.  Also, as a result of the increase in total sales relative to the same periods last year, manufacturing volumes increased.  Accordingly, we more fully utilized and absorbed our base of manufacturing and support expenses.
 
We continue to utilize contract manufacturing relationships to maximize production efficiencies and minimize material and labor costs.  We also regularly consider manufacturing alternatives to improve quality, speed and costs.  We anticipate that the current contract manufacturing relationships or comparable alternatives will be available to us in the future.  As demonstrated during the second and third quarters 2012, we believe leveraging increased sales volumes and P-25 product sales, combined with the aforementioned manufacturing improvements, should yield gross margin improvements.
 
 
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Selling, General and Administrative Expenses
 
Selling, general and administrative (SG&A) expenses consist of marketing, sales, commissions, engineering, product development, management information systems, accounting, headquarters and non-cash share-based employee compensation expenses.
 
SG&A expenses for the third quarter 2012 were approximately $2.6 million (32.5% of sales) compared with approximately $2.5 million (36.4% of sales) for the same quarter last year.  For the nine months ended September 30, 2012, SG&A expenses totaled approximately $7.6 million (34.9% of sales) compared with approximately $8.3 million (45.1% of sales) for the same period last year.
 
Engineering and product development expenses for the third quarter 2012 declined approximately $27,000 (2.7%) compared with the same quarter last year.  For the nine months ended September 30, 2012, engineering and product development expenses decreased approximately $819,000 (23.8%) compared with the same period last year.  The expense decreases for the third quarter and nine month periods were the result of expense reductions initially implemented during the second quarter last year, and maintained thereafter, as some product development initiatives were completed.
 
Marketing and selling expenses for the third quarter 2012 increased by approximately $104,000 (11.7%) compared with the same quarter last year.  For the nine months ended September 30, 2012, marketing and selling expenses increased approximately $25,000 (0.9%) compared with the same period last year.  The increase in marketing and selling expenses relates primarily to commissions and incentives, which directly correlate with the growth in sales.  Those increases were partially offset by expense reductions initially implemented during the second quarter last year and maintained thereafter.
 
General and administrative expenses for the third quarter 2012 increased by approximately $15,000 (2.3%) from the same period last year.  For the nine months ended September 30, 2012, general and administrative expenses increased approximately $119,000 (5.9%) compared with the same period last year.  These expense increases were primarily related to additional headquarters and public company expenses.
 
Operating Income (Loss)
 
Operating income for the quarter ended September 30, 2012 totaled approximately $1.4 million (17.2% of sales), compared with approximately $968,000 (13.9% of sales) for the same quarter last year.  For the nine months ended September 30, 2012, operating income totaled approximately $2.7 million (12.6% of sales), compared with an operating loss of approximately $506,000 (2.8% of sales) for the same period last year.  Changes in operating income for the third quarter and nine months ended September 30, 2012 were primarily due to higher product sales combined with improved product and operating costs.
 
Net Interest Expense
 
For the third quarter and nine months ended September 30, 2012, net interest expense totaled $0 and $3,000, respectively, compared with $27,000 and $89,000, respectively, for the same periods last year.  We incur interest expense on outstanding borrowings under our revolving credit facility and earn interest income on our cash balances.  The decreases in interest expense were the result of the repayment of borrowings under our revolving credit facility.  The interest rate on such revolving credit facility as of September 30, 2012 was 4.50% per annum.  This rate is variable based on the lender’s prime rate plus 50 basis points.
 
Income Taxes
 
We recorded income tax expense for the quarter ended September 30, 2012 of approximately $508,000, compared with $25,000 for the same quarter last year.  For the nine months ended September 30, 2012, income tax expense totaled approximately $1.0 million, compared with $25,000 for the same period last year.  Our income tax expense is primarily non-cash.
 
 
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As of September 30, 2012, our net deferred tax assets totaled approximately $7.2 million, and are primarily composed of net operating loss carry forwards (NOLs).  These NOLs total $10.7 million for federal and $18.8 million for state purposes, with expirations starting in 2017 through 2030.
 
In order to fully utilize the net deferred tax assets, we will need to generate sufficient taxable income in future years to utilize our NOLs prior to their expiration.  ASC Topic 740, “Income Taxes”, requires us to analyze all positive and negative evidence to determine if, based on the weight of available evidence, we are more likely than not to realize the benefit of the net deferred tax assets. The recognition of the net deferred tax assets and related tax benefits is based upon our conclusions regarding, among other considerations, estimates of future earnings based on information currently available and current and anticipated customers, contracts and product introductions, as well as historical operating results and certain tax planning strategies.
 
We have evaluated the available evidence and the likelihood of realizing the benefit of our net deferred tax assets.  From our evaluation we have concluded that based on the weight of available evidence, it is more likely than not that we will not realize a portion of the benefit of our net deferred tax assets recorded at September 30, 2012.  Accordingly, as of September 30, 2012, we maintained our valuation allowance totaling approximately $250,000 for the portion of benefit of our federal and state deferred tax assets that more likely than not will not be realized.  We cannot presently estimate what, if any, changes to the valuation of our deferred tax assets may be deemed appropriate in the future.  If we incur future losses, it may be necessary to record additional valuation allowance related to the deferred tax assets recognized as of September 30, 2012.
 
Liquidity and Capital Resources
 
For the nine months ended September 30, 2012, net cash provided by operating activities totaled approximately $4.0 million compared with approximately $247,000 for the same period last year.  Cash provided by operating activities was primarily related to net income, depreciation and amortization, deferred tax assets, accounts payable and accrued expenses.  These items were partially offset by increases in trade receivables and other current assets.  For the nine months ended September 30, 2012, we realized net income of approximately $1.7 million compared with a net loss totaling approximately $628,000 for the same period last year.  Depreciation and amortization totaled approximately $975,000 for the nine months ended September 30, 2012, compared with approximately $1.1 million for the same period last year as some capital assets reached the end or a later stage of their depreciation cycle.  Deferred tax assets for the first nine months of 2012 decreased by approximately $938,000 due to non-cash tax expense on our pretax income.  During the same period last year deferred tax assets were unchanged.  Accounts payable for the period increased approximately $795,000 due to higher business volumes and related material purchases.  Last year trade payables decreased by approximately $1.3 million primarily due to payments to suppliers.  Accrued compensation increased by approximately $739,000 reflecting incentive compensation related to improved sales and operating results.  For the same period last year, accrued compensation increased approximately $61,000.  Net inventories increased during the nine months ended September 30, 2012 by approximately $168,000 due to material purchases in anticipation of sales growth.
 
Cash used in investing activities for the nine months ended September 30, 2012 totaled approximately $509,000 compared with approximately $198,000 for the same period last year.  Cash used in investing activities for the nine months ended September 30, 2012 was primarily to fund the purchase of engineering and manufacturing equipment and the development of software.  We anticipate that future capital expenditures will be funded through our existing cash balance and operating cash flow.
 
Cash provided by financing activities for the nine months ended September 30, 2012 totaled approximately $22,000, representing proceeds from the issuance of common stock.  For the same period last year cash used in financing activities totaled approximately $200,000, which represented the repayment of borrowings under our revolving credit facility.
 
We have a secured revolving credit facility with Silicon Valley Bank with maximum borrowing availability of $5 million (subject to the borrowing base) and a maturity date of December 31, 2012.
 
As of September 30, 2012 and the date of this report, we were in compliance with all covenants under the loan and security agreement, as amended, governing the revolving credit facility.   For a description of such covenants and the other terms and conditions of the loan and security agreement, as amended, reference is made to Note 6 (Debt) of our Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011.
 
 
13

 
 
As of September 30, 2012 and the date of this report, there were no borrowings outstanding under the revolving credit facility.  As of September 30, 2012 and the date of this report, there was approximately $3.7 million and $3.1 million, respectively, of borrowing available under the revolving credit facility.
 
Our cash balance at September 30, 2012 was approximately $6.2 million.  We believe these funds combined with anticipated cash generated from operations and borrowing availability under our revolving credit facility are sufficient to meet our working capital requirements for the foreseeable future.   However, although we do not anticipate needing additional capital in the near term, the current financial and economic conditions could limit our access to credit and impair our ability to raise capital, if needed, on acceptable terms or at all. We also face other risks that could impact our business, liquidity and financial condition. For a description of these risks, see “Item 1A. Risk Factors” set forth in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011.
 
Critical Accounting Policies
 
In response to the SEC’s financial reporting release, FR-60, Cautionary Advice Regarding Disclosure About Critical Accounting Policies, we have selected for disclosure our revenue recognition process and our accounting processes involving significant judgments, estimates and assumptions.  These processes affect our reported revenues and current assets and are therefore critical in assessing our financial and operating status.  We regularly evaluate these processes in preparing our financial statements.  The processes for revenue recognition, allowance for collection of trade receivables, reserves for excess or obsolete inventory, software development and income taxes involve certain assumptions and estimates that we believe to be reasonable under present facts and circumstances.  These estimates and assumptions, if incorrect, could adversely impact our operations and financial position.  There were no changes to our critical accounting policies during the quarter ended September 30, 2012 as described in Item 7. of our Annual Report on Form 10-K for the fiscal year ended December 31, 2011.
 
ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
We may be subject to the risk of fluctuating interest rates in the ordinary course of business for borrowings under our revolving credit facility, which bears interest at a variable rate based on the lender’s prime rate, in effect from time to time, plus 50 basis points.  As of September 30, 2012, there were no borrowings outstanding under our revolving credit facility.
 
ITEM 4.   CONTROLS AND PROCEDURES
 
Evaluation of Disclosure Controls and Procedures
 
Our Chief Executive Officer and Chief Financial Officer (who serves as our principal financial and accounting officer) have evaluated the effectiveness of our disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 (Securities Exchange Act) Rules 13a-15(e) and 15d-15(e)) as of September 30, 2012.  Based on this evaluation, they have concluded that our disclosure controls and procedures were effective as of September 30, 2012.
 
Changes in Internal Control over Financial Reporting
 
During the third quarter ended September 30, 2012, there were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Securities Exchange Act Rules 13a-15 or 15d-15 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
 
14

 
 
PART II- OTHER  INFORMATION
 
ITEM 1.   LEGAL PROCEEDINGS
 
Reference is made to Note 9 (Legal Proceedings) of the Company’s Condensed Consolidated Financial Statements included elsewhere in this report for the information required by this Item.
 
ITEM 6.   EXHIBITS
 
Exhibit 3(i)
 
Articles of Incorporation(1)
     
Exhibit 3(ii)
 
Certificate of Amendment to Articles of Incorporation(2)
     
Exhibit 3(iii)
 
By-Laws, as amended (3)
     
Exhibit 31.1
 
Certification Pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
Exhibit 31.2
 
Certification Pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
Exhibit 32.1
 
Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished pursuant to Item 601(b)(32) of Regulation S-K).
     
Exhibit 32.2
 
Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished pursuant to Item 601(b)(32) of Regulation S-K).
     
Exhibit 101.INS
 
XBRL Instance Document
     
Exhibit 101.SCH
 
XBRL Taxonomy Extension Schema Document
     
Exhibit 101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
     
Exhibit 101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document
     
Exhibit 101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document
     
Exhibit 101.DEF
 
XBRL Taxonomy Definition Linkbase Document
__________
(1)
Incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 1997.
 
(2)
Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2001.
 
(3)
Incorporated by reference to the Company's Registration Statement on Form S-3 (Registration No. 333-129113).
 
 
15

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

  RELM WIRELESS CORPORATION  
  (The “Registrant”)  
       
Date: November 14, 2012
By:
/s/ David P. Storey
 
   
David P. Storey
President and Chief Executive Officer
(Principal executive officer and duly authorized officer)
 
       
Date: November 14, 2012
By:
/s/ William P. Kelly
 
   
William P. Kelly
Executive Vice President and Chief Financial Officer
(Principal financial and accounting officer and duly authorized officer)
 

 
16

 
 
Exhibit Index
 
Exhibit Number
 
Description
     
Exhibit 3(i)
 
Articles of Incorporation(1)
     
Exhibit 3(ii)
 
Certificate of Amendment to Articles of Incorporation(2)
     
Exhibit 3(iii)
 
By-Laws, as amended (3)
     
Exhibit 31.1
 
Certification Pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
Exhibit 31.2
 
Certification Pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
Exhibit 32.1
 
Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished pursuant to Item 601(b)(32) of Regulation S-K).
     
Exhibit 32.2
 
Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished pursuant to Item 601(b)(32) of Regulation S-K).
     
Exhibit 101.INS
 
XBRL Instance Document
     
Exhibit 101.SCH
 
XBRL Taxonomy Extension Schema Document
     
Exhibit 101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
     
Exhibit 101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document
     
Exhibit 101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document
     
Exhibit 101.DEF
 
XBRL Taxonomy Definition Linkbase Document
__________
(1)
Incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 1997.
 
(2)
Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2001.
 
(3)
Incorporated by reference to the Company's Registration Statement on Form S-3 (Registration No. 333-129113).
 
 
17