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| WRLS > SEC Filings for WRLS > Form 10-Q on 11-May-2009 | All Recent SEC Filings |
11-May-2009
Quarterly Report
Results of Operations
Second quarter fiscal year 2009 compared to second quarter fiscal year 2008
Revenues and Cost of Sales
Change
2009 2008 Amount Percentage
Net product sales
Monitoring Equipment $ 4,359 $ 10,224 $ (5,865 ) -57 %
Terminal 1,982 3,840 (1,858 ) -48 %
Total product revenues 6,341 14,064 (7,723 ) -55 %
Service revenues 5,482 5,549 (67 ) -1 %
Total revenues 11,823 19,613 (7,790 ) -40 %
Cost of sales
Products 4,790 9,351 (4,561 ) -49 %
Services 2,450 2,633 (183 ) -7 %
7,240 11,984 (4,744 ) -40 %
Gross margin $ 4,583 $ 7,629 $ (3,046 )
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Revenues
Product revenues decreased 55% primarily due to the decreased sales of our
Telguard monitoring equipment as a result of lower, customer demand. Demand for
these products during the second quarter of fiscal 2008 was heightened by an FCC
mandated transition from analog to digital cellular service. In addition,
certain of our terminal distributors in Central American Latin American ("CALA")
region reduced their existing inventory during the quarter along with a
depressed economy resulted in decreased purchases.
Service revenues decreased 1% due to lower average revenue per unit ("ARPU") for
those units placed in service during the quarter. Analog service units generated
a higher ARPU than digital service units. Despite activating 25,000 new
subscribers during the period, all digital service units, the Company
experienced a reduced level of revenue as a result digital service revenues
having a lower ARPU.
Cost of Sales
The decrease in cost of sales of 40% in the second quarter of fiscal 2009 when
compared to the same period of fiscal 2008 reflects the lower sales volumes and
product mix. Gross margin, as a percentage of sales, was 39% for the second
quarters of both fiscal 2009 and 2008. Product margins, as a percentage of total
revenues, were 24% for the three months ended March 31, 2009 compared to 34% for
the same period in fiscal 2008, while service revenue, as a percentage of total
revenues, was 46% for the three months ended March 31, 2009, compared 28% for
the same period of fiscal 2008. This mix of product and service revenues
resulted in the total margin remaining consistent between fiscal years.
Operating Expenses
Change % of Revenues
2009 2008 Amount Percentage 2009 2008
Engineering and development $ 1,265 $ 1,302 $ (37 ) -3 % 10 % 7 %
Selling and marketing 1,643 1,924 (281 ) -15 % 14 % 10 %
General and administrative 1,533 1,952 (419 ) -21 % 13 % 10 %
Amortization 71 - 71 >100 % <1 % -
$ 4,512 $ 5,178 $ (666 ) 37 % 26 %
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Engineering and Development
The decrease of 3% was primarily due to a decrease in engineering materials and
supplies of $27, a decrease in travel expenses of $18, a decrease of various
general expenses of $11, offset by an increase in facility expenses of $19 as a
result of the purchase of SupplyNet on October 1, 2008.
Selling and Marketing
The decrease in selling and marketing of 15% was primarily due to reductions of:
• $219 in co-op marketing expense reflecting the decreased level of
Telguard product and foreign terminal product sales;
• $216 of third party commission expenses, which also was the result of reduced product level sales;
• $112 of internal commissions as a result of decreases product sales; and,
• $16 in various general expenses.
Offsetting these reductions were an increase of $218 in salary related expenses
as a result of increased marketing staff and the addition of the SupplyNet's
sales force and an increase of $64 of travel and facility costs.
General and Administrative (G&A)
The decrease of 21% was primarily due to reductions of:
• $270 in professional fees, related to decreased legal costs as a result
of reduced use of outside counsel, decreased accounting fees as a
result of changing our independent public accountants and decreased
consulting fees as a result of not renewing certain strategic projects
undertaken in fiscal 2008.
• $112 in various general expenses, primarily in bank fees related to the amortization of the prepaid loan fee in fiscal 2008 and a reduction in commercial insurance premiums;
• $74 in payroll expenses, primarily from non-cash compensation related to stock options;
• $46 in facility and office expenses, primarily a decrease in telecommunications expenses; and,
• $19 in travel expenses.
Offsetting these expense reductions was a $102 increase in proxy costs as a
result of the proxy contest that occurred during the second quarter of fiscal
2009. These proxy costs included legal fees, consulting fees, printing and
mailing costs.
Amortization
The increase in amortization expense is due to the intangible assets capitalized
as part of the purchase of SupplyNet on October 1, 2008.
Other Income
Other income for the three months ended March 31, 2009 increased $39 to $73 from
$34 for the same period of fiscal 2008. The increase was primarily due to a
decrease in business taxes of $42, offset by a reduction in interest income of
$9 as a result of lower interest rates and decrease in various miscellaneous
expenses of $6.
Income Taxes
The Company recorded an income tax provision for the three months ended
March 31, 2009 related to alternative minimum taxes.
Discontinued Operations
The income from discontinued operations of $160 for the three month period ended
March 31, 2009, was from an unexpected sale of phone units that were
manufactured utilizing existing inventory that had previously been written down
to $0. This order will be completed in the third quarter of fiscal 2009. The
Company has no future intentions to market or expand the production of fixed
cellular phones.
First six months fiscal year 2009 compared to the first six months fiscal year
2008
Revenues and Cost of Sales
Change
2009 2008 Amount Percentage
Net product sales
Monitoring Equipment $ 8,148 $ 20,359 $ (12,211 ) -60 %
Terminal 3,853 8,035 (4,182 ) -52 %
Total product revenues 12,001 28,394 (16,393 ) -58 %
Service revenues 10,597 10,945 (348 ) -3 %
Total revenues 22,598 39,339 (16,741 ) -43 %
Cost of sales
Products 8,749 19,134 (10,385 ) -54 %
Services 4,808 5,529 (721 ) -13 %
13,557 24,663 (11,106 ) -45 %
Gross margin $ 9,041 $ 14,676 $ (5,635 )
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Revenues
Product revenues decreased 58% primarily due to decreased sales of our Telguard
monitoring equipment as a result of lower, customer demand. Demand for these
products during the first six months of fiscal 2008 was heightened by an FCC
mandated transition from analog to digital cellular service. Sales of our
terminal products were lower primarily in the CALA region due to our
distributors reducing their existing inventory during the period along with a
depressed economy resulted in decreased purchases.
Service revenue decreased 3% due to the elimination of numerous analog
subscribers in February 2009 as a result of the sunset of the analog wireless
networks. Although digital subscribers have since replaced the lost analog
subscribers, the digital subscribers have a lower ARPU than analog.
Additionally, in fiscal 2009, the Company experienced an unexpected reduction of
existing subscribers in excess of 23,000 as a result of one major dealer
cleansing its customer base to eliminate inactive subscribers.
Cost of Sales
The decrease in cost of sales of 45% in the first six months of fiscal 2009 when
compared to the same period of fiscal 2008 reflects both lower sales volume and
product mix. Gross margin, as a percentage of sales, was 40% for the first six
months of fiscal 2009 as compared to 37% for the same period last year. Service
revenues, as a percentage of sales, were 47% for the first six months of fiscal
2009 and were 28% for the same period of last year. This resulted in an increase
in total margin as a percentage of sales because service revenue has a lower
cost of sales than products.
Operating Expenses
Change % of Revenues
2009 2008 Amount Percentage 2009 2008
Engineering and development $ 2,513 $ 2,669 $ (156 ) -6 % 11 % 7 %
Selling and marketing 3,051 3,470 (419 ) -12 % 14 % 9 %
General and administrative 3,239 3,846 (607 ) -16 % 14 % 10 %
Amortization 141 - 141 > 100 % 1 % -
$ 8,944 $ 9,985 $ (1,041 ) 39 % 25 %
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Engineering and Development
Engineering and development expenses decreased $156 primarily due to reductions
of:
• $75 in engineering materials and supplies;
• $55 professional fees related to reduced utilization of engineering consultants;
• $68 in travel expenses which reflects the move of the Engineering and Development function to Atlanta from New York in fiscal 2008;and,
• $20 payroll related expenses.
These expense reductions were offset by a $62 increase in facility and general
expenses related to moving expenses incurred as a result of relocating the
engineering and development function from New York to Atlanta and increased
facility cost allocated to engineering and development as a result of the
purchase of SupplyNet.
Selling and Marketing
Selling and marketing expenses decreased $419 primarily due to reductions of
expenses specifically related to the decreased level of product sales:
• $518 of third party commission expenses;
• $208 of co-op marketing expenses; and,
• $200 of internal commissions.
Offsetting these expense reductions was a $502 increase in payroll expenses as a
result of the addition of marketing staff, additional sales staff as a result of
the purchase of SupplyNet, and the absorption of costs that were allocated to
the abandoned FCP business segment in fiscal 2008 and a $5 increase in various
general expenses.
General and Administrative (G&A)
G&A expenses decreased $607 primarily due to reductions of:
• $296 in professional fees, related to decreased legal costs as a result
of reduced use of outside counsel, decreased accounting fees as a
result of changing our independent public accountants and decreased
consulting fees as a result of not renewing certain strategic projects
undertaken in fiscal 2008.
• $212 in payroll related expenses as a result of bonus accrual reductions and non-cash compensation related to issued stock options and stock option modifications;
• $143 of general expenses primarily as a result of the reduction of amortization expenses related to a prepaid loan fee and reduced commercial insurance premiums;
• $55 of facility and office expenses; and,
• $40 of travel expenses.
Offsetting these reductions was an increase of $139 in public company expenses,
primarily due to increased proxy expenses related to the proxy contest in fiscal
2009.
Amortization
The increase in amortization expense is due to the intangible assets capitalized
as part of the purchase of SupplyNet on October 1, 2008.
Other Income
Other income for the six month period ended March 31, 2009 increased $123 from
$41 for the same period of fiscal 2008. The increase was primarily due a
reduction in miscellaneous business taxes of $102, an increase in interest
income of $7 primarily due to increased investment balances and a decrease of
$14 in various miscellaneous expenses.
Income Taxes
The Company recorded an income tax provision for the six months ended March 31,
2009 related to alternative minimum taxes.
Discontinued Operations
The income from discontinued operations of $160 for the six month period ended
March 31, 2009, was from an unexpected sale of phone units that were
manufactured utilizing exiting inventory that had previously been written down
to $0. The Company has no future intentions to market or expand the production
of fixed cellular phones.
Liquidity
Management regularly reviews net working capital in addition to cash to
determine if it has enough cash to operate the business. On March 31, 2009, the
Company had $19,738 of unrestricted cash and cash equivalents and a working
capital surplus of $32,282. Based upon its current operating plan, the Company
believes its existing capital resources, including the line of credit with
Silicon Valley Bank, will enable it to maintain its current and planned
operations. Cash requirements may vary and are difficult to predict given the
volatility of demand in certain of the developing markets targeted by the
Company. The Company expects to maintain levels of cash reserves which are
required to undertake major product development initiatives and to qualify for
large sales opportunities.
Cash From Operations
The Company generated $2,733 of cash from operations during the first six months
of fiscal year 2009 compared to cash generated of $3,447 during the same period
of fiscal year 2008. The components of cash generated for the first six months
of fiscal 2009 are as follows:
$ 737 The decrease in trade accounts receivable is due to the
timely collection of outstanding balances, resulting from a
more favorable product mix.Service revenue represents 47% of
Telular's total revenues for the six month period ending
March 31, 2009. The accounts receivable associated with this
revenue stream are generally collected within 30 days of
invoicing.
1,157 The decrease in inventory reflects the Company overall
inventory strategy; sell from existing stock while reducing
production levels to augment the reduction in sales levels.
462 Trade accounts payable primarily consists of amounts due to
Telular's contract manufacturers. The increase reflects
increased purchases from our contract manufacturers, mostly
during the last month of the quarter. These vendors have
extended payments terms, thereby increasing the overall trade
accounts receivable balance at March 31, 2009.
(1,777 ) The decrease in accrued liabilities was primarily due to
payments for bonuses, royalties and co-op advertising and the
reduction in liability balances related to reduced sales
volumes such as agent commissions, professional fees and
certain operating expenses.
1,435 Non-cash expenses: $909 from stock based compensation; $385
depreciation expense; $141 amortization expense.
464 Net cash provided by other working capital items.
255 Income from continuing operations; cash provided.
$ 2,733 Total cash provided by continuing operations
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Cash Used in Investing Activities
Investing activities used $2,785 of cash for the first six months of fiscal 2009
primarily from the acquisition of SupplyNet Communications for $2,342 and from
the purchase of equipment of $443. This compares to cash provided by investing
activities of $149, primarily from the release of restricted cash, for the same
period of fiscal 2008.
Cash Used in Financing Activities
The decrease in cash from financing activities of $3,626 in the first six months
of fiscal 2009 is due to the Company's payment of notes payable of $978, which
were acquired in the SupplyNet purchase, and the repurchase of its common stock
on the open market of $2,648. Cash of $2,323 was provided by financing
activities in the six months of fiscal year 2008 as a result of the exercise of
stock options and warrants.
Cash Flows of Discontinued Operations
The increase in cash from discontinued operations of $2,248 was due to the
collections of trade accounts receivable of $2,154 and $94 from the sale of the
remaining fixed assets that were previously associated with the FCP business
segment that was abandoned in effective June 30, 2008.
Critical Accounting Policies
The Company's financial statements are based on the selection and application of
significant accounting policies, which require management to make significant
estimates and assumptions. The Company believes that the following represent the
critical accounting policies that currently affect the presentation of the
Company's financial condition and results of operations.
Reserve for Obsolescence
Significant management judgment is required to determine the reserve for
obsolete or excess inventory. The Company currently considers inventory
quantities greater than a one-year supply based on current year activity as well
as any additional specifically identified inventory to be excess. The Company
also provides for the total value of inventories that are determined to be
obsolete based on criteria such as customer demand and changing technologies. At
March 31, 2009, and September 30, 2008, the inventory reserves for continuing
operations were $78 and $84, respectively. Changes in strategic direction, such
as discontinuance or expansion of product lines, changes in technology or
changes in market conditions, could result in significant changes in required
reserves.
Goodwill and Intangible Assets
The Company evaluates the fair value and recoverability of the goodwill whenever
events or changes in circumstances indicate the carrying value of the asset may
not be recoverable or at least annually. In determining fair value and
recoverability, the Company makes projections regarding future cash flows. These
projections are based on assumptions and estimates of growth rates for the
related reporting unit, anticipated future economic conditions, and the
assignment of discount rates relative to risk associated with companies in
similar industries and estimates of terminal values. An impairment loss is
assessed and recognized in operating earnings when the fair value of the asset
is less than its carrying amount.
The Company reviews for the impairment of other intangible assets whenever
events or changes in circumstances indicate that the carrying amount of the
assets may not be recoverable. The Company evaluates recoverability of other
intangible assets by comparing the carrying amount of the intangible asset to
future net undiscounted cash flows generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceed the fair value of the
assets calculated using a discounted cash flow analysis.
Income Taxes
The Company recognizes deferred tax assets and liabilities based on the
differences between the financial statement carrying amounts and the tax bases
of assets and liabilities. Currently, the Company has significant deferred tax
assets principally related to the carryforward of net operating losses. Deferred
tax assets are reviewed regularly for recoverability, and when necessary,
valuation allowances are established based on historical tax losses, projected
future taxable income, and expected timing of reversals of existing temporary
differences. Valuation allowances have been provided for all deferred tax
assets, as management makes assessments about the realizability of such deferred
tax assets. Changes in the Company's expectations could result in significant
adjustments to the valuation allowances, which would significantly impact the
Company's results of operations.
Forward Looking Information
The Company includes certain estimates, projections and other forward-looking
statements within the meaning of section 27A of the Securities Act of 1933 and
section 21E of the Securities Exchange Act of 1934 in its reports and in other
publicly available material. Statements regarding expectations, including
performance assumptions and estimates relating to capital requirements, as well
as other statements that are not historical facts, are forward-looking
statements.
These statements reflect management's judgments based on currently available
information and involve a number of risks and uncertainties that could cause
actual results to differ materially from those in the forward-looking
statements. With respect to these forward-looking statements, management has
made assumptions regarding, among other things, customer growth and retention,
pricing, operating costs and the economic environment.
The words "estimate", "project", "intend", "expect", "believe", "target" and
similar expressions are intended to identify forward-looking statements.
Forward-looking statements are found throughout Management's Discussion and
Analysis. The reader should not place undue reliance on forward-looking
. . .
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