Business Context and Reporting Period
RELM Wireless Corporation, doing business as RELM Wireless Corporation and BK Technologies, designs, manufactures and markets two-way land mobile radios, repeaters, base stations and related components for government, public safety, business and industrial customers. The filing covers the unaudited quarter ended March 31, 2018, compared with the quarter ended March 31, 2017. The report was filed May 9, 2018.
Key Financial Metrics
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Sales, net | $11.746 million | $7.380 million |
| Gross profit margin | 41.2% | 30.3% |
| Operating income (loss) | $748,000 | $(1.206) million |
| Pretax loss | $(549,000) | $(1.389) million |
| Net loss | $(443,000) | $(1.268) million |
| Loss per diluted share | $(0.03) | $(0.09) |
| Net cash used in operating activities | $(3.318) million | $(1.117) million |
- P-25 digital product sales were approximately $9.1 million, or 77.0% of sales, versus $5.5 million, or 74.3%, in the prior-year quarter.
- SG&A was $4.089 million, or 34.8% of sales, compared with $3.443 million, or 46.7%.
- Cash and cash equivalents were $8.058 million at March 31, 2018, compared with $7.147 million at December 31, 2017.
- Working capital was approximately $22.9 million at March 31, 2018, compared with $26.7 million at year-end 2017.
- Total assets were $40.727 million and total liabilities were $9.736 million at March 31, 2018.
- There were no borrowings under the secured revolving credit facility; $1.0 million remained available, subject to the borrowing base. The facility matures December 26, 2018, and the company reported compliance with its covenants.
- Investing activities provided $4.859 million, primarily from $8.335 million of proceeds from selling Iteris securities, partially offset by a $3.333 million investment in 1347 Property Insurance Holdings and $143,000 of capital expenditures.
Material Changes Versus the Prior Comparable Period
- Sales increased 59.2%, driven primarily by demand from federal and international public safety customers and supplemented by state agency orders.
- Gross margin expanded by 10.9 percentage points, reflecting a more favorable product mix, efficiency and quality initiatives, and the absence of prior-year expenses related to a product enhancement and discontinued development initiative.
- The company moved from a $1.206 million operating loss to $748,000 of operating income. Higher sales and gross profit were partly offset by increased product development expenses.
- The net loss narrowed to $443,000 from $1.268 million despite $849,000 of loss on the sale of securities, a $297,000 unrealized loss on the 1347 Property Insurance Holdings investment, and $168,000 of other expense, primarily foreign exchange losses.
- Operating cash flow deteriorated to a $3.318 million use, primarily because accounts receivable increased $2.184 million, inventories increased $929,000, and accounts payable declined $1.116 million.
- Financing cash use declined to $630,000 from $1.149 million, reflecting lower dividends and continued share repurchases.
- Adoption of ASU 2016-01 reclassified approximately $4.3 million of previously recognized unrealized investment gains from accumulated other comprehensive income to accumulated deficit. Adoption of the new revenue standard had no material impact.
Guidance, Outlook, Risks and Unusual Items
- Management planned to introduce the first model in a new multi-band product line later in 2018 and stated that its sales prospect funnel was encouraging. No quantified revenue or earnings guidance was provided.
- Management stated that cash, anticipated operating cash flow and available borrowing capacity should be sufficient for foreseeable working capital requirements, while noting that economic conditions could restrict access to credit or capital.
- Key risks include dependence on U.S. government agencies, government budget constraints, competition, technology changes, contract manufacturers and suppliers, product development and introduction risks, inventory levels, foreign operations and currency exposure, cybersecurity, key personnel retention, and fluctuations in operating results.
- U.S. government agencies represented approximately $3.993 million, or 34.0%, of gross sales in Q1 2018. Purchase commitments to suppliers for inventory totaled approximately $4.494 million.
- The company settled litigation with The Sales Group, Inc. It paid $900,000 in 2017 and owed commissions on qualifying 2018 sales; $149,000 of such commissions was paid during Q1 2018. A change-in-control transaction during 2018 could trigger an additional payment of up to $2.0 million, reduced by commissions already paid.
- Net deferred tax assets were $3.423 million. Management concluded that approximately $64,000 was more likely than not unrealizable because of insufficient Florida taxable income and cautioned that additional valuation allowances could be required if future losses occur.
- The company indirectly held 424,572 shares of 1347 Property Insurance Holdings with a March 31, 2018 fair value of $3.036 million. Affiliates of its largest stockholder collectively held approximately 43.1% of that company, and certain company directors had relationships with the related investment manager and issuer boards.
- Disclosure controls and procedures were assessed as effective, with no material changes in internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Whether the strong 59.2% sales growth and 41.2% gross margin are sustainable after the unusually favorable product mix and prior-year one-time costs.
- Whether working-capital requirements, especially receivables and inventory, improve enough to restore positive operating cash flow.
- The performance, valuation and governance implications of the 1347 Property Insurance Holdings investment and related-party relationships.
- The status and potential cost of the TSG settlement obligations, including the change-in-control payment provision.
- The company’s ability to use its federal and state NOLs and whether additional deferred-tax valuation allowances will be required.
- Renewal or replacement of the $1.0 million revolving credit facility before its December 26, 2018 maturity date.
- Execution of the planned multi-band product launch and the effect of product development spending on future margins and earnings.