10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2011

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 000-07336

RELM WIRELESS CORPORATION

(Exact name of registrant as specified in its charter)

Nevada	59-3486297
State or other jurisdiction of	(I.R.S. Employer
Incorporation or organization	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 £      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. (Check one):

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 13,519,323 shares of common stock, $0.60 par value, of the registrant outstanding at July 22, 2011.

PART I. - FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

RELM WIRELESS CORPORATION

Condensed Consolidated Balance Sheets

(In thousands, except share data)(Unaudited)

	June 30, 2011			December 31, 2010
ASSETS
Current assets:
Cash and cash equivalents	$	4,234		$	5,050
Trade accounts receivable (net of allowance for doubtful
accounts of $44 at June 30, 2011 and at December 31, 2010, respectively)		2,528			3,900
Inventories, net		12,992			11,942
Deferred tax assets, net		2,165			2,165
Prepaid expenses and other current assets		613			703
Total current assets		22,532			23,760
Property, plant and equipment, net		1,333			1,357
Deferred tax assets, net		5,637			5,637
Capitalized software, net		3,277			3,776
Other assets		239			262
Total assets	$	33,018		$	34,792
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	1,927		$	2,753
Accrued compensation and related taxes		833			795
Accrued warranty expense		286			266
Accrued other expenses and other current liabilities		156			202
Total current liabilities		3,202			4,016
Deferred revenue		578			386
Long-term debt		2,300			2,000
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:
13,508,815 issued and outstanding shares at June 30, 2011 and December 31, 2010, respectively		8,105			8,105
Additional paid-in capital		24,495			24,404
Accumulated deficit		(5,662	)		(4,119	)
Total stockholders' equity		26,938			28,390
Total liabilities and stockholders' equity	$	33,018		$	34,792

See notes to condensed consolidated financial statements.

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RELM WIRELESS CORPORATION

Condensed Consolidated Statements of Operations

(In thousands, except per share data) (Unaudited)

	Three Months Ended						Six Months Ended
	June 30, 2011			June 30, 2010			June 30, 2011			June 30, 2010
Sales, net	$	4,671		$	7,079		$	11,385		$	13,527
Expenses
Cost of products		3,015			3,678			7,128			7,162
Selling, general and administrative		2,484			2,858			5,732			5,808
Total expenses		5,499			6,536			12,860			12,970
Operating (loss) income		(828	)		543			(1,475	)		557
Other (expense) income:
Net interest expense		(27	)		-			(62	)		-
Other income (expense)		-			6			(6	)		(6	)
Total other (expense) income		(27	)		6			(68	)		(6	)
(Loss) income before income taxes		(855	)		549			(1,543	)		551
Income tax expense		-			(210	)		-			(211	)
Net (loss) income	$	(855	)	$	339		$	(1,543	)	$	340
Net (loss) earnings per share-basic:	$	(0.06	)	$	0.03		$	(0.11	)	$	0.03
Net (loss) earnings per share-diluted:	$	(0.06	)	$	0.02		$	(0.11	)	$	0.02
Weighted average shares outstanding-basic		13,508,815			13,489,485			13,508,815			13,463,256
Weighted average shares outstanding-diluted		13,508,815			13,870,397			13,508,815			13,872,182

See notes to condensed consolidated financial statements.

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RELM WIRELESS CORPORATION

Condensed Consolidated Statements of Cash Flows

(In thousands) (Unaudited)

	Six months Ended
	June 30, 2011			June 30, 2010
Operating activities
Net (loss) income	$	(1,543	)	$	340
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
Allowance for doubtful accounts		-			7
Inventories reserve		52			167
Deferred tax asset		-			201
Depreciation and amortization		704			317
Shared-based compensation expense		91			180
Excess tax benefit from share-based compensation		-			(20	)
Changes in operating assets and liabilities:
Accounts receivable		1,372			629
Inventories		(1,102	)		(1,932	)
Prepaid expenses and other current assets		90			7
Other assets		23			39
Accounts payable		(826	)		548
Accrued compensation and related taxes		38			(197	)
Accrued warranty expense		20			147
Deferred revenue		192			-
Accrued other expenses and other current liabilities		(46	)		123
Net cash  (used in) provided by operating activities		(935	)		556
Investing activities
Purchases of property, plant and equipment		(181	)		(226	)
Capitalized software		-			(788	)
Net cash used in investing activities		(181	)		(1,014	)
Financing activities
Proceeds from issuance of common stock		-			79
Excess tax benefit from share-based compensation		-			20
Net increase in revolving credit line		300			-
Cash provided by financing activities		300			99
Net change in cash and cash equivalents		(816	)		359
Cash and cash equivalents, beginning of period		5,050			7,660
Cash and cash equivalents, end of period	$	4,234		$	7,301
Supplemental disclosure
Cash paid for interest	$	62		$	-
Income tax paid	$	-		$	11

See notes to condensed consolidated financial statements.

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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 June 30, 2011 and December 31, 2010, the condensed consolidated statements of operations for the three and six months ended June 30, 2011 and 2010 and the condensed consolidated statements of cash flows for the six months ended June 30, 2011 and 2010 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, 2010 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, 2010, as filed with the Securities and Exchange Commission.  The results of operations for the three and six months ended June 30, 2011 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 six month periods ended June 30, 2011 and 2010, 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 $44 on gross trade receivables of $2,572 and $3,944 at June 30, 2011 and December 31, 2010, respectively.  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:

	June 30, 2011		December 31, 2010
Finished goods	$	3,419	$	3,110
Work in process		5,941		6,075
Raw materials		3,632		2,757
	$	12,992	$	11,942

Reserves for slow-moving, excess, or obsolete inventory were approximately $2,670 at June 30, 2011, compared with approximately $2,617 at December 31, 2010. 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

No income tax expense or benefit has been recorded for the three or six months ended June 30, 2011.

As of June 30, 2011 and December 31, 2010, the Company’s deferred tax assets totaled approximately $7,802, and are primarily composed of net operating loss carry forwards (NOLs).  These NOLs total $13,621 for federal and $19,374 for state purposes, with expirations starting in 2017 through 2028.

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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 to not realize a portion of the benefit of its net deferred tax assets recorded at June 30, 2011.  Accordingly, for the six months ended June 30, 2011, the Company has established a valuation allowance totaling approximately $2,154 for the portion of benefit of its federal and state deferred tax assets that more likely than not will not be realized. This represents a $1,834 increase to the valuation allowance of $320 the Company established at December 31, 2010 for the portion of benefit of its 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 June 30, 2011.

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 June 30, 2011, the Company’s amortization cost was approximately $250 and $500, respectively, compared with $58 and $117 for the same periods last year.  Net capitalized software costs totaled $3,277 and $3,776 as of June 30, 2011 and December 31, 2010, respectively.

6.            Stockholders’ Equity

The changes in consolidated stockholders’ equity for the six months ended June 30, 2011 are as follows:

	Common Stock Shares		Common Stock Amount		Additional Paid-In Capital		Accumulated Deficit			Total
Balance at December 31, 2010		13,508,815	$	8,105	$	24,404	$	(4,119	)	$	28,390
Share-based compensation expense		−		−		91		−			91
Net loss		−		−		−		(1,543	)		(1,543	)
Balance at June 30, 2011		13,508,815	$	8,105	$	24,495	$	(5,662	)	$	26,938

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Notes to Condensed Consolidated Financial Statements

Unaudited

(in Thousands, Except Share Data and Percentages)

7.            (Loss) income per Share

The following table sets forth the computation of basic and diluted (loss) income per share:

	Three Months Ended					Six Months Ended
	June 30, 2011			June 30, 2010		June 30, 2011			June 30, 2010
Numerator:
Net  (loss) income  (numerator for basic and diluted earnings per share)	$	(855	)	$	339	$	(1,543	)	$	340
Denominator:
Denominator for basic earnings per share weighted average shares		13,508,815			13,489,485		13,508,815			13,463,256
Effect of dilutive securities:
Options		-			380,912		-			408,926
Denominator
Denominator for diluted earnings per share weighted average shares		13,508,815			13,870,397		13,508,815			13,872,182
Basic (loss) income per share	$	(0.06	)	$	0.03	$	(0.11	)	$	0.03
Diluted (loss) income per share	$	(0.06	)	$	0.02	$	(0.11	)	$	0.02

A total of 1,030,224 shares related to options are not included in the computation of diluted loss per share for the three and six months ended June 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 $41 and $91, respectively, for the three and six months ended June 30, 2011, compared with $48 and $180 for the same periods last year.  The Company considers its non-cash share-based employee compensation expenses as a component of cost of products ($4 and $8 for the three and six  months ended June 30, 2011, respectively, compared with $4 and $18 for the same periods last year) and selling, general and administrative expenses ($37 and $83 for the three and six months ended June 30, 2011, respectively, compared with $44 and $162 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 six months ended June 30, 2011 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, 2010.

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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 June 30, 2011, and changes during the three months ended June 30, 2011 are presented below:

As of April 1, 2011	Stock Options		Wgt. Avg. Exercise Price ($)		Wgt. Avg. Remaining Contractual Life (Years)		Wgt. Avg. Grant Date Fair Value($)		Aggregate Intrinsic Value ($)
Outstanding		1,000,224		2.74		-		1.81		-
Vested		903,555		2.72		-		1.79		-
Nonvested		96,669		2.98		-		1.99		-
Period activity
Issued		30,000		2.00		-		1.11		-
Exercised		-		-		-		-		-
Forfeited		-		-		-		-		-
Expired		-		-		-		-		-
As of June 30, 2011
Outstanding		1,030,224		2.72		3.03		1.79		124,777
Vested		958,556		2.68		2.72		1.76		124,777
Nonvested		71,668		3.20		7.10		2.14		0

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 June 30, 2011.

Other

As of June 30, 2011, the Company had purchase orders to suppliers of approximately $2,566.

Significant Customers

Sales to United States government agencies represented approximately $1,805 (38.6%) and $5,100 (44.8%) of the Company’s total sales for the three and six months ended June 30, 2011, respectively, compared with approximately $4,645 (65.6%) and $9,302 (68.8%) for the same periods last year.  Accounts receivable from agencies of the United States government were approximately $765 as of June 30, 2011 compared with approximately $1,596 at the same date last year.

10.          Debt

The Company has a secured revolving credit facility with Silicon Valley Bank (SVB) with maximum borrowing availability of $5,000 (subject to a borrowing base) and a maturity date of December 31, 2012.  On June 22, 2011, the Company and SVB amended the related loan and security agreement by entering into the second amendment thereto, pursuant to which the Company’s revolving credit facility was amended as follows:

●    calculation of the “borrowing base” was adjusted by increasing the “eligible inventory” threshold to $1,000 from $500 within the definition of “borrowing base” and clause (i) of the definition of “eligible accounts”, which relates to accounts owing from an account debtor which is a United States government entity or any department, agency or instrumentality thereof, was amended to, among other things,  increase the threshold to $2,000 from $1,500; and

●    the required “adjusted quick ratio” was reduced to 1.00 to 1.0 from 1.75 to 1.0 and the calculation thereof was adjusted.

8

Notes to Condensed Consolidated Financial Statements

Unaudited

(in Thousands, Except Share Data and Percentages)

Under the second amendment, SVB waived any “event of default” that may have existed by reason of the loans, advances and other extensions of credit made to the Company exceeding the “borrowing base” at any time during the period from January 1, 2011 through the date of the second amendment.

The Company continues to be subject to substantially the same customary borrowing terms and conditions under the revolving credit facility as it was prior to the second amendment, including the accuracy of representations and warranties, compliance with financial maintenance and restrictive covenants and the absence of events of default.

As of June 30, 2011, the Company was in compliance with all covenants under the loan and security agreement, as amended.   For a description of such covenants and the other terms and conditions of the loan and security agreement, as amended by the second amendment, 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, 2010 and the second amendment to the loan and security agreement, a copy of which is listed and incorporated by reference as Exhibit 10.1 to this report, and is incorporated herein by reference.

Borrowings outstanding under the revolving credit facility as of June 30, 2011 totaled $2,300.  As of June 30, 2011 there was approximately $334 of additional borrowing available under the credit facility.

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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, 2010 and in our subsequent filings with the Securities and Exchange Commission, and include, among others, the following:

● changes in customer preferences;

● our inventory and debt levels;

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

● federal, state and local government budget deficits and spending limitations;

● quality of management, business abilities and judgment of our personnel;

● the availability, terms and deployment of capital;

● competition in the land mobile radio industry;

● reliance on contract manufacturers;

● limitations in available radio spectrum for use of land mobile radios;

● changes or advances in technology; and

● general economic and business conditions.

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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 six months ended June 30, 2011 declined compared with the same periods last year.  Total sales and sales of P25 digital products both declined compared with the three and six months ended June 30, 2011, while costs of products increased.  These factors combined to yield an operating loss for the three and six months ended June 30, 2011.

For the three and six months ended June 30, 2011, total sales were approximately $4.7 million and $11.4 million, respectively, compared with approximately $7.1 million and $13.5 million for the same periods last year.  Sales of P25 digital products for the second quarter of 2011 totaled approximately $2.5 million (53.8% of total sales) compared with approximately $4.4 million (62.5% of total sales) for the same quarter last year.  For the six months ended June 30, 2011, sales of P25 digital products totaled approximately $7.0 million (61.8% of total sales) compared with approximately $8.9 million (65.8% of total sales) for the same period last year.

Gross margins as a percentage of sales for the three months ended June 30, 2011 were 35.5% compared with 48.1% for the same quarter last year.  For the six months ended June 30, 2011 gross margins were approximately 37.4% compared with 47.1% for the same period last year.  Our gross margins for the three and six months ended June 30, 2011 reflect higher than normal product costs related to early production of some of our new products.

For the three months ended June 30, 2011, selling, general and administrative expenses totaled approximately $2.5 million (53.2% of sales) compared with approximately $2.9 million (40.4% of sales) for the same period last year.  The decrease for the three months ended June 30, 2011 compared with the same period last year was the result of reductions in engineering, marketing, selling, headquarters and public company expenses.  For the six months ended June 30, 2011, selling, general and administrative expenses totaled approximately $5.7 million (50.3% of sales) compared with approximately $5.8 million (42.9% of sales) for the same period last year.  The aforementioned expense reductions were partially offset by additional software amortization that commenced in the fourth quarter of 2010 in connection with the launch of our new products.

Pretax loss for the three and six months ended June 30, 2011 totaled approximately $855,000 and $1.5 million, respectively, compared with pretax income of approximately $549,000 and $551,000 for the same periods last year.

For the three and six months ended June 30, 2011, we did not recognize any income tax expense or benefit, compared with income tax expense of 210,000 and 211,000, respectively,  for the same periods last year.

Net loss for the three months ended June 30, 2011 was approximately $855,000 ($0.06 per basic share), compared with net income of approximately $339,000 ($0.03 per basic share and $0.02 per diluted share) for the same period last year.  For the six months ended June 30, 2011 the net loss was approximately $1.5 million ($0.11 per basic share), compared with net income of approximately $340,000 ($0.03 per basic share and $0.02 per diluted share) for the same period last year.

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As of June 30, 2011, working capital totaled approximately $19.3 million, of which approximately $6.8 million was comprised of cash and trade receivables.  As of December 31, 2010 working capital totaled approximately $19.7 million, of which approximately $9.0 million was comprised of cash and trade receivables.

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 Six Months Ended
	June 30, 2011			June 30, 2010			June 30, 2011			June 30, 2010
Sales		100.0	%		100.0	%		100.0	%		100.0	%
Cost of products		(64.5	)		(51.9	)		(62.6	)		(52.9	)
Gross margin		35.5			48.1			37.4			47.1
Selling, general and administrative expenses		(53.2	)		(40.4	)		(50.3	)		(42.9	)
Net interest (expense) income		(0.6	)		0.0			(0.5	)		0.0
Other (expense) income		0.0			0.1			(0.1	)		0.0
Pretax  (loss) income		(18.3	)		7.8			(13.5	)		4.2
Income tax expense		(0.0	)		(3.0	)		(0.0	)		(1.6	)
Net (loss) income		(18.3	)%		4.8	%		(13.5	)%		2.6	%

Net Sales

For the second quarter ended June 30, 2011, net sales were approximately $4.7 million compared with approximately $7.1 million for the same quarter last year.  Sales of P25 digital products for the quarter totaled approximately $2.5 million (53.8% of total sales), compared with approximately $4.4 million (62.5% of total sales) for the same quarter last year.

For the six months ended June 30, 2011, net sales were approximately $11.4 million, compared with approximately $13.5 million for the same period last year.  Sales of P25 digital products for the six months ended June 30, 2011 totaled approximately $7.0 million (61.8% of total sales) compared with approximately $8.9 million (65.8% of total sales) for the same period last year.

Net sales for the second quarter ended June 30, 2011 decreased approximately 34.0% from the prior year’s second quarter, while sales of P25 digital products decreased approximately 43.2%.  In April 2011, the federal government’s 2011 budget was enacted to fund federal government operations for the remainder of its 2011 fiscal year ending September 30, 2011.  For many agencies, however, the enactment has not yet yielded the anticipated funding for land mobile radio equipment purchases.  Consequently, such agencies have deferred fulfilling their identified requirements.  Although current conditions remain uncertain, we believe this situation should improve during our third quarter because government agencies generally spend remaining funding before it expires at the federal government’s fiscal year end on September 30.  Meanwhile, leveraging our broader product line that covers more frequencies and includes trunking, we are pursuing a wide range of state and local public safety P25 opportunities.

Cost of Products and Gross Margin

Gross margins as a percentage of sales for the second quarter ended June 30, 2011 were 35.5% compared with 48.1% for the same quarter last year.  For the six months ended June 30, 2011, gross margins as a percentage of sales were 37.4% compared with 47.1% for the same period last year.

12

Our cost of products and gross margins are primarily related to material and labor costs, product mix, manufacturing volumes and pricing.  The increase in cost of products and corresponding decrease in gross margins for the three and six months ended June 30, 2011 reflected higher material and labor costs for the early production of new products, which comprised a greater portion of our overall mix of products sold.  Such circumstances are not unusual.  We are actively managing the manufacturing processes and recent production runs have yielded lower material costs and improved labor efficiency.  Also, as a result of lower sales, manufacturing volumes decreased.  Accordingly, we did not fully utilize and absorb 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.  Leveraging increased sales volumes and P-25 product sales combined with the aforementioned manufacturing improvements, we believe, should yield gross margin improvements.

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 second quarter 2011 were approximately $2.5 million (53.2% of sales) compared with approximately $2.9 million (40.4% of sales) for the same quarter last year.  For the six months ended June 30, 2011, SG&A expenses totaled approximately $5.7 million (50.3% of sales) compared with approximately $5.8 million (42.9% of sales) for the same period last year.

Engineering and product development expenses for the second quarter 2011, declined approximately $39,000 (3.6%) compared with the same quarter last year.  For the six months ended June 30, 2011, engineering and product development expenses increased approximately $289,000 (13.4%) compared with the same period last year.  The expense decrease for the second quarter 2011 was the result of expense reductions implemented during the quarter, as some product development initiatives have been completed.  The expense increase for the six months ended June 30, 2011 was primarily due to amortization of certain capitalized software that commenced during the fourth quarter 2010 and continued in the first six months of 2011.  Additional new products and capabilities in our KNG line are in the pipeline and planned for coming quarters.

Marketing and selling expenses for the second quarter 2011 decreased by approximately $282,000 (26.7%) compared with the same quarter last year.  For the six months ended June 30, 2011, marketing and selling expenses decreased approximately $252,000 (11.6%) compared with the same period last year.  These decreases relate primarily to reduced commissions and expense reductions implemented during the second quarter.  Although expenses have been reduced, we intend to prioritize and support critical initiatives for sales growth.

General and administrative expenses for the second quarter 2011 decreased by approximately $53,000 (7.3%), compared with the same quarter last year.  For the six months ended June 30, 2011 general and administrative expenses decreased approximately $113,000 (7.7%) compared with the same period last year.  These expense reductions are primarily the result of reduced headquarters and public company expenses, including non-cash share-based employee compensation expenses.

Operating (Loss) Income

Operating loss for the quarter ended June 30, 2011 totaled approximately $828,000 (17.7% of sales), compared with operating income of approximately $543,000 (7.7% of sales) for the same quarter last year.  For the six months ended June 30, 2011, the operating loss totaled approximately $1.5 (13.0%) million compared with operating income of approximately $557,000 (4.1%) for the same period last year.  The operating losses for the second quarter and six months ended June 30, 2011 were primarily due to lower product sales combined with increases in cost of products and the resulting decrease in gross margins.  These factors were partially offset by operating expense reductions implemented during the second quarter.

13

Net Interest Expense

For the quarter and six months ended June 30, 2011, net interest expense totaled approximately $27,000 and $62,000, respectively, compared to no net interest expense for the same periods last year.  The expense increase is due to borrowings under our revolving credit facility.  We incur interest expense on outstanding borrowings under our revolving credit facility and earn interest income on our cash balances.  The interest rate on such revolving credit facility as of June 30, 2011 was 3.75% per annum.  This rate is variable based on the prime rate plus 50 basis points.

Income Taxes

We recorded no income tax benefit or expense for the three and six months ended June 30, 2011, compared with income tax expense of approximately $210,000 and $211,000, respectively, for the same periods last year.  Our income tax benefit and expense is primarily non-cash as we have the availability of net operating loss carryforwards.

As of June 30, 2011, our deferred tax assets totaled approximately $7,802, and are primarily composed of net operating loss carry forwards (NOLs).  These NOLs total $13,621 for federal and $19,374 for state purposes, with expirations starting in 2017 through 2028

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, 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, we are more likely than not to not realize a portion of the benefit of our net deferred tax assets recorded at June 30, 2011.  Accordingly, as of June 30, 2011, we have established a valuation allowance totaling approximately $2,154 for the portion of benefit of our federal and state deferred tax assets that more likely than not will not be realized. This represents a $1,834 increase to the valuation allowance of $320 we established at December 31, 2010 for the portion of benefit of our 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 June 30, 2011.

Liquidity and Capital Resources

For the six months ended June 30, 2011, net cash used in operating activities totaled approximately $935,000 compared with net cash provided by operating activities of approximately $556,000 for the same period last year.  Cash used in operating activities was primarily related to a net loss, inventory purchases and the payment of trade payables.  For the six months ended June 30, 2011, we realized a net loss of approximately $1.5 million compared with net income of approximately $340,000 for the same period last year.  Net inventories increased during the period by approximately $1.1 million compared with $1.9 million for the same period last year in support of the broader line of new products and anticipated demand.  We have reduced and are actively managing our purchases to align inventory with anticipated business levels.  For the six months ended June 30, 2011, accounts payable decreased by approximately $826,000 as a result of payment to suppliers.  For the same period last year accounts payable increased by approximately $548,000 primarily due to material purchases.  For the six months ended June 30, 2011, accounts receivable decreased by approximately $1.4 million compared with a decrease of approximately $629,000 for the same period last year.  The decrease in accounts receivable as of June 30, 2011 was primarily the result of collections and lower sales.  Depreciation and amortization totaled approximately $704,000 for the six months ended June 30, 2011, compared with approximately $317,000 for the same period last year, reflecting the additional amortization of capitalized software relating to our new product that commenced in the fourth quarter 2010.

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Cash used in investing activities for the six months ended June 30, 2011 totaled approximately $181,000 compared with approximately $1.0 million used in the same period last year.  Cash used in investing activities for the six months ended June 30, 2011 was primarily to fund the purchase of test equipment and tooling for manufacturing and engineering applications.  For the same period last year, cash used in investing activities was to fund digital software development and the acquisition of assets pertaining to the development of our new digital products.  We anticipate that future capital expenditures will be funded through our existing cash balance and operating cash flow.

Cash generated from financing activities for the six months ended June 30, 2011 totaled approximately $300,000, representing borrowings of $1.5 million and repayments of $1.2 million under our revolving credit facility.  For the same period last year, $79,000 in proceeds were generated from the issuance of common stock and $20,000 in tax benefits from the exercise and sale of employees’ stock options.

We have a secured revolving credit facility with Silicon Valley Bank (SVB) with maximum borrowing availability of $5 million (subject to borrowing base) and a maturity date of December 31,2012.  On June 22, 2011, we and SVB amended the related loan and security agreement by entering into the second amendment thereto, pursuant to which our revolving credit facility was amended as described in Note 10 of our Condensed Consolidated Financial Statements included elsewhere in this report. Under the second amendment, SVB waived any “event of default” that may have existed by reason of the loans, advances and other extensions of credit made to us exceeding the “borrowing base” at any time during the period from January 1, 2011 through the date of the second amendment.

We continue to be subject to substantially the same customary borrowing terms and conditions under the revolving credit facility as we were prior to the second amendment, including the accuracy of representations and warranties, compliance with financial maintenance and restrictive covenants and the absence of events of default.

As of June 30, 2011, we were in compliance with all covenants under the loan and security agreement, as amended.   For a description of such covenants and the other terms and conditions of the loan and security agreement, as amended by the second amendment, 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, 2010 and the second amendment to the loan and security agreement, a copy of which is listed and incorporated by reference as Exhibit 10.1 to this report, and is incorporated herein by reference.

Borrowings outstanding under the revolving credit facility as of June 30, 2011 totaled $2.3 million.  As of June 30, 2011 there was approximately $334,000 of additional borrowing available under the credit facility.

Our cash balance at June 30, 2011 was approximately $4.2 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, 2010.

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 June 30, 2011.  Item 7. of our Annual Report on Form 10-K for the fiscal year ended December 31, 2010 includes a detailed discussion of these critical accounting policies.

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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 prime rate, in effect from time to time, plus 50 basis points.  As of June 30, 2011, borrowings outstanding under the facility totaled $2.3 million bearing interest at 3.75% per annum.

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 Rules 13a-15(e) and 15d-15(e)) as of June 30, 2011.  Based on this evaluation, they have concluded that our disclosure controls and procedures were effective as of June 30, 2011.

Changes in Internal Control over Financial Reporting

During the second quarter ended June 30, 2011, 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.

16

PART II- OTHER  INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

Reference is made to Note 9 of the Company’s Condensed Consolidated Financial Statements included elsewhere in this report for the information required by this Item.

ITEM 6.  EXHIBITS

Exhibit 10.1	Second Amendment to Loan and Security Agreement dated as of June 22, 2011 by and among Silicon Valley Bank, RELM Wireless Corporation and RELM Communications, Inc. (incorporated by reference from the Company’s Current Report on Form 8-K dated June 22, 2011, as filed with the Securities and Exchange Commission on June 22, 2011).
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).

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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:  August 9, 2011	By:	/s/ David P. Storey
		David P. Storey President and Chief Executive Officer (Principal executive officer and duly authorized officer)
Date:  August 9, 2011	By:	/s/ William P. Kelly
		William P. Kelly Executive Vice President and Chief Financial Officer (Principal financial and accounting officer and duly authorized officer)

18

Exhibit Index

Exhibit Number	Description
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.
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.
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).
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).

19

EX-31.1

Exhibit 31.1

CERTIFICATION PURSUANT TO

SECTION 302 OF THE

SARBANES-OXLEY ACT OF 2002

I, David P. Storey, President and Chief Executive Officer of RELM Wireless Corporation, certify that:

1.           I have reviewed this quarterly report on Form 10-Q of RELM Wireless Corporation;

2.           Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.           Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.           The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)           designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)           designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)           evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)           disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.           The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)           all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)           any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:  August 9, 2011	/s/ David P. Storey
	David P. Storey
	President and Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION PURSUANT TO

SECTION 302 OF THE

SARBANES-OXLEY ACT OF 2002

I, William P. Kelly, Executive Vice President and Chief Financial Officer of RELM Wireless Corporation, certify that:

1.           I have reviewed this quarterly report on Form 10-Q of RELM Wireless Corporation;

2.           Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.           Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.           The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)           designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)           designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles:

(c)           evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)           disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.           The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)           all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)           any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:  August 9, 2011	/s/ William P. Kelly
	William P. Kelly
	Executive Vice President and Chief Financial Officer

EX-32.1

Exhibit 32.1

RELM WIRELESS CORPORATION

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of RELM Wireless Corporation (the “Company”) on Form 10-Q for the quarterly period ended June 30, 2011 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, David P. Storey, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

	RELM Wireless Corporation
Date:  August 9, 2011	/s/ David P. Storey
	David P. Storey
	President and Chief Executive Officer

EX-32.2

Exhibit 32.2

RELM WIRELESS CORPORATION

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of RELM Wireless Corporation (the “Company”) on Form 10-Q for the quarterly period ended June 30, 2011 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, William P. Kelly, Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

	RELM Wireless Corporation
Date:  August 9, 2011	/s/ William P. Kelly
	William P. Kelly
	Executive Vice President and Chief Financial Officer

XML



Balance Sheets (Parenthetical) (USD $)	Jun. 30, 2011	Dec. 31, 2010
Allowance for doubtful accounts, net	$ 44	$ 44
Stockholders equity:
Preferred stock, par value	$ 1.00	$ 1.00
Preferred stock, authorized shares	1,000,000	1,000,000
Preferred stock, issued shares	0	0
Preferred stock, outstanding shares	0	0
Common stock, par value	$ 0.60	$ 0.60
Common stock, authorized shares	20,000,000	20,000,000
Common stock, issued shares	13,508,815	13,508,815
Common stock, outstanding shares	13,508,815	13,508,815

XML



Statements of Operations (Unaudited) (USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2011	Jun. 30, 2010	Jun. 30, 2011	Jun. 30, 2010
Sales, net	$ 4,671	$ 7,079	$ 11,385	$ 13,527
Expenses
Cost of products	3,015	3,678	7,128	7,162
Selling, general and administrative	2,484	2,858	5,732	5,808
Total expenses	5,499	6,536	12,860	12,970
Operating (loss) income	(828)	543	(1,475)	557
Other (expense) income:
Net Interest expense	(27)	0	(62)	0
Other income (expense )	0	6	(6)	(6)
Total other (expense) income	(27)	6	(68)	(6)
(Loss) income before income taxes	(855)	549	(1,543)	551
Income tax (expense)	0	(210)	0	(211)
Net (loss) income	$ (855)	$ 339	$ (1,543)	$ 340
Net (loss) income per share-basic:	$ (0.06)	$ 0.03	$ (0.11)	$ 0.03
Net (loss) income per share-diluted:	$ (0.06)	$ 0.02	$ (0.11)	$ 0.02
Weighted average shares outstanding-basic	13,508,815	13,489,485	13,508,815	13,463,256
Weighted average shares outstanding-diluted	13,508,815	13,870,397	13,508,815	13,872,182

XML



Document and Entity Information (USD $)	6 Months Ended
	Jun. 30, 2011	Aug. 15, 2011	Aug. 08, 2011
Entity Registrant Name	RELM WIRELESS CORP
Entity Central Index Key	0000002186
Document Type	10-Q
Document Period End Date	Jun. 30, 2011
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Is Entity a Well-known Seasoned Issuer?	No
Is Entity a Voluntary Filer?	No
Is Entity's Reporting Status Current?	Yes
Entity Filer Category	Smaller Reporting Company
Entity Public Float		$ 24,956,489	$ 24,956,489
Entity Common Stock, Shares Outstanding		13,519,323	13,519,323
Document Fiscal Period Focus	Q2
Document Fiscal Year Focus	2011

XML



(Loss) income per Share

6 Months Ended

Jun. 30, 2011

(Loss) income per Share

The following table sets forth the computation of basic and diluted (loss) income per share:

	Three Months Ended					Six Months Ended
	June 30, 2011			June 30, 2010		June 30, 2011			June 30, 2010
Numerator:
Net   (loss) income  (numerator for basic and diluted earnings per share)	$	(855	)	$	339	$	(1,543	)	$	340
Denominator:
Denominator for basic earnings per share weighted average shares		13,508,815			13,489,485		13,508,815			13,463,256
Effect of dilutive securities:
Options		—			380,912		—			408,926
Denominator
Denominator for diluted earnings per share weighted average shares		13,508,815			13,870,397		13,508,815			13,872,182
Basic (loss) income per share	$	(0.06	)	$	0.03	$	(0.11	)	$	0.03
Diluted (loss) income per share	$	(0.06	)	$	0.02	$	(0.11	)	$	0.02

 A total of 1,030,224 shares related to options are not included in the computation of diluted loss per share for the three and six months ended June 30, 2011, because to do so would have been anti-dilutive for these periods.

XML



Inventories, net

6 Months Ended

Jun. 30, 2011

Inventories, net

The components of inventory, net of reserves for slow-moving, excess or obsolete inventory, consist of the following:

	June 30, 2011		December 31, 2010
Finished goods	$	3,419	$	3,110
Work in process		5,941		6,075
Raw materials		3,632		2,757
	$	12,992	$	11,942

Reserves for slow-moving, excess, or obsolete inventory were approximately $2,670 at June 30, 2011, compared with approximately $2,617 at December 31, 2010. The reserve for slow-moving, excess, or obsolete inventory is used to state the Company’s inventories at the lower of cost or market.

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Commitments and Contingencies

6 Months Ended

Jun. 30, 2011

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 June 30, 2011.

Other

As of June 30, 2011, the Company had purchase orders to suppliers of approximately $2,566.

Significant Customers

Sales to United States government agencies represented approximately $1,805 (38.6%) and $5,100 (44.8%) of the Company’s total sales for the three and six months ended June 30, 2011, respectively, compared with approximately $4,645 (65.6%) and $9,302 (68.8%) for the same periods last year. Accounts receivable from agencies of the United States government were approximately $765 as of June 30, 2011 compared with approximately $1,596 at the same date last year.

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Debt

6 Months Ended

Jun. 30, 2011

Debt

The Company has a secured revolving credit facility with Silicon Valley Bank (SVB) with maximum borrowing availability of $5,000 (subject to a borrowing base) and a maturity date of December 31, 2012. On June 22, 2011, the Company and SVB amended the related loan and security agreement by entering into the second amendment thereto, pursuant to which the Company’s revolving credit facility was amended as follows:

·calculation of the “borrowing base” was adjusted by increasing the “eligible inventory” threshold to $1,000 from $500 within the definition of “borrowing base” and clause (i) of the definition of “eligible accounts”, which relates to accounts owing from an account debtor which is a United States government entity or any department, agency or instrumentality thereof, was amended to, among other things, increase the threshold to $2,000 from $1,500; and

·the required “adjusted quick ratio” was reduced to 1.00 to 1.0 from 1.75 to 1.0 and the calculation thereof was adjusted.

Under the second amendment, SVB waived any “event of default” that may have existed by reason of the loans, advances and other extensions of credit made to the Company exceeding the “borrowing base” at any time during the period from January 1, 2011 through the date of the second amendment.

The Company continues to be subject to substantially the same customary borrowing terms and conditions under the revolving credit facility as it was prior to the second amendment, including the accuracy of representations and warranties, compliance with financial maintenance and restrictive covenants and the absence of events of default.

As of June 30, 2011, the Company was in compliance with all covenants under the loan and security agreement, as amended. For a description of such covenants and the other terms and conditions of the loan and security agreement, as amended by the second amendment, 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, 2010 and the second amendment to the loan and security agreement, a copy of which is listed and incorporated by reference as Exhibit 10.1 to this report, and is incorporated herein by reference.

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Non-Cash Share-Based Employee Compensation

6 Months Ended

Jun. 30, 2011

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 $41 and $91, respectively, for the three and six months ended June 30, 2011, compared with $48 and $180 for the same periods last year. The Company considers its non-cash share-based employee compensation expenses as a component of cost of products ($4 and $8 for the three and six months ended June 30, 2011, respectively, compared with $4 and $18 for the same periods last year) and selling, general and administrative expenses ($37 and $83 for the three and six months ended June 30, 2011, respectively, compared with $44 and $162 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 six months ended June 30, 2011 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, 2010.

A summary of stock option activity under the Company’s stock option plans as of June 30, 2011, and changes during the three months ended June 30, 2011 are presented below:

As of April 1, 2011	Stock Options		Wgt. Avg. Exercise Price ($)		Wgt. Avg. Remaining Contractual Life (Years)		Wgt. Avg. Grant Date Fair Value($)		Aggregate Intrinsic Value ($)
Outstanding		1,000,224		2.74		—		1.81		—
Vested		903,555		2.72		—		1.79		—
Nonvested		96,669		2.98		—		1.99		—
Period activity
Issued		30,000		2.00		—		1.11		—
Exercised		—		—		—		—		—
Forfeited		—		—		—		—		—
Expired		—		—		—		—		—
As of June 30, 2011
Outstanding		1,030,224		2.72		3.03		1.79		124,777
Vested		958,556		2.68		2.72		1.76		124,777
Nonvested		71,668		3.20		7.10		2.14		0

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Condensed Consolidated Financial Statements

6 Months Ended

Jun. 30, 2011

Condensed Consolidated Financial Statements

The condensed consolidated balance sheets as of June 30, 2011 and December 31, 2010, the condensed consolidated statements of operations for the three and six months ended June 30, 2011 and 2010 and the condensed consolidated statements of cash flows for the six months ended June 30, 2011 and 2010 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, 2010 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, 2010, as filed with the Securities and Exchange Commission. The results of operations for the three and six months ended June 30, 2011 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 six month periods ended June 30, 2011 and 2010, or which are expected to impact future periods, which were not previously disclosed in prior periods.

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Income Taxes

6 Months Ended

Jun. 30, 2011

Income Taxes

No income tax expense or benefit has been recorded for the three or six months ended June 30, 2011.

As of June 30, 2011 and December 31, 2010, the Company’s deferred tax assets totaled approximately $7,802, and are primarily composed of net operating loss carry forwards (NOLs).  These NOLs total $13,621 for federal and $19,374 for state purposes, with expirations starting in 2017 through 2028.

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 to not realize a portion of the benefit of its net deferred tax assets recorded at June 30, 2011. Accordingly, for the six months ended June 30, 2011, the Company has established a valuation allowance totaling approximately $2,154 for the portion of benefit of its federal and state deferred tax assets that more likely than not will not be realized. This represents a $1,834 increase to the valuation allowance of $320 the Company established at December 31, 2010 for the portion of benefit of its 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 June 30, 2011.

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Capitalized Software

6 Months Ended

Jun. 30, 2011

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 June 30, 2011, the Company’s amortization cost was approximately $250 and $500, respectively, compared with $58 and $117 for the same periods last year. Net capitalized software costs totaled $3,277 and $3,776 as of June 30, 2011 and December 31, 2010, respectively.

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Stockholders’ Equity

6 Months Ended

Jun. 30, 2011

Stockholders’ Equity

The changes in consolidated stockholders’ equity for the six months ended June 30, 2011 are as follows:

	Common Stock Shares		Common Stock Amount		Additional Paid-In Capital		Accumulated Deficit			Total
Balance at December 31, 2010		13,508,815	$	8,105	$	24,404	$	(4,119	)	$	28,390
Share-based compensation expense		—		—		91		—			91
Net loss		—		—		—		(1,543	)		(1,543	)
Balance at June 30, 2011		13,508,815	$	8,105	$	24,495	$	(5,662	)	$	26,938

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Statements of Cash Flows (Unaudited) (USD $)	6 Months Ended
	Jun. 30, 2011	Jun. 30, 2010
Operating activities
Net (loss) income	$ (1,543)	$ 340
Adjustments to reconcile net (loss) income to net cash (used in ) provided by operating activities:
Allowance for doubtful accounts	0	7
Inventories reserve	52	167
Deferred tax asset	0	201
Depreciation and amortization	704	317
Share-based compensation expense	91	180
Excess tax benefit from share-based payment arrangement	0	(20)
Changes in operating assets and liabilities:
Accounts receivable	1,372	629
Inventories	(1,102)	(1,932)
Prepaid expenses and other current assets	90	7
Other assets	23	39
Accounts payable	(826)	548
Accrued compensation and related taxes	38	(197)
Accrued warranty expense	20	147
Deferred revenue	192	0
Accrued other expenses and other current liabilities	(46)	123
Net cash (used in) provided by operating activities	(935)	556
Investing activities
Purchases of property, plant and equipment	(181)	(226)
Capitalized software	0	(788)
Net cash used in investing activities	(181)	(1,014)
Financing activities
Proceeds from issuance of common stock	0	79
Excess tax benefit from share-based payment arrangement	0	20
Net increase in revolving credit line	300	0
Cash provided by financing activities	300	99
Net change in cash and cash equivalents	(816)	359
Cash and cash equivalents, beginning of year	5,050	7,660
Cash and cash equivalents, end of year	4,234	7,301
Supplemental disclosure
Cash paid for interest	62	0
Cash paid for income taxes	$ 0	$ 11

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Allowance for Doubtful Accounts

6 Months Ended

Jun. 30, 2011

Allowance for Doubtful Accounts

The allowance for doubtful accounts on trade receivables was approximately $44 on gross trade receivables of $2,572 and $3,944 at June 30, 2011 and December 31, 2010, respectively. 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.

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Balance Sheets (Unaudited) (USD $)	Jun. 30, 2011	Dec. 31, 2010
ASSETS
Cash and cash equivalents	$ 4,234	$ 5,050
Trade accounts receivable (net of allowance for doubtful accounts of $44 at June 30, 2011 and at December 31, 2010, respectively)	2,528	3,900
Inventories, net	12,992	11,942
Deferred tax assets	2,165	2,165
Prepaid expenses and other current assets	613	703
Total current assets	22,532	23,760
Property, plant and equipment, net	1,333	1,357
Deferred tax assets, net	5,637	5,637
Capitalized software, net	3,277	3,776
Other assets	239	262
Total assets	33,018	34,792
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable	1,927	2,753
Accrued compensation and related taxes	833	795
Accrued warranty expense	286	266
Accrued other expenses and other current liabilities	156	202
Total current liabilities	3,202	4,016
Deferred revenue	578	386
Long-term debt	2,300	2,000
Total liabilities	6,080	6,402
Stockholders' equity:
Preferred stock; $1.00 par value; 1,000,000 authorized shares none issued or outstanding.	0	0
Common stock; $.60 par value; 20,000,000 authorized shares: 13,508,815 issued and outstanding shares at June 30, 2011 and December 31, 2010, respectively	8,105	8,105
Additional paid-in capital	24,495	24,404
Accumulated deficit	(5,662)	(4,119)
Total stockholders' equity	26,938	28,390
Total liabilities and stockholders' equity	$ 33,018	$ 34,792