|
Note 1.
|
Nature of Business and Significant Accounting Policies
|
Nature of business:
Winland Electronics, Inc. (“Winland” or the “Company”) provides a line of proprietary environmental monitoring products to the security industry. In most cases, these products are manufactured to protect against loss of assets due to damage from water, excess humidity, extremes of temperature and loss of power. These Winland branded and trademarked products accounted for 100% of the Company’s revenue in 2012 and 2011.
Discontinued Operations:
Included in discontinued operations is Winland’s Electronic Manufacturing Services (EMS) operation. The sale of the EMS operations to a third party was completed on January 1, 2011 pursuant to the terms of an Asset Purchase Agreement dated November 15, 2010 (the “APA”). The transaction involved the sale of 100% of Winland’s EMS assets and assumptions of certain liabilities under the APA. The Company’s shareholders approved the sale on December 29, 2010.
In September 2011, the Company made a formal decision to sell the Company’s land and building. Based on an expected sale date within one year, the Company as of December 31, 2011 classified the land and building as assets held for sale. The assets were not classified as non-current discontinued assets prior to the sale of the assets on December 31, 2012, as the Company received significant cash flows from the asset group until the sale date. As a result of the sale of the land and building on December 31, 2012, the Company determined it would not have any significant continuing involvement in the operations of the asset group after the disposal date and, therefore, reclassified for all periods presented the operations and the gain on sale of the land and building as discontinued operations.
These transactions met the requirements of ASC 205-20 “Discontinued Operations” as being held for sale as December 31, 2012. Accordingly, the Company has restated the previously reported financial results to report the net results as a separate line in the statements of operations as “Loss from discontinued operations, net of tax” for all periods presented, and the respective assets and liabilities on the balance sheets have been separately classified as “Assets/Liabilities of discontinued operations”. In accordance with ASC 205-20-S99-3 “Allocation of Interest to Discontinued Operations”, the Company elected to not allocate interest expense to the discontinued operations where the debt is not directly attributed to or related to the discontinued operations. Notes to the financial statements have been revised to reflect only the results of continuing operations (see Note 7).
A summary of Winland’s significant accounting policies follow:
Use of estimates:
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and related disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include allowances for obsolete inventories, rework and warranties, valuation of long-lived assets and doubtful accounts. Winland cannot assure that actual results will not differ from those estimates.
Revenue Recognition:
Revenue is recognized from the sale of products and out of warranty repairs when the product is delivered to a common carrier for shipment and title transfers.
Shipping and handling charges billed to customers are included in net sales, and shipping and handling costs incurred by the Company are included in cost of sales. For all sales, Winland has a binding purchase order from the customer. Winland does not generally accept returns but does provide a limited warranty as outlined below under Allowance for Rework and Warranty Costs. Sales and use taxes are reported on a net basis, excluding them from sales and cost of sales.
Rental revenue included rents that our tenant paid in accordance with the terms of its lease reported on a straight-line basis over the non-cancellable term of the lease. The lease provided for tenant occupancy during periods where no rent was due or where minimum rent payments changed during the term of the lease. Deferred rent in the accompanying balance sheet included the cumulative difference between rental revenue as recorded on a straight-line basis and rents received from the tenant in accordance with the lease terms.
Cash and cash equivalents:
Cash and cash equivalents include money market mutual funds and other highly liquid investments defined as maturities of three months or less from date of purchase. Winland maintains its cash in bank deposit accounts which, at times, may exceed federally insured limits. Winland has not experienced any losses in such accounts.
|
Note 1.
|
Nature of Business and Significant Accounting Policies (Continued)
|
Allowance for Doubtful Accounts:
The Company generally requires no collateral from its customer with respect to trade accounts receivable. Invoices are generally due 30 days after presentation. Accounts receivable over 30 days are considered past due. No interest is charged on past due accounts. Winland evaluates its allowance for uncollectible accounts on a quarterly basis and reviews any significant customers with delinquent balances to determine future collectability. Winland bases its determinations on legal issues, past history, current financial and credit agency reports, and experience. Winland reserves for accounts deemed to be uncollectible in the quarter in which the determination is made. Management believes these values are estimates and may differ from actual results. Winland believes that, based on past history and credit policies, the net accounts receivable are of good quality. The Company writes off accounts receivable when they are deemed uncollectible and records recoveries of trade receivables previously written off when collected. The Allowance for Doubtful Accounts was $7 at both December 31, 2012 and 2011.
Inventory Valuation:
Raw component and finished goods inventories are stated at the lower of cost, using the first-in, first-out (FIFO) method, or market value. Winland estimates excess, slow moving and obsolete reserves for inventory on a quarterly basis based upon order demand and production requirements for its major customers and annual reviews for other customers. Management’s estimated reserve for slow moving and obsolete finished goods inventories was $24 and $30 as of December 31, 2012 and 2011, respectively.
Depreciation:
Depreciation is computed using the straight-line method based on the estimated useful lives of the various assets, as follows:
|
|
|
Years
|
|
|
Machinery and equipment
|
|
|
5 – 7
|
|
|
Data processing equipment
|
|
|
3 – 7
|
|
|
Office furniture and equipment
|
|
|
3 – 7
|
|
Long-lived assets:
Considerable management judgment is necessary in estimating future cash flows and other factors affecting the valuation of long-lived assets including the operating and macroeconomic factors that may affect them. The Company uses historical financial information, internal plans and projections and industry information in making such estimates. While the Company currently believes the expected cash flows from these long-lived assets exceeds the carrying amount, materially different assumptions regarding future performance and discount rates could result in future impairment losses. Such impairment would adversely affect earnings. No impairment losses were recognized in 2012 or 2011.
Allowance for Rework and Warranty Costs:
Winland provides a limited warranty for its Proprietary Products for a period of one year, which requires Winland to repair or replace defective product at no cost to the customer or refund the purchase price. Reserves are established based on historical experience and analysis for specific known and potential warranty issues. The reserve reflecting historical experience and potential warranty issues is determined based on experience factors including rate of return by item, average weeks outstanding from production to return, average cost of repair and relation of repair cost to original sales price. Any specific known warranty issues are considered individually. These are analyzed to determine the probability and the amount of financial exposure, and a specific reserve is established. The allowance for rework and warranty costs was $15 and $13 as of December 31, 2012 and 2011, respectively. The product warranty liability reflects management’s best estimate of probable liability under Winland’s product warranties and may differ from actual results.
Changes in Winland’s warranty liability, which is included in other accrued liabilities on the balance sheets, are approximately as follows:
|
|
|
For the Years Ended December 31,
|
|
|
($ in thousands)
|
|
2012
|
|
|
2011
|
|
|
Balance, Beginning
|
|
$
|
13
|
|
|
$
|
11
|
|
|
Accruals for products sold
|
|
|
20
|
|
|
|
7
|
|
|
Expensing of specific warranty items
|
|
|
(15
|
)
|
|
|
(3
|
)
|
|
Change in estimate
|
|
|
(3
|
)
|
|
|
(2
|
)
|
|
Balance, Ending
|
|
$
|
15
|
|
|
$
|
13
|
|
|
Note 1.
|
Nature of Business and Significant Accounting Policies (Continued)
|
Income taxes:
Income taxes are accounted for in accordance with FASB ASC Topic 740 Income Taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
In assessing the realizability of deferred income tax assets, Winland considers whether it is "more likely than not," according to the criteria that some portion or all of the deferred income tax assets will be realized. The ultimate realization of deferred income tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.
Per FASB ASC 740-10-25-5 Winland recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more likely than not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority.
Fair value of financial instruments:
The carrying values of cash and cash equivalents, accounts receivable and accounts payable approximate their fair value due to the short-term nature of these instruments.
Income (loss) per common share:
Basic income (loss) per common share is computed by dividing the net income (loss) by the weighted-average number of common shares outstanding during the period. Diluted income (loss) per common share is computed by dividing the net income (loss) by the weighted-average number of common shares outstanding during the period, including potentially dilutive shares such as the options and warrants to purchase shares of common stock at various amounts per share (see Note 6).
For years ended December 31, 2012 and 2011, the diluted loss per share was the same as basic loss per share since the effects of options and warrants would have been anti-dilutive. The diluted share calculation excluded 471,000 and 190,000 shares for the years ended December 31, 2012 and 2011, respectively, as inclusion of these shares would have been anti-dilutive.
Employee stock based compensation plans:
At December 31, 2012, Winland had stock-based compensation plans, which are described more fully in Note 6. Winland accounts for these plans under FASB ASC Topic 718, Stock Compensation.
Advertising expense:
Advertising is expensed as incurred and was $14 and $40 for the years ended December 31, 2012 and 2011, respectively.
Research and Development Expense:
The Company expenses research and development costs as incurred. Research and development expenses of $285 and $237 were charged to operations during the years ended December 31, 2012 and 2011, respectively.
Subsequent events:
The Company evaluates events occurring after the date of the financial statements for events requiring recording or disclosure in the financial statements. See Note 13 for more information regarding subsequent events.
The components of inventories at December 31, 2012 and 2011 were as follows:
|
|
|
December 31
|
|
|
|
|
2012
|
|
|
2011
|
|
|
Raw materials
|
|
$
|
114
|
|
|
$
|
14
|
|
|
Finished goods
|
|
|
770
|
|
|
|
553
|
|
|
Total, net
|
|
$
|
884
|
|
|
$
|
567
|
|
|
Note 3.
|
Financing Arrangement and Long-Term Debt
|
Effective January 3, 2011, Winland and TCI Business Capital, Inc. (“TCI”), entered into a Factoring, Security and Service Agreement (the “Agreement”). The Agreement allowed TCI to purchase from the Company certain eligible accounts receivable based on TCI’s sole and absolute discretion and was terminated by mutual agreement between the Company and TCI in April 2011 for a fee of $5.
On January 1, 2011, Winland had an Accounts Receivable Agreement with PrinSource Capital Companies, LLC (“PrinSource”). The agreement was terminated on January 3, 2011 with Winland paying $3 to PrinSource for factoring of accounts receivable for the year ended December 31, 2011.
In December 2011, the Company paid the outstanding balance satisfying the mortgage note payable with US Bank National Association.
During 1994, Winland and the city of Mankato entered into a tax increment financing agreement for the construction of its operating facility. In connection with this agreement, the city donated land improvements to Winland with a fair value of $270. The fair value of land improvements donated was accounted for as deferred revenue and is being amortized over 39 years, which is the life of the building. On December 31, 2012, deferred revenue remaining of $106 was recognized as income due to the sale of the manufacturing facility and is included in income from discontinued operations on the Statement of Operations for the year ended December 31, 2012.
Components of income tax expense are as follows:
|
|
|
Year Ended December 31
|
|
|
|
|
2012
|
|
|
2011
|
|
|
Current expense
|
|
$
|
-
|
|
|
$
|
(9
|
)
|
|
Deferred benefit
|
|
|
-
|
|
|
|
-
|
|
|
|
|
$
|
-
|
|
|
$
|
(9
|
)
|
The statutory income tax rate reconciliation for continuing operations to the effective rate is as follows:
|
|
|
December 31
|
|
|
|
|
2012
|
|
|
2011
|
|
|
Statutory U.S. income tax rate
|
|
|
34
|
%
|
|
|
(34
|
)%
|
|
State benefit (tax), net of federal tax effect
|
|
|
4
|
|
|
|
(3
|
)
|
|
Change in valuation allowance
|
|
|
(40
|
)
|
|
|
39
|
|
|
Other, including permanent differences
|
|
|
2
|
|
|
|
(1
|
)
|
|
Effective income tax benefit rate
|
|
|
-
|
%
|
|
|
1
|
%
|
|
Note 5.
|
Income Taxes (Continued)
|
Deferred tax assets (liabilities) consist of the following components as of:
|
|
|
December 31
|
|
|
|
|
2012
|
|
|
2011
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
Inventory
|
|
$
|
23
|
|
|
$
|
22
|
|
|
Allowance for doubtful accounts
|
|
|
2
|
|
|
|
2
|
|
|
Non-qualified stock options
|
|
|
89
|
|
|
|
89
|
|
|
Accrued expenses
|
|
|
3
|
|
|
|
8
|
|
|
Research credit carryover
|
|
|
8
|
|
|
|
8
|
|
|
Net operating loss carryforward
|
|
|
1,733
|
|
|
|
1,773
|
|
|
Other
|
|
|
23
|
|
|
|
23
|
|
|
Valuation allowance
|
|
|
(1,853
|
)
|
|
|
(1,889
|
)
|
|
|
|
|
28
|
|
|
|
36
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
|
(9
|
)
|
|
|
(25
|
)
|
|
Prepaid expenses
|
|
|
(19
|
)
|
|
|
(11
|
)
|
|
|
|
|
(28
|
)
|
|
|
(36
|
)
|
|
Net deferred tax assets
|
|
$
|
-
|
|
|
$
|
-
|
|
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Winland records a tax valuation allowance when it is more likely than not that it will not be able to recover the value of its deferred tax assets. The valuation allowance for deferred tax assets as of December 31, 2012 and 2011 was $1,853 and $1,889 respectively. The net change in the total valuation allowance for the years ended December 31, 2012 and 2011 was an increase (decrease) of ($36) and $296, respectively. The tax effect of the Company’s valuation allowance for deferred tax assets is included in the annual effective tax rate. As of December 31, 2012 and 2011, the Company calculated its estimated annualized effective tax benefit rate at 0% and -1.2%, respectively. The Company recognized an income tax expense of $0 (net of the valuation allowance) based on its $634 pre-tax loss from continuing operations for year ended 2012 compared to an income tax benefit of $9 (net of the valuation allowance) based on its $1,051,000 pre-tax loss from continuing operations for year ended 2011.
Winland recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority.
The Company files income tax returns in the U.S. federal and state jurisdictions and during 2011 settled an examination by the State of Minnesota for its 2003 through 2006 tax years. The Company recognized a $301 reduction in income tax expense as of December 31, 2007 for credits filed with the Internal Revenue Service and the State of Minnesota for tax years 2003 through 2007, net of $129 reserve for FASB ASC 740, Income Taxes. The Company reached a settlement with the Internal Revenue Service during 2010 which resulted in a reduction of $200 to the unrecognized tax benefit balance.
The Company reached a settlement with the Minnesota Department of Revenue during 2011 which resulted in a reduction of $68 to the unrecognized tax benefit balance. The years 2009 through 2012 remain open for examination by other agencies.
A reconciliation of the unrecognized tax benefit is as follows:
|
|
|
2012
|
|
|
2011
|
|
|
Beginning Balance
|
|
$
|
-
|
|
|
$
|
68
|
|
|
Additions for tax positions taken for open tax years
|
|
|
-
|
|
|
|
-
|
|
|
Deductions for tax positions closed
|
|
|
-
|
|
|
|
(68
|
)
|
|
Ending Balance
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Note 5.
|
Income Taxes (Continued)
|
The Company recognizes interest accrued on unrecognized tax benefits as well as interest received from favorable tax settlements within interest expense. The Company recognizes penalties accrued on unrecognized tax benefits within general and administrative expenses. As of December 31, 2012 and 2011, the Company recognized no interest or penalties related to uncertain tax positions due to their insignificance to its financial position and results of operations.
At December 31, 2012, the Company had net operating loss carryforwards for federal purposes of $4,268 and $4,367 for state income tax purposes that are available to offset future taxable income and begin to expire in the year 2022. At December 31, 2012, the Company had Minnesota research and development tax credit carryforwards of $12, which begin to expire in the year 2022.
The Company does not anticipate that the total amount of unrecognized tax benefits will change significantly in the next twelve months.
|
Note 6.
|
Warrants and Stock-Based Compensation Plans
|
Warrants:
The Company has warrants outstanding to purchase 2,500 shares of common stock at a weighted average exercise price of $4.01 per share. These warrants were granted prior to 2007 and expire on February 16, 2016.
Employee stock purchase plan:
The 1997 Employee Stock Purchase Plan (ESPP) has provided Winland employees the opportunity to purchase common stock through payroll deductions. The purchase price is set at the lower of 85% of the fair market value of common stock at the beginning of the participation period or 85% of the fair market value on the purchase date. The participation periods have a 6-month duration beginning in January and July of each year. A total of 300,000 shares of common stock were authorized for issuance under the ESPP of which 136,880 have been issued. No shares were issued for the years ended December 31, 2012 and 2011, respectively.
Stock option plans:
On January 25, 2013, Winland’s Board of Directors approved the 2013 Equity Incentive Plan from which 250,000 stock-based compensation awards can be granted to eligible employees, officers or directors and was the only equity-based compensation plan available. On February 28, 2013, Winland’s Board of Directors approved an amendment to the 2013 Equity Incentive Plan increasing the plan to 350,000 stock-based compensation awards available to grant. The plan is subject to approval by the Company’s shareholders. Previous to this plan, stock-based compensation awards were granted from the 2008 and 2005 Equity Incentive Plans. The plans are as follows:
2013 Equity Incentive Plan – This plan provides up to 350,000 awards in the form of incentive stock options, nonqualified stock options, and restricted stock. As of January 25, 2013, this is the only plan under which awards are authorized for grant. Awards issued under the plan as of March 15, 2013 include 185,000 shares of incentive stock options outstanding and which are unvested. The exercise price is equal to the fair market value of Winland’s common stock at the date of grant. Options generally vest over five years and have a contractual life up to 10 years. Option awards provide for accelerated vesting if substantially all of Winland’s assets are transferred through an acquisition, merger, reorganization or other similar change of control transaction. The Company issues new shares upon the exercise of options. This plan is subject to shareholder approval.
On January 28, 2013, the Company issued 50,000 incentive stock options to Brian D. Lawrence, the Company’s Chief Financial Officer and Senior Vice President pursuant to the 2008 Equity Incentive Plan. These options had weighted average grant date fair value of $0.38 with annual vesting of twenty five percent (25%) over the next succeeding four years. Also on January 28, 2013, the Company issued 185,000 incentive stock options to David A. Gagne, the Company’s Chief Executive Officer pursuant to the 2013 Equity Incentive Plan. These options had an estimated grant date fair value of $0.38 with annual vesting of twenty five percent (25%) over the next succeeding four years.
2008 Equity Incentive Plan – This plan provided awards in the form of incentive stock options, nonqualified stock options, and restricted stock. As of December 31, 2012, this was the only plan under which awards were authorized for grant. As amended by the shareholders in May 2009, up to 500,000 shares are authorized for issuance under the plan. Awards issued under the plan as of December 31, 2012 include 185,000 shares of incentive stock options outstanding and which are un-vested and 256,000 nonqualified stock options which were outstanding and which were vested. This plan was terminated as to future grants in January 2013.
|
Note 6.
|
Warrants and Stock-Based Compensation Plans (Continued)
|
The exercise price is equal to the fair market value of Winland’s common stock at the date of grant. Options generally vest over five years and have a contractual life up to 10 years. Option awards provide for accelerated vesting if substantially all of Winland’s assets are transferred through an acquisition, merger, reorganization or other similar change of control transaction. The Company issues new shares upon the exercise of options.
2005 Equity Incentive Plan – This plan provided grants in the form of incentive stock options, nonqualified stock options, and restricted stock. This plan was terminated as to future grants in May 2008. As of December 31, 2012, there were 27,500 options outstanding under this plan of which 27,500 are vested.
Winland uses the Black-Scholes option pricing model to estimate the fair value of stock-based awards with the following weighted-average assumptions for the indicated periods.
|
|
|
December 31
|
|
|
|
|
2012
|
|
|
2011
|
|
|
Expected life, in years
|
|
|
4
|
|
|
|
5
|
|
|
Expected volatility
|
|
|
79.1
|
%
|
|
|
80.3
|
%
|
|
Risk-free interest rate
|
|
|
0.4
|
%
|
|
|
1.8
|
%
|
|
Dividend yield
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Winland calculates the expected life of awards using historical data to estimate option exercises and employee terminations. Expected volatility is based on daily historical fluctuations of Winland’s common stock using the closing market value for the number of days of the expected term immediately preceding the grant. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of the grant for a bond with a similar term. The dividend yield is based on the expectation that Winland will not pay dividends.
Winland receives a tax deduction for certain stock option exercises and disqualifying stock dispositions during the period the options are exercised or the stock is sold, generally for the excess of the price at which the shares are sold over the exercise prices of the options. In accordance with FASB ASC 718-10-50-1, Winland revised its presentation in the Statements of Cash Flows to report any tax benefit from the exercise of stock options as financing cash flows. For the years ended December 31, 2012 and 2011, there were no such stock option exercises and disqualifying stock dispositions. Net cash proceeds from the exercise of stock options were $0 and $2 for the years ended December 31, 2012 and 2011, respectively.
In January 2011, 54,000 stock options were cancelled due to the termination of certain employees related to the sale of the EMS assets, with a weighted average exercise price of $1.24.
|
Note 6.
|
Warrants and Stock-Based Compensation Plans (Continued)
|
The following table represents stock option activity for the years ended December 31, 2012 and 2011:
|
|
|
Number of
Shares
|
|
|
Weighted Average Exercise
Price
|
|
|
Weighted Average Remaining Contract Life
|
|
|
Aggregate Intrinsic
Value
|
|
|
Outstanding options at January 1, 2011
|
|
|
285,600
|
|
|
$
|
2.31
|
|
|
|
|
|
|
|
|
Granted
|
|
|
70,000
|
|
|
|
0.70
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(2,400
|
)
|
|
|
0.70
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(165,700
|
)
|
|
|
2.44
|
|
|
|
|
|
|
|
|
Outstanding options at December 31, 2011
|
|
|
187,500
|
|
|
$
|
1.62
|
|
|
|
6.9
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2011
|
|
|
187,500
|
|
|
$
|
1.62
|
|
|
|
6.9
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding options at January 1, 2012
|
|
|
187,500
|
|
|
$
|
1.62
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
305,000
|
|
|
|
0.72
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(24,000
|
)
|
|
|
3.62
|
|
|
|
|
|
|
|
|
|
|
Outstanding options at December 31, 2012
|
|
|
468,500
|
|
|
$
|
0.93
|
|
|
|
8.2
|
|
|
$
|
42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2012
|
|
|
283,500
|
|
|
$
|
0.99
|
|
|
|
7.1
|
|
|
$
|
42
|
|
The aggregate intrinsic value of options outstanding and options exercisable is based upon the Company’s closing stock price on the last trading day of the fiscal year for the in-the-money options.
The weighted average fair value of stock options granted with an exercise price equal to the deemed stock price on the date of grant during 2012 and 2011 was $0.41 and $0.44, respectively.
The total fair value of shares vested during the years ended December 31, 2012 and 2011 was $38 and $44, respectively.
The following table summarizes information about stock options outstanding at December 31, 2012:
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
Range of
Exercise Prices
|
|
|
Number of
Shares
|
|
|
Weighted-Average
Remaining Contractual
Life (Years)
|
|
|
Weighted-Average Exercise Price
|
|
|
Number of
Shares
|
|
|
Weighted-Average Exercise Price
|
|
|
$
|
0.448 - $0.896
|
|
|
|
419,000
|
|
|
|
8.6
|
|
|
$
|
0.72
|
|
|
|
234,000
|
|
|
$
|
0.63
|
|
|
$
|
0.896 - $1.792
|
|
|
|
22,000
|
|
|
|
5.3
|
|
|
|
1.74
|
|
|
|
22,000
|
|
|
|
1.74
|
|
|
$
|
1.792 - $2.240
|
|
|
|
5,500
|
|
|
|
5.0
|
|
|
|
2.23
|
|
|
|
5,500
|
|
|
|
2.23
|
|
|
$
|
2.240 - $3.584
|
|
|
|
11,000
|
|
|
|
4.4
|
|
|
|
3.27
|
|
|
|
11,000
|
|
|
|
3.27
|
|
|
$
|
3.584 - $4.480
|
|
|
|
11,000
|
|
|
|
2.9
|
|
|
|
4.30
|
|
|
|
11,000
|
|
|
|
4.30
|
|
|
|
|
|
|
|
468,500
|
|
|
|
8.2
|
|
|
$
|
0.93
|
|
|
|
283,500
|
|
|
$
|
0.99
|
|
At December 31, 2012, there was $86 unrecognized compensation cost, adjusted for estimated forfeitures, related to share-based payments which is expected to be recognized over a weighted-average period of 2.5 years and will be adjusted for any future changes in estimated forfeitures.
|
Note 7.
|
Discontinued Operations
|
On November 15, 2010, Winland entered into an Asset Purchase Agreement with Nortech Systems, Incorporated (“Nortech”). Pursuant to the terms of the Asset Purchase Agreement, Winland sold to Nortech the Company’s EMS business segment, which consisted of the design and manufacture of printed circuit board assemblies and higher level products sold mainly to original equipment manufacturer customers. The sale of the EMS segment to Nortech was completed on January 1, 2011 pursuant to the terms of the Asset Purchase Agreement and approved by the Company’s shareholders on December 29, 2010 (the “Asset Sale”).
Aggregate consideration for the Asset Sale consisted of the following: (i) $1,542 in cash, of which $1,042 was paid at closing, $250 was paid on July 1, 2011 and $250 was paid on October 1, 2011, (ii) inventory consumption of $2,906 against the obligation of at least $2,200, and (ii) the assumption of $2,073 of liabilities of the EMS business segment. The terms of the Asset Purchase Agreement and the amount of the consideration for the Asset Sale were negotiated by the Company and Nortech on an arms-length basis. The Asset Sale, net of transaction costs, resulted in a gain of approximately $59 during year ended December 31, 2011.
|
Cash consideration
|
|
$
|
1,542
|
|
|
Total liabilities to be assumed
|
|
|
2,073
|
|
|
Subtotal
|
|
|
3,615
|
|
|
Less: Transaction costs
|
|
|
(496
|
)
|
|
Net proceeds
|
|
|
3,119
|
|
|
|
|
|
|
|
|
Total assets to be assumed
|
|
|
(3,133
|
)
|
|
Reduction of reserve for inventory obsolescence
|
|
|
73
|
|
|
Net gain on assets sold
|
|
$
|
59
|
|
Additionally, in connection with the Asset Sale, the Company entered into (i) a manufacturing agreement with Nortech, whereby Nortech manufactures certain products for the Company related to the production of the Company’s proprietary monitoring devices, (ii) a lease agreement whereby the Company leased to Nortech, for six years, its office and manufacturing facility and improvements located at 1950 Excel Drive, Mankato Minnesota, 56001, and (iii) a sublease agreement with Nortech whereby Nortech subleased to the Company 1,000 square feet of the building that the Company leased to Nortech pursuant to the lease agreement, and (iv) non-compete agreements with the Company and certain key employees for a period of two-years.
Winland and Nortech entered into a manufacturing agreement effective January 1, 2011 pursuant to which Nortech manufactured certain products for Winland through July 1, 2011. The agreed upon transfer price for products manufactured was Winland’s current standard manufacturing costs at time of sale plus a five percent (5%) mark-up during the six months after the date of the agreement, seven percent (7%) during the seventh through ninth months after the date of the agreement and ten percent (10%) during the tenth through the twelfth months after the date of the agreement. On December 27, 2011, Winland and Nortech entered into a new Manufacturing Agreement replacing the prior manufacturing agreement.
The new Manufacturing Agreement provides Nortech exclusive rights to manufacture Winland’s finished goods requirements relating to specified products at a mutually agreed upon price. The new Manufacturing Agreement will expire on December 31, 2013.
On January 1, 2011, Nortech entered into a commercial building lease (the “Lease”) with the Company to lease the entire office and manufacturing facility located at 1950 Excel Drive, Mankato, MN from the Company. The term of the Lease was scheduled to terminate on January 1, 2017 with Nortech required to pay rent of $5.25 per square foot ($305 annually) commencing on January 1, 2012. The Lease provided for a 2.5% increase on the third anniversary and requires Nortech to pay all operating costs including real estate taxes. Nortech also had the right of first refusal upon sale of the property as defined in the Lease. The lease terminated on December 31, 2012 with the sale of the building as noted below.
In September 2011, the Company made a formal decision to sell the Company’s land and building. Based on an expected sale date within one year, the Company as of December 31, 2011 classified the land and building as assets held for sale.
|
Note 7.
|
Discontinued Operations (Continued)
|
On November 27, 2012, Winland executed a Purchase Agreement (“Agreement”) with Nortech Systems, Inc. (“Nortech”) to sell the above mentioned facility and land. The agreed upon purchase price was $2,650,000. Winland and Nortech executed the closing documents on December 31, 2012 with the funds placed in to escrow with North American Title Company. Winland received the funds on January 8, 2013. The building and land had a carrying cost of $2,135,000, resulting in a gain of $506,000, after deducting expenses related to the sale of $9,000. Rental revenue for the year ended December 31, 2012, was $261,000, reduced by $218,000 for the reversal of unamortized rental revenue recognized on the straight-line basis in 2011. For the year ended December 31, 2012, the Company also recognized income of $106,000 related to the remaining unamortized deferred revenue associated with the tax increment financing associated with the facility.
The assets were not classified as non-current discontinued assets prior to the sale of the assets on December 31, 2012, as the Company received significant cash flows from the asset group until the sale date. As a result of the sale of the land and building on December 31, 2012, the Company determined it would not have any significant continuing involvement in the operations of the asset group after the disposal date and, therefore, reclassified for all periods presented the operations and the gain on sale of the land and building as discontinued operations.
.
In connection with the Company’s sale of its office and manufacturing facility and improvements to Nortech, the Company entered into a month-to-month lease agreement with Nortech for the lease of 1,900 square feet of office space at $5.25 per square foot.
|
|
|
Year ended December 31,
|
|
|
(in thousands)
|
|
2012
|
|
|
2011
|
|
|
Net sales
|
|
$
|
-
|
|
|
$
|
2,906
|
|
|
Gross profit (loss)
|
|
|
-
|
|
|
|
-
|
|
|
Income from discontinued operations (1)
|
|
|
655
|
|
|
|
320
|
|
(1) 2012 includes gain on sale of land and building of $506
There was no income tax expense or benefit from discontinued operations for either year ended December 31, 2012 or 2011.
|
Note 8.
|
Commitments and Contingencies
|
Operating leases:
On January 1, 2013, the Company entered in to a twelve month lease for office space at 601 Carlson Parkway, Suite 1050, Minnetonka, MN which is used for the Company’s sales and marketing, product management and executive staff. Minimum lease payment obligations for this lease for the year ending December 31, 2013 are $36.
|
Note 9.
|
Employee Benefit Plans
|
Pension plan:
Winland had a qualified defined contribution 401(k) profit-sharing plan for its employees who met certain age and service requirements. Employees were allowed to make contributions of up to 15% of their eligible compensation. The plan also provided for a Company-sponsored match as determined by the Board of Directors. Winland made no contributions to the plan for the year ended December 31, 2010. Effective December 31, 2010, Winland froze the plan with all contributions ceasing as of that date. The plan was terminated with all account balances being distributed during the year ended December 31, 2011.
Health Savings Account:
Winland has a health savings account plan for its employees who meet certain service requirements. The plan provides for Winland to make contributions equal to one-half the deductible limit elected by the employee. The employee may also make contributions equal to one-half the deductible limit elected. Winland makes contributions to the plan on a quarterly basis on the first day of each quarter. The contributions cannot be refunded to Winland if the employee’s employment with Winland is terminated voluntarily or involuntarily. Winland contributed approximately $13 and $14 to the plan for the years ended December 31, 2012 and 2011, respectively.
Winland has a customer which accounted for more than 10 percent of net sales for the years ended December 31, 2012 and 2011, as follows:
|
|
|
2012
|
|
|
2011
|
|
|
Sales percentage:
|
|
|
|
|
|
|
|
Customer A
|
|
|
52
|
%
|
|
|
50
|
%
|
|
Accounts receivable percentage at December 31:
|
|
|
|
|
|
|
|
|
|
Customer A
|
|
|
56
|
%
|
|
|
49
|
%
|
|
Note 11.
|
Shareholder Rights Plan
|
On December 9, 2003, Winland’s Board of Directors adopted a Shareholder Rights Plan. Under the plan, rights were constructively distributed as a dividend at the rate of one right for each share of common stock of Winland held by the shareholders of record as of the close of business on December 31, 2003. Each right entitles its holder to purchase one-hundredth of a share of Series A Junior Participating Preferred Stock at an exercise price of $36. The rights will only be exercisable if a person or group acquires, has the right to acquire, or has commenced a tender offer for 15 percent or more of Winland’s outstanding common stock.
The rights are nonvoting, pay no dividends, expire, unless extended, on December 9, 2013, and may be redeemed by Winland for $0.001 per right at any time before the 15th day (subject to adjustment) after a 15 percent position is acquired. The rights have no effect on earnings per share until they become exercisable.
After the rights are exercisable, if Winland is acquired in a merger or other business combination, or if 50% or more of Winland’s assets are sold, each right will entitle its holder (other than the acquiring person or group) to purchase, at the then current exercise price, common stock of the acquiring entity having a value of twice the exercise price. In connection with the adoption of the Shareholder Rights Plan, the Board of Directors has designated 60,000 shares of previously undesignated stock as Series A Junior Participating Preferred Stock. The shares have a par value of $0.01 per share and a liquidation value equal to the greater of $100 or 100 times the aggregate amount to be distributed per share to holders of common stock. Shares of Series A Junior Participating Preferred Stock are not convertible into shares of Winland’s common stock. Each share of Series A Junior Participating Preferred Stock will be entitled to a minimum preferential quarterly dividend payment equal to the greater of $1 per share or an aggregate dividend of 100 times the dividend declared per share of common stock.
Each share of Series A Junior Participating Preferred Stock has 100 votes. In the event of any merger, consolidation or other transaction in which common stock is exchanged; each share of Series A Junior Participating Preferred Stock will be entitled to receive 100 times the amount received per share of common stock. There are no shares of Series A Junior Participating Preferred Stock outstanding.
|
Note 12 .
|
Severance Expense
|
On January 1, 2011, the Company agreed to terminate the employment relationships of its then Chief Executive Officer and Chief Financial Officer. Pursuant to the separation agreements, the Company agreed to pay salaries due to the former executives totaling $358,000. The agreements call for the amounts to be paid at regular payroll intervals over the term of the agreement. The accrual for severance was included in Accrued Liabilities: Compensation on the balance sheet at December 31, 2011.
The following table provides financial information on the employee severance expense payable at December 31, 2012 and 2011.
|
|
|
December 31, 2010
|
|
|
Net Additions
|
|
|
Payments
|
|
|
December 31, 2011
|
|
|
Employee Severance Expense
|
|
$
|
313
|
|
|
$
|
-
|
|
|
$
|
(270
|
)
|
|
$
|
43
|
|
|
|
|
December 31, 2011
|
|
|
Net Additions
|
|
|
Payments
|
|
|
December 31, 2012
|
|
|
Employee Severance Expense
|
|
$
|
43
|
|
|
$
|
-
|
|
|
$
|
(43
|
)
|
|
$
|
-
|
|
|
Note 12.
|
Severance Expense (Continued)
|
As part of the Company’s employment agreements with certain executive employees, if such employees are terminated without cause, severance payments may be due to such employees.
|
Note 13.
|
Subsequent Events
|
On April 11, 2012 the Company received a notice from NYSE Amex LLC indicating that it was not in compliance with the continued listing requirements due to: the Company having stockholders’ equity of less than $4,000,000 and losses from continuing operations and/or net losses in three of its four most recent fiscal years, as set forth in Section 1003(a)(ii) of the NYSE Amex Exchange’s Corporate Guide; and stockholders’ equity of less than $6,000,000 and losses from continuing operations and/or net losses in the Company’s five most recent fiscal years ended December 31, 2011, as set forth in Section 1003(a)(iii) of the NYSE Amex Exchange’s Company Guide.
Despite the Company’s diligent efforts to meet the requirements of the NYSE Amex Exchange, On March 6, 2013 it was informed by the NYSE Amex Exchange that the Company’s common stock would be delisted. The Company’s common stock was immediately eligible for quotation on the OTC Bulletin Board and began trading on the OTC Bulletin Board as of the open of business on March 21, 2013. The OTC Bulletin Board symbol of the Company’s common stock is WELX.