pcti-10q_20170930.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

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

For the quarterly period ended September 30, 2017

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 000-27115

 

PCTEL, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

 

Delaware

 

77-0364943

(State or Other Jurisdiction of

 

(I.R.S. Employer

Incorporation or Organization)

 

Identification Number)

 

 

 

471 Brighton Drive,

 

 

Bloomingdale, IL

 

60108

(Address of Principal Executive Office)

 

(Zip Code)

(630) 372-6800

(Registrant's Telephone Number, Including Area Code)

 

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     No   

Indicate by check mark whether the registrant has submitted electronically and on its corporate Web site, if any, every Interactive Date 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, a smaller reporting company, or an emerging growth company.  See definition of “large accelerated filer,” "accelerated filer,” “smaller reporting company," and “emerging growth company” in Rule 12b-2 of the Exchange Act:

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

(do not check if a smaller reporting company)

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes     No   

Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date.

 

Title

 

Outstanding

 

 

 

Common Stock, par value $.001 per share

 

17,727,497 as of November 9, 2017

 

 

 

 


PCTEL, INC.

Form 10-Q

For the Quarterly Period Ended September 30, 2017

TABLE OF CONTENTS

 

PART I

 

FINANCIAL INFORMATION

 

Page

Item 1

 

Financial Statements (unaudited)

 

3

 

 

Condensed Consolidated Balance Sheets

 

3

 

 

Condensed Consolidated Statements of Operations

 

4

 

 

Condensed Consolidated Statements of Comprehensive Income (Loss)

 

5

 

 

Condensed Consolidated Statement of Stockholders' Equity

 

6

 

 

Condensed Consolidated Statements of Cash Flows

 

7

 

 

Notes to the Condensed Consolidated Financial Statements

 

8

Item 2

 

Management's Discussion and Analysis of Financial Condition and Results of Operations

 

29

Item 3

 

Quantitative and Qualitative Disclosures about Market Risk

 

37

Item 4

 

Controls and Procedures

 

37

 

 

 

 

 

PART II

 

OTHER INFORMATION

 

38

Item 1

 

Legal Proceedings

 

38

Item 1A

 

Risk Factors

 

38

Item 2

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

38

Item 3

 

Defaults Upon Senior Securities

 

38

Item 4

 

Mine Safety Disclosures

 

38

Item 5

 

Other Information

 

38

Item 6

 

Exhibits

 

38

Signatures

 

 

 

39

 

 

2


PART I – FINANCIAL INFORMATION

Item 1: Financial Statements (unaudited)

PCTEL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

 

 

 

(unaudited)

 

 

 

 

 

 

 

September 30,

 

 

December 31,

 

 

 

2017

 

 

2016

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

6,527

 

 

$

14,855

 

Short-term investment securities

 

 

29,979

 

 

 

18,456

 

Accounts receivable, net of allowance for doubtful accounts of $302 and $273 at

   September 30, 2017 and December 31, 2016, respectively

 

 

18,530

 

 

 

19,101

 

Inventories, net

 

 

12,828

 

 

 

14,442

 

Prepaid expenses and other assets

 

 

966

 

 

 

1,498

 

Current assets held for sale

 

 

0

 

 

 

50

 

Total current assets

 

 

68,830

 

 

 

68,402

 

Property and equipment, net

 

 

12,227

 

 

 

11,833

 

Goodwill

 

 

3,332

 

 

 

3,332

 

Intangible assets, net

 

 

2,403

 

 

 

3,275

 

Deferred tax assets, net

 

 

5,344

 

 

 

4,512

 

Other noncurrent assets

 

 

69

 

 

 

36

 

Non-current assets held for sale

 

 

0

 

 

 

776

 

TOTAL ASSETS

 

$

92,205

 

 

$

92,166

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

5,185

 

 

$

6,073

 

Accrued liabilities

 

 

6,734

 

 

 

7,177

 

Total current liabilities

 

 

11,919

 

 

 

13,250

 

 

 

 

 

 

 

 

 

 

Other long-term liabilities

 

 

430

 

 

 

391

 

 

 

 

 

 

 

 

 

 

Total liabilities

 

 

12,349

 

 

 

13,641

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Common stock, $0.001 par value, 100,000,000 shares authorized, 17,762,694 and 17,335,122

   shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively

 

 

18

 

 

 

17

 

Additional paid-in capital

 

 

134,441

 

 

 

134,480

 

Accumulated deficit

 

 

(54,508

)

 

 

(55,590

)

Accumulated other comprehensive loss

 

 

(95

)

 

 

(382

)

Total stockholders’ equity

 

 

79,856

 

 

 

78,525

 

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

 

$

92,205

 

 

$

92,166

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

3


PCTEL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

(in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

REVENUES

 

$

23,665

 

 

$

20,892

 

 

$

68,136

 

 

$

61,383

 

COST OF REVENUES

 

 

13,515

 

 

 

12,637

 

 

 

39,570

 

 

 

36,735

 

GROSS PROFIT

 

 

10,150

 

 

 

8,255

 

 

 

28,566

 

 

 

24,648

 

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

2,757

 

 

 

2,451

 

 

 

8,141

 

 

 

7,581

 

Sales and marketing

 

 

3,230

 

 

 

3,116

 

 

 

9,394

 

 

 

9,070

 

General and administrative

 

 

3,146

 

 

 

2,847

 

 

 

10,081

 

 

 

9,031

 

Amortization of intangible assets

 

 

124

 

 

 

124

 

 

 

372

 

 

 

408

 

Restructuring expenses

 

 

0

 

 

 

17

 

 

 

0

 

 

 

233

 

Total operating expenses

 

 

9,257

 

 

 

8,555

 

 

 

27,988

 

 

 

26,323

 

OPERATING INCOME (LOSS)

 

 

893

 

 

 

(300

)

 

 

578

 

 

 

(1,675

)

Other income, net

 

 

32

 

 

 

35

 

 

 

74

 

 

 

49

 

INCOME (LOSS) BEFORE INCOME TAXES

 

 

925

 

 

 

(265

)

 

 

652

 

 

 

(1,626

)

(Benefit) expense for income taxes

 

 

206

 

 

 

(354

)

 

 

(68

)

 

 

6,603

 

NET INCOME (LOSS) FROM CONTINUING OPERATIONS

 

 

719

 

 

 

89

 

 

 

720

 

 

 

(8,229

)

NET INCOME (LOSS) FROM DISCONTINUED OPERATIONS, NET OF TAX BENEFIT (EXPENSE)

 

 

236

 

 

 

86

 

 

 

(148

)

 

 

(4,125

)

NET INCOME (LOSS)

 

$

955

 

 

$

175

 

 

$

572

 

 

$

(12,354

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income (Loss) per Share From Continuing Operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.04

 

 

$

0.01

 

 

$

0.04

 

 

$

(0.51

)

Diluted

 

$

0.04

 

 

$

0.01

 

 

$

0.04

 

 

$

(0.51

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income (Loss) per Share From Discontinued Operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.01

 

 

$

0.01

 

 

$

(0.01

)

 

$

(0.26

)

Diluted

 

$

0.01

 

 

$

0.01

 

 

$

(0.01

)

 

$

(0.26

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income (Loss) per Share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.06

 

 

$

0.01

 

 

$

0.03

 

 

$

(0.77

)

Diluted

 

$

0.06

 

 

$

0.01

 

 

$

0.03

 

 

$

(0.77

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted Average Shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

16,757

 

 

 

16,106

 

 

 

16,526

 

 

 

16,136

 

Diluted

 

 

17,065

 

 

 

16,245

 

 

 

16,830

 

 

 

16,136

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividend per share

 

$

0.055

 

 

$

0.05

 

 

$

0.155

 

 

$

0.15

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

4


PCTEL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (unaudited)

(in thousands, except per share data)

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NET INCOME (LOSS)

 

$

955

 

 

$

175

 

 

$

572

 

 

$

(12,354

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OTHER COMPREHENSIVE INCOME (LOSS):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

131

 

 

 

(14

)

 

 

287

 

 

 

(126

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

COMPREHENSIVE INCOME (LOSS)

 

$

1,086

 

 

$

161

 

 

$

859

 

 

$

(12,480

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

5


PCTEL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(unaudited, in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

Total

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

Comprehensive

 

 

Stockholders'

 

 

 

Common

 

 

Paid-In

 

 

Retained

 

 

Income

 

 

Equity of

 

 

 

Stock

 

 

Capital

 

 

Deficit

 

 

(Loss)

 

 

PCTEL, Inc.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE at DECEMBER 31, 2016

 

$

17

 

 

$

134,480

 

 

$

(55,590

)

 

$

(382

)

 

$

78,525

 

Cumulative-effect adjustment resulting from adoption of ASU 2016-09

 

 

 

 

 

 

 

 

 

 

510

 

 

 

 

 

 

 

510

 

BALANCE at JANUARY 1, 2017

 

 

17

 

 

 

134,480

 

 

 

(55,080

)

 

 

(382

)

 

 

79,035

 

Stock-based compensation expense

 

 

1

 

 

 

2,506

 

 

 

0

 

 

 

0

 

 

 

2,507

 

Issuance of shares for stock purchase plans

 

 

0

 

 

 

1,375

 

 

 

0

 

 

 

0

 

 

 

1,375

 

Cancellation of shares for payment of withholding tax

 

 

0

 

 

 

(1,190

)

 

 

0

 

 

 

0

 

 

 

(1,190

)

Dividends paid

 

 

0

 

 

 

(2,730

)

 

 

0

 

 

 

0

 

 

 

(2,730

)

Net income

 

 

0

 

 

 

0

 

 

 

572

 

 

 

0

 

 

 

572

 

Change in cumulative translation adjustment, net

 

 

0

 

 

 

0

 

 

 

0

 

 

 

287

 

 

 

287

 

BALANCE at SEPTEMBER 30, 2017

 

$

18

 

 

$

134,441

 

 

$

(54,508

)

 

$

(95

)

 

$

79,856

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements

 

 

6


PCTEL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

.

 

2017

 

 

2016

 

 

 

 

 

 

 

 

 

 

Operating Activities:

 

 

 

 

 

 

 

 

Net income (loss) from continuing operations

 

$

720

 

 

$

(8,229

)

Adjustments to reconcile net loss to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation

 

 

1,913

 

 

 

1,994

 

Intangible asset amortization

 

 

872

 

 

 

908

 

Stock-based compensation

 

 

2,458

 

 

 

3,069

 

Loss on disposal/sale of property and equipment

 

 

18

 

 

 

4

 

Restructuring costs

 

 

(88

)

 

 

112

 

Deferred tax provision

 

 

(282

)

 

 

6,332

 

Changes in operating assets and liabilities, net of acquisitions:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

710

 

 

 

2,946

 

Inventories

 

 

1,809

 

 

 

2,793

 

Prepaid expenses and other assets

 

 

509

 

 

 

306

 

Accounts payable

 

 

(1,078

)

 

 

(1,360

)

Income taxes payable

 

 

(154

)

 

 

(153

)

Other accrued liabilities

 

 

(426

)

 

 

(857

)

Deferred revenue

 

 

95

 

 

 

12

 

Net cash provided by operating activities

 

 

7,076

 

 

 

7,877

 

 

 

 

 

 

 

 

 

 

Investing Activities:

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(2,097

)

 

 

(1,550

)

Proceeds from disposal of property and equipment

 

 

1

 

 

 

1

 

Purchases of investments

 

 

(37,579

)

 

 

(47,552

)

Redemptions/maturities of short-term investments

 

 

26,056

 

 

 

54,181

 

Net cash (used in) provided by investing activities

 

 

(13,619

)

 

 

5,080

 

 

 

 

 

 

 

 

 

 

Financing Activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of common stock

 

 

1,375

 

 

 

649

 

Payments for repurchase of common stock

 

 

0

 

 

 

(4,095

)

Payment of withholding tax on stock-based compensation

 

 

(1,190

)

 

 

(365

)

Principle payments on capital leases

 

 

(64

)

 

 

(34

)

Cash dividends

 

 

(2,730

)

 

 

(2,589

)

Net cash used in financing activities

 

 

(2,609

)

 

 

(6,434

)

 

 

 

 

 

 

 

 

 

Cash flows from discontinued operations:

 

 

 

 

 

 

 

 

      Net cash used in operating activities

 

 

(697

)

 

 

(321

)

      Net cash provided by (used in) investing activities

 

 

1,434

 

 

 

(149

)

 

 

 

 

 

 

 

 

 

Net (decrease) increase in cash and cash equivalents

 

 

(8,415

)

 

 

6,053

 

Effect of exchange rate changes on cash

 

 

87

 

 

 

(3

)

Cash and cash equivalents, beginning of year

 

 

14,855

 

 

 

7,055

 

Cash and Cash Equivalents, End of Period

 

$

6,527

 

 

$

13,105

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

7


PCTEL, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Three and Nine Months Ended September 30, 2017 (Unaudited)
(in thousands except share data and as otherwise noted)

 

 

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.  For further information, refer to the audited consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

Nature of Operations

PCTEL, Inc. (“PCTEL”, the “Company”, “we”, “ours”, and “us”) delivers Performance Critical TELecom technology solutions to the wireless industry.  PCTEL is a leading global supplier of antennas and wireless network testing solutions. PCTEL’s Connected Solutions segment designs and manufactures precision antennas. PCTEL antennas are deployed in small cells, enterprise Wi-Fi access points, fleet management and transit systems, and in network equipment and devices for the Industrial Internet of Things (“IIoT”).  PCTEL’s RF Solutions segment provides test tools that improve the performance of wireless networks globally. Mobile operators, neutral hosts, and equipment manufacturers rely on PCTEL to analyze, design, and optimize next generation wireless networks.

Segment Reporting

 

PCTEL operates in two segments for reporting purposes, Connected Solutions and RF Solutions.  The Company’s chief operating decision maker uses operating profits and identified assets for the Connected Solutions and RF Solutions segments for resource allocations.  Each segment has its own segment manager as well as its own engineering, sales and marketing, and operational general and administrative functions.  All of the Company’s accounting and finance, human resources, IT and legal functions are provided on a centralized basis through the corporate function. The Company manages its balance sheet and cash flows centrally at the corporate level, with the exception of trade accounts receivable and inventory which is managed at the segment level. Each of the segment managers reports to and maintains regular contact with the chief operating decision maker to discuss operating activities, financial results, forecasts, or plans for the segment.

 

Connected Solutions Segment

PCTEL Connected Solutions designs and manufactures precision antennas. Our precision antennas are deployed in small cells, enterprise Wi-Fi access points, fleet management and transit systems, and in equipment and devices for the Industrial Internet of Things (IIoT). We offer in-house design, testing, radio integration, and manufacturing capabilities for our antenna customers. Revenue growth in these markets is driven by the increased use of wireless communications and increased complexity trends occurring in these markets. PCTEL antennas are primarily sold to original equipment manufacturer (“OEM”) providers where they are designed into the customer’s solution.

 

Competition in the antenna markets addressed by Connected Solutions is fragmented. Competitors include Airgain, Amphenol, Laird, Pulse, and Taoglas. The Company seeks out product applications that command a premium for product performance and customer service, and avoids commodity markets.

 

PCTEL maintains expertise in several technology areas in order to be competitive in the antenna market.  These include radio frequency engineering, mobile antenna design and manufacturing, mechanical engineering, product quality and testing, and wireless network engineering.

 

RF Solutions Segment

PCTEL RF Solutions provides test tools improve the performance of wireless networks globally, with a focus on LTE, public safety, and emerging 5G technologies. Network operators, neutral hosts, and equipment manufacturers rely on our scanning receivers and testing solutions to analyze, design, and optimize their networks.  Revenue growth is driven by the implementation and roll out of new wireless technology standards (i.e., 1G to 2G, 2G to 3G, 3G to 4G, 4G to 5G, etc.). PCTEL test equipment is sold directly to wireless carriers or to OEM providers who integrate the Company’s products into their solution which is then sold to wireless carriers.

 

8


Competitors for PCTEL’s test tool products include OEMs such as Anritsu, Berkley Varitronics, Digital Receiver Technology, and Rohde and Schwarz.

 

PCTEL maintains expertise in several technology areas in order to be competitive in the test tool market. These include radio frequency engineering, digital signal process (“DSP”) engineering, manufacturing, mechanical engineering, product quality and testing, and wireless network engineering.

 

Discontinued Operations

 

During the quarter ended June 30, 2017, the Company approved a plan to sell its Network Engineering Services business (“Engineering Services”), which was part of the RF Solutions segment, and shift its focus towards research and development driven radio frequency (“RF”) products.  On July 31, 2017, the Company sold substantially all of the Engineering Services assets of the Company’s Network Engineering Services business unit to Gabe’s Construction Co., Inc. (“Gabe’s”).  The Company’s financial statements have been restated to reflect the historical results of Engineering Services as discontinued operations. The Company classified the Engineering Services assets as held for sale at December 31, 2016 and classified the results of its operations as discontinued operations for the three and nine months ended September 30, 2017 and 2016, respectively.  See Note 5 in the notes to the financial statements for more information on discontinued operations.  

 

Basis of Consolidation

The condensed consolidated balance sheet as of September 30, 2017 and the condensed consolidated statements of operations, statements of comprehensive income (loss), and cash flows for the three and nine months ended September 30, 2017 and 2016, respectively, are unaudited and reflect all adjustments of a normal recurring nature that are, in the opinion of management, necessary for a fair presentation of the interim period financial statements.  The interim condensed consolidated financial statements are derived from the audited financial statements as of December 31, 2016.  

The unaudited interim condensed consolidated financial statements of the Company have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).  Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the U.S. have been condensed or omitted.  The significant accounting policies followed by the Company are set forth within the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 (“the 2016 Form 10-K”).  There were no changes in the Company’s significant accounting policies during the three and nine months ended September 30, 2017.  In addition, the Company reaffirms the use of estimates in the preparation of the financial statements as set forth in the 2016 Form 10-K.  These interim condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the 2016 Form 10-K.  The results of operations for the period ended September 30, 2017 may not be indicative of the results for the period ending December 31, 2017.

Reclassifications

 

Certain reclassifications of the prior year’s financial statement and footnote amounts have been made to conform to the current year’s presentation.

Foreign Operations

The Company is exposed to foreign currency fluctuations due to its foreign operations and because products are sold internationally.  The functional currency for the Company’s foreign operations is predominantly the applicable local currency.  Accounts of foreign operations are translated into U.S. dollars using the exchange rate in effect at the applicable balance sheet date for assets and liabilities and average monthly rates prevailing during the period for revenue and expense accounts.  Adjustments resulting from translation are included in accumulated other comprehensive income (loss), a separate component of shareholders’ equity.  Gains and losses resulting from other transactions originally in foreign currencies and then translated into U.S. dollars are included in the condensed consolidated statement of operations.  Net foreign exchange (losses) gains resulting from foreign currency transactions included in other income, net were $(45) and $11 for the three months ended September 30, 2017 and 2016, respectively. Net foreign exchange losses resulting from foreign currency transactions included in other income, net were $(98) and $(24) for the nine months ended September 30, 2017 and 2016, respectively.

 

Recent Accounting Pronouncements

 

In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU 2017-04”).  ASU 2017-04 eliminates Step 2 as part of the goodwill impairment test, the result of which is that the impairment charge recognized would now be the amount by which the carrying value exceeds the reporting unit’s fair value.  The loss to be recognized cannot exceed the amount of goodwill allocated to that reporting unit.  The Company early adopted this guidance on January 1, 2017 because its annual impairment

9


test is performed after January 1, 2017.  The adoption of this ASU is not expected to have a material impact on the Company's consolidated financial statements.

 

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. This ASU addresses the following eight specific cash flow issues: Debt prepayment or debt extinguishment costs; settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies (including bank-owned life insurance policies); distributions received from equity method investees; beneficial interests in securitization transactions; and separately identifiable cash flows and application of the predominance principle. This guidance will be effective for us on January 1, 2018.  The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.

 

In June 2016, the FASB issued Accounting Standards Update No. 2016-13 ("ASU 2016-13") regarding ASC Topic 326, "Financial Instruments - Credit Losses," which modifies the measurement of expected credit losses of certain financial instruments. The amendments will be effective for us on January 1, 2020.  The Company is currently evaluating this guidance and the impact it will have on its consolidated financial statements.

 

In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. ASU No. 2016-09 affects all entities that issue share-based payment awards to their employees. ASU No. 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows, including recognizing all excess tax benefits and tax deficiencies as income tax expense or benefit in the income statement rather than in additional paid-in capital. The Company adopted this ASU in the first quarter 2017.  Upon adoption, the Company recognized deferred tax assets of $0.6 million for all excess tax benefits that had not been previously recognized.  The Company also elected to recognize forfeitures as incurred.  The Company recorded an adjustment of $0.1 million to deferred tax assets for estimated forfeitures previously recorded.  These adjustments were recorded through a cumulative-effect adjustment to retained earnings of approximately $0.5 million and adjustment to the valuation allowance for $0.2 million.

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which amends existing guidance to require lessees to recognize assets and liabilities on the balance sheet for the rights and obligations created by long-term leases and to disclose additional quantitative and qualitative information about leasing arrangements. This ASU also provides clarifications surrounding the presentation of the effects of leases in the income statement and statement of cash flows. This guidance will be effective for us on January 1, 2019. The Company is currently evaluating this guidance and the impact it will have on its consolidated financial statements and related disclosures.

 

In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory. ASU 2015-11 simplifies the subsequent measurement of inventory by requiring inventory to be measured at the lower of cost and net realizable value.  ASU 2015-11 applies only to inventories for which cost is determined by methods other than last-in first-out and the retail inventory method.  The Company adopted this guidance on January 1, 2017.  The adoption of this ASU did not have a material impact to the Company’s consolidated financial statements.

 

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers” which introduces a new revenue recognition model in which an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 defines a five-step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP. This ASU also requires disclosures sufficient to enable users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers, including qualitative and quantitative disclosures about contracts with customers, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. This guidance will be effective for us on January 1, 2018. The FASB has also issued the following standards which clarify ASU 2014-09 and have the same effective date as the original standard: ASU 2016-20, Technical Corrections and Improvements to Topic 606, ASU No. 2016-12, Narrow-Scope Improvements and Practical Expedients, ASU 2016-10, Identifying Performance Obligations and Licensing and ASU 2016-08, Principal versus Agent Considerations.

 

The Company commenced its assessment of ASU 2014-09 during the first quarter of 2017.  The Company has developed its project plan to guide the implementation. This project plan includes analyzing the standard’s impact on the Company’s contract portfolio, comparing historical accounting policies and practices to the requirements of the new standard and identifying potential differences from applying the requirements of the new standard to its contracts. We made progress on this project plan including categorizing the revenue portfolio, surveying the Company's businesses and discussing the various revenue streams, and completing contract reviews. The Company will draft an updated accounting policy, evaluate new disclosure requirements and identify and implement appropriate changes to the business processes, systems and controls to support recognition and disclosure under the new standard.  The Company

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expects to adopt this new standard using the modified retrospective method that will result in a cumulative effect adjustment as of the date of adoption.  The Company is currently evaluating this guidance and the impact it will have on the consolidated financial statements. 

 

2. Fair Value of Financial Instruments

The Company follows accounting guidance for fair value measurements and disclosures, which establishes a fair value hierarchy that requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.  Fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, a three-tier fair value hierarchy has been established, which prioritizes the inputs used in measuring fair value as follows:

Level 1: inputs are unadjusted quoted prices in active markets for identical assets or liabilities.

Level 2: inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of assets or liabilities.

Level 3: unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Cash equivalents are measured at fair value and investments are recognized at amortized cost in the Company’s financial statements.  Accounts receivable and other investments are financial assets with carrying values that approximate fair value due to the short-term nature of these assets.  Accounts payable is a financial liability with a carrying value that approximates fair value due to the short-term nature of these liabilities.

 

3. Earnings per Share

The following table is the computation of basic and diluted earnings per share:

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Basic Earnings Per Share computation:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) from continuing operations

 

$

719

 

 

$

89

 

 

$

720

 

 

$

(8,229

)

Net income (loss) from discontinued operations

 

$

236

 

 

$

86

 

 

$

(148

)

 

$

(4,125

)

Net income (loss)

 

$

955

 

 

$

175

 

 

$

572

 

 

$

(12,354

)

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common shares outstanding

 

 

16,757

 

 

 

16,106

 

 

 

16,526

 

 

 

16,136

 

Earnings per common share - basic

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) from continuing operations

 

$

0.04

 

 

$

0.01

 

 

$

0.04

 

 

$

(0.51

)

Net income (loss) from discontinued operations

 

$

0.01

 

 

$

0.01

 

 

$

(0.01

)

 

$

(0.26

)

Net income (loss)

 

$

0.06

 

 

$

0.01

 

 

$

0.03

 

 

$

(0.77

)

Diluted Earnings Per Share computation:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common shares outstanding

 

 

16,757

 

 

 

16,106

 

 

 

16,526

 

 

 

16,136

 

Restricted shares subject to vesting

 

 

304

 

 

 

139

 

 

 

302

 

 

*

 

Common stock option grants

 

 

4

 

 

 

0

 

 

 

2

 

 

*

 

Total shares

 

 

17,065

 

 

 

16,245

 

 

 

16,830

 

 

 

16,136

 

Earnings per common share - diluted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) from continuing operations

 

$

0.04

 

 

$

0.01

 

 

$

0.04

 

 

$

(0.51

)

Net income (loss) from discontinued operations

 

$

0.01

 

 

$

0.01

 

 

$

(0.01

)

 

$

(0.26

)

Net income (loss)

 

$

0.06

 

 

$

0.01

 

 

$

0.03

 

 

$

(0.77

)

 

*

As denoted by “*” in the table above, the weighted average common stock option grants and restricted shares of  140,000 for the nine months ended September 30, 2016, were excluded from the calculations of diluted net loss per share since their effects are anti-dilutive.

 

 

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4. Cash, Cash Equivalents and Investments

The Company’s cash and investments consisted of the following:

 

 

September 30,

 

 

December 31,

 

 

 

2017

 

 

2016

 

 

 

 

 

 

 

 

 

 

Cash

 

$

4,822

 

 

$

7,507

 

Cash equivalents

 

 

1,705

 

 

 

7,348

 

Short-term investments

 

 

29,979

 

 

 

18,456

 

 

 

$

36,506

 

 

$

33,311

 

 Cash and Cash Equivalents

At September 30, 2017 and December 31, 2016, cash and cash equivalents included bank balances and investments with original maturities less than 90 days.  At September 30, 2017 and December 31, 2016, the Company’s cash equivalents were invested in highly liquid AAA rated money market funds that are required to comply with Rule 2a-7 of the Investment Company Act of 1940.  Such funds utilize the amortized cost method of accounting, seek to maintain a constant $1.00 per share price, and are redeemable upon demand.  The Company restricts its investments in AAA money market funds to those invested 100% in either short-term U.S. government agency securities or bank repurchase agreements collateralized by these same securities.  The fair values of these money market funds are established through quoted prices in active markets for identical assets (Level 1 inputs).  The Company’s cash in U.S. banks is insured by the Federal Deposit Insurance Corporation up to the insurable limit of $250.

At September 30, 2017, the Company had $4.8 million in cash and $1.7 million in cash equivalents, and at December 31, 2016, the Company had $7.5 million in cash and $7.3 million in cash equivalents.  At September 30, 2017, the Company had in cash equivalents $0.5 million in AA rated or higher corporate bonds, $8 million in U.S. government agency bonds, and $0.5 million in money market funds.  At December 31, 2016, the Company had in cash equivalents, $3.6 million in AA rated or higher corporate bonds, $2.8 million in U.S. government agency bonds, $0.8 million in certificates of deposit, and $0.1 million in money market funds.  

The Company had $1.4 million and $0.9 million of cash and cash equivalents in foreign bank accounts at September 30, 2017 and December 31, 2016, respectively.  With respect to the cash in foreign bank accounts, the Company had cash of $1.2 million and $0.5 million in Chinese bank accounts at September 30, 2017 and December 31, 2016, respectively.  As of September 30, 2017, the Company has no intention of repatriating the cash in its foreign bank accounts in China.  If the Company decides to repatriate the cash in the foreign bank accounts, it may experience difficulty in doing so in a timely manner.  The Company may also be exposed to foreign currency fluctuations and taxes if it repatriates these funds.  The Company’s cash in its foreign bank accounts is not insured.  The Company ceased ongoing operations of its Israel subsidiary during the third quarter 2016.  The Company expects to liquidate the subsidiary and repatriate its remaining cash in 2018.  

Investments

At September 30, 2017 and December 31, 2016, the Company’s short-term investments consisted of pre-refunded municipal bonds, U.S. government agency bonds, AA or higher rated corporate bonds, and certificates of deposit, all classified as held-to-maturity.  At September 30, 2017, the Company had invested $15.0 million in AA rated or higher corporate bonds, $6.2 million in certificates of deposit, $4.4 million in pre-refunded municipal bonds, and $4.4 million in U.S. government agency bonds.   The income and principal from the pre-refunded municipal bonds are secured by an irrevocable trust of U.S. Treasury securities.  The bonds have original maturities greater than 90 days and mature in less than one year.  The Company’s bond investments are recorded at the purchase price and carried at amortized cost.  The net unrealized losses were $15 and $9 at September 30, 2017 and December 31, 2016, respectively.  Approximately 3% and 6% of the Company’s bond investments were protected by bond default insurance at September 30, 2017 and December 31, 2016, respectively.

At December 31, 2016, the Company had invested $7.8 million in pre-refunded municipal bonds and taxable bond funds, $5.6 million in AA rated or higher corporate bond funds, $2.6 million in U.S. government agency bonds, and $2.5 million in certificates of deposit.

The Company categorizes its financial instruments within a fair value hierarchy according to accounting guidance for fair value.  The fair value hierarchy is described under the Fair Value of Financial Instruments in Note 2.  For the Level 2 investments, the Company uses quoted prices of similar assets in active markets.

 

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Cash equivalents and investments measured at fair value were as follows at September 30, 2017 and December 31, 2016:

 

 

 

September 30, 2017

 

 

December 31, 2016

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

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