pcti-10q_20180930.htm

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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, 2018

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 every Interactive Date File required to be submitted 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 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

 

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

 

18,336,543 as of November 8, 2018

 

 

 

 


PCTEL, INC.

Form 10-Q

For the Quarterly Period Ended September 30, 2018

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 (Loss) Income

 

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

 

28

Item 3

 

Quantitative and Qualitative Disclosures about Market Risk

 

36

Item 4

 

Controls and Procedures

 

36

 

 

 

 

 

PART II

 

OTHER INFORMATION

 

37

Item 1

 

Legal Proceedings

 

37

Item 1A

 

Risk Factors

 

37

Item 2

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

37

Item 3

 

Defaults Upon Senior Securities

 

37

Item 4

 

Mine Safety Disclosures

 

37

Item 5

 

Other Information

 

37

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,

 

 

 

2018

 

 

2017

 

ASSETS

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

5,377

 

 

$

5,559

 

Short-term investment securities

 

 

31,770

 

 

 

32,499

 

Accounts receivable, net of allowances of $278 and $319 at September 30, 2018 and

   December 31, 2017, respectively

 

 

13,261

 

 

 

18,624

 

Inventories, net

 

 

12,691

 

 

 

12,756

 

Prepaid expenses and other assets

 

 

1,185

 

 

 

1,605

 

Total current assets

 

 

64,284

 

 

 

71,043

 

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

 

12,491

 

 

 

12,369

 

Goodwill

 

 

3,332

 

 

 

3,332

 

Intangible assets, net

 

 

1,280

 

 

 

2,113

 

Deferred tax assets, net

 

 

8,685

 

 

 

7,734

 

Other noncurrent assets

 

 

52

 

 

 

72

 

TOTAL ASSETS

 

$

90,124

 

 

$

96,663

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Accounts payable

 

$

5,392

 

 

$

5,471

 

Accrued liabilities

 

 

5,069

 

 

 

7,481

 

Total current liabilities

 

 

10,461

 

 

 

12,952

 

Long-term liabilities

 

 

383

 

 

 

392

 

Total liabilities

 

 

10,844

 

 

 

13,344

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Common stock, $0.001 par value, 100,000,000 shares authorized, 18,318,141 and 17,806,792

   shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively

 

 

18

 

 

 

18

 

Additional paid-in capital

 

 

134,455

 

 

 

134,505

 

Accumulated deficit

 

 

(54,920

)

 

 

(51,258

)

Accumulated other comprehensive (loss) income

 

 

(273

)

 

 

54

 

Total stockholders’ equity

 

 

79,280

 

 

 

83,319

 

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

 

$

90,124

 

 

$

96,663

 

 

 

 

 

 

 

 

 

 

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,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

REVENUES

 

$

18,426

 

 

$

23,665

 

 

$

61,739

 

 

$

68,136

 

COST OF REVENUES

 

 

11,705

 

 

 

13,515

 

 

 

39,355

 

 

 

39,570

 

GROSS PROFIT

 

 

6,721

 

 

 

10,150

 

 

 

22,384

 

 

 

28,566

 

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

3,028

 

 

 

2,757

 

 

 

9,021

 

 

 

8,141

 

Sales and marketing

 

 

2,957

 

 

 

3,230

 

 

 

9,059

 

 

 

9,394

 

General and administrative

 

 

3,029

 

 

 

3,146

 

 

 

9,172

 

 

 

10,081

 

Amortization of intangible assets

 

 

85

 

 

 

124

 

 

 

333

 

 

 

372

 

Total operating expenses

 

 

9,099

 

 

 

9,257

 

 

 

27,585

 

 

 

27,988

 

OPERATING (LOSS) INCOME

 

 

(2,378

)

 

 

893

 

 

 

(5,201

)

 

 

578

 

Other income, net

 

 

226

 

 

 

32

 

 

 

486

 

 

 

74

 

(LOSS) INCOME BEFORE INCOME TAXES

 

 

(2,152

)

 

 

925

 

 

 

(4,715

)

 

 

652

 

(Benefit) expense for income taxes

 

 

(482

)

 

 

206

 

 

 

(961

)

 

 

(68

)

(LOSS) INCOME FROM CONTINUING OPERATIONS

 

 

(1,670

)

 

 

719

 

 

 

(3,754

)

 

 

720

 

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

 

 

0

 

 

 

236

 

 

 

0

 

 

 

(148

)

NET (LOSS) INCOME

 

$

(1,670

)

 

$

955

 

 

$

(3,754

)

 

$

572

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (Loss) Income per Share from Continuing Operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.10

)

 

$

0.04

 

 

$

(0.22

)

 

$

0.04

 

Diluted

 

$

(0.10

)

 

$

0.04

 

 

$

(0.22

)

 

$

0.04

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income (Loss) per Share from Discontinued Operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.00

 

 

$

0.01

 

 

$

0.00

 

 

$

(0.01

)

Diluted

 

$

0.00

 

 

$

0.01

 

 

$

0.00

 

 

$

(0.01

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (Loss) Income per Share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.10

)

 

$

0.06

 

 

$

(0.22

)

 

$

0.03

 

Diluted

 

$

(0.10

)

 

$

0.06

 

 

$

(0.22

)

 

$

0.03

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted Average Shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

17,234

 

 

 

16,757

 

 

 

17,145

 

 

 

16,526

 

Diluted

 

 

17,234

 

 

 

17,065

 

 

 

17,145

 

 

 

16,830

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividend per share

 

$

0.055

 

 

$

0.055

 

 

$

0.155

 

 

$

0.155

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

4


PCTEL, INC.

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

(in thousands)

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NET (LOSS) INCOME

 

$

(1,670

)

 

$

955

 

 

$

(3,754

)

 

$

572

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OTHER COMPREHENSIVE (LOSS) INCOME:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

(223

)

 

 

131

 

 

 

(327

)

 

 

287

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

COMPREHENSIVE (LOSS) INCOME

 

$

(1,893

)

 

$

1,086

 

 

$

(4,081

)

 

$

859

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

Total

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

Other

 

 

Stockholders'

 

 

 

Common

 

 

Paid-In

 

 

Retained

 

 

Comprehensive

 

 

Equity of

 

 

 

Stock

 

 

Capital

 

 

Deficit

 

 

Income (Loss)

 

 

PCTEL, Inc.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE at DECEMBER 31, 2017

 

$

18

 

 

$

134,505

 

 

$

(51,258

)

 

$

54

 

 

$

83,319

 

Cumulative-effect adjustment resulting from adoption of ASU 2016-16

 

 

0

 

 

 

0

 

 

 

92

 

 

 

0

 

 

 

92

 

BALANCE at JANUARY 1, 2018

 

 

18

 

 

 

134,505

 

 

 

(51,166

)

 

 

54

 

 

 

83,411

 

Stock-based compensation expense

 

 

0

 

 

 

2,572

 

 

 

0

 

 

 

0

 

 

 

2,572

 

Issuance of shares for stock purchase plans

 

 

0

 

 

 

686

 

 

 

0

 

 

 

0

 

 

 

686

 

Cancellation of shares for payment of withholding tax

 

 

0

 

 

 

(301

)

 

 

0

 

 

 

0

 

 

 

(301

)

Dividends paid

 

 

0

 

 

 

(3,007

)

 

 

0

 

 

 

0

 

 

 

(3,007

)

Net loss

 

 

0

 

 

 

0

 

 

 

(3,754

)

 

 

0

 

 

 

(3,754

)

Change in cumulative translation adjustment, net

 

 

0

 

 

 

0

 

 

 

0

 

 

 

(327

)

 

 

(327

)

BALANCE at SEPTEMBER 30, 2018

 

$

18

 

 

$

134,455

 

 

$

(54,920

)

 

$

(273

)

 

$

79,280

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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,

 

.

 

2018

 

 

2017

 

 

 

 

 

 

 

 

 

 

Operating Activities:

 

 

 

 

 

 

 

 

Net (loss) income from continuing operations

 

$

(3,754

)

 

$

720

 

Adjustments to reconcile net (loss) income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation

 

 

2,088

 

 

 

1,913

 

Intangible asset amortization

 

 

833

 

 

 

872

 

Stock-based compensation

 

 

2,572

 

 

 

2,458

 

Loss on disposal of property and equipment

 

 

11

 

 

 

18

 

Restructuring costs

 

 

(28

)

 

 

(88

)

Bad debt provision

 

 

248

 

 

 

38

 

Deferred tax provision

 

 

(868

)

 

 

(282

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

4,968

 

 

 

672

 

Inventories

 

 

(173

)

 

 

1,809

 

Prepaid expenses and other assets

 

 

425

 

 

 

509

 

Accounts payable

 

 

255

 

 

 

(1,078

)

Income taxes payable

 

 

(39

)

 

 

(154

)

Other accrued liabilities

 

 

(2,395

)

 

 

(426

)

Deferred revenue

 

 

(43

)

 

 

95

 

Net cash provided by operating activities

 

 

4,100

 

 

 

7,076

 

Investing Activities:

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(2,205

)

 

 

(2,097

)

Proceeds from disposal of property and equipment

 

 

14

 

 

 

1

 

Purchases of investments

 

 

(33,978

)

 

 

(37,579

)

Redemptions/maturities of short-term investments

 

 

34,707

 

 

 

26,056

 

Net cash used in investing activities

 

 

(1,462

)

 

 

(13,619

)

Financing Activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of common stock

 

 

686

 

 

 

1,375

 

Payment of withholding tax on stock-based compensation

 

 

(301

)

 

 

(1,190

)

Principle payments on capital leases

 

 

(91

)

 

 

(64

)

Cash dividends

 

 

(3,007

)

 

 

(2,730

)

Net cash used in financing activities

 

 

(2,713

)

 

 

(2,609

)

Cash flows from discontinued operations:

 

 

 

 

 

 

 

 

      Net cash used in operating activities

 

 

0

 

 

 

(697

)

      Net cash provided by investing activities

 

 

0

 

 

 

1,434

 

Net cash flows provided by discontinued operations

 

0

 

 

 

737

 

 

 

 

 

 

 

 

 

 

Net decrease in cash and cash equivalents

 

 

(75

)

 

 

(8,415

)

Effect of exchange rate changes on cash

 

 

(107

)

 

 

87

 

Cash and cash equivalents, beginning of period

 

 

5,559

 

 

 

14,855

 

Cash and Cash Equivalents, End of Period

 

$

5,377

 

 

$

6,527

 

 

 

 

 

 

 

 

 

 

 

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, 2018 (Unaudited)
(in thousands except per share data and as otherwise noted)

 

 

1. Basis of Presentation

The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) 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. GAAP 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, 2017 (the “2017 Form 10-K”).

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 wireless network antenna and 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

Effective August 2018, the Company consolidated its organizational structure to drive growth and address the convergence in the industrial IoT, public safety, and 4G infrastructure markets and the emergence of new technologies such as 5G.  The Company’s operations, engineering, business development, sales and marketing, and operational general and administrative functions were consolidated into single  enterprise-wide organizations.  As a result of the reorganization that occurred in the third quarter 2018, the Company’s Chief Executive Officer, as the chief operating decision maker (“CODM”) began assessing operating profits and identified assets at the enterprise level for resource allocations, and instead of segment managers, the Chief Operating Officer began reporting to maintaining regular contact with the CODM to discuss operating activities, financial results, forecasts, and plans for the entire business.  All operating profit and cash flows are measured and managed at the enterprise level.  

Until the reorganization, PCTEL operated in two segments for reporting purposes, Connected Solutions and RF Solutions.  The CODM assessed operating profits and identified assets for the Connected Solutions and RF Solutions segments for resource allocations.  Each segment had its own segment manager as well as its own engineering, business development, sales and marketing, and operational general and administrative functions.  The Company managed its balance sheet and cash flows centrally at the corporate level, with the exception of trade accounts receivable and inventory which were managed at the segment level. Each of the segment managers reported to and maintained regular contact with the CODM to discuss operating activities, financial results, forecasts, and plans for the segment. All of the Company’s accounting and finance, human resources, information technology (“IT”) and legal functions were provided on a centralized basis through the corporate function.

Because the reorganization occurred during the third quarter 2018, this report reflects the segment reporting structure that was in effect for all of 2017 and through August of 2018.  Beginning with the Form 10-K for the year ended December 31, 2018, the Company will not report any segment information.  The Company will report revenue and gross profit for its two major product lines, Antenna Products and Test and Measurement Products.

Connected Solutions Segment

PCTEL Connected Solutions designs and manufactures precision antennas. PCTEL antennas are deployed primarily in small cells, enterprise Wi-Fi access points, fleet management and transit systems, and in equipment and devices for the IIoT. Revenue growth in these markets is driven by the increased use of wireless communications and increased complexity 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 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 it avoids commodity markets.

8


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 that 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 PCTEL’s 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. 3G to 4G, 4G to 5G).  PCTEL test equipment is sold directly to wireless carriers or to OEMs who integrate the Company’s products into their solutions which are then sold to wireless carriers.

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 engineering, manufacturing, mechanical engineering, product quality and testing, and wireless network engineering.

During the quarter ended June 30, 2017, the Company approved a plan to sell its Network Engineering Services business (“Engineering Services”) and shift its focus to research and development driven radio frequency (“RF”) products. On July 31, 2017, the Company sold substantially all of the assets of the Company’s Engineering Services business to Gabe’s Construction Co., Inc. (“Gabe’s”) for a purchase price of $1.45 million. The Engineering Services business provided design, testing, commissioning, optimization, and consulting services for cellular, Wi-Fi and public safety networks and was a reporting unit within the RF Solutions segment. The disposition of Engineering Services qualified as a discontinued operation for reporting purposes due to the material significance of its historical results and because this disposition represented a strategic shift by the Company to focus on products.  As such, the Company reported the results of its Engineering Services business as discontinued operations beginning with the quarter ended June 30, 2017.  The Company restated the results of Engineering Services as discontinued operations for the three and six months ended June 30, 2017.  See Note 5 for more information on discontinued operations.

Basis of Consolidation

The unaudited interim condensed consolidated financial statements of the Company include the condensed consolidated balance sheet and the condensed consolidated statement of stockholders’ equity as of September 30, 2018, and the condensed consolidated statements of operations, statements of comprehensive (loss) income, and cash flows for the three and nine months ended September 30, 2018 and 2017, respectively. The interim condensed consolidated financial statements 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 condensed consolidated balance sheet as of December 31, 2017 is derived from the audited financial statements as of December 31, 2017.  Certain amounts in the prior year have been reclassified to conform to the current year presentation.  

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 U.S. GAAP have been condensed or omitted.  The significant accounting policies followed by the Company are set forth within the 2017 Form 10-K.  There were no changes in the Company’s significant accounting policies during the nine months ended September 30, 2018.  See Note 13 related to Revenue from Contracts with Customers for additional disclosures related to revenue policies.  In addition, the Company reaffirms the use of estimates in the preparation of the financial statements as set forth in the 2017 Form 10-K.  These unaudited interim condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the 2017 Form 10-K.  The results of operations for the period ended September 30, 2018 may not be indicative of the results for the period ending December 31, 2018.

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 (loss) income, a separate component of stockholders’ 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 gains (losses) resulting from foreign currency transactions included in other income,

9


net were $37 and $(45) for the three months ended September 30, 2018 and 2017, respectively. Net foreign exchange gains (losses) resulting from foreign currency transactions included in other income, net were $28 and $(98) for the nine months ended September 30, 2018 and 2017, respectively.

 

Recent Accounting Pronouncements

 

In June 2016, the Financial Accounting Standards Board (“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 the Company on January 1, 2020.  The Company is currently evaluating this guidance and the impact it will have on its consolidated financial statements.

 

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. Topic 842 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 the Company on January 1, 2019.  The Company has prepared a complete portfolio of its active leases and has developed a project plan to implement Topic 842.  The Company is currently evaluating key policy elections and considerations prompted by the standard.  The Company is in process of drafting an internal policy document to address the new standard requirements and is in process of evaluating the impact of the new lease accounting guidance on its consolidated financial statements and related disclosures.

 

In August 2016, the FASB issued ASU 2016-15Statement of Cash Flows (Topic 230): Classification of certain cash receipts and cash payments (“Topic 230”).  Topic 230 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. The Company adopted Topic 230 on January 1, 2018.  Adoption of this guidance did not have an impact on the Company’s consolidated financial statements.

 

In October 2016, the FASB issued ASU 2016-16, Income Taxes (“Topic 740”): Intra-Entity Transfer of Assets Other than Inventory.  Topic 740 requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs.  The Company adopted Topic 740 on January 1, 2018 using the modified retrospective approach, and as a result recorded a deferred tax asset with a corresponding adjustment to retained earnings of $0.1 million associated with an intra-entity transfer of goodwill in 2009.  The goodwill was transferred to the U.S. entity from a Canadian entity that was dissolved in 2009.

 

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers” (“Topic 606”) 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. Topic 606 defines a five-step process to achieve this core principle and, in doing so, more judgment and estimates may be required in connection with the revenue recognition process than were previously required under prior U.S. GAAP. Topic 606 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.  The FASB has also issued the following standards which clarify Topic 606 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 adopted Topic 606 on January 1, 2018 using the modified retrospective approach.  The majority of the Company’s revenue is recognized on a “point-in-time” basis and a nominal amount of our revenue is recognized “over time” under the new standard, which is consistent with our revenue recognition policy under the previous guidance.  There were no changes to retained earnings from the adoption of Topic 606.  The Company made changes to incorporate the impact of the new standard into our policies, processes, and controls.  See Note 13 for information on Revenue from Contracts with Customers.

 

 

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

10


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,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Basic Loss Per Share computation:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income from continuing operations

 

$

(1,670

)

 

$

719

 

 

$

(3,754

)

 

$

720

 

Net income (loss) from discontinued operations

 

$

0

 

 

$

236

 

 

$

0

 

 

$

(148

)

Net (loss) income

 

$

(1,670

)

 

$

955

 

 

$

(3,754

)

 

$

572

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common shares outstanding

 

 

17,234

 

 

 

16,757

 

 

 

17,145

 

 

 

16,526

 

Net Loss per common share - basic

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income from continuing operations

 

$

(0.10

)

 

$

0.04

 

 

$

(0.22

)

 

$

0.04

 

Net income (loss) from discontinued operations

 

$

0.00

 

 

$

0.01

 

 

$

0.00

 

 

$

(0.01

)

Net (loss) income

 

$

(0.10

)

 

$

0.06

 

 

$

(0.22

)

 

$

0.03

 

Diluted Loss Per Share computation:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common shares outstanding

 

 

17,234

 

 

 

16,757

 

 

 

17,145

 

 

 

16,526

 

Restricted shares subject to vesting

 

*

 

 

 

304

 

 

*

 

 

 

302

 

Common stock option grants

 

*

 

 

 

4

 

 

*

 

 

 

2

 

Total shares

 

 

17,234

 

 

 

17,065

 

 

 

17,145

 

 

 

16,830

 

Loss per common share - diluted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income from continuing operations

 

$

(0.10

)

 

$

0.04

 

 

$

(0.22

)

 

$

0.04

 

Net income (loss) from discontinued operations

 

$

0.00

 

 

$

0.01

 

 

$

0.00

 

 

$

(0.01

)

Net (loss) income

 

$

(0.10

)

 

$

0.06

 

 

$

(0.22

)

 

$

0.03

 

 

*

As denoted by “*” in the table above, the weighted average common stock option grants and restricted shares of 274 and 566 for the three and nine months ended September 30, 2018, respectively, were excluded from the calculations of diluted net loss per share since their effects are anti-dilutive.

 

 

4. Cash, Cash Equivalents and Investments

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

 

 

 

September 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Cash

 

$

2,237

 

 

$

3,785

 

Cash equivalents

 

 

3,140

 

 

 

1,774

 

Short-term investments

 

 

31,770

 

 

 

32,499

 

Total

 

$

37,147

 

 

$

38,058

 

11


Cash and Cash Equivalents

At September 30, 2018 and December 31, 2017, cash and cash equivalents included bank balances and investments with original maturities less than 90 days.  At September 30, 2018 and December 31, 2017, 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.

The Company had $1.6 million and $1.2 million of cash and cash equivalents in foreign bank accounts at September 30, 2018 and December 31, 2017, respectively.  Included in such amounts are cash of $1.4 million and $1.0 million in China bank accounts at September 30, 2018 and December 31, 2017, respectively.  As of September 30, 2018, the Company has no intentions 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 is in process of liquidating its Israeli legal entity and will repatriate the cash net of taxes from the foreign bank account in Israel upon liquidation.  The Company accounted for the tax impact of the repatriation of the Israel cash in 2017.  The Company’s cash in its foreign bank accounts is not insured.

Investments

At September 30, 2018, the Company’s short-term investments consisted of U.S. government agency bonds, AA or higher rated corporate bonds, and certificates of deposit. At December 31, 2017, the Company’s short-term investments consisted of pre-funded municipal bonds, U.S. government agency bonds, AA or higher rated corporate bonds, and certificates of deposit.  All of the investments at September 30, 2018 and December 31, 2017 were classified as held-to-maturity.  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 income and principal from the pre-refunded municipal bonds were secured by an irrevocable trust of U.S. Treasury securities.  Approximately 8% of the Company’s municipal bond investments were protected by bond default insurance at December 31, 2017.  All of the municipal bonds matured during the quarter ended June 30, 2018.

Cash equivalents and investments were as follows at September 30, 2018 and December 31, 2017:

 

 

 

September 30, 2018

 

 

December 31, 2017

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

 

$

0

 

 

$

1,971

 

 

$

0

 

 

$

1,971

 

 

$

0

 

 

$

1,350

 

 

$

0

 

 

$

1,350

 

US government agency bonds

 

 

0

 

 

 

330

 

 

 

0

 

 

 

330

 

 

 

0

 

 

 

249

 

 

 

0

 

 

 

249

 

Certificates of deposit

 

 

503

 

 

 

0