pcti-10q_20190331.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 March 31, 2019

OR

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)

 

Registrant's Telephone Number, Including Area Code: (630) 372-6800

 

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   

As of May 10, 2019, the registrant had 18,417,701 shares of common stock, $0.001 par value per share, outstanding.

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

 

Common Stock

 

PCTI

 

Nasdaq Global Select Market

 

 

 


PCTEL, INC.

Form 10-Q

For the Quarterly Period Ended March 31, 2019

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

 

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

 

24

Item 3

 

Quantitative and Qualitative Disclosures about Market Risk

 

30

Item 4

 

Controls and Procedures

 

30

 

 

 

 

 

PART II

 

OTHER INFORMATION

 

 

Item 1

 

Legal Proceedings

 

31

Item 1A

 

Risk Factors

 

31

Item 2

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

31

Item 3

 

Defaults Upon Senior Securities

 

31

Item 4

 

Mine Safety Disclosures

 

31

Item 5

 

Other Information

 

31

Item 6

 

Exhibits

 

32

Signatures

 

 

 

33

 

 

2


PART I – FINANCIAL INFORMATION

Item 1: Financial Statements (unaudited)

 

PCTEL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

 

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

ASSETS

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

4,455

 

 

$

4,329

 

Short-term investment securities

 

 

30,586

 

 

 

30,870

 

Accounts receivable, net of allowances of $86 and $63 at March 31, 2019 and

   December 31, 2018, respectively

 

 

16,427

 

 

 

15,864

 

Inventories, net

 

 

12,919

 

 

 

12,848

 

Prepaid expenses and other assets

 

 

1,541

 

 

 

1,416

 

Total current assets

 

 

65,928

 

 

 

65,327

 

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

 

11,740

 

 

 

12,138

 

Goodwill

 

 

3,332

 

 

 

3,332

 

Intangible assets, net

 

 

789

 

 

 

1,029

 

Other noncurrent assets

 

 

1,531

 

 

 

45

 

TOTAL ASSETS

 

$

83,320

 

 

$

81,871

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Accounts payable

 

$

6,881

 

 

$

6,083

 

Accrued liabilities

 

 

6,668

 

 

 

5,801

 

Total current liabilities

 

 

13,549

 

 

 

11,884

 

Long-term liabilities

 

 

868

 

 

 

381

 

Total liabilities

 

 

14,417

 

 

 

12,265

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Common stock, $0.001 par value, 100,000,000 shares authorized, 18,417,701 and 18,271,249

   shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively

 

 

18

 

 

 

18

 

Additional paid-in capital

 

 

133,320

 

 

 

133,859

 

Accumulated deficit

 

 

(64,372

)

 

 

(64,055

)

Accumulated other comprehensive loss

 

 

(63

)

 

 

(216

)

Total stockholders’ equity

 

 

68,903

 

 

 

69,606

 

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

 

$

83,320

 

 

$

81,871

 

 

 

 

 

 

 

 

 

 

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

 

 

 

March 31,

 

 

 

2019

 

 

2018

 

 

 

 

 

 

 

 

 

 

REVENUES

 

$

20,590

 

 

$

21,731

 

COST OF REVENUES

 

 

11,932

 

 

 

13,867

 

GROSS PROFIT

 

 

8,658

 

 

 

7,864

 

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

Research and development

 

 

3,003

 

 

 

2,940

 

Sales and marketing

 

 

2,798

 

 

 

3,028

 

General and administrative

 

 

3,253

 

 

 

2,993

 

Amortization of intangible assets

 

 

73

 

 

 

124

 

Total operating expenses

 

 

9,127

 

 

 

9,085

 

OPERATING LOSS

 

 

(469

)

 

 

(1,221

)

Other income, net

 

 

162

 

 

 

51

 

LOSS BEFORE INCOME TAXES

 

 

(307

)

 

 

(1,170

)

Expense (benefit) for income taxes

 

 

10

 

 

 

(312

)

NET LOSS

 

$

(317

)

 

$

(858

)

 

 

 

 

 

 

 

 

 

Net Loss per Share:

 

 

 

 

 

 

 

 

Basic

 

$

(0.02

)

 

$

(0.05

)

Diluted

 

$

(0.02

)

 

$

(0.05

)

 

 

 

 

 

 

 

 

 

Weighted Average Shares:

 

 

 

 

 

 

 

 

Basic

 

 

17,617

 

 

 

17,056

 

Diluted

 

 

17,617

 

 

 

17,056

 

 

 

 

 

 

 

 

 

 

Cash dividend per share

 

$

0.055

 

 

$

0.055

 

 

 

 

 

 

 

 

 

 

 

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

 

 

4


PCTEL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (unaudited)

(in thousands)

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

 

 

 

 

 

 

 

 

 

NET LOSS

 

$

(317

)

 

$

(858

)

 

 

 

 

 

 

 

 

 

OTHER COMPREHENSIVE INCOME:

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

153

 

 

 

244

 

 

 

 

 

 

 

 

 

 

COMPREHENSIVE LOSS

 

$

(164

)

 

$

(614

)

 

 

 

 

 

 

 

 

 

 

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, 2018

 

$

18

 

 

$

133,859

 

 

$

(64,055

)

 

$

(216

)

 

$

69,606

 

Stock-based compensation expense

 

 

0

 

 

 

882

 

 

 

0

 

 

 

0

 

 

 

882

 

Issuance of shares for stock purchase plans

 

 

0

 

 

 

338

 

 

 

0

 

 

 

0

 

 

 

338

 

Cancellation of shares for payment of withholding tax

 

 

0

 

 

 

(743

)

 

 

0

 

 

 

0

 

 

 

(743

)

Dividends paid ($0.055 per share)

 

 

0

 

 

 

(1,016

)

 

 

0

 

 

 

0

 

 

 

(1,016

)

Net loss

 

 

0

 

 

 

0

 

 

 

(317

)

 

 

0

 

 

 

(317

)

Change in cumulative translation adjustment, net

 

 

0

 

 

 

0

 

 

 

0

 

 

 

153

 

 

 

153

 

BALANCE at MARCH 31, 2019

 

$

18

 

 

$

133,320

 

 

$

(64,372

)

 

$

(63

)

 

$

68,903

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE at DECEMBER 31, 2017

 

$

18

 

 

$

134,505

 

 

$

(51,258

)

 

$

54

 

 

$

83,319

 

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

 

 

 

 

 

 

 

 

 

 

92

 

 

 

 

 

 

 

92

 

BALANCE at JANUARY 1, 2018

 

 

18

 

 

 

134,505

 

 

 

(51,166

)

 

 

54

 

 

 

83,411

 

Stock-based compensation expense

 

 

0

 

 

 

668

 

 

 

0

 

 

 

0

 

 

 

668

 

Issuance of shares for stock purchase plans

 

 

0

 

 

 

364

 

 

 

0

 

 

 

0

 

 

 

364

 

Cancellation of shares for payment of withholding tax

 

 

0

 

 

 

(289

)

 

 

0

 

 

 

0

 

 

 

(289

)

Dividends paid ($0.055 per share)

 

 

0

 

 

 

(995

)

 

 

0

 

 

 

0

 

 

 

(995

)

Net loss

 

 

0

 

 

 

0

 

 

 

(858

)

 

 

0

 

 

 

(858

)

Change in cumulative translation adjustment, net

 

 

0

 

 

 

0

 

 

 

0

 

 

 

244

 

 

 

244

 

BALANCE at MARCH 31, 2018

 

$

18

 

 

$

134,253

 

 

$

(52,024

)

 

$

298

 

 

$

82,545

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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)

 

 

 

Three Months Ended March 31,

 

.

 

2019

 

 

2018

 

 

 

 

 

 

 

 

 

 

Operating Activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(317

)

 

$

(858

)

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

 

 

 

 

 

 

 

 

Depreciation

 

 

711

 

 

 

674

 

Intangible asset amortization

 

 

240

 

 

 

290

 

Stock-based compensation

 

 

882

 

 

 

668

 

Loss on disposal of property and equipment

 

 

0

 

 

 

10

 

Restructuring costs

 

 

(3

)

 

 

(11

)

Bad debt provision

 

 

7

 

 

 

15

 

Deferred tax provision

 

 

0

 

 

 

(236

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(512

)

 

 

(350

)

Inventories

 

 

38

 

 

 

321

 

Prepaid expenses and other assets

 

 

23

 

 

 

(250

)

Accounts payable

 

 

554

 

 

 

(64

)

Income taxes payable

 

 

(22

)

 

 

(3

)

Other accrued liabilities

 

 

(39

)

 

 

(1,808

)

Deferred revenue

 

 

(23

)

 

 

14

 

Net cash provided by (used in) operating activities

 

 

1,539

 

 

 

(1,588

)

Investing Activities:

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(311

)

 

 

(884

)

Proceeds from disposal of property and equipment

 

 

0

 

 

 

14

 

Purchases of investments

 

 

(13,893

)

 

 

(7,266

)

Redemptions/maturities of short-term investments

 

 

14,177

 

 

 

17,480

 

Net cash (used in) provided by investing activities

 

 

(27

)

 

 

9,344

 

Financing Activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of common stock

 

 

338

 

 

 

364

 

Payment of withholding tax on stock-based compensation

 

 

(743

)

 

 

(289

)

Principle payments on finance leases

 

 

(26

)

 

 

(24

)

Cash dividends

 

 

(1,016

)

 

 

(995

)

Net cash used in financing activities

 

 

(1,447

)

 

 

(944

)

 

 

 

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

 

65

 

 

 

6,812

 

Effect of exchange rate changes on cash

 

 

61

 

 

 

81

 

Cash and cash equivalents, beginning of period

 

 

4,329

 

 

 

5,559

 

Cash and Cash Equivalents, End of Period

 

$

4,455

 

 

$

12,452

 

 

 

 

 

 

 

 

 

 

 

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

 

7


PCTEL, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(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 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, 2018 (the “2018 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 designs and manufactures precision antennas and provides test and measurement products that improve the performance of wireless networks globally. PCTEL products address three market segments: Enterprise Wireless, Intelligent Transportation, and Industrial Internet of Things (“IoT”).  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 IoT. PCTEL test tools 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.

Product Lines

Antenna Products

PCTEL designs and manufactures precision antennas and offers in-house wireless product development for our customers, including design, testing, radio integration, and manufacturing capabilities. PCTEL antennas are deployed in small cells, enterprise Wi-Fi access points, fleet management and transit systems, and in equipment and devices for the Industrial IoT. Revenue growth in these markets is driven by the increased use and complexity of wireless communications. Consistent with the Company’s mission to solve complex network engineering problems and in order to compete effectively in the antenna market, PCTEL maintains expertise in the following areas: radio frequency engineering, wireless network engineering, mechanical engineering, mobile antenna design, manufacturing, and product quality and testing. The Company seeks out product applications that command a premium for product design and performance and customer service, and it avoids commodity markets. The Company’s 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, Panorama and Taoglas.

Test and Measurement Products

PCTEL provides RF test and measurement tools that improve the performance of wireless networks globally, with a focus on LTE, public safety, and emerging 5G technologies. Mobile operators, neutral hosts, and equipment manufacturers rely on PCTEL to analyze, design, and optimize next generation wireless networks. Revenue growth in this market is driven by the implementation and roll out of new wireless technology standards (i.e. 3G to 4G, 4G to 5G). Consistent with our mission to solve complex network engineering problems and in order to compete effectively in the RF test and measurement market, PCTEL maintains expertise in the following areas: radio frequency engineering, digital signal process (“DSP”) engineering, wireless network engineering, mechanical engineering, manufacturing, and product quality and testing. The Company’s test equipment is sold directly to wireless carriers or to OEMs who integrate its products into their solutions which are then sold to wireless carriers. Competitors for the Company’s test tool products include OEMs such as Anritsu, Berkley Varitronics, Digital Receiver Technology, and Rohde and Schwarz.

  

Reorganization and 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 “Reorganization”). The Company’s operations, engineering, business development, sales and marketing, and operational general and administrative functions were consolidated into a single enterprise-wide organization. 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. In connection with the Reorganization, the Board of Directors appointed a Chief Operating Officer who maintains regular contact with the CODM to discuss operating activities, financial

8


results, forecasts, and plans for the Company’s businesses. 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 general manager as well as its own engineering, business development, sales and marketing, and operational general and administrative functions.

 

The Company included revenues and gross profit for the two major product lines (antenna products and test and measurement products) because each product line has a significantly different gross profit profile. In order to understand the Company’s financial results, it is necessary to understand the impact on gross profit of the revenue mix between them.

 

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 for the period ended March 31, 2019 and December 31, 2018, and the condensed consolidated statements of operations, statements of comprehensive loss, and cash flows for the three months ended March 31, 2019 and 2018, 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, 2018 is derived from the audited financial statements as of December 31, 2018.  

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 2018 Form 10-K.  There were no significant changes in the Company’s significant accounting policies during the three months ended March 31, 2019.  See Note 10 related to Leases for additional disclosures related to the implementation of ASU 2016-02 (“Topic 842”).  In addition, the Company reaffirms the use of estimates in the preparation of the financial statements as set forth in the 2018 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 2018 Form 10-K.  The results of operations for the period ended March 31, 2019 may not be indicative of the results for the period ending December 31, 2019.

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, 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 losses resulting from foreign currency transactions included in other income, net was $57 and $69 for the three months ended March 31, 2019 and 2018, respectively.   

 

Recent Accounting Pronouncements

 

In February 2016, the FASB issued Accounting Standards Update (“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. The Company adopted this guidance on January 1, 2019.  The Company commenced its assessment of Topic 842 in the second half of 2018 and developed a project plan to guide the implementation. The Company completed this project plan, in which it analyzed the ASU's impact on its leases, surveyed the Company's key employees, assessed the portfolio of leases, and established a future lease process to keep the lease accounting portfolio up to date. The Company also evaluated the key policy elections and considerations under the standard and completed the internal policy documentation to address the new standard requirements.  The Company adopted this new guidance using the updated modified transition method allowed per ASU 2018-11 of Topic 842.  Upon adoption on January 1, 2019, total assets and liabilities increased due to the recording of right-of-use assets of $1.5 million and lease liabilities of $1.6 million.  Additional information and disclosures required by this new standard are contained in Note 10, 'Leases'.

 

9


 

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 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 the Company on January 1, 2020. The Company is currently evaluating this guidance and the impact it will have on its 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 March 31,

 

 

 

2019

 

 

2018

 

Basic Loss Per Share computation:

 

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

 

 

 

Net loss

 

$

(317

)

 

$

(858

)

Denominator:

 

 

 

 

 

 

 

 

Common shares outstanding

 

 

17,617

 

 

 

17,056

 

Net Loss per common share - basic

 

 

 

 

 

 

 

 

Net loss

 

$

(0.02

)

 

$

(0.05

)

Diluted Loss Per Share computation:

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

Common shares outstanding

 

 

17,617

 

 

 

17,056

 

Restricted shares subject to vesting

 

*

 

 

*

 

Common stock option grants

 

*

 

 

*

 

Total shares

 

 

17,617

 

 

 

17,056

 

Loss per common share - diluted

 

 

 

 

 

 

 

 

Net loss

 

$

(0.02

)

 

$

(0.05

)

 

*

As denoted by “*” in the table above, the weighted average common stock option grants and restricted shares of 43,000 and 565,000 for the three months ended March 31, 2019 and 2018, respectively, were excluded from the calculations of diluted net loss per share since their effects are anti-dilutive.

 

10


 

4. Cash, Cash Equivalents and Investments

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

 

 

 

March 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

Cash

 

$

2,095

 

 

$

1,485

 

Cash equivalents

 

 

2,360

 

 

 

2,844

 

Short-term investments

 

 

30,586

 

 

 

30,870

 

Total

 

$

35,041

 

 

$

35,199

 

Cash and Cash Equivalents

At March 31, 2019 and December 31, 2018, cash and cash equivalents included bank balances and investments with original maturities less than 90 days.  At March 31, 2019 and December 31, 2018, 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 $1.1 million and $0.8 million of cash and cash equivalents in foreign bank accounts at March 31, 2019 and December 31, 2018, respectively.  The Company’s cash in its foreign bank accounts is not insured.  Within the cash in foreign bank accounts, the Company had cash of $0.9 million and $0.6 million in China bank accounts at March 31, 2019 and December 31, 2018, respectively.  As of March 31, 2019, 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 have trouble 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 completed the closure of its Israeli subsidiary during the fourth quarter of 2018.  The Company expects to repatriate the subsidiary’s remaining cash of $0.2 million in 2019.  The Company does not expect the foreign currency exchange rate related to the repatriation of these funds to have a material impact on the financial statements.

Investments

At March 31, 2019 and December 31, 2018, the Company’s short-term investments consisted of U.S. government agency bonds, A or higher rated corporate bonds, and certificates of deposit. All the investments at March 31, 2019 and December 31, 2018 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. 

Cash equivalents and investments were as follows at March 31, 2019 and December 31, 2018:

 

 

 

March 31, 2019

 

 

December 31, 2018

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

 

$

0

 

 

$

999

 

 

$

0

 

 

$

999

 

 

$

0

 

 

$

1,156

 

 

$

0

 

 

$

1,156

 

Certificates of deposit

 

 

1,312

 

 

 

0

 

 

 

0

 

 

 

1,312

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

Money market funds

 

 

49

 

 

 

0

 

 

 

0

 

 

 

49

 

 

 

1,688

 

 

 

0

 

 

 

0

 

 

 

1,688

 

Total Cash Equivalents

 

$

1,361

 

 

$

999

 

 

$

0

 

 

$

2,360

 

 

$

1,688

 

 

$

1,156

 

 

$

0

 

 

$

2,844

 

Investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

 

$

0

 

 

$

24,311

 

 

$

0

 

 

$

24,311

 

 

$

0

 

 

$

21,583

 

 

$

0

 

 

$

21,583

 

US government agency bonds

 

 

0

 

 

 

4,032

 

 

 

0

 

 

 

4,032

 

 

 

0

 

 

 

5,671

 

 

 

0

 

 

 

5,671

 

Certificates of deposit

 

 

2,243

 

 

 

0

 

 

 

0

 

 

 

2,243

 

 

 

3,616

 

 

 

0

 

 

 

0

 

 

 

3,616

 

Total Investments

 

$

2,243

 

 

$

28,343

 

 

$

0

 

 

$

30,586

 

 

$

3,616

 

 

$

27,254

 

 

$

0

 

 

$

30,870

 

Cash equivalents and Investments - book value

 

$

3,604

 

 

$

29,342

 

 

$

0

 

 

$

32,946

 

 

$

5,304

 

 

$

28,410

 

 

$

0

 

 

$

33,714

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents and Investments - fair value

 

$

3,604

 

 

$

29,293

 

 

$

0

 

 

$

32,897

 

 

$

5,304

 

 

$

28,389

 

 

$

0

 

 

$

33,693

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11


 

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.  The fair values in the table above reflect net unrealized losses of $49 and $21 at March 31, 2019 and December 31, 2018, respectively.  

 

5. Goodwill and Intangible Assets

Goodwill

There were no changes to the goodwill valued at $3.3 million during the three months ended March 31, 2019.   There were no triggering events during the quarter ended March 31, 2019.  The Company will continue to monitor goodwill for impairment going forward.  

The goodwill is related to the test and measurement product line, not to the whole Company.  Due to the reorganization in the third quarter 2018, the Company’s operations, engineering, business development, sales and marketing, and operational general and administrative functions were consolidated into a single enterprise-wide organization. As such, there are  no longer reportable segments. The Company does have discrete financial information necessary to perform goodwill impairment testing for the reporting unit under the accounting guidance. The Company evaluates the goodwill based on the cash flows for the test and measurement product line. The cash flows for the test and measurement product line are only prepared for testing goodwill and were not reviewed by the Company’s CODM for business planning purposes.  

Intangible Assets

The Company amortizes intangible assets with finite lives on a straight-line basis over the estimated useful lives, which range from one to six years.  The summary of amortization expense in the consolidated statement of operations is as follows:   

  

 

 

Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

Cost of revenues

 

$

167

 

 

$

166

 

Operating expenses

 

 

73

 

 

 

124

 

Total

 

$

240

 

 

$

290

 

 

 

 

 

 

 

 

 

 

The summary of other intangible assets, net is as follows:

 

 

 

March 31, 2019

 

 

December 31, 2018

 

 

 

 

 

 

 

Accumulated

 

 

Net Book

 

 

 

 

 

 

Accumulated

 

 

Net Book

 

 

 

Cost

 

 

Amortization

 

 

Value

 

 

Cost

 

 

Amortization

 

 

Value

 

Customer contracts and relationships

 

$

16,880

 

 

$

16,880

 

 

$

0

 

 

$

16,880

 

 

$

16,880

 

 

$

0

 

Patents and technology

 

 

10,114

 

 

 

9,503

 

 

 

611

 

 

 

10,114

 

 

 

9,336

 

 

 

778

 

Trademarks and trade names