pcti-10q_20200331.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, 2020 

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

 

 

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

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 8, 2020, the registrant had 18,580,985 shares of common stock, $0.001 par value per share, outstanding.

2


PCTEL, INC.

Form 10-Q

For the Quarterly Period Ended March 31, 2020

TABLE OF CONTENTS

 

PART I

 

FINANCIAL INFORMATION

 

Page

Item 1

 

Financial Statements (unaudited)

 

4

 

 

Condensed Consolidated Balance Sheets

 

4

 

 

Condensed Consolidated Statements of Operations

 

5

 

 

Condensed Consolidated Statements of Comprehensive Loss

 

6

 

 

Condensed Consolidated Statement of Stockholders' Equity

 

7

 

 

Condensed Consolidated Statements of Cash Flows

 

8

 

 

Notes to the Condensed Consolidated Financial Statements

 

9

Item 2

 

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

 

27

Item 3

 

Quantitative and Qualitative Disclosures about Market Risk

 

33

Item 4

 

Controls and Procedures

 

33

 

 

 

 

 

PART II

 

OTHER INFORMATION

 

 

Item 1

 

Legal Proceedings

 

34

Item 1A

 

Risk Factors

 

34

Item 2

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

35

Item 3

 

Defaults Upon Senior Securities

 

35

Item 4

 

Mine Safety Disclosures

 

35

Item 5

 

Other Information

 

36

Item 6

 

Exhibits

 

36

Signatures

 

 

 

37

 

 

3


PART I – FINANCIAL INFORMATION

Item 1: Financial Statements (unaudited)

PCTEL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

 

 

 

(unaudited)

 

 

 

 

 

 

 

March 31,

 

 

December 31,

 

 

 

2020

 

 

2019

 

ASSETS

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

9,662

 

 

$

7,094

 

Short-term investment securities

 

 

28,608

 

 

 

32,556

 

Accounts receivable, net of allowances of $117 and $104 at March 31, 2020 and

 

 

 

 

 

 

 

 

December 31, 2019, respectively

 

 

13,918

 

 

 

17,380

 

Inventories, net

 

 

11,133

 

 

 

11,935

 

Prepaid expenses and other assets

 

 

1,568

 

 

 

1,842

 

Total current assets

 

 

64,889

 

 

 

70,807

 

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

 

12,130

 

 

 

11,985

 

Goodwill

 

 

3,332

 

 

 

3,332

 

Intangible assets, net

 

 

0

 

 

 

144

 

Other noncurrent assets

 

 

2,748

 

 

 

2,969

 

TOTAL ASSETS

 

$

83,099

 

 

$

89,237

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Accounts payable

 

$

3,984

 

 

$

3,190

 

Accrued liabilities

 

 

5,770

 

 

 

9,382

 

Total current liabilities

 

 

9,754

 

 

 

12,572

 

Long-term liabilities

 

 

4,289

 

 

 

3,315

 

Total liabilities

 

 

14,043

 

 

 

15,887

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Common stock, $0.001 par value, 100,000,000 shares authorized, 18,456,149 and 18,611,289

 

 

 

 

 

 

 

 

shares issued and outstanding at March 31, 2020 and December 31, 2019, respectively

 

 

18

 

 

 

19

 

Additional paid-in capital

 

 

130,438

 

 

 

133,954

 

Accumulated deficit

 

 

(60,993

)

 

 

(60,305

)

Accumulated other comprehensive loss

 

 

(407

)

 

 

(318

)

Total stockholders’ equity

 

 

69,056

 

 

 

73,350

 

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

 

$

83,099

 

 

$

89,237

 

 

 

 

 

 

 

 

 

 

 

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

 

4


PCTEL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

(in thousands, except per share data)

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2020

 

 

2019

 

 

 

 

 

 

 

 

 

 

REVENUES

 

$

17,506

 

 

$

20,590

 

COST OF REVENUES

 

 

9,291

 

 

 

11,932

 

GROSS PROFIT

 

 

8,215

 

 

 

8,658

 

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

Research and development

 

 

3,029

 

 

 

3,003

 

Sales and marketing

 

 

3,142

 

 

 

2,798

 

General and administrative

 

 

2,802

 

 

 

3,253

 

Amortization of intangible assets

 

 

33

 

 

 

73

 

Restructuring expenses

 

 

87

 

 

 

0

 

Total operating expenses

 

 

9,093

 

 

 

9,127

 

OPERATING LOSS

 

 

(878

)

 

 

(469

)

Other income, net

 

 

198

 

 

 

162

 

LOSS BEFORE INCOME TAXES

 

 

(680

)

 

 

(307

)

Expense for income taxes

 

 

8

 

 

 

10

 

NET LOSS

 

$

(688

)

 

$

(317

)

 

 

 

 

 

 

 

 

 

Net Loss per Share:

 

 

 

 

 

 

 

 

Basic

 

$

(0.04

)

 

$

(0.02

)

Diluted

 

$

(0.04

)

 

$

(0.02

)

 

 

 

 

 

 

 

 

 

Weighted Average Shares:

 

 

 

 

 

 

 

 

Basic

 

 

18,207

 

 

 

17,617

 

Diluted

 

 

18,207

 

 

 

17,617

 

 

 

 

 

 

 

 

 

 

Cash dividend per share

 

$

0.055

 

 

$

0.055

 

 

 

 

 

 

 

 

 

 

 

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

 

 

5


PCTEL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (unaudited)

(in thousands)

 

 

 

Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

 

 

 

 

 

 

 

 

 

NET LOSS

 

$

(688

)

 

$

(317

)

 

 

 

 

 

 

 

 

 

OTHER COMPREHENSIVE (LOSS) INCOME:

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

(89

)

 

 

153

 

 

 

 

 

 

 

 

 

 

COMPREHENSIVE LOSS

 

$

(777

)

 

$

(164

)

 

 

 

 

 

 

 

 

 

 

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

 

 

6


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, 2019

 

$

19

 

 

$

133,954

 

 

$

(60,305

)

 

$

(318

)

 

$

73,350

 

Stock-based compensation expense

 

 

0

 

 

 

562

 

 

 

0

 

 

 

0

 

 

 

562

 

Issuance of shares for stock purchase plans and stock options

 

 

0

 

 

 

59

 

 

 

0

 

 

 

0

 

 

 

59

 

Cancellation of shares for payment of withholding tax

 

 

0

 

 

 

(1,106

)

 

 

0

 

 

 

0

 

 

 

(1,106

)

Repurchase of common stock

 

 

(1

)

 

 

(1,999

)

 

 

0

 

 

 

0

 

 

 

(2,000

)

Dividends paid ($0.055 per share)

 

 

0

 

 

 

(1,032

)

 

 

0

 

 

 

0

 

 

 

(1,032

)

Net loss

 

 

0

 

 

 

0

 

 

 

(688

)

 

 

0

 

 

 

(688

)

Change in cumulative translation adjustment, net

 

 

0

 

 

 

0

 

 

 

0

 

 

 

(89

)

 

 

(89

)

BALANCE at MARCH 31, 2020

 

$

18

 

 

$

130,438

 

 

$

(60,993

)

 

$

(407

)

 

$

69,056

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

7


PCTEL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, in thousands)

 

 

 

Three Months Ended March 31,

 

.

 

2020

 

 

2019

 

 

 

 

 

 

 

 

 

 

Operating Activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(688

)

 

$

(317

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

748

 

 

 

711

 

Intangible asset amortization

 

 

144

 

 

 

240

 

Stock-based compensation

 

 

562

 

 

 

882

 

Loss on disposal of property and equipment

 

 

7

 

 

 

0

 

Restructuring costs

 

 

63

 

 

 

(3

)

Bad debt provision

 

 

18

 

 

 

7

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

3,432

 

 

 

(512

)

Inventories

 

 

760

 

 

 

38

 

Prepaid expenses and other assets

 

 

470

 

 

 

23

 

Accounts payable

 

 

737

 

 

 

554

 

Income taxes payable

 

 

8

 

 

 

(22

)

Other accrued liabilities

 

 

(2,011

)

 

 

(39

)

Deferred revenue

 

 

39

 

 

 

(23

)

Net cash provided by operating activities

 

 

4,289

 

 

 

1,539

 

Investing Activities:

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(1,516

)

 

 

(311

)

Purchases of short-term investments

 

 

(9,918

)

 

 

(13,893

)

Redemptions/maturities of short-term investments

 

 

13,866

 

 

 

14,177

 

Net cash provided by (used in) investing activities

 

 

2,432

 

 

 

(27

)

Financing Activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of common stock

 

 

59

 

 

 

338

 

Payment of withholding tax on stock-based compensation

 

 

(1,106

)

 

 

(743

)

Principle payments on finance leases

 

 

(20

)

 

 

(26

)

Purchase of common stock from repurchase program

 

 

(2,000

)

 

 

0

 

Cash dividends

 

 

(1,032

)

 

 

(1,016

)

Net cash used in financing activities

 

 

(4,099

)

 

 

(1,447

)

 

 

 

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

 

2,622

 

 

 

65

 

Effect of exchange rate changes on cash

 

 

(54

)

 

 

61

 

Cash and cash equivalents, beginning of period

 

 

7,094

 

 

 

4,329

 

Cash and Cash Equivalents, End of Period

 

$

9,662

 

 

$

4,455

 

 

 

 

 

 

 

 

 

 

 

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

 

8


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, 2019 (the “2019 Form 10-K”).

Nature of Operations

PCTEL, Inc. (“PCTEL”, the “Company”, “we”, “our”, and “us”) is a leading global supplier of wireless network antenna and test solutions. PCTEL designs and manufactures precision antennas and provide test & 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 & measurement tools improve the performance of wireless networks globally. Mobile operators, neutral hosts, and network equipment manufacturers rely on PCTEL products to analyze, design, and optimize next generation wireless networks.

Our strength is to solve complex network engineering problems for our customers through our products and solutions. To this end, we are constantly innovating and improving antenna and wireless testing products and capabilities in order to capture the opportunities and meet the challenges of the rapidly evolving wireless industry. We focus on engineering, research and development to maintain and expand its competitiveness.

PCTEL was incorporated in California in 1994 and reincorporated in Delaware in 1998. Our principal executive offices are located at 471 Brighton Drive, Bloomingdale, Illinois 60108. Our telephone number at that address is (630) 372-6800 and our website is www.pctel.com. Additional information about our Company can be obtained on our website; however, the information within, or that can be accessed through, our website, is not part of this report.

Product Lines

Antenna Products

PCTEL designs and manufactures precision antennas and we offer 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 Internet of Things. Revenue growth in these markets is driven by the increased use and complexity of wireless communications. Consistent with our 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, digital signal process (“DSP”) engineering, wireless network engineering, mechanical engineering, mobile antenna design, manufacturing, and product quality and testing. We seek out product applications that command a premium for product design and performance, and we avoid commodity markets. Our antennas are primarily sold to original equipment manufacturer (“OEM”) providers where they are designed into the customer’s solution.

Test & Measurement Products

PCTEL provides radio frequency (“RF”) test & measurement tools that improve the performance of wireless networks globally, with a focus on LTE, public safety, and 5G technologies. Network operators, neutral hosts, and equipment manufacturers rely on our scanning receivers and testing solutions 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 & measurement market, PCTEL maintains expertise in the following areas: radio frequency engineering, DSP engineering, wireless network engineering, mechanical engineering, manufacturing, and product quality and testing. Our test & measurement equipment is sold directly to wireless carriers or to OEMs who integrate our products into their solutions which are then sold to wireless carriers.

 

 

9


Basis of Consolidation

The unaudited interim condensed consolidated financial statements of the Company include the condensed consolidated balance sheets for the period ended March 31, 2020 and December 31, 2019, and the condensed consolidated statements of operations, statements of comprehensive loss, the condensed consolidated statements of stockholders’ equity and statements of cash flows for the three months ended March 31, 2020 and 2019, 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, 2019 is derived from the audited financial statements as of December 31, 2019.  

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 in the 2019 Form 10-K.  There were no significant changes in the Company’s significant accounting policies during the three months ended March 31, 2020.  In addition, the Company reaffirms the use of estimates in the preparation of the financial statements as set forth in the 2019 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 2019 Form 10-K.  The results of operations for the period ended March 31, 2020 may not be indicative of the results for the period ending December 31, 2020.

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 China 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 statements of operations.  Net foreign exchange gains (losses) resulting from foreign currency transactions included in other income, net was $37 and $(57) for the three months ended March 31, 2020 and 2019, respectively.        

Recent Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)  2016-02, Leases (“Topic 842”), which amended 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 statement of operations and statement of cash flows. The Company adopted Topic 842 on January 1, 2019 using the updated modified transition method.  Upon adoption on January 1, 2019, the Company recorded right-of-use assets of $1.5 million and lease liabilities of $1.6 million.  See Note 10 for additional information and disclosures required by this new standard.  

 

In June 2016, the FASB issued Accounting Standards Update No. 2016-13, Financial Instruments - Credit Losses (“ASU 2016-13”), which modifies the measurement of expected credit losses of certain financial instruments. The Company adopted ASU 2016-13 on January 1, 2020 using a modified retrospective approach. Adoption of ASU 2016-13 did not have a material impact on the Company’s consolidated financial statements but required changes to its process of estimating expected credit losses.  See Note 4 and Note 6 for further information on the Company’s allowance for credit losses.

In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The amendments in this update align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments in this update.  The Company adopted ASU 2018-15 on January 1, 2020, and it did not have an impact on its consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement.” ASU 2018-13 modifies the disclosure requirements on fair value measurements.  The Company adopted ASU 2018-13 on January 1, 2020, and it did not have a material impact on its consolidated financial statements.

10


In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which simplifies income tax accounting in various areas including, but not limited to, the accounting for hybrid tax regimes, tax implications related to business combinations, and interim period accounting for enacted changes in tax law, along with some codification improvements.  The changes related to this update are effective for fiscal years beginning after December 15, 2020, with early adoption permitted. Certain changes in the standard require retrospective or modified retrospective adoption, while other changes must be adopted prospectively.  The Company is currently evaluating ASU 2019-12 and its impact on the consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (ASU 2017-14).  This new guidance eliminates the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge.  Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value.  The changes are effective for smaller reporting companies for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, and early adoption is permitted.  The Company is currently evaluating the impact that this guidance will have on its consolidated financial statements.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (“Topic 848”): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This update provides optional expedients and exceptions for applying generally accepted accounting principles to certain contract modifications and hedging relationships that reference London Inter-bank Offered Rate (LIBOR) or another reference rate expected to be discontinued. Topic 848 is effective upon issuance and generally can be applied through December 31, 2022.  The Company is currently evaluating the impact of Topic 848 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.

 

11


3. Loss per Share

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

 

 

 

Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

Basic Loss Per Share computation:

 

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

 

 

 

Net loss

 

$

(688

)

 

$

(317

)

Denominator:

 

 

 

 

 

 

 

 

Common shares outstanding

 

 

18,207,165

 

 

 

17,617,009

 

Net loss per common share - basic

 

 

 

 

 

 

 

 

Net loss

 

$

(0.04

)

 

$

(0.02

)

Diluted Loss Per Share computation:

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

Common shares outstanding

 

 

18,207,165

 

 

 

17,617,009

 

Performance related awards

 

*

 

 

*

 

Restricted shares subject to vesting

 

*

 

 

*

 

Common stock option grants

 

*

 

 

*

 

Total shares

 

 

18,207,165

 

 

 

17,617,009

 

Net loss per common share - diluted

 

 

 

 

 

 

 

 

Net loss

 

$

(0.04

)

 

$

(0.02

)

 

*

As denoted by “*” in the table above, the weighted average common stock option grants and restricted shares of 136,095 and 43,070 for the three months ended March 31, 2020 and 2019, 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:

 

 

 

March 31,

 

 

December 31,

 

 

 

2020

 

 

2019

 

Cash

 

$

5,061

 

 

$

5,604

 

Cash equivalents

 

 

4,601

 

 

 

1,490

 

Short-term investments

 

 

28,608

 

 

 

32,556

 

Total

 

$

38,270

 

 

$

39,650

 

 

 

 

 

 

 

 

 

 

Cash and Cash Equivalents

At March 31, 2020 and December 31, 2019, cash and cash equivalents included bank balances and investments with original maturities less than 90 days.  At March 31, 2020 and December 31, 2019, 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 $2.1 million of cash and cash equivalents in bank accounts in China at March 31, 2020 and December 31, 2019, respectively.  The Company’s cash in its China bank accounts is not insured.  As of March 31, 2020, 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 China bank accounts, it may have trouble doing so in a timely manner.  The Company may also be exposed to foreign currency fluctuations and taxes if it repatriates these funds.   

Investments

At March 31, 2020 and December 31, 2019, the Company’s short-term investments consisted of U.S. government agency bonds, corporate bonds with ratings of A or higher, and certificates of deposit. All the investments at March 31, 2020 and December 31, 2019

12


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.  

Effective January 1, 2020, the Company adopted ASU 2016-13.  This ASU replaces the incurred loss impairment model with an expected loss impairment model for financial instruments, including short-term investments.  The amendment requires entities to consider forward-looking information to estimate expected credit losses.  Under ASU-2016-13, the Company classifies its held-to-maturity investment portfolio by the investment type and further classifies the corporate bonds by the bond ratings.  For estimating potential credit losses, the Company considers the historical loss data, the bond ratings, as well as and current and future economic conditions.  The Company did not record an estimate for credit losses upon adoption of ASU 2016-13 on January 1, 2020 or at March 31, 2020.

Cash equivalents and investments were as follows at March 31, 2020 and December 31, 2019:

 

 

 

March 31, 2020

 

 

December 31, 2019

 

 

 

Level 1

 

 

Level 2

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Total

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

 

$

0

 

 

$

0

 

 

$

0

 

 

$

0

 

 

$

708

 

 

$

708

 

Money market funds

 

 

4,601

 

 

 

0

 

 

 

4,601

 

 

 

782

 

 

 

0

 

 

 

782

 

Total Cash Equivalents

 

$

4,601

 

 

$

0

 

 

$

4,601

 

 

$

782

 

 

$

708

 

 

$

1,490

 

Investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate bonds

 

$

0

 

 

$

25,224

 

 

$

25,224

 

 

$

0

 

 

$

28,710

 

 

$

28,710

 

Certificates of deposit

 

 

3,384

 

 

 

0

 

 

 

3,384

 

 

 

3,846

 

 

 

0

 

 

 

3,846

 

Total Investments

 

$

3,384

 

 

$

25,224

 

 

$

28,608

 

 

$

3,846

 

 

$

28,710

 

 

$

32,556

 

Cash equivalents and Investments - book value

 

$

7,985

 

 

$

25,224

 

 

$

33,209

 

 

$

4,628

 

 

$

29,418

 

 

$

34,046

 

Unrealized gains (losses)

 

$

(6

)

 

$

(59

)

 

$

(65

)

 

$

1

 

 

$

(11

)

 

$

(10

)

Cash equivalents and Investments - fair value

 

$

7,979

 

 

$

25,165

 

 

$

33,144

 

 

$

4,629

 

 

$

29,407

 

 

$

34,036

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 $65 and $10 at March 31, 2020 and December 31, 2019, 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, 2020.  The Company performs an annual impairment test of goodwill as of the end of the first month of the fourth fiscal quarter (October 31st), or at an interim date if an event occurs or if circumstances change that would indicate that an impairment loss may have been incurred. In performing the annual impairment test, the Company may consider qualitative factors that would indicate possible impairment. A quantitative fair value assessment is also performed at the reporting unit level. If the fair value exceeds the carrying value, then goodwill is not impaired, and no further testing is performed. If the carrying value exceeds the fair value, the implied fair value of goodwill is then compared against the carrying value of goodwill to determine the amount of impairment.  In addition to the annual impairment test, the Company is required to regularly assess whether a triggering event has occurred which would require interim impairment testing. The Company considered the current and expected future economic and market conditions surrounding the COVID-19 pandemic and its impact on each of the reporting units. Further, the Company assessed the current market capitalization, forecasts and the amount of headroom in the 2019 impairment test.  There were no triggering events during the quarter ended March 31, 2020.  The Company will continue to monitor goodwill for impairment going forward.  

Intangible Assets

13


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 condensed consolidated statement of operations is as follows:   

 

 

 

Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

Cost of revenues

 

$

111

 

 

$

167

 

Operating expenses

 

 

33

 

 

 

73

 

Total

 

$

144

 

 

$

240

 

 

 

 

 

 

 

 

 

 

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

 

 

 

March 31, 2020

 

 

December 31, 2019

 

 

 

 

 

 

 

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

 

 

 

10,114

 

 

 

0

 

 

 

10,114

 

 

 

10,003

 

 

 

111

 

Trademarks and trade names

 

 

4,834

 

 

 

4,834

 

 

 

0

 

 

 

4,834

 

 

 

4,801

 

 

 

33

 

Other

 

 

2,506

 

 

 

2,506

 

 

 

0

 

 

 

2,506

 

 

 

2,506

 

 

 

0

 

Total

 

$

34,334

 

 

$

34,334

 

 

$

0

 

 

$

34,334

 

 

$

34,190

 

 

$

144

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The $0.1 million decrease in the net book value of intangible assets at March 31, 2020 compared to December 31, 2019 relates to amortization expense for the three months ended March 31, 2020.  

The assigned lives and weighted average amortization periods by intangible asset category are summarized below:

 

Intangible Assets

 

Assigned Life