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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

Form 10-K

 

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

For the fiscal year ended December 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

Incorporation or Organization)

 

(I.R.S. Employer

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)

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, $.001 Par Value Per Share

PCTI

The Nasdaq Global Select Market

 

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

None

 

Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes     No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.     Yes     No

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 checkmark whether the registrant has submitted electronically every Interactive Data 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 the definitions 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 has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.Yes    No

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

As of June 30, 2020, the last business day of the registrant's most recently completed second fiscal quarter, there were 18,640,295 shares of the registrant's common stock outstanding, and the aggregate market value of such shares held by non-affiliates of the registrant (based upon the closing sale price of such shares on the Nasdaq Global Select Market on June 30, 2020) was approximately $125,517,171. Shares of the registrant's common stock held by each executive officer and director and by each entity that owns 5% or more of the registrant's outstanding common stock have been excluded because such persons may be deemed to be affiliates.  This determination of affiliate status is not necessarily a conclusive determination for any other purposes.

18,530,687 shares of common stock were issued and outstanding as of March 12, 2021.

Documents Incorporated by Reference

Certain sections of the registrant's definitive proxy statement relating to its 2021 Annual Stockholders' Meeting to be held on May 26, 2021 are incorporated by reference into Part III of this Annual Report on Form 10-K. The Company intends to file its proxy statement within 120 days after the end of its fiscal year end to which this report relates.

 

 

 

 


 

PCTEL, Inc.

Form 10-K

For the Fiscal Year Ended December 31, 2020

TABLE OF CONTENTS

 

PART I

 

 

 

Item 1

Business

 

3

Item 1A

Risk Factors

 

7

Item 1B

Unresolved Staff Comments

 

12

Item 2

Properties

 

12

Item 3

Legal Proceedings

 

13

Item 4

Mine Safety Disclosures

 

13

 

 

 

 

PART II

 

 

 

Item 5

Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

14

Item 6

Selected Financial Data

 

14

Item 7

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

 

15

Item 7A

Quantitative and Qualitative Disclosures about Market Risk

 

22

Item 8

Financial Statements and Supplementary Data

 

24

Item 9

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

58

Item 9A

Controls and Procedures

 

58

Item 9B

Other Information

 

58

 

 

 

 

PART III

 

 

 

Item 10

Directors, Executive Officers and Corporate Governance

 

59

Item 11

Executive Compensation

 

59

Item 12

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

59

Item 13

Certain Relationships and Related Transactions, and Director Independence

 

59

Item 14

Principal Accountant Fees and Services

 

59

 

 

 

 

PART IV

 

 

 

Item 15

Exhibits and Financial Statement Schedules

 

60

 

Index to Exhibit

 

61

Item 16

Form 10-K Summary

 

63

 

Signatures

 

64

 

 

 

 

 

 

 

 

 

2


PART I

Item 1:  Business

This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements include, among other things, statements concerning our future operations, financial condition prospects, business strategies, anticipated revenues, profits, costs and expenses, revenue mix and the impact on our business from the COVID-19 pandemic. These forward-looking statements include, among others, those statements including the words “may,” “will,” “plans,” “seeks,” “expects,” “anticipates,” “intends,” “believes” and words of similar meaning.  Investors in our common stock are cautioned not to place undue reliance on these forward-looking statements.  Our actual results could differ materially from those projected in these forward-looking statements. Specifically, the statements about our expectations regarding the impact of the COVID-19 pandemic; our future financial performance; growth of our antenna solutions and Industrial Internet of Things (“Industrial IoT) and test and measurement businesses; the impact of our transition plan for manufacturing inside and outside China; the impact of the uncertainty regarding the renewal of our lease of our Tianjin, China manufacturing premises; the anticipated demand for certain products including those related to public safety, Industrial IoT, 5G and intelligent transportation; the impact of tariffs on certain imports from China; and the anticipated growth of public and private wireless systems are forward-looking statements. These statements are based on management’s current expectations and actual results may differ materially from those projected as a result of certain risks and uncertainties, including the disruptions to our workforce, operations, supply chain and customer demand caused by the COVID-19 pandemic and impact of the pandemic on our results of operations, financial condition and stock price; the impact of data densification and IoT on capacity and coverage demand; the impact of 5G; customer demand and growth generally in our defined market segments, including demand from customers in China; and our ability to grow our business and create, protect and implement new technologies and solutions. These forward-looking statements are made only as of the date hereof. We do not undertake, and expressly disclaim, any obligation to update or revise any forward-looking statements whether because of new information, future events or otherwise, except as may be required by applicable law.  Investors should carefully review the information contained in Item 1A Risk Factors.  

 

Overview

 

PCTEL, Inc. (‘PCTEL’, the ‘Company’, ‘we’, ‘ours’, and ‘us’) formerly filed as PC-Tel, Inc. We were incorporated in California in 1994 and reincorporated in Delaware in 1998. PCTEL is a leading global provider of wireless technology, including purpose-built Industrial Internet of Things (“Industrial IoT”) devices, antenna systems, and test and measurement solutions. We solve complex wireless challenges to help organizations stay connected, transform, and grow. We have a strong brand presence and expertise in radio frequency (“RF”), digital and mechanical engineering.  We have two businesses (antennas/Industrial IoT devices and test & measurement products) that address three market segments: Enterprise Wireless, Intelligent Transportation, and Industrial IoT.  Our antennas and Industrial IoT devices include antennas deployed in small cells, enterprise Wi-Fi access points, fleet management and transit systems, and in network equipment and devices for Industrial IoT. Our test & measurement products improve the performance of wireless networks globally.  Mobile operators, neutral hosts, and network equipment manufacturers rely on our products to analyze, design, and optimize next generation wireless networks. We seek out product applications that command a premium for product design and performance, and we avoid commodity markets.  Our strength is solving complex wireless challenges for our customers through our products and solutions. To this end, we are constantly innovating and improving antenna and wireless testing products and capabilities to capture the opportunities of the rapidly evolving wireless industry. We focus on engineering, research, and development to maintain and expand our competitiveness.

 

Antennas and Industrial IoT Devices

 

PCTEL designs and manufactures precision antennas and Industrial IoT devices, and we offer in-house wireless product development for our customers, including design, testing, radio integration, and manufacturing capabilities.  Revenue growth in these markets is driven by the increased use and complexity of wireless communications. Our antenna portfolio includes Wi-Fi, Bluetooth, Land Mobile Radio (“LMR”), Tetra, Global Navigation Satellite System (“GNSS”), Cellular, industrial, scientific, medical (“ISM”), LoRa, and combination antenna solutions.  Our Industrial IoT device portfolio includes access points, radio modules, and wireless communication sensors.  Consistent with our mission to solve complex network engineering problems and 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. Competition among providers of antennas and Industrial IoT devices is fragmented.  Competitors include Airgain, Amphenol, Laird, Panorama, and Taoglas.

 

Test & Measurement Products

 

PCTEL provides RF test & measurement products that improve the performance of wireless networks globally, with a focus on LTE, public safety, and 5G technologies.  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) and new market applications for public safety and government. Our portfolio includes scanning receivers, scanning receiver software, public safety solutions, interference location systems, and mmwave transmitters.  Our

3


scanning receivers are software defined radios used to 1) confirm adequate RF coverage during deployment, 2) identify interfering signals which decreases capacity, 3) troubleshoot system performance issues as networks expand, and 4) benchmark competing networks because our scanning receivers can scan all technologies across all frequencies during one test.  They are necessary for initial network deployment and throughout the entire life cycle of the mobile network.  Most of our 4G scanners can be upgraded to 5G via firmware.  Consistent with our mission to solve complex network engineering problems and to compete effectively in the RF test & measurement market, PCTEL maintains expertise in the following areas: radio frequency engineering, digital signal processing (DSP) engineering, wireless network engineering, mechanical engineering, manufacturing, and product quality and testing.  Competitors for PCTEL’s test & measurement products include OEMs such as Anritsu, Berkley Varitronics, Digital Receiver Technology, Rohde and Schwarz, and Viavi.

 

Vision and Strategy

 

As a global leader for RF hardware that enables wireless connectivity, we are focused on four key strategies:

 

Launch products: We respond rapidly to market trends and demand.  Our vision is to provide the most robust and capable RF hardware products for our OEMs, distributors, and direct customers.  We work with world class customers that are experts in their vertical applications.  Our commitment to our customers is to provide the RF hardware that enables the most reliable wireless connectivity for their systems, whether it is for monitoring factory equipment, electricity distribution through smart grids, or other industrial applications.  Our products include antennas, IoT radio devices, IoT sensor and modem platforms and our 4G/5G test & measurement equipment.

 

Expand Distribution Channels: Our strategy is to leverage the reach and vertical market knowledge of our OEMs and distributors. We focus on key distributors who align with our targeted market segments, including Industrial IoT, intelligent transportation and enterprise wireless.  In addition to making the most of our R&D investments to develop new products, we believe we can increase shareholder value by adding key distribution partners that have specific expertise such as providing Industrial IoT solutions, or have regional strength.

 

Increase Market Share: We leverage our existing customer relationships to provide access points, sensors and other Industrial IoT RF products. We have made significant investments in developing new products that we can market and sell to our existing customer base using our same go-to-market strategy.  Many of our customers who purchase antennas for IoT applications also need other products we offer, such as sensors, interface cards and access points.  

 

Drive Operational and Financial Efficiency: We have a disciplined management team, and we will continuously improve processes and productivity. 

 

Markets and Market Opportunity

 

There are two key market drivers for our long-term growth: Industrial IoT and 5G. We believe that Industrial IoT has the greatest long-term potential for our antennas and ruggedized radio devices to support smart utilities and automation for manufacturing and commercial applications.  Industrial IoT will continue to be a growing market to address remote control and data analysis.  The critical link for many of these systems is the wireless connection between the device and the core system, which is where PCTEL adds value with our antennas, radio devices and sensors.  Enabling reliable and robust wireless connections is critical for wireless Industrial IoT.

 

5G is still in the early phases of deployment to address capacity in dense user areas.  It has better reliability, security, and lower latency than Wi-Fi. Future releases and the availability of new shared spectrum such as Citizens Broadband Radio Service (“CBRS”) will drive further investment in 5G to support private networks and neutral host services in valuable mid-range spectrum.  Private networks provide a lower cost solution than cellular operators to support enterprises and rural areas.  

 

To capitalize on the market opportunities, we focus on the Industrial IoT, intelligent transportation and enterprise wireless markets:

 

Industrial IoT

 

Industrial IoT is about the efficient use of data to make better operating decisions.  Wireless connectivity is often the most critical link in an Industrial IoT system, and our long-term strategy is to be the RF hardware supplier of choice for these systems.  From a hardware perspective, wireless Industrial IoT solutions require antennas, radio modules, access points or modems, and sensors.  Our strategy is to provide a “toolbox” of hardware solutions to our existing OEMs and distributors for Industrial IoT systems.  We provide all of the field hardware required for wireless Industrial IoT systems - antennas, ruggedized Wi-Fi access points, radio modules, and integrated cellular sensors for Industrial IoT. Our go-to-market strategy for this growing sector is to sell more RF hardware components to our customers that traditionally purchase antennas from PCTEL.  We believe we are uniquely positioned to grow in IoT markets given our current antennas sales and our RF, radio hardware and mechanical expertise.

 

4


 

Intelligent Transportation Products

 

In the intelligent transportation market segment, we provide antenna systems for smart roadways and smart rail, and we are recognized for our high-performance fleet applications.  Many of these transportation systems require multi-frequency and multi-element antennas housed in customized and ruggedized radomes.  Smart traffic management antennas support multiple technologies and frequency bands, and are housed in a ruggedized antenna radomes because these units are deployed at street level.  Fleet antennas for public safety, including police vehicles, is a key market.  We not only manufacture the antennas, but we also provide engineering design services to determine the layout of multi-antenna installations to minimize potential interference between each antenna element. Our customized solutions often result in general purpose products with advance capabilities, such as multi-element 6-in-1, 7-in-1, or 8-in-1 antenna systems in a single radome.  These systems can include several LTE bands, Wi-Fi bands and GPS navigation elements, all in one housing.  An antenna designed for one application can be modified to be used for other applications.  

 

We have RF and mechanical engineering expertise to rapidly design performance critical antennas with integrated electronics that can withstand some of the harshest industrial conditions.  Our antennas for autonomous farming support multiple wireless technologies and satellite navigation systems operate effectively in extreme heat, humidity, dirt, grease, and rain.  

 

Enterprise Wireless

 

Our enterprise wireless market segment addresses Wi-Fi, cellular, 5G and public safety markets.  In this market segment, we supply external and embedded Wi-Fi antennas to OEMs and RF scanning receivers to wireless operators for 4G and 5G network testing.  

 

In-building communication is important for first responders and a significant number of U.S. building require in-building wireless communication testing and certification for first responders. In the public safety market segment, we provide antennas for LMR and cellular networks and we provide test & measurement equipment to test public safety networks, including P25, Tetra and digital mobile radio (“DMR”).  

 

Customers

 

Our strategy is to leverage leading global OEMs and distributors to expand the reach of our products across multiple market segments and industries.  

 

Our antennas and Industrial IoT devices are sold to OEMs where they are designed into their customers’ solutions.  We also sell through distribution channels that promote and sell our products into specialized markets.  We support our major stocking distributors, and we sell our antennas directly to customers where integration into larger systems is not required.

 

Our test & measurement equipment for the cellular market is sold directly to wireless carriers or to OEMs who integrate our products into their solutions which are then sold to wireless carriers.  Our test & measurement equipment for public safety markets is sold to distributors and other engineering service providers.  

 

We do not view customer concentration as a significant issue.  

 

Research and Development- Intellectual Property

 

Given that our mission is to solve complex RF problems for our customers, research and development is essential to our long-term success. We work closely with our customers, consultants, and market research organizations to monitor and predict changes in the wireless industry, including emerging industry standards.  We continue to make substantial investments in engineering, talent, research and development and we devote substantial resources to product development, innovation, and patent submissions.  

 

We have approximately 70 patents and over 70 patents pending in the U.S. and other countries worldwide.  The patent submissions are primarily for defensive purposes, rather than for potential license revenue generation.

Sales, Marketing and Support

Our marketing strategy is focused on building market awareness and acceptance of new products.  Our Global Marketing group is responsible for promotion and lead generation through optimizing our website, managing trade shows, social media, webinars and general marcom material generation.  Our sales function is managed under the Chief Sales Officer who has primary responsibility for revenue generation and oversight of the worldwide sales force.   PCTEL’s direct sales force is technologically sophisticated with many sales personnel having college degrees in engineering and sales executives having strong industry domain knowledge.  We supply our products to OEMs, wireless equipment distributors, public and private carriers, wireless infrastructure providers, and value-added resellers (“VARs”).  Our direct sales force supports the sales efforts of our distributors and OEM resellers.

5


Manufacturing

 

We have historically done final assembly of most of our antennas in-house at our facilities in Tianjin, China, and Bloomingdale, Illinois.  To optimize the cost structure of our antennas and reduce our fixed costs in China, we are in the process of transitioning most of the manufacturing activities from our Tianjin facility to contract manufacturers in China and elsewhere.  We expect to substantially complete the transition by the end of fiscal year 2021.  We do final assembly of all our test & measurement products in-house at our facility in Clarksburg, Maryland.

 

By transitioning some of our manufacturing to multiple contract manufacturers with a variety of expertise, we avoid becoming dependent on any specific contract manufacturer.  If any contract manufacturer is unable to provide timely or satisfactory services for us, our other contract manufacturers will be available, provided, however, that transitioning production to a different contract manufacturer could cause delays, disruption and additional costs that could negatively impact timely delivery of our products and our earnings therefrom.  We have no material guaranteed supply contracts or long-term agreements with any of our suppliers, but we do have open purchase orders with several of our suppliers.  See the contractual obligations and commercial commitments section of Note 6 for information on purchase commitments.

 

Human Capital

Our employees are among our most valuable assets and are critical to our ability to deliver on our strategic plans. Our success in delivering high quality and innovative products and solutions for our customers and driving operational excellence is only achievable through the talent, expertise, and dedication of our global team.

We recognize that attracting, developing, and retaining skilled talent and promoting a diverse and inclusive culture are essential to maintaining our leadership positions in the markets we serve. We offer employees competitive compensation and benefits, and resources to continuously improve their skills and performance with the goal of further cultivating the diversity and expertise in our global businesses to fill key positions. We seek to hire people who share our values. We value technology and innovation and the achievement of customer-driven success.  From our employees, we expect leadership at every level and to act with integrity, fairness, and respect.  We invest in talent development and recognize that the growth and development of our employees is essential for our continued success.

Our employees in Tianjin, China are represented by a labor union, and our employees in Beijing, China are represented by a separate labor union pursuant to the requirements of China’s National Labor Law.  These two labor unions do not have collective bargaining rights.  

The full-time equivalent employees by geography and functional area were as follows:

 

 

 

December 31,

2020

 

Operations:

 

 

 

 

U.S.

 

 

85

 

China

 

 

101

 

 

 

 

186

 

Engineering:

 

 

 

 

U.S.

 

 

47

 

China

 

 

9

 

 

 

 

56

 

Sales & Marketing:

 

 

 

 

U.S.

 

 

40

 

Rest of World

 

 

10

 

 

 

 

50

 

Administration:

 

 

 

 

U.S.

 

 

29

 

China

 

 

5

 

 

 

 

34

 

 

 

 

 

 

Total

 

 

326

 

 

 

 

 

 

 

6


 

Available Information

Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to such reports, are available free of charge through our website as soon as reasonably practicable after we electronically file such material with, or furnish it to, the United States Securities and Exchange Commission (the “SEC”).  Our website is located at the following address: www.pctel.com.  The information within, or that can be accessed through our website, is not part of this Annual Report on Form 10-K.  Further, the SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding our filings at www.sec.gov.

Item 1A:  Risk Factors

Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below, together with all of the other information in this Annual Report on Form 10-K, including the sections titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes, before making a decision to invest in our common stock. Our business, financial condition, results of operations, or prospects could also be harmed by risks and uncertainties not currently known to us or that we currently do not believe are material. If any of the risks actually occur, our business, financial condition, results of operations, and prospects could be adversely affected. In that event, the market price of our common stock could decline, and you could lose part or all of your investment.

Factors That May Affect Our Business, Financial Condition and Future Operations

Risks Related to Our Business

Our business model depends upon our ability to recognize significant emerging technologies in a timely manner and to innovate to solve the engineering problems presented by such emerging technologies.

In order to provide solutions to complex engineering problems, we must anticipate which technologies are promising and will be adopted by our customers and potential customers, and we need to be engaged early in the development of these new technologies and products. If we expend resources on the wrong technologies or are not included in the development phase of new technologies that are widely adopted in our industry, we may miss the opportunity for meaningful participation or revenue generation.  Missed opportunities like these could have a negative impact on our long-term competitiveness.

We must attract and retain specific types of engineers and other skilled professionals who are capable of innovating and solving complex network engineering problems in order to be successful.  In addition, we must create intellectual property or obtain it from third parties when necessary. We also must maintain our intellectual property and enforce the protection of our intellectual property. Failure to accomplish these tasks while managing the costs thereof will result in difficulty in distinguishing us from our competitors and may result in a significant loss of business or diminishing margin on our products.

We have significant international operations and face risks related to global public health crises such as the coronavirus epidemic.

Any outbreaks of contagious diseases or other adverse public health developments in countries where we operate could have a material and adverse effect on our business, financial condition, and results of operations. For example, the recent worldwide outbreak of COVID-19 has resulted in significant governmental measures being implemented to control the spread of the virus, including temporary closure of businesses, severe restrictions on travel and the movement of people, and other material limitations on the conduct of business.  These measures resulted in temporary work stoppages, shipping delays, material shortages and other disruptions at our manufacturing facilities in China and the United States as well as the facilities of our suppliers, customers, and our contract manufacturers. Most of these disruptions have been resolved or improved; however, if our supply chain experiences extended disruptions, we may need to seek alternate sources of supply or transportation, which may be more expensive. Alternate sources may not be available or may result in delays in shipments to us from our supply chain and subsequently to our customers, each of which would affect our results of operations. Further, if our customers’ businesses are similarly affected, they might delay or reduce purchases from us, which could adversely affect our results of operations. In addition, the continuation of the spread of COVID-19 could adversely affect the economies and financial markets of many countries, negatively impacting demand for our products and our end customers’ products. The extent to which COVID-19 will impact our business and our financial results will depend on future developments, which are highly uncertain and cannot be predicted.

7


Competition within the wireless product industry is intense and could result in decreased margins on our products or loss of key customers.  Failure to compete successfully could materially harm our prospects and financial results.

Competition in our industry can result from the following:

 

competitors, including foreign government-funded competitors, significantly reducing prices on their products causing disruption to our customer relationships.

 

customers demanding lower prices and requiring suppliers like us to engage in auctions and other forms of competitive bidding for purchase orders.

 

entrance of a significant competitor in the markets for our products, either from new participants, such as emerging low-cost international competitors, or because of a merger of existing competitors; and

 

competitors with substantially greater financial, marketing, technical and other resources with which to pursue engineering, manufacturing, marketing, and distribution of their products and delivery of their services.  These competitors may succeed in establishing technology standards or strategic alliances in the connectivity products markets, obtain more rapid market acceptance for their products, or otherwise gain a competitive advantage.

The COVID-19 pandemic has adversely impacted, and poses risks to, our business, the nature and extent of which are highly uncertain and unpredictable.

In January 2020, the World Health Organization (the “WHO”) declared a Public Health Emergency of International Concern, and on March 11, 2020, the WHO characterized COVID-19 as a pandemic. This pandemic has resulted in a global health crisis that has adversely affected broader economies, financial markets, and our business environment.  During 2020, the Company took steps to mitigate risks related to the pandemic by working with our employees, customers, suppliers, and other stakeholders. We continue to monitor the global impact of the COVID-19 pandemic. The pandemic has adversely affected, and is expected to continue to adversely affect, certain elements of our business. For brief periods during 2020, portions of our workforce were unable to work effectively due to illness and containment measures, including quarantines, facility closures, illness precautions, travel restrictions, and other restrictions. While spread of the pandemic has slowed and certain of these restrictions have been lifted, we may continue to experience volatility and delays in customer demand as a result of the impact of the pandemic on their businesses. In addition, we have instituted work-from-home guidelines for all employees who can work remotely. An extended period of remote work arrangements could strain our business plans, introduce operational risk, including, but not limited to, cybersecurity risks, and impair our ability to manage our business. Further, our management is focused on mitigating the spread of COVID-19, which has required and will continue to require a substantial investment of time and resources across our business and could delay other company initiatives. If the pandemic continues, we may experience additional adverse impacts on our operational and commercial activities, including rising costs, volatility in customer orders and purchases and declines in collections of accounts receivable, which may be material. Furthermore, the pandemic has impacted and may further impact the broader economies of affected countries, including negatively impacting economic growth, the proper functioning of financial and capital markets, foreign currency exchange rates and interest rates.  Due to the global breadth of the pandemic, and the range of governmental and community reactions thereto, there is uncertainty around its duration, ultimate impact, and the timing of recovery. Therefore, the pandemic could lead to an extended disruption of economic activity, delays in our sales cycle, customers cancelling purchases of our products and the impact on our stock price, consolidated results of operations, financial position and cash flows could be material.

Conducting business in foreign countries involves additional financial, operating, and regulatory risks.

A substantial portion of our manufacturing, and a portion of our research and development and sales activities is conducted outside the United States, primarily in China.

On March 5, 2020, PCTEL (Tianjin) Wireless Telecommunications Products, Co. Ltd., a wholly owned subsidiary of the Company (“PCTEL Tianjin”), entered into a letter agreement with Wang Zhuang Village Committee of Tianjin, China (the “Letter Agreement”) specifying the terms for extension of the lease of the premises on which PCTEL Tianjin currently conducts its manufacturing activities in Tianjin, China (the “Tianjin Lease”) to October 2022. The Letter Agreement did not, however, effect the lease extension. The Tianjin Lease expired on October 8, 2020 without extension.  On October 16, 2020, the Wang Zhuang Village Committee issued a notice informing PCTEL Tianjin that the Chinese Party Central Committee and the State Council are accelerating the layout optimization and transformation of the industrial park in which the leased premises is located, and accordingly leases and lease extensions for all premises in the industrial park have been suspended and rent collection has been postponed. The letter indicates that if the Tianjin Lease extension is subsequently approved, the rent for the period from October 9, 2020 to the date of the Tianjin Lease extension (the “Intervening Period”) will then be due and payable.  If the Tianjin Lease extension is not approved, PCTEL Tianjin will need to vacate the premises and no rent will be due for the Intervening Period.  PCTEL Tianjin has not received an indication of the likelihood of approval of the Tianjin Lease extension, the length of the Intervening Period or the notice period for vacating the leased premises; provided, however,

8


based upon past practices and verbal assurances, we believe that PCTEL Tianjin will have not less than 30 days to vacate the leased premises if the Lease Extension is not approved.

As a result of the uncertainty regarding the Tianjin Lease renewal, we are refining our transition plan for the manufacturing activities conducted on the leased premises.  Under the transition plan, we expect to maintain small operations in Tianjin and will utilize our existing contract manufacturers in China and elsewhere, as well as our Bloomingdale, Illinois facility for production of the products currently produced on the leased premises.  Once transitioned, we do not intend to resume production of the transitioned products on the leased premises even if permitted.  If PCTEL Tianjin is given an opportunity to extend the Tianjin Lease, PCTEL Tianjin will seek to extend the term for a short period in which the transition will be ongoing.  While we believe that we will be able to maintain our supply chain and on-time product delivery during the transition period, the contemplated transition of production may initially result in quality issues, delays of in product deliveries and increased production costs which could negatively impact our revenue, expenses, and reputation. We are devoting substantial resources to assure the least disruptive transition of manufacturing processes allowed by the transition time allotted.

In addition, there are a number of risks inherent in doing business in foreign countries, including: (i) fluctuations in the value of the U.S. dollar relative to other currencies, and in particular the impact of a re-valuation of the Chinese Yuan; (ii) impact of tariffs or trade wars among the countries in which we do business; (iii) difficulties in repatriation of earnings; (iv) disruption to our supply chain, whether as a result of the spread of COVID-19 or other factors which limit our ability to import materials and export products;  (v) nationalist sentiment creating advantages for our competitors in their home countries; (vi) impact of labor unrest, potentially in connection with the reduction in force of a significant portion of our workforce in Tianjin, China (vii) unexpected legal or regulatory changes, particularly changes to environmental, labor or manufacturing regulations; (viii) lack of sufficient protection for intellectual property rights and the risk of theft and forced transfer of intellectual property; (ix) difficulties in recruiting and retaining personnel and managing international operations;(x) under-developed infrastructure; and (xi) other unfavorable political or economic factors which could include nationalization of the wireless communications or related industries.  If we are unable to successfully manage these and other risks pertaining to our international activities, our operating results, cash flows and financial position could be materially and adversely affected.

All of our imports from mainland China are subject to U.S. tariffs ranging from 7.5% to 25.0%.  The tariffs apply to the antennas sent from our facility in Tianjin, China and our China-based contract manufacturers to our U.S.-based customers and components and materials sent from our Tianjin facility and our China-based contract manufacturers to our Bloomingdale, Illinois facility for final assembly.  Tariffs impact the gross margin that we earn on sales of our products because we have not been able to adjust all our prices on all of our affected products to cover the entire cost of the imposed tariffs. We will continue to monitor and adjust prices as market conditions permit.  The impact of the tariffs on our future revenue and profitability is uncertain. We do not believe these tariffs resulted in a significant loss of revenue in 2019 or 2020.

Any delays in our sales cycles could result in customers canceling purchases of our products.

Sales cycles for our products with major customers can be lengthy, often lasting nine months or longer.  In addition, it can take an additional nine months or more before a customer requires volume production of our products.  Sales cycles with our major customers are lengthy for several reasons, including:

 

our OEM customers and carriers usually complete a lengthy technical evaluation of our products, over which we have no control, before placing a purchase order, and

 

the development of new technologies and commercialization of products incorporating new technologies frequently are delayed.

A significant portion of our operating expenses is relatively fixed and is largely based on our forecasts of volume and timing of orders.  The lengthy sales cycles make forecasting the volume and timing of product orders difficult.  In addition, the delays inherent in lengthy sales cycles raise additional uncertainty that customers may decide to cancel or change product phases.  If customer cancellations or product changes were to occur, this could result in the loss of anticipated sales without enough time for us to reduce our operating expenses.

Disruption in our manufacturing and supply chains could adversely impact our sales and reputation.

We assemble our antennas in our facilities located in Bloomingdale, Illinois, and Tianjin, China, and test & measurement products at our facility in Clarksburg, Maryland. We may experience delays, disruptions, or capacity constraints (whether due to the non-renewal of our Tianjin, China facility lease, the COVID-19 pandemic or otherwise) or quality control problems at our assembly facilities, which could result in lower yields or delays of product shipments to our customers. In addition, a significant number of our antennas are currently manufactured in China by contract manufacturers and we are transitioning additional products currently manufactured in our Tianjin facility to contract manufacturers in China and elsewhere. Any disruption of our own or contract manufacturers' operations could cause delayed product delivery, which could negatively impact our sales, competitive reputation, and position. Moreover, if we do not

9


accurately forecast demand for our products, we will have excess or insufficient parts to build our products, either of which could materially affect our operating results and may lead to obsolete inventory.

Given the dynamic nature of the COVID-19 pandemic, our operations, including our manufacturing facilities and those of our contract manufacturers, may slow again depending on whether there are future resurgences in infection rates and the imposition of additional containment measures. Early in the first quarter 2020, our Tianjin, China facility ceased production for approximately one month and our Chinese contract manufacturers ceased production for several weeks due to the COVID-19 outbreak in China, and our U.S. manufacturing facilities shut down for two weeks in April 2020 and operated at less than full capacity in May 2020. We have limited in-house manufacturing capability. For some product lines, we outsource the manufacturing, assembly, and testing of printed circuit board subsystems. For other product lines, we purchase completed hardware platforms and add our proprietary software. While our suppliers have no unique capability, any failure by these suppliers to meet delivery commitments could cause delayed product delivery and potentially disrupt our supply chain and ability to accept new orders for products. The spread of COVID-19 has impacted supply chains worldwide and may impact our ability to produce and sell products.

In addition, in the event that for any reason our suppliers discontinue manufacturing materials used in our products, we would be forced to incur the time and expense of finding a new supplier or to modify our products in such a way that such materials were not necessary. Either of these alternatives could result in increased manufacturing costs and increased prices of our products.

In summary, in order to be successful, we must manage our operations to limit the cost of product production, accurately forecast demand for our products, avoid excess production and inventory that results in waste or obsolescence, dual source critical materials to avoid shortages and delays in shipping, build for manufacturability and avoid excessive quality issues.

Future acquisitions and investments may not yield their intended benefits.  Our failure to successfully integrate acquisitions into our existing operations could adversely affect our business.

In the future, we may make acquisitions of, or large investments in, businesses that offer products and technologies that we believe would complement our products, including wireless products and technology.  We may also make acquisitions of or investments in businesses that we believe could expand our distribution channels.  Even if we were to announce an acquisition, we may not be able to complete it.  Additionally, any future acquisition or substantial investment would present numerous risks, including:

 

difficulty in integrating the technology, operations, internal accounting controls or work force of the acquired business with our existing business,

 

disruption of our on-going business,

 

difficulty in realizing the potential financial or strategic benefits of the transaction,

 

difficulty in maintaining uniform standards, controls, procedures, and policies,

 

tax, employment, logistics, and other related issues unique to international organizations and assets we acquire,

 

possible impairment of relationships with employees and customers as a result of integration of new businesses and management personnel, and

 

impairment of assets related to resulting goodwill, and reductions in our future operating results from amortization of intangible assets.

We expect that future acquisitions may be paid in cash, shares of our common stock, or a combination of cash and our common stock.  If consideration for a transaction is paid in common stock, this would further dilute our existing stockholders. We may also incur debt to pay for an acquisition which could impose restrictive covenants on how we conduct our business.

A failure in our information technology systems could negatively impact our business.

We rely on information technology to record and process transactions, manage our business, and maintain the financial accuracy of our records. Our computer systems are subject to damage or interruption from various sources, including power outages, computer and telecommunications failures, computer viruses, security breaches, vandalism, catastrophic events, and human error. If a cyber-incident, such as a phishing or ransomware attack, virus, malware installation, server malfunction, software or hardware failure, impairment of data integrity, loss of data or other computer assets, adware or other similar issue, impairs or shuts down one or more of our computing systems or our information technology network, we may be subject to negative treatment and lawsuits. In addition, attention to remediating cyber incidents may distract our technical or management personnel from their normal responsibilities. Public announcements of such cyber incidents could occur, and negative perception of such cyber incidents could adversely affect the price of our common stock, and we could lose sales and customers. Interruptions of our computer systems could disrupt our business and could result in the loss of business and cause us to incur additional expense.

10


We, our customers and our third-party service providers face an evolving threat landscape in which cybercriminals, among others, employ a complex array of cyber-attack techniques designed to access sensitive information or disrupt our operations, including, for example, the use of fraudulent or stolen access credentials, malware, ransomware, phishing, denial of service and other types of attacks. While we have engaged experts in cybersecurity to advise us and we have taken protective measures, our information technology security threats are increasing in frequency and sophistication. Our information technology systems could be breached by unauthorized outside parties or misused by employees or other insiders’ intent on extracting sensitive information, corrupting information, or disrupting business processes. Such unauthorized access could compromise confidential information, disrupt our business, harm our reputation, result in the loss of assets, customer confidence and business and have a negative impact on our financial results.

Additional income tax expense or exposure to additional income tax liabilities could have a negative impact on our financial results.

We are subject to income tax laws and regulations in the United States, China, and various foreign jurisdictions. Significant judgment is required in evaluating and estimating our provision and accruals for these taxes. Our income tax liabilities are dependent upon the location of earnings among these different jurisdictions. Our income tax provision and income tax liabilities could be adversely affected by the jurisdictional mix of earnings, changes in valuation of deferred tax assets and liabilities and changes in tax laws and regulations. In the ordinary course of our business, we are also subject to continuous examinations of our income tax returns by tax authorities. Although we believe our tax estimates are reasonable, the results of any tax examination or related litigation could be materially different from our related historical income tax provisions and accruals. Adverse developments in an audit, examination, litigation related to previously filed tax returns, or in the relevant jurisdiction’s tax laws, regulations, administrative practices, principles, and interpretations could have a material effect on our results of operations and cash flows in the period or periods for which that development occurs, as well as for prior and subsequent periods.

Legislative or regulatory initiatives related to climate change concerns may negatively affect our business.

Concern over climate change may result in new or additional legal, legislative, and regulatory requirements to reduce or mitigate the effects of climate change on the environment, which could result in future tax, transportation, and utility increases, which could adversely affect our business.  There is also increased focus, including by investors, customers, and other stakeholders on these and other sustainability matters, including the use of plastic, energy, waste, and worker safety. Our reputation could be damaged if we do not (or are perceived not to) act responsibly with respect to sustainability matters, which could adversely affect our business, results of operations, financial position and cash flows.

Risks Related to our Common Stock.

The trading price of our stock fluctuates, sometimes significantly, based upon a variety of factors, many of which are not under our control.

Over time, our stock experiences significant changes in price on a percentage basis.  The closing price of our common stock on the Nasdaq Global Select Market fluctuated between a high of $9.33 and a low of $4.25 during 2020.  A variety of factors, many of which are not under of our control influence our stock price, including:

 

adverse changes in domestic or global economic conditions, including COVID-19 and recessions,

 

new products offered by us or our competitors,

 

actual or anticipated variations in quarterly operating results,

 

changes in financial estimates by securities analysts,

 

announcements of technological innovations,

 

our announcement of significant acquisitions, strategic partnerships, joint ventures, or capital commitments,

 

conditions or trends in our industry,

 

additions or departures of key personnel,

 

mergers and acquisitions,

 

sales of common stock by our stockholders or the Company, and

 

repurchases of our common stock by the Company.

11


 

Provisions in our charter documents may inhibit a change of control or a change of management, which may cause the market price for our common stock to decline and may inhibit a takeover or change in our control that a stockholder may consider favorable.

Provisions in our charter documents could discourage potential acquisition proposals and could delay or prevent a change in control transaction that our stockholders may favor.  Specifically, our charter documents do not permit stockholders to act by written consent, do not permit stockholders to call a stockholders meeting, and provide for a classified board of directors, which means stockholders can only elect, or remove, a limited number of our directors in any given year.  These provisions could have the effect of discouraging others from making tender offers for our shares, and as a result, these provisions may prevent the market price of our common stock from reflecting the effects of actual or rumored takeover attempts and may prevent stockholders from reselling their shares at or above the price at which they purchased their shares.  These provisions may also prevent changes in our management that our stockholders may favor.

Our board of directors has the authority to issue up to 5,000,000 shares of preferred stock in one or more series.  The board of directors can fix the price, rights, preferences, privileges, and restrictions of this preferred stock without any further vote or action by our stockholders.  The rights of the holders of our common stock will be affected by, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future.  Further, the issuance of shares of preferred stock may delay or prevent a change in control transaction without further action by our stockholders.  As a result, the market price of our common stock may decline.

Item 1B:  Unresolved Staff Comments

None.

Item 2:  Properties

The following table lists our main facilities:

 

 

 

 

 

 

 

Lease

Location

 

Square feet

 

Owned/Leased

 

Expiration (Yr)

Bloomingdale, Illinois

 

75,517

 

Owned

 

N/A

Tianjin, China

 

44,289

 

Leased (*)

 

2020 (*)

Clarksburg, Maryland

 

21,030

 

Leased

 

2031

Akron, Ohio

 

5,977

 

Leased

 

2025

Beijing, China

 

5,393

 

Leased

 

2021

 

 

 

 

 

 

 

Facility Overview

The Bloomingdale facility is used for our corporate headquarters and for antenna manufacturing, engineering, product management, and sales. The Tianjin facility is used for antenna manufacturing. The Clarksburg facility is used for assembly, engineering, and product management for test & measurement products.  Our Akron, Ohio office is used for antenna and Industrial IoT device product development and our Beijing, China office is used for antenna product development, product management, and sales. All properties are in good condition and are suitable for the purposes for which they are used.  We believe that we have adequate space for our current needs.

Facility Changes

 

(*) On March 5, 2020, PCTEL (Tianjin) Wireless Telecommunications Products, Co. Ltd., a wholly owned subsidiary of the Company (“PCTEL Tianjin”), entered into a letter agreement with Wang Zhuang Village Committee of Tianjin, China (the “Letter Agreement”) specifying the terms for extension of the lease of the premises on which PCTEL Tianjin currently conducts its manufacturing activities in Tianjin, China (the “Tianjin Lease”) to October 2022. The Letter Agreement did not, however, effect the lease extension. The Tianjin Lease expired on October 8, 2020 without extension.  On October 16, 2020, the Wang Zhuang Village Committee issued a notice informing PCTEL Tianjin that the Chinese Party Central Committee and the State Council are accelerating the layout optimization and transformation of the industrial park in which the leased premises is located, and accordingly leases and lease extensions for all premises in the industrial park have been suspended and rent collection has been postponed. The letter indicates that if the Tianjin Lease extension is subsequently approved, the rent for the period from October 9, 2020 to the date of the Tianjin Lease extension (the “Intervening Period”) will then be due and payable.  If the Tianjin Lease extension is not approved, PCTEL Tianjin will need to vacate the premises and no rent will be due for the Intervening Period.  PCTEL Tianjin has not received an indication of the likelihood of approval of the Tianjin Lease extension, the length of the Intervening Period or the notice period for vacating the leased premises; provided, however, based upon past practices and verbal assurances, we believe that PCTEL Tianjin will have not less than 30 days to vacate the leased premises if the Lease Extension is not approved.  See risk factors in Section 1A for additional information on the Tianjin lease.  

12


 

In July 2020, we signed a one-year lease renewal for its engineering design center in Beijing, China.  Under the new lease, the square footage was reduced from 11,210 square feet to 5,393 square feet. The lease period ends on June 14, 2021 and the total lease obligation is approximately $0.1 million.  We expect to renew this lease for one year.

 

In January 2019, we entered into an eleven-year lease ending February 28, 2031 for 21,030 square feet of office space in Clarksburg, Maryland for our test & measurement product line. In January 2020, we completed the move to the new Clarksburg office from our Germantown, Maryland office.  The lease for our Germantown facility ended in February 2020.  Under the terms of the Clarksburg lease, the total lease payments for the eleven-year lease are $5.0 million, and we received $1.5 million in tenant improvement incentives.

 

Our lease and sublease for our Colorado lease terminated in October 2020.

We may, from time to time, be the subject of various pending or threatened legal actions in the ordinary course of our business. All such matters are subject to many uncertainties and outcomes that are not predictable with assurance. To our knowledge, as of December 31, 2020, there were no claims or litigation pending against the Company that would be reasonably likely to have a material adverse effect on our consolidated financial position, results of operations or liquidity.

Item 4:  Mine Safety Disclosures

Not applicable.

13


PART II

Item 5:  Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information

PCTEL’s common stock has been traded on the Nasdaq Global Select Market under the symbol PCTI since our initial public offering on October 19, 1999.  As of March 12, 2021, there were 35 holders of record of the common stock.  A substantially greater number of holders of the common stock are in “street name” or beneficial holders, whose shares are held of record by banks, brokers, and other financial institutions.

We historically have paid a quarterly cash dividend on our common stock. We currently expect that comparable cash dividends will continue to be paid in the future. However, no assurances can be given that any dividends will be declared or paid on our common stock in the future, or, if declared and paid, the amount or frequency of those dividends. Our ability to pay dividends is restricted by certain laws and regulations, and the payment of dividends is within the discretion of our board of directors.

Sales of Unregistered Equity Securities

None.

 

Issuer Purchases of Equity Securities

All share repurchase programs are authorized by our Board of Directors and are announced publicly.  Such purchases may be made from time to time at predetermined prices in the open market, by block purchases, in private transactions or otherwise.  Repurchases are funded from cash on hand.

On November 6, 2019, the Board of Directors approved a share repurchase program, and on March 10, 2020, the Board of Directors reauthorized the program pursuant to which the Company was authorized to repurchase of up to $7.0 million of its common stock through the end of 2020. The Company spent $2.0 million to repurchase 375,046 shares at an average price of $5.36 during the three months ended March 31, 2020.  Due to uncertainties related to the COVID-19 pandemic and to protect our cash position, on April 1, 2020, our Board of Directors approved the termination of the stock repurchase program.

On November 4, 2020, the Board of Directors approved a new share repurchase program pursuant to which the Company may repurchase up to $5.0 million of its common stock through the end of 2021. The plan became effective November 10, 2020.  The Company spent $1.8 million to repurchase 288,573 shares at an average price of $6.30 during the three months ended December 31, 2020.

The Company did not repurchase any shares of its common stock during 2019.

The following table provides the activity of our repurchase program during the three months ended December 31, 2020:

 

Period

 

Total Number

of Shares

Purchased

 

 

Average Price

per Share

 

 

Total Number of

Shares Purchased

as Part of Publicly

Announced Programs

 

 

Maximum Number (or

Approximate Dollar

Value) of Shares That

May Yet be Purchased

Under the Programs

 

October 1 - October 31, 2020

 

 

0

 

 

NA

 

 

 

0

 

 

$

0

 

November 1 - November 30, 2020

 

 

241,063

 

 

$

6.25

 

 

 

241,063

 

 

$

3,492,772

 

December 1 - December 31, 2020

 

 

47,510

 

 

$

6.52

 

 

 

288,573

 

 

$

3,183,184

 

 

 

Item 6: Selected Financial Data

 

Not applicable.

 

 

 

 

14


 

Item 7:  Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following commentary presents a discussion and analysis of the Company’s financial condition and results of operations by its management. This review highlights the principal factors affecting earnings and the significant changes in balance sheet items for the years 2020 and 2019.  Financial information for prior years is presented when appropriate. The objective of this financial review is to enhance investor understanding of the accompanying tables and charts, the consolidated financial statements, notes to financial statements, and financial statistics appearing elsewhere in this Annual Report on Form 10-K. Where applicable, this discussion also reflects management’s insights with respect to known events and trends that have or may reasonably be expected to have a material effect on the Company’s operations and financial condition.

You should read this discussion of the Company’s financial condition and results of operations in conjunction with, and we qualify our discussion in its entirety by, the consolidated financial statements and notes thereto included elsewhere within this annual report, the material contained under Part 1, Item 1. “Description of Business” and Part I, Item 1A. “Risk Factors” of this annual report, and the cautionary disclosure about forward-looking statements at the front of Part I of this annual report.

 

Introduction

 

PCTEL is a leading global provider of wireless technology, including purpose-built Industrial Internet of Thing (“IoT”) devices, antenna systems, and test and measurement solutions. We solve complex wireless challenges to help organizations stay connected, transform, and grow. We have two businesses (antennas/Industrial IoT devices and test & measurement products) that address three market segments: Enterprise Wireless, Intelligent Transportation, and Industrial IoT.  Our antennas and Industrial IoT devices include antennas deployed in small cells, enterprise Wi-Fi access points, fleet management and transit systems, and in network equipment and devices for the Industrial IoT. Our test & measurement products improve the performance of wireless networks globally.  Mobile operators, neutral hosts, and network equipment manufacturers rely on our products to analyze, design, and optimize next generation wireless networks.

 

COVID-19

 

The COVID-19 pandemic disrupted the global economy and adversely impacted our business, including demand for our products across multiple end-markets as well as our supply chain and operations.  Our foremost focus as we respond to the pandemic has been on the health and safety of our employees. We consider our company to be an essential supplier to our customers and business partners as we provide products which our customers rely upon daily to support crucial functions such as public safety, train control, and agriculture. We continue to operate with enhanced health and safety measures across our facilities, including modifying practices to adhere to guidance from the U.S. Centers for Disease Control and Prevention and local health and governmental authorities with respect to social distancing, physical separation, personal protective equipment, and sanitization. We have restricted the number of employees permitted in common areas at any given time. We also have enhanced procedures for dealing with confirmed COVID-19 cases, compliance auditing, and manufacturing line design. Employees whose duties permit working remotely continue to do so, including our executive, sales, engineering, marketing, and customer service teams. Virtually all employees remain subject to travel restrictions and access to our premises by non-employees is restricted. We will continue to closely monitor the risks posed by COVID-19 and adjust our practices accordingly.

 

In order to mitigate some of the negative financial impact caused by the pandemic, during 2020 we executed a number of temporary cost saving measures: (i) reduced our capital spending for the year without deferring strategic ongoing initiatives; (ii) reduced operating expenses through temporary salary and director fee reductions; (iii) implemented a hiring freeze; (iv) reduced discretionary spending; and (v)  terminated our then-existing stock repurchase program as of April 1, 2020 with $5.0 million remaining. We also deferred payroll taxes under The Coronavirus Aid, Relief, and Economic Security Act.  We did not however, terminate or furlough any employees as a result of the pandemic. Because we were able to maintain our profitability and cash position in the second quarter and based on our third quarter outlook, in July 2020 we reinstated the salaries for all employees not identified as an executive or key manager and approved hiring for open positions. In August 2020, the reinstatement of 5% of the salary reductions for executives and key managers and director fees were approved.  

 

The public health situation, global response measures and corresponding impacts on various markets remain fluid and uncertain and may lead to sudden changes in trajectory and outlook. We will continue to proactively respond to the situation and may take further actions that alter our business activity as may be required by governmental authorities, or that we determine are in the best interests of our employees and operations. Although the COVID-19 pandemic adversely impacted our operations and financial results in with lower revenues and profits in 2020 compared to 2019, we remained profitable and we were able pursue our research and development and growth strategies.

 

Financial Summary

 

Revenues were $77.5 million for the year ended December 31, 2020, a decrease of 14.5% from the prior year.  By product line, revenues decreased to $27.6 million by $0.6 million (2%) for test & measurement products and decreased to $50.5 million by $12.2 million (19.4%) for antennas & Industrial IoT devices.  Gross profits of $37.9 million were lower by $3.6 million due to the impact of lower

15


revenues, but the gross profit percentage increased by 3.2% in 2020 due to a higher mix of test & measurement products which have a higher gross profit than antennas & Industrial IoT devices and a higher gross profit percentage within the test & measurement product line compared to 2019.  Operating expenses of $34.6 million decreased by $4.1 million as 2020 included lower employee costs $1.2 million, mainly cash-based incentive compensation expense, lower stock compensation expense of $1.5 million, lower sales commissions of $0.6 million, lower travel expenses of $1.0 million, and lower restructuring expense of $0.4 million, partially offset by higher development costs of $0.2 million for engineering and higher office expense and professional fees of $0.4 million.  Other income declined by $0.9 million because interest income declined by $0.4 million, the Company incurred net foreign exchange losses of $0.4 million, and other income declined by $0.1 million.  The net impact of these changes resulted in income before tax of $3.4 million in 2020 compared to income before tax of $3.8 million in 2019.

Results of Operations

Years ended December 31, 2020 and 2019

(All amounts in tables, other than percentages, are in thousands)

REVENUES BY PRODUCT LINE

 

 

 

 

 

 

 

2020 compared to 2019

 

 

 

 

 

 

 

2020

 

 

$ Change

 

 

% Change

 

 

2019

 

Antennas & Industrial IoT Devices

 

$

50,540

 

 

$

(12,168

)

 

 

-19.4

%

 

$

62,708

 

Test & Measurement Products

 

 

27,565

 

 

 

(550

)

 

 

-2.0

%

 

 

28,115

 

Corporate

 

 

(649

)

 

 

(443

)

 

not meaningful

 

 

 

(206

)

Total

 

$

77,456

 

 

$

(13,161

)

 

 

-14.5

%

 

$

90,617

 

 

 

Revenues for antennas and Industrial IoT devices of $50.5 million decreased $12.2 million (19.4%) compared to 2019, as we experienced lower revenues for antennas for public safety applications, small cells, and enterprise wireless applications. The decline in revenues for small cell antennas is primarily due to lower demand from Huawei Technologies Co., Ltd. resulting from restrictions imposed by the U.S. Department of Commerce on sales of certain products to Huawei. Revenues in the other antenna markets were also negatively impacted by delays and demand for customer orders as a result of the COVID-19 pandemic.  Revenues from Huawei declined by $2.0 million for the year ended December 31, 2020 compared to the year ended December 31, 2019.  

 

Revenues for test & measurement products of $27.6 million decreased by $0.6 million (2.0%) as higher revenues for 5G products and public safety applications offset lower revenues for products with technologies other than 5G.  

GROSS PROFIT BY PRODUCT LINE

 

 

 

2020

 

 

% of Revenues

 

 

2019

 

 

% of Revenues

 

Antennas & Industrial IoT Devices

 

$

17,665

 

 

 

35.0

%

 

$

21,841

 

 

 

34.8

%

Test & Measurement Products

 

 

20,244

 

 

 

73.4

%

 

 

19,640

 

 

 

69.9

%

Corporate

 

 

18

 

 

not meaningful

 

 

 

31

 

 

not meaningful

 

Total

 

$

37,927

 

 

 

49.0

%

 

$

41,512

 

 

 

45.8

%

 

The gross profit percentage was 49.0% for the year ended December 31, 2020, an increase of 3.2% compared to 2019.  Approximately 2.0% of the gross profit percentage increase was due to a higher mix of test & measurement products in 2020.  The proportion of revenues from test & measurement products as a percentage of total revenues increased from 31% in 2019 to 36% in 2020.  The remainder of the gross profit percentage increase was primarily due to a higher gross profit percentage for test & measurement products in 2020 compared to 2019. For test & measurement products, the gross profit percentage increased by 3.5% primarily due to revenue mix with more software content and lower inventory reserve provision expense as well as reduced intangible amortization expense in cost of sales. The inventory reserve provisions in 2019 were higher because of write-downs for excess inventory related to older components.  For antennas & Industrial IoT devices, the gross profit percentage was approximately the same as more favorable product mix and cost reductions in China offset the negative impact of lower volume.

16


CONSOLIDATED OPERATING EXPENSES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

% of Revenues

 

 

 

2020

 

 

Change

 

 

2019

 

 

2020

 

 

2019

 

Research and development

 

$

12,519

 

 

$

247

 

 

$

12,272

 

 

 

16.2

%

 

 

13.5

%

Sales and marketing

 

 

11,104

 

 

 

(1,150

)

 

 

12,254

 

 

 

14.3

%

 

 

13.5

%

General and administrative

 

 

10,808

 

 

 

(2,644

)

 

 

13,452

 

 

 

14.0

%

 

 

14.8

%

Amortization of intangible assets

 

 

32

 

 

 

(187

)

 

 

219

 

 

 

0.0

%

 

 

0.2

%

Restructuring expenses

 

 

124

 

 

 

(383

)

 

 

507

 

 

 

0.2

%

 

 

0.6

%

 

 

$

34,587

 

 

$

(4,117

)

 

$

38,704

 

 

 

44.7

%

 

 

42.7

%

 

Research and development expenses increased by $0.2 million from 2019 to 2020.  For the year ended December 31, 2020, spending on outside services and materials increased by $0.8 million and depreciation expense increased by $0.2 million, offsetting lower incentive compensation expense of $0.8 million compared to the same period in the prior year.  The spending on outside services and materials related to new product development and the depreciation expense was related to test equipment and leasehold improvements in our Clarksburg, Maryland office.  We had 56 and 55 full-time equivalent employees in research and development at December 31, 2020 and 2019, respectively.

Sales and marketing expenses include costs associated with the sales and marketing employees, sales representatives, product line management, and other direct marketing expenses.  Sales and marketing expenses decreased by approximately $1.2 million from 2019 to 2020 as lower travel expenses, lower employee sales commissions, and a credit loss recovery offset higher salary expenses.  Travel expenses were lower by $0.8 million, employee sales commissions were lower by $0.6 million, and recovery of a credit loss contributed $0.2 million.  Salary expenses increased by $0.4 million due to higher average headcount in marketing, business development, and in the U.S. sales organization.  We had 50 and 48 full-time equivalent employees in sales and marketing at December 31, 2020 and 2019, respectively.

General and administrative expenses include costs associated with the general management, finance, human resources, information technology, legal, public company costs, and other operating expenses to the extent not otherwise allocated to other functions.  General and administrative expenses decreased by $2.6 million from 2019 to 2020 primarily due to lower incentive compensation expenses. For the year ended December 31, 2020, performance-based incentive compensation expense decreased by $2.2 million, and time-based stock-based compensation declined by $0.3 million.  Additionally, administrative expenses declined by $0.1 million for our China operations.  We had 34 and 31 full-time equivalent employees in general and administrative functions at December 31, 2020 and 2019, respectively.

Amortization of intangible assets within operating expenses was approximately $32 and $0.2 million for the years ended December 31, 2020 and 2019, respectively.  The decrease in amortization expense in 2020 compared to 2019 was because all intangible assets were fully amortized in 2020.

Restructuring expenses of $0.1 million in 2020 consisted of employee severance and payroll related costs associated with the termination of 12 employees in connection with our transition of manufacturing from our Tianjin, China facility to contract manufacturers.  The restructuring expense of $0.5 million for the year ended December 31, 2019 consisted of employee severance and related costs associated with the termination of 84 employees as a result of transitioning manufacturing from our Tianjin, China facility to contract manufacturers.  See Note 4 to the financial statements for additional information related to the Tianjin restructuring.

OPERATING PROFIT

 

 

 

2020

 

 

% of Revenues

 

 

2019

 

 

% of Revenues

 

Total

 

$

3,340

 

 

 

4.3

%

 

$

2,808

 

 

 

3.1

%

 

 

Total operating profit increased $0.5 million for the year ended December 31, 2020 compared to 2019 as the positive impact of lower operating expenses offset the negative impact of lower gross profits.

OTHER INCOME, NET

 

 

 

2020

 

 

2019

 

Interest income

 

$

410

 

 

$

833

 

Foreign exchange (losses) gains

 

 

(294

)

 

 

130

 

Other, net

 

 

(10

)

 

 

19

 

 

 

$

106

 

 

$

982

 

Percentage of revenues

 

 

0.1

%

 

 

1.1

%

17


 

 

 

Other income, net consists of interest income, foreign exchange gains and losses, and interest expense.  For the year ended December 31, 2020, interest income decreased by $0.4 million due to lower average interest rates.  Foreign exchange losses during the year ended December 31, 2020 were related to fluctuation in the Chinese Yuan compared to the U.S. dollar.  The foreign exchange gains during the year ended December 31, 2019 were also related to the fluctuations in the Chinese Yuan compared to the U.S. Dollar.

EXPENSE FOR INCOME TAXES

 

 

 

2020

 

 

2019

 

Expense for income taxes

 

$

29

 

 

$

40

 

Effective tax rate

 

 

0.8

%

 

 

1.1

%

 

 

The effective tax rate for the year ended December 31, 2020 was lower than the statutory rate of 21.0% by approximately 20% primarily because we have a full valuation allowance on our deferred tax assets.

 

In accordance with ASC 740 “Accounting for Income Taxes” (“ASC 740”), we evaluate our deferred income tax assets quarterly to determine if valuation allowances are required or should be adjusted. ASC 740 requires that companies assess whether valuation allowances should be established against their deferred tax assets based on consideration of all available evidence, both positive and negative, using a “more likely than not” standard of whether the deferred tax assets will be realized.  Our net deferred tax assets consist of assets related to net operating losses and credits as well as assets related to timing differences.

 

We generated net income and tax income during 2020 but our earnings were below our projections. While we recorded pretax book income for 2020 and 2019 and we believe our financial outlook remains positive, we did not meet expectations during two of the past three years and the COVID-19 pandemic has created a high level of uncertainty. Because of difficulties with forecasting financial results historically, and due to the uncertainties associated with the COVID-19 pandemic, we maintained a full valuation allowance on our deferred tax assets at December 31, 2020. The Company’s performance versus its 2020 and 2018 projections are considered significant negative evidence that is difficult to overcome on a “more likely than not” standard through objectively verifiable data. While the Company believes its financial outlook remains positive, under the accounting standards, objective verifiable evidence will have greater weight than subjective evidence such as the Company’s projections for future growth. Based on an evaluation in accordance with the accounting standards, as of December 31, 2020, we maintained a full valuation allowance on our deferred tax assets.  We have a valuation allowance of $12.1 million recorded against our net U.S. deferred tax assets and a valuation allowance of $0.8 million recorded against our net China deferred tax assets to measure the deferred tax assets that are more likely than not to be realized based on the weight of all the available evidence.

 

Until an appropriate level of profitability is attained, we expect to maintain a full valuation allowance on our U.S. net deferred tax assets, and our China net deferred tax assets.  Any U.S. or China tax benefits or tax expense recorded on our Consolidated Statement of Income will be offset with a corresponding valuation allowance until such time that we change our determination related to the realization of deferred tax assets.  If we change our determination as to the amount of deferred tax assets that can be realized, we will adjust the valuation allowance with a corresponding impact to the provision for income taxes in the period in which such determination is made.

 

The analysis that we prepared to determine the valuation allowance required significant judgment and assumptions regarding future market conditions as well as forecasts for profits, taxable income, and taxable income by jurisdiction.  Due to the sensitivity of the analysis, changes to the assumptions in subsequent periods could have a material effect on the valuation allowance.

 

See Note 5 of the consolidated financial statements for more information on income taxes.

LIQUIDITY AND CAPITAL RESOURCES

On December 31, 2020, our cash, cash equivalents, and short-term investments were approximately $36.3 million, and we had working capital of approximately $52.9 million.  In addition, we had $4.6 million of long-term investments at December 31, 2020.  On December 31, 2020 we had $2.9 million of cash held in China bank accounts.  This cash cannot be accessed without incurring a local withholding tax rate of 10%.  These funds are currently considered permanently reinvested.  Our primary source of liquidity is cash provided by operations and a significant balance of cash, with short term swings in liquidity supported short-term investments.  The balance has fluctuated with cash from operations, acquisitions and divestitures, payment of dividends and the repurchase of our common shares.

Within operating activities, we are historically a net generator of operating funds from our income statement activities.  In periods of expansion, we expect to use cash from our balance sheet.

18


Within investing activities, capital spending historically ranges between 2.0% and 4.0% of our revenues and the primary use of capital is for manufacturing and engineering development requirements.  Our capital expenditures during the year ended December 31, 2020 were approximately 5.3% of revenues. Capital expenditures were higher than the upper limit of our historical range in 2020 because we spent $1.4 million for leasehold improvements for the Clarksburg, Maryland facility that opened in 2020.

We historically have significant transfers between investments and cash as we rotate large cash balances and short-term investment balances between money market funds, which are accounted for as cash equivalents, and other investments.  We have a history of supplementing our organic revenue growth with acquisitions of product lines or companies, resulting in significant uses of our cash and short-term investment balances from time to time.  We expect the historical trend for capital spending and the variability caused by moving money between cash and investments and periodic acquisition activity to continue in the future.

Within financing activities, we are a net user of funds.  We have historically used funds for quarterly dividends and generated funds from the exercise of stock options and proceeds from the issuance of common stock through the Employee Stock Purchase Plan (“ESPP”).  We also periodically repurchase shares of our common stock through share repurchase programs.  We used $3.8 million of cash during 2020 for the repurchase of 663,619 shares.

 

We believe that cash generated by operating activities, our short-term investment balances, and cash on our balance sheet will be enough to support our operations for the next 12 months, including dividend payments and capital expenditures.

The following table is a summary of cash flow activity for the years ended December 31, 2020 and 2019:

 

 

 

Years Ended December 31,

 

 

 

2020

 

 

2019

 

Net cash flow provided by (used in):

 

 

 

 

 

 

 

 

Operating activities

 

$

13,420

 

 

$

10,918

 

Investing activities

 

$

(6,759

)

 

$

(3,949

)

Financing activities

 

$

(8,262

)

 

$

(4,136

)

Net (decrease) increase in cash and cash equivalents

 

$

(1,601

)

 

$

2,833

 

Operating Activities:

We generated $13.4 million of funds from operating activities during the year ended December 31, 2020.  The cash from operating activities includes net income of $3.4 million, the add-back of $5.5 million for non-cash expenses, and positive net changes in operating assets and liabilities of $4.5 million.  The balance sheet provided cash due to lower inventories of $2.1 million, higher accounts payable of $1.1 million and lower accounts receivables of $1.0 million.  The decrease in inventories was primarily within the antenna product line due to lower revenues in the fourth quarter compared to fourth quarter in 2019, and due to the transition of manufacturing to contract manufactures.  Accounts payable were higher due to timing of purchases in the fourth quarter 2020 compared to the fourth quarter 2019 and by extending the payment cycle for certain vendors.  Accounts receivable declined because revenues were lower in the fourth quarter 2020 compared to the fourth quarter 2019.

We generated $10.9 million of funds from operating activities during the year ended December 31, 2019.  The cash from operating activities was due to net income of $3.8 million, the add-back of $7.9 million for non-cash expenses, offset by changes in operating assets and liabilities of $0.8 million.  We used cash of $2.8 million for the decrease of accounts payable.  Accounts receivable increased by $1.5 million primarily because revenues were higher in the fourth quarter 2019 by $1.7 million compared to the fourth quarter 2018.  Accrued liabilities were higher by $2.3 million primarily because the Company’s accrual for its Short-Term Incentive Plan was $2.6 million at December 31, 2019 and was $0 at December 31, 2018.

Investing Activities:

Our investing activities used $6.8 million of cash during the year ended December 31, 2020.  Redemptions and maturities of our short-term investments during the year provided $47.0 million in cash and we rotated $49.7 million of cash into new short-term and long-term investments. We used $4.1 million of cash for capital expenditures during the year ended December 31, 2020.  The capital expenditures during 2020 included $2.1 million for leasehold improvements and furniture and equipment for the new Clarksburg, Maryland office.

Our investing activities used $3.9 million of cash during the year ended December 31, 2019.  Redemptions and maturities of our short-term investments during the year provided $46.6 million in cash and we rotated $48.2 million of cash into new short-term investments. We used $2.3 million of cash for capital expenditures during the year ended December 31, 2019.  The capital expenditures during 2019 included $0.6 million for leasehold improvements for the new Clarksburg, Maryland office.

Financing Activities:

 

19


 

We used $8.2 million of cash for financing activities during the year ended December 31, 2020. We used $2.0 million for the common stock repurchases during the first quarter and $1.8 million for common stock repurchases during the fourth quarter. We used $4.1 million for cash dividends paid quarterly during 2020 and we used $1.1 million for payroll taxes related to stock-based compensation. The tax payments related to our common stock issued for restricted stock awards. We received $0.9 million in proceeds from the purchase of shares through our ESPP.  On April 16, 2020, we received a $3.5 million paycheck protection program (“PPP”) loan from the Small Business Administration. Based upon subsequent guidance regarding PPP loan eligibility, we returned the funds on April 30, 2020.

We used $4.1 million of cash for financing activities during the year ended December 31, 2019. We used $4.1 million for cash dividends paid quarterly and we used $1.2 million for payroll taxes related to stock-based compensation. The tax payments related to our common stock issued for restricted stock awards.  We received $1.2 million in proceeds from the purchase of shares through our ESPP.

Contractual Obligations and Commercial Commitments

The following summarizes our contractual obligations on December 31, 2020 for office and product assembly facility leases, office equipment leases and purchase obligations, and the effect such obligations are expected to have on the liquidity and cash flows in future periods (in thousands):

 

 

 

 

Payments Due by Period

 

 

 

 

 

 

 

 

Less than

 

 

 

 

 

 

 

 

 

 

After

 

 

 

 

Total

 

 

1 year

 

 

1-3 years

 

 

4-5 years

 

 

5 years

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Facility leases

(a)

 

$

5,356

 

 

$

472

 

 

$

1,708

 

 

$

995

 

 

$

2,181

 

Future payments for maintenance lease of office equipment

(b)

 

 

158

 

 

 

41

 

 

 

117

 

 

 

0

 

 

 

0

 

Purchase obligations

(c)

 

 

10,943

 

 

 

10,942

 

 

 

1

 

 

 

0

 

 

 

0

 

Total

 

 

$

16,457

 

 

$

11,455

 

 

$

1,826

 

 

$

995

 

 

$

2,181

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(a)

Future payments for the lease of office and production facilities.

(b)

Future payments for the maintenance lease of office equipment.

(c)

Purchase orders or contracts for the purchase of inventory, as well as for other goods and services, in the ordinary course of business, and excludes the balances for purchases currently recognized as liabilities on the balance sheet.

We have a liability related to uncertain positions for income taxes of $0.8 million on December 31, 2020.  We do not know when this obligation will be settled.

 

Off-Balance Sheet Arrangements

None.

Critical Accounting Policies and Estimates

The preparation of our consolidated financial statements in accordance with generally accepted accounting principles requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the period reported.  By their nature, these estimates and judgments are subject to an inherent degree of uncertainty.  Management bases its estimates and judgments on historical experience, market trends, and other factors that are believed to be reasonable under the circumstances.  Actual results may differ from these estimates under different assumptions or conditions.

Revenue Recognition - We sell antennas & Industrial IoT devices and test & measurement products.  All our revenue relates to contracts with customers. Our accounting contracts are from purchase orders or purchase orders combined with purchase agreements. Most of our revenue is recognized on a “point-in-time” basis and a nominal amount of revenue is recognized “over time”. For the sale of products, we satisfy our performance obligations generally at the time of shipment, or upon delivery based on the contractual terms with our customers. For antennas shipped on consignment, we recognize revenue upon delivery from the consignment location. For our test & measurement software tools, we have performance obligations to provide software maintenance and support for one year. We recognize revenues for the maintenance and support over this period.  We allow our major antenna distributors to return a limited number of products under specified terms and conditions and accrue for product returns.  See Note 14 for additional information related to revenue policies.

Accounts Receivable and Allowance for Credit Losses - Accounts receivable is recorded at invoiced amount.  We extend credit to our customers based on an evaluation of a customer’s financial condition and collateral is generally not required.  We maintain an allowance

20


for credit losses for estimated uncollectible accounts receivable.  The allowance is based on our assessment of known delinquent accounts, historical experience, and other currently available evidence of the collectability and the aging of accounts receivable.  Although management believes the current allowance is sufficient to cover existing exposures, there can be no assurance against the deterioration of a major customer’s creditworthiness, or against defaults that are higher than what has been experienced historically.

Excess and Obsolete Inventory - We maintain reserves to reduce the value of inventory to net realizable value and reserves for excess and obsolete inventory.  Reserves for excess inventory are calculated based on our estimate of inventory more than normal and planned usage.  Reserves for obsolete inventory are based on our identification of inventory where carrying value is above net realizable value.  We believe the accounting estimate related to excess and obsolete inventory is a critical accounting estimate because it requires us to make assumptions about future sales volumes and product mix, both of which are highly uncertain.  Changes in these estimates can have a material impact on our financial statements.

Warranty Costs - We offer repair and replacement warranties of primarily five years for antennas & Industrial IoT devices and scanning receiver products.  Our warranty reserve is based on historical sales and costs of repair and replacement trends.  We believe that the accounting estimate related to warranty costs is a critical accounting estimate because it requires us to make assumptions about matters that are highly uncertain, including future rates of product failure and repair costs.  Changes in warranty reserves could be material to our financial statements.

Stock-based Compensation - We recognize stock-based compensation expense for all equity awards in accordance with fair value recognition provisions.  For service-based equity awards, we amortize stock-based compensation expense over the requisite service period.  For performance-based equity awards, we amortize stock-based compensation expense based on the estimated achievement award over the performance period.  We record forfeitures as incurred.  Stock-based compensation expense is dependent on assumptions used in calculating such amounts.  These assumptions include risk-free interest rates, expected term of the stock-based compensation instrument granted, volatility of stock and option prices, expected time between grant date and date of exercise, attrition, performance, and other factors.  These factors require us to use judgment.  Our estimates of these assumptions typically are based on historical experience and currently available marketplace data.  While management believes that the estimates used are appropriate, differences in actual experience or changes in assumptions may affect our future stock-based compensation expense and disclosures.

Income Taxes - Income taxes are accounted for under the asset and liability method.  Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

Our Company has an international subsidiary located in Tianjin and a representative office located in Hong Kong.  Our Tianjin subsidiary has a branch office in Beijing, China.  The complexities that arise from operating in different tax jurisdictions inevitably lead to an increased exposure to worldwide taxes.  Should review of the tax filings result in unfavorable adjustments to our tax returns, the operating results, cash flows, and financial position could be materially and adversely affected.

We are subject to the continuous examination of our income tax returns by the Internal Revenue Service and other tax authorities.  A change in the assessment of the outcomes of such matters could materially impact our consolidated financial statements.  The calculation of tax liabilities involves dealing with uncertainties in the application of complex tax regulations.  We recognize liabilities for anticipated tax audit issues based on our estimate of whether, and the extent to which, additional taxes may be required.  If we ultimately determine that payment of these amounts is unnecessary, then we reverse the liability and recognize a tax benefit during the period in which we determine that the liability is no longer necessary.  We also recognize tax benefits to the extent that it is more likely than not that our positions will be sustained if challenged by the taxing authorities.  To the extent we prevail in matters for which liabilities have been established or are required to pay amounts in excess of our liabilities, our effective tax rate in a given period may be materially affected.  An unfavorable tax settlement would require cash payments and may result in an increase in our effective tax rate in the year of resolution.  A favorable tax settlement would be recognized as a reduction in our effective tax rate in the year of resolution.

Valuation Allowances for Deferred Tax Assets - We establish an income tax valuation allowance when available evidence indicates that it is more likely than not that all or a portion of a deferred tax asset will not be realized.  In assessing the need for a valuation allowance, we consider the amounts and timing of expected future deductions or carryforwards and sources of taxable income that may enable utilization.  We maintain an existing valuation allowance until enough positive evidence exists to support its reversal.  Changes in the amount or timing of expected future deductions or taxable income may have a material impact on the level of income tax valuation allowances.  Our assessment of the realizability of the deferred tax assets requires judgment about our future results.  Inherent in this estimation is the requirement for us to estimate future book and taxable income and possible tax planning strategies.  These estimates require us to exercise judgment about our future results, the prudence and feasibility of possible tax planning strategies, and the

21


economic environment in which we do business.  It is possible that the actual results will differ from the assumptions and require adjustments to the allowance.  Adjustments to the allowance would affect future net income.

Impairment Reviews of Goodwill – We perform an annual impairment test of goodwill as of the end of the first month of the fiscal fourth 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 our annual impairment test, we may consider qualitative factors that would indicate possible impairment. A quantitative fair value assessment is performed at the reporting unit level.  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.

The process of evaluating the potential impairment of goodwill is subjective because it requires the use of estimates and assumptions in determining a reporting unit’s fair value. We calculate the fair value of each reporting unit by using the income approach based on the present value of future discounted cash flows. The discounted cash flow method requires us to use estimates and judgments about the future cash flows of the reporting units. Although we base cash flow forecasts on assumptions that are consistent with plans and estimates we use to manage the underlying reporting units, there is significant judgment in determining the cash flows attributable to these reporting units, including markets and market share, sales volumes and mix, research and development expenses, tax rates, capital spending, discount rate and working capital changes. Cash flow forecasts are based on reporting unit operating plans for the early years and business projections in later years. We believe the accounting estimate related to the valuation of goodwill is a critical accounting estimate because it requires us to make assumptions that are highly uncertain about the future cash flows of our reporting units.

Impairment Reviews of Finite-Lived Intangible Assets - We evaluate the carrying value of finite-lived intangible assets and other long-lived assets for impairment whenever indicators of impairment exist. We test finite-lived intangible assets for recoverability using undiscounted cash flows. Although we base cash flow forecasts on assumptions that are consistent with plans and estimates we use to manage the underlying reporting units, there is significant judgment in determining the cash flows attributable to these reporting units, including markets and market share, sales volumes and mix, research and development expenses, capital spending and working capital changes. Cash flow forecasts are based on operating plans and business projections. We compare the tax-affected undiscounted cash flows to the carrying value of the asset group. If the carrying value exceeds the sum of the undiscounted cash flows of the asset group, we would assess the fair value of the intangible assets in the group to determine if an impairment charge should be recognized in the financial statements.

We believe the accounting estimate related to the valuation of intangible assets is a critical accounting estimate because it requires us to make assumptions about future sales prices and volumes for products that involve new technologies and applications where customer acceptance of new products or timely introduction of new technologies into their networks are uncertain. The recognition of impairment could be material to our financial statements.

Recent Accounting Pronouncements

See Note 1 Organization and Summary of Significant Accounting Policies in Item 1 of this Form 10-K for a discussion of recent accounting pronouncements.

 

Item 7A:  Quantitative and Qualitative Disclosures about Market Risk

We are exposed to market risk from changes in interest rates, foreign exchange rates, credit risk, and investment risk as follows:

Interest Rate Risk

We manage the sensitivity of our results of operations to interest rate risk on cash equivalents by maintaining a conservative investment portfolio.  The primary objective of our investment activities is to preserve principal without significantly increasing risk.  To achieve this objective, we maintain our portfolio of cash equivalents and short-term investments in U.S. government agency bonds or money market funds invested exclusively in government agency bonds and A or higher rated corporate bonds.

Due to changes in interest rates, our future investment income may fall short of expectations.  A hypothetical increase or decrease of 10% in market interest rates would not result in a material change in interest income earned through maturity on investments held at December 31, 2020.  We do not hold or issue derivatives, derivative commodity instruments or other financial instruments for trading purposes.

Foreign Currency Risk

 

22


 

Cross-border transactions, both with external parties and with our intercompany relationship, result in increased exposure to foreign exchange effects.  We are exposed to currency risk primarily with the Chinese yuan due to our operations in China.  Fluctuations with the Chinese yuan against the U.S. dollar could have an adverse effect on our results of operations and cash flows. We manage certain operating activities at the local level with revenues, costs, assets, and liabilities generally being denominated in local currencies. However, our results of operations and assets and liabilities are reported in U.S. dollars and thus will fluctuate with changes in exchange rates between such local currencies and the U.S. dollar. For the year ended December 31, 2020, approximately 3% of revenue and 17% of expenses were transacted in foreign currencies as compared to 5% and 25%, respectively for the year ended December 31, 2019. The percentage decline in both revenues and expenses during 2020 was due to the decrease in revenues for antennas & Industrial IoT devices relative to test & measurement products.

We had $2.9 million of cash in bank accounts in China on December 31, 2020.  As of December 31, 2020, we had no intention of repatriating cash in our foreign bank accounts in China.  If we decide to repatriate the cash in these foreign bank accounts, the process may be time-consuming and expensive.  We may also be exposed to foreign currency fluctuations and taxes if we repatriate these funds.

Credit Risk

The financial instruments that potentially subject us to credit risk consist primarily of trade receivables.  For trade receivables, credit risk is the potential for a loss due to a customer not meeting its payment obligations.  Our customers are concentrated in the wireless communications industry.  Estimates are used in determining an allowance for amounts which we may not be able to collect, based on current trends, the length of time receivables are past due and historical collection experience.  Provisions for and recovery of credit losses are recorded as sales and marketing expense in the consolidated statements of income.  We perform ongoing evaluations of customers' credit limits and financial condition.  We do not require collateral from customers, but for some customers we do require partial or full prepayments.  See Note 1 to the consolidated financial statements for additional information on credit losses.

 

The following tables represents customers that accounted for 10% or more of total trade accounts receivable on December 31, 2020 and 2019.

 

 

 

As of December 31,

 

Trade Accounts Receivable

 

2020

 

 

2019

 

Customer A

 

31%

 

 

15%

 

Customer B

 

10%

 

 

8%

 

Customer C

 

0%

 

 

11%

 

 

23


 

Item 8:  Financial Statements and Supplementary Data

PCTEL, INC.

INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

Page

Reports of Independent Registered Public Accounting Firm

 

25

 

 

 

Consolidated Balance Sheets as of December 31, 2020 and 2019

 

28

 

 

 

Consolidated Statements of Income for the years December 31, 2020, and 2019

 

29

 

 

 

Consolidated Statements of Comprehensive Income for the years ended December 31, 2020, and 2019

 

30

 

 

 

Consolidated Statements of Stockholders' Equity for the years ended December 31, 2020, and 2019

 

31

 

 

 

Consolidated Statements of Cash Flows for the years ended December 31, 2020, and 2019

 

32

 

 

 

Notes to the Consolidated Financial Statements

 

33

 

 

 

 

 

 

 

24


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

Board of Directors and Stockholders

PCTEL, Inc.

 

 

Opinion on the financial statements

We have audited the accompanying consolidated balance sheets of PCTEL Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the years then ended, and the related notes and financial statement schedules included under Item 15(a) (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the years then ended, in conformity with accounting principles generally accepted in the United States of America.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated March 12, 2021 expressed an unqualified opinion.

 

 

Basis for opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

 

Critical audit matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

 

Deferred Tax Asset Valuation Allowance

 

The Company’s deferred tax asset valuation allowance was $12.9 million as of December 31, 2020. As described in Note 5 to the consolidated financial statements, the Company’s deferred tax assets consist of federal and state net operating losses, credits, and timing differences. On a regular basis, the Company evaluates the recoverability of deferred tax assets and the need for a valuation allowance.  This evaluation requires significant judgement. We identified the deferred tax asset valuation allowance as a critical audit matter.

 

The principal considerations for our determination that the deferred tax asset valuation allowance is a critical audit matter are the Company’s evaluation of the recoverability of deferred tax assets and the need for a valuation allowance involved a high degree of auditor judgment due to the significant estimation required.  In particular, the evaluation of the recoverability of deferred tax assets and the need for a valuation allowance was sensitive to significant judgment and assumptions regarding future market conditions as well as forecasts for profits, taxable income, and taxable income by jurisdiction.

 

 

 

 

 

 

 

25


 

 

 

Our audit procedures related to the deferred tax asset valuation allowance included the following procedures, among others. We tested the design and operating effectiveness of key controls over the Company’s deferred tax asset valuation allowance, including review of the valuation model and significant assumptions used. We tested the significant judgments and assumptions discussed above by assessing the reasonableness of the Company’s forecasts compared to current results and forecasted industry trends. We performed sensitivity analysis of certain assumptions to evaluate potential changes in the assumptions.  With the assistance of our tax specialists, we evaluated the reasonability of maintaining a full valuation allowance on the Company’s deferred tax assets with respect to the recoverability and utilization of net operating losses. We also tested the underlying source information and the mathematical accuracy of the calculations.  

 

 

/s/ GRANT THORNTON LLP

 

We have served as the Company’s auditor since 2006.

Chicago, Illinois

March 12, 2021

26


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders

PCTEL, Inc.

 

Opinion on internal control over financial reporting

We have audited the internal control over financial reporting of PCTEL Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2020, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in the 2013 Internal Control—Integrated Framework issued by COSO.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of and for the year ended December 31, 2020, and our report dated March 12, 2021 expressed an unqualified opinion on those financial statements.

 

Basis for opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

 

Definition and limitations of internal control over financial reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ GRANT THORNTON LLP

Chicago, Illinois

March 12, 2021

27


PCTEL, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

 

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

 

December 31,

 

 

 

2020

 

 

2019

 

ASSETS

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

5,761

 

 

$

7,094

 

Short-term investment securities

 

 

30,582

 

 

 

32,556

 

Accounts receivable, net of allowances of $113 and $104 at December 31, 2020 and

 

 

 

 

 

 

 

 

December 31, 2019, respectively

 

 

16,601

 

 

 

17,380

 

Inventories, net

 

 

9,984

 

 

 

11,935

 

Prepaid expenses and other assets

 

 

1,685

 

 

 

1,842

 

Total current assets

 

 

64,613

 

 

 

70,807

 

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

 

12,505

 

 

 

11,985

 

Long-term investment securities

 

 

4,640

 

 

 

0

 

Goodwill

 

 

3,332

 

 

 

3,332

 

Intangible assets, net

 

 

0

 

 

 

144

 

Other noncurrent assets

 

 

2,441

 

 

 

2,969

 

TOTAL ASSETS

 

$

87,531

 

 

$

89,237

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Accounts payable

 

$

4,430

 

 

$

3,190

 

Accrued liabilities

 

 

7,316

 

 

 

9,382

 

Total current liabilities

 

 

11,746

 

 

 

12,572

 

Long-term liabilities

 

 

4,387

 

 

 

3,315

 

Total liabilities

 

 

16,133

 

 

 

15,887

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Common stock, $0.001 par value, 50,000,000 and 100,000,000 shares authorized at

 

 

 

 

 

 

 

 

December 31, 2020 and December 31, 2019, respectively, and 18,429,350 and 18,611,289

 

 

 

 

 

 

 

 

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

 

 

18

 

 

 

19

 

Additional paid-in capital

 

 

128,250

 

 

 

133,954

 

Accumulated deficit

 

 

(56,888

)

 

 

(60,305

)

Accumulated other comprehensive income (loss)

 

 

18

 

 

 

(318

)

Total stockholders’ equity

 

 

71,398

 

 

 

73,350

 

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

 

$

87,531

 

 

$

89,237

 

 

 

 

 

 

 

 

 

 

 

 

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

28


PCTEL, INC.

CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share data)

 

 

 

Years Ended December 31,

 

 

 

2020

 

 

2019

 

REVENUES

 

$

77,456