0001564590-21-055570 | 10-Q | XBRL Viewer

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Document and Entity Information - shares	9 Months Ended
Document and Entity Information - shares	Sep. 30, 2021	Nov. 09, 2021
Cover [Abstract]
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Sep. 30, 2021
Document Fiscal Year Focus	2021
Document Fiscal Period Focus	Q3
Entity Registrant Name	PCTEL, Inc.
Entity Central Index Key	0001057083
Entity Incorporation, State or Country Code	DE
Entity Current Reporting Status	Yes
Entity Interactive Data Current	Yes
Current Fiscal Year End Date	--12-31
Entity Filer Category	Accelerated Filer
Entity Small Business	true
Entity Emerging Growth Company	false
Entity Shell Company	false
Title of 12(b) Security	Common Stock
Trading Symbol	PCTI
Security Exchange Name	NASDAQ
Entity File Number	000-27115
Entity Tax Identification Number	77-0364943
Entity Address, Address Line One	471 Brighton Drive
Entity Address, City or Town	Bloomingdale
Entity Address, State or Province	IL
Entity Address, Postal Zip Code	60108
City Area Code	630
Local Phone Number	372-6800
Entity Common Stock Shares Outstanding		18,239,387
Document Quarterly Report	true
Document Transition Report	false

Condensed Consolidated Balance Sheets (unaudited) - USD ($) $ in Thousands	Sep. 30, 2021	Dec. 31, 2020
ASSETS
Cash and cash equivalents	$ 9,772	$ 5,761
Short-term investment securities	22,680	30,582
Accounts receivable, net of allowances of $62 and $113 at September 30, 2021 and December 31, 2020, respectively	15,846	16,601
Inventories, net	12,983	9,984
Prepaid expenses and other assets	1,282	1,685
Total current assets	62,563	64,613
Property and equipment, net	12,369	12,505
Long-term investment securities	0	4,640
Goodwill	6,429	3,332
Intangible assets, net	1,727	0
Other noncurrent assets	2,479	2,441
TOTAL ASSETS	85,567	87,531
LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable	4,615	4,430
Accrued liabilities	10,269	7,316
Total current liabilities	14,884	11,746
Long-term liabilities	4,238	4,387
Total liabilities	19,122	16,133
Stockholders’ equity:
Common stock, $0.001 par value, 50,000,000 shares authorized at September 30, 2021 and December 31, 2020, respectively, and 18,159,628 and 18,429,350 shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively	18	18
Additional paid-in capital	123,702	128,250
Accumulated deficit	(57,055)	(56,888)
Accumulated other comprehensive (loss) income	(220)	18
Total stockholders’ equity	66,445	71,398
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$ 85,567	$ 87,531

Condensed Consolidated Balance Sheets (Parenthetical) (unaudited) - USD ($) $ in Thousands	Sep. 30, 2021	Dec. 31, 2020
Statement Of Financial Position [Abstract]
Allowance for accounts receivable	$ 62	$ 113
Common stock, par value	$ 0.001	$ 0.001
Common stock, shares authorized	50,000,000	50,000,000
Common stock, shares issued	18,159,628	18,429,350
Common stock, shares outstanding	18,159,628	18,429,350

Condensed Consolidated Statements of Operations (unaudited) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2021	Sep. 30, 2020	Sep. 30, 2021	Sep. 30, 2020
Income Statement [Abstract]
REVENUES	$ 22,411	$ 18,923	$ 61,799	$ 56,271
COST OF REVENUES	12,157	9,348	33,266	28,960
GROSS PROFIT	10,254	9,575	28,533	27,311
OPERATING EXPENSES:
Research and development	3,338	3,216	9,754	9,315
Sales and marketing	3,347	2,640	9,497	8,179
General and administrative	2,817	2,559	9,228	8,306
Amortization of intangible assets	80	0	135	32
Restructuring expenses	(1)	25	59	124
Total operating expenses	9,581	8,440	28,673	25,956
OPERATING INCOME (LOSS)	673	1,135	(140)	1,355
Other (expense) income, net	(4)	(84)	(10)	216
INCOME (LOSS) BEFORE INCOME TAXES	669	1,051	(150)	1,571
Expense for income taxes	5	9	17	25
NET INCOME (LOSS)	$ 664	$ 1,042	$ (167)	$ 1,546
Net Income (Loss) per Share:
Basic	$ 0.04	$ 0.06	$ (0.01)	$ 0.09
Diluted	$ 0.04	$ 0.06	$ (0.01)	$ 0.08
Weighted Average Shares:
Basic	17,945,053	18,198,567	18,077,506	18,184,441
Diluted	17,961,686	18,310,772	18,077,506	18,381,656
Cash dividend per share	$ 0.055	$ 0.055	$ 0.165	$ 0.165

Condensed Consolidated Statements of Comprehensive Income (Loss) (unaudited) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2021	Sep. 30, 2020	Sep. 30, 2021	Sep. 30, 2020
Statement Of Income And Comprehensive Income [Abstract]
NET INCOME (LOSS)	$ 664	$ 1,042	$ (167)	$ 1,546
OTHER COMPREHENSIVE (LOSS) INCOME:
Foreign currency translation adjustments	(152)	206	(238)	132
COMPREHENSIVE INCOME (LOSS)	$ 512	$ 1,248	$ (405)	$ 1,678

- Definition

The portion of profit or loss for the period, net of income taxes, which is attributable to the parent.

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+ Details

Condensed Consolidated Statements of Stockholders' Equity (unaudited) - USD ($) $ in Thousands	Total	Common Stock [Member]	Additional Paid - In Capital [Member]	Accumulated Deficit [Member]	Accumulated Other Comprehensive Income (Loss) [Member]
BALANCE at beginning of year at Dec. 31, 2019	$ 73,350	$ 19	$ 133,954	$ (60,305)	$ (318)
Stock-based compensation expense	1,996	1	1,995	0	0
Issuance of shares for stock purchase plans and stock options	504	0	504	0	0
Cancellation of shares for payment of withholding tax	(1,108)	0	(1,108)	0	0
Repurchase of common stock	(2,000)	(1)	(1,999)	0	0
Dividends paid	(3,079)	0	(3,079)	0	0
Net (loss) income	1,546	0	0	1,546	0
Change in cumulative translation adjustment, net	132	0	0	0	132
BALANCE at end of year at Sep. 30, 2020	71,341	19	130,267	(58,759)	(186)
BALANCE at beginning of year at Jun. 30, 2020	70,679	19	130,853	(59,801)	(392)
Stock-based compensation expense	433	0	433	0	0
Issuance of shares for stock purchase plans and stock options	8	0	8	0	0
Cancellation of shares for payment of withholding tax	(2)	0	(2)	0	0
Dividends paid	(1,025)	0	(1,025)	0	0
Net (loss) income	1,042	0	0	1,042	0
Change in cumulative translation adjustment, net	206	0	0	0	206
BALANCE at end of year at Sep. 30, 2020	71,341	19	130,267	(58,759)	(186)
BALANCE at beginning of year at Dec. 31, 2020	71,398	18	128,250	(56,888)	18
Stock-based compensation expense	2,029	1	2,028	0	0
Issuance of shares for stock purchase plans and stock options	418	0	418	0	0
Cancellation of shares for payment of withholding tax	(782)	0	(782)	0	0
Repurchase of common stock	(3,193)	(1)	(3,192)	0	0
Dividends paid	(3,020)	0	(3,020)	0	0
Net (loss) income	(167)	0	0	(167)	0
Change in cumulative translation adjustment, net	(238)	0	0	0	(238)
BALANCE at end of year at Sep. 30, 2021	66,445	18	123,702	(57,055)	(220)
BALANCE at beginning of year at Jun. 30, 2021	69,023	19	126,791	(57,719)	(68)
Stock-based compensation expense	372	0	372	0	0
Repurchase of common stock	(2,460)	(1)	(2,459)	0	0
Dividends paid	(1,002)	0	(1,002)	0	0
Net (loss) income	664	0	0	664	0
Change in cumulative translation adjustment, net	(152)	0	0	0	(152)
BALANCE at end of year at Sep. 30, 2021	$ 66,445	$ 18	$ 123,702	$ (57,055)	$ (220)

- Definition

The portion of profit or loss for the period, net of income taxes, which is attributable to the parent.

+ References

+ Details

- Definition

Total of all stockholders' equity (deficit) items, net of receivables from officers, directors, owners, and affiliates of the entity which are attributable to the parent. The amount of the economic entity's stockholders' equity attributable to the parent excludes the amount of stockholders' equity which is allocable to that ownership interest in subsidiary equity which is not attributable to the parent (noncontrolling interest, minority interest). This excludes temporary equity and is sometimes called permanent equity.

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+ Details

Condensed Consolidated Statements of Stockholders' Equity (Parenthetical) (unaudited) - $ / shares	3 Months Ended		9 Months Ended
	Sep. 30, 2021	Sep. 30, 2020	Sep. 30, 2021	Sep. 30, 2020
Statement Of Stockholders Equity [Abstract]
Cash dividend per share	$ 0.055	$ 0.055	$ 0.165	$ 0.165

Condensed Consolidated Statements of Cash Flows (unaudited) - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2021	Sep. 30, 2020
Operating Activities:
Net (loss) income	$ (167)	$ 1,546
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and amortization	2,257	2,260
Intangible asset amortization	171	144
Stock-based compensation	2,029	1,996
Loss on disposal of property and equipment	3	7
Restructuring costs	(15)	(40)
Bad debt provision	(39)	(164)
Changes in operating assets and liabilities:
Accounts receivable	2,162	3,599
Inventories	(1,734)	1,691
Prepaid expenses and other assets	932	1,058
Accounts payable	(700)	(1,210)
Income taxes payable	(15)	(12)
Other accrued liabilities	1,405	(269)
Deferred revenue	82	13
Net cash provided by operating activities	6,371	10,619
Investing Activities:
Capital expenditures	(2,006)	(3,373)
Purchase of investments	(21,124)	(40,038)
Redemptions/maturities of short-term investments	33,666	35,756
Cash paid for acquisition, net of cash acquired	(6,277)	0
Net cash provided by (used in) investing activities	4,259	(7,655)
Financing Activities:
Proceeds from issuance of common stock	418	504
Proceeds from Paycheck Protection Program Loan	0	3,500
Repayment of Paycheck Protection Program Loan	0	(3,500)
Payment of withholding tax on stock-based compensation	(782)	(1,108)
Principle payments on finance leases	(54)	(59)
Purchase of common stock from repurchase program	(3,193)	(2,000)
Cash dividends	(3,020)	(3,079)
Net cash used in financing activities	(6,631)	(5,742)
Net increase (decrease) in cash and cash equivalents	3,999	(2,778)
Effect of exchange rate changes on cash	12	113
Cash and cash equivalents, beginning of period	5,761	7,094
Cash and Cash Equivalents, End of Period	$ 9,772	$ 4,429

Basis of Presentation

9 Months Ended

Sep. 30, 2021

Organization Consolidation And Presentation Of Financial Statements [Abstract]

Basis of Presentation

1. Basis of Presentation

The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments of a normal, recurring nature that are considered necessary for a fair presentation have been included. For further information, refer to the audited consolidated financial statements and footnotes thereto included in the Annual Report on Form 10-K for the year ended December 31, 2020 by PCTEL, Inc. (the “2020 Form 10-K”).

Throughout this Quarterly Report on Form 10-Q, including under Part 1, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” we disclose certain measures that the Company has taken in response to the macroeconomic impacts of the ongoing coronavirus (“COVID-19”) and the ensuing supply chain disruption. The full extent to which the COVID-19 pandemic will directly or indirectly impact the Company’s business, results of operations and financial condition will depend on future developments that remain highly uncertain at this time.

Nature of Operations

PCTEL, Inc. (PCTEL or the Company) was incorporated in California in 1994 and reincorporated in Delaware in 1998. The Company is a leading global provider of wireless technology, including purpose-built Industrial Internet of Things (“IoT”) devices, antenna systems, and test and measurement solutions. The Company has expertise in radio frequency (“RF”), digital and mechanical engineering. This expertise enables the Company to solve complex wireless challenges. The Company has two businesses (antennas & Industrial IoT devices and test & measurement products) that address three market segments: Enterprise Wireless, Intelligent Transportation, and Industrial IoT.

The Company’s principal executive offices are located at 471 Brighton Drive, Bloomingdale, Illinois 60108. The telephone number at

that address is (630) 372-6800 and the website is www.pctel.com. Additional information about the Company can be obtained on the Company’s website; however, the information within, or that can be accessed through, the Company’s website, is not part of this Quarterly Report on Form 10-Q.

Basis of Consolidation

The unaudited interim condensed consolidated financial statements of the Company include the condensed consolidated balance sheets as of September 30, 2021 and December 31, 2020, the condensed consolidated statements of cash flows for the nine months ended September 30, 2021 and 2020, the condensed consolidated statements of operations, condensed consolidated statements of comprehensive income (loss), and the condensed consolidated statements of stockholders’ equity for the three and nine months ended September 30, 2021 and 2020, respectively. The interim condensed consolidated financial statements are unaudited and reflect all adjustments of a normal recurring nature that are, in the opinion of management, necessary for a fair presentation of the interim period financial statements. The condensed consolidated balance sheet as of December 31, 2020 is derived from the audited financial statements as of December 31, 2020.

The unaudited interim condensed consolidated financial statements of the Company have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. The significant accounting policies followed by the Company are set forth in the 2020 Form 10-K. There were no material changes in the Company’s significant accounting policies during the three and nine months ended September 30, 2021. In addition, the Company reaffirms the use of estimates in the preparation of the financial statements as set forth in the 2020 Form 10-K. These unaudited interim condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the 2020 Form 10-K. The results of operations for the period ended September 30, 2021 may not be indicative of the results for the period ending December 31, 2021.

Foreign Operations

Cross-border transactions, both with external parties and in our internal operations, result in exposure to foreign exchange rate fluctuations. We are exposed to currency risk with the Chinese Yuan due to our operations in China, and with other foreign currencies related to the acquisition of Smarteq (see Note 4) and related to suppliers and employees outside the U.S. Fluctuations 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. Gains and losses resulting from transactions originally in foreign currencies and then translated into U.S. dollars are included in the condensed consolidated statements of operations. For the nine months ended September 30, 2021, approximately 9% of revenues and 20% of expenses were transacted in foreign currencies as compared to 3% and 19% for the nine months ended September 30, 2020. Net foreign exchange losses resulting from foreign currency transactions included in other income, net were $(10) and $(158) for the three months ended September 30, 2021 and 2020, respectively. Net foreign exchange gains (losses) resulting from foreign currency transactions included in other income, net was $(54) and $(139) for the nine months ended September 30, 2021 and 2020, respectively.

Recent Accounting Pronouncements

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

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

Fair Value of Financial Instruments

9 Months Ended

Sep. 30, 2021

Fair Value Disclosures [Abstract]

Fair Value of Financial Instruments

2. Fair Value of Financial Instruments

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

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

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

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

Cash equivalents are measured at fair value and investments are recognized at amortized cost in the Company’s financial statements. Accounts receivable is a financial asset with a carrying value that approximates fair value due to the short-term nature of these assets. Accounts payable, accrued employee compensation and certain operating liabilities are financial liabilities with a carrying value that approximates fair value due to the short-term nature of these liabilities.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

+ References + Details

Income (Loss) per Share

9 Months Ended

Sep. 30, 2021

Earnings Per Share [Abstract]

Income (Loss) per Share

3. Income (Loss) per Share

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021			2020
Basic Income Per Share computation:
Numerator:
Net income (loss)	$	664	$	1,042	$	(167	)	$	1,546
Denominator:
Weighted shares outstanding - basic		17,945,053		18,198,567		18,077,506			18,184,441
Net income per common share - basic
Net income (loss)	$	0.04	$	0.06	$	(0.01	)	$	0.09
Diluted Income Per Share computation:
Denominator:
Weighted shares outstanding - basic		17,945,053		18,198,567		18,077,506			18,184,441
Restricted shares subject to vesting		16,633		87,006		0			167,296
Performance related awards		0		23,943		0			23,943
Common stock option grants		0		1,256		0			5,976
Weighted shares outstanding - diluted		17,961,686		18,310,772		18,077,506			18,381,656
Net income per common share - diluted
Net income (loss)	$	0.04	$	0.06	$	(0.01	)	$	0.08

Business Combinations

9 Months Ended

Sep. 30, 2021

Business Combinations [Abstract]

Business Combination

4. Business Combinations

On April 30, 2021, the Company acquired all the outstanding stock of Smarteq Wireless Aktiebolag (“Smarteq”), a Swedish company based in Kista, Sweden, that designs antennas for specialized Industrial IoT and vehicular applications, pursuant to a Share Sale and Purchase Agreement (the “SPA”) between PCTEL and Allgon Aktiebolag, a Swedish company and holder of the outstanding stock of Smarteq. Smarteq owns all the outstanding stock of SAS Smarteq France (“Smarteq France”), which engages in sales of Smarteq products.

Pursuant to the SPA, the Company acquired Smarteq for a cash purchase price consisting of SEK 53.0 million plus working capital adjustments of SEK 1.6 million and an adjustment for the net cash at closing of SEK 2.1 million for total cash consideration of SEK 56.8 million ($6.8 million), all of which was provided from PCTEL’s existing cash. The Company believes the acquisition of Smarteq will provide a strong local presence, expertise, and channel partners to accelerate revenue growth in Europe, as well as a complementary portfolio of products for our Industrial IoT and intelligent transportation customers worldwide. The results for Smarteq are combined with the Company’s antenna and Industrial IoT device product line. The Company applied the provisions of Accounting Standards Codification (ASC) 805, Business Combinations, in accounting for its acquisitions. It requires the Company to recognize separately from goodwill the assets acquired, and the liabilities assumed, at the acquisition date fair values. Goodwill as of the acquisition date is measured as the excess of consideration transferred over the acquisition date fair values of the net assets acquired and the liabilities assumed. While the Company uses its best estimates and assumptions where applicable to accurately value assets acquired and liabilities assumed at the acquisition date, its estimates are inherently uncertain and subject to refinement. The purchase price allocation is preliminary because the evaluations necessary to assess the fair values of the net assets acquired are still in process. As a result, during the measurement period, which may be up to one year from the acquisition date, the Company will record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments will be recorded to the consolidated statements of operations. The operating results of the acquired business are included in the Company’s Consolidated Financial Statements from the date of the acquisition.

Fair Value of Purchase Consideration:

The following table summarizes the fair value of purchase consideration to acquire Smarteq:

Fair value of purchase consideration
Cash	$	6,785
Working capital adjustment		(5	)
Total purchase consideration	$	6,780

Preliminary Purchase Price Allocation:

The Company acquired all of the assets and liabilities of Smarteq, including cash of $0.5 million and debt of $0.1 million.

The following is an allocation of the purchase price as of the April 30, 2021 closing date based upon a preliminary estimate of the fair value of the assets acquired and liabilities assumed by the Company in the acquisition:

Preliminary Purchase Price Allocation:
Cash	$	503
Accounts receivable		1,415
Prepaid expenses and other assets		109
Inventories		1,286
Right of use assets		232
Property and equipment		131
Intangible assets		1,983
Accounts payable		(981	)
Accrued liabilities		(837	)
Lease liabilities - short-term		(102	)
Lease liabilities - long-term		(112	)
Debt		(91	)
Identifiable assets acquired	$	3,536
Goodwill		3,244
Total purchase price	$	6,780

The following is a summary of identifiable intangible assets acquired and the related expected lives for the finite-lived intangible assets:

Finite-lived assets:

Customer relationships	$	787
Trade names		639
Technology		438
Other intangible assets		119
	$	1,983

Intangible Assets:	Useful Life
Customer relationships	5 years
Trade names	5 years
Technology	5 years
Other intangible assets	.5 to 5 years

Assumptions in the Allocations of Purchase Price

The Company prepared the purchase price allocation and in doing so utilized reports of a third-party valuation expert to calculate the fair value of the identifiable intangible assets. Estimates of fair value require management to make significant estimates and assumptions which are preliminary and subject to change upon finalization of the valuation analysis. The goodwill recognized is attributable primarily to the acquired workforce, expected synergies, and other benefits that the Company believes will result from integrating the Smarteq operations with the operations of the Company. Updates to and/or completion of the valuations of certain assets acquired and liabilities assumed may result in changes to the recorded amounts of assets and liabilities, with corresponding adjustments to goodwill amounts in subsequent periods. The Company expects to complete the purchase price allocation within 12 months of the respective acquisition date. The areas that are not yet finalized relate to intangible assets, goodwill and inventory.

The fair value of the customer relationships was determined using the multi-period excess earnings method (“MPEEM”). MPEEM estimates the value of an intangible asset by quantifying the amount of residual (or excess) cash flows generated by the future customer cash flows, and discounting those cash flows to the present value. Future cash flows for customers were estimated based on forecasted revenue and costs, taking into account the growth rates, customer attrition, and contributory charges. The fair value of the customer backlog was calculated using the present value of the cash flows associated with the acquired backlog.

The fair values of the trade names, developed technology, and exclusive rights were determined using the relief-from-royalty method. The relief-from-royalty method is a specific application of the discounted-cash-flow method, which is a form of the income approach. It is based on the principle that ownership of the intangible asset relieves the owner of the need to pay a royalty to another party in exchange for rights to use the asset. Key assumptions to estimate the hypothetical royalty rate include observable royalty rates, which are royalty rates in negotiated licenses and market-based royalty rates which are royalty rates found in available market data for licenses involving similar assets.

The fair value of covenants to non-compete was estimated using the with-or-without method. The with-and-without method estimates the value of an intangible asset by quantifying the loss of economic profits under a hypothetical condition where only the subject intangible does not exist and needs to be re-created. Projected revenues, operating expenses and cash flows are calculated in each "with" and "without" scenario and the difference in the cash flow is discounted to present value.

Inventory was valued at net realizable value. Raw materials were valued at book value and finished goods were valued assuming hypothetical revenues from finished goods adjusted for disposal costs, profit attributable to the seller and holding costs. An inventory step-up to fair value of $0.5 million was included in the purchase price allocation above. The inventory step-up was calculated based on the net realizable value, on a part-by-part basis, of the inventory on the opening balance sheet. The amortization expense was recorded based on the consumption of those parts. Approximately $0.1 million of the inventory fair value step-up was recognized during the three months ended September 30, 2021 and $0.4 million was recognized during the nine months ended September 30, 2021.

The Company assumed gross accounts receivable of $1.4 million. Based on Smarteq’s bad debt experience and a review of the receivables, the Company does not anticipate an issue with collectability.

The Company assumed liabilities in the acquisition which primarily consist of accounts payable, accrued employee compensation and certain operating liabilities. The fair value of the liabilities assumed are valued at their cash settlement value.

As part of the acquisition of Smarteq on April 30, 2021, the Company assumed an office lease. The office in Kista, Sweden has 4,080 square feet used for engineering, sales, and administration and the lease term is through July 31, 2023. On the acquisition date, the Company recorded $0.2 million for each of the right-of-use assets and the lease liabilities.

The Company assumed Smarteq France’s five-year loan of approximately $0.1 million with an interest rate of 0.57%. The loan was part of a program from the French Ministry of Economy and Finance to support for French businesses during the COVID-19 pandemic. The loan is denominated in Euros. Payment of the interest and principal on the loan are deferred until June 2022 and the loan term ends in May 2026.

The Company recorded net deferred tax assets of $2.4 million, primarily relating to deferred tax assets for net operating losses. The Company also booked a deferred tax asset for inventory reserves and deferred tax liabilities related to intangible asset amortization that is not deductible for income taxes. The Company booked a full valuation allowance against the net deferred tax assets. While the Company expects book and tax profits in 2021 and future periods, Smarteq has recorded a three-year cumulative tax loss. Based on this objective evidence and uncertainty associated with the COVID-19 pandemic, the Company recorded a full valuation allowance on the opening balance sheet.

Goodwill recorded in connection with the acquisition was $3.2 million. The Company does not expect to deduct any of the acquired goodwill for tax purposes. The Company recorded $0.3 million of transaction costs for the three months ended June 30, 2021 in general and administrative expenses in the statement of operations. The transaction costs will not be deductible for income tax purposes.

Supplemental pro forma financial information

The following unaudited pro forma financial information presents the combined results of operations for each of the periods presented as if the Smarteq acquisition had occurred as of January 1, 2020:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Net Revenue - pro forma combined	$	22,411	$	23,503	$	64,517	$	62,420
Net Income - pro forma combined		797		620		493		314
Weighted Average Shares:
Basic		17,945		18,199		18,078		18,184
Diluted		17,962		18,311		18,078		18,382
Net Income per Share:
Basic	$	0.04	$	0.03	$	0.03	$	0.02
Diluted	$	0.04	$	0.03	$	0.03	$	0.02

The following adjustments were included in the unaudited pro forma combined net revenues:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Net Revenue	$	22,411	$	18,923	$	61,799	$	56,271
Add: Net Revenue - acquired business		0		4,580		2,718		6,149
Net Revenue - pro forma combined	$	22,411	$	23,503	$	64,517	$	62,420

The following adjustments were included in the unaudited pro forma combined net income (loss):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2021			2020			2021			2020
Net Income (Loss)	$	664		$	1,042		$	(167	)	$	1,546
Add: Results of operations of acquired business		0		$	(94	)		183			(26	)
Less: pro forma adjustments
Amortization of intangibles		3			(99	)		(226	)		(296	)
Inventory fair value adjustments		133			(222	)		416			(444	)
Acquisition related expenses		0			0			304			(425	)
Interest expense		(3	)		(7	)		(17	)		(41	)
Net Income - pro forma combined	$	797		$	620		$	493		$	314

The unaudited pro forma financial information has been adjusted to reflect the amortization expense for acquired intangibles, removal of historical intangible asset amortization and recognition of expense associated with the step-up of inventory.

The pro forma data is presented for illustrative purposes only, and the historical results of Smarteq are based on its books and records prior to the acquisition and is not necessarily indicative of the consolidated results of operations of the combined business had the acquisition actually occurred as of January 1, 2020. In addition, future results may vary significantly from the pro forma results reflected herein and should not be relied upon as an indication of the results of future operations of the combined business. The unaudited pro forma financial information does not reflect any operating efficiencies and cost savings that may be realized from the integration of the acquired entity. For the three months ended September 30, 2021, $2.3 million of revenue and net income of $0.1 million was included in the Company's condensed consolidated statements of operations related to Smarteq. For the nine months ended September 30, 2021, $3.9 million of revenue and a net loss of $0.1 million was included in the Company's condensed consolidated statements of operations related to Smarteq.

Cash, Cash Equivalents and Investments

9 Months Ended

Sep. 30, 2021

Cash And Cash Equivalents [Abstract]

Cash, Cash Equivalents and Investments

5. Cash, Cash Equivalents and Investments

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

	September 30,		December 31,
	2021		2020
Cash	$	8,342	$	4,740
Cash equivalents		1,430		1,021
Short-term investments		22,680		30,582
Long-term investments		0		4,640
Total	$	32,452	$	40,983

Cash and Cash Equivalents

At September 30, 2021 and December 31, 2020, cash and cash equivalents included bank balances and investments with original maturities of less than 90 days. At September 30, 2021 and December 31, 2020, the Company’s cash equivalents were invested in highly liquid AAA rated money market funds that are required to comply with Rule 2a-7 of the Investment Company Act of 1940. Such funds utilize the amortized cost method of accounting, seek to maintain a constant $1.00 per share price, and are redeemable upon demand. The Company restricts its investments in AAA money market funds to those invested 100% in either short-term U.S. government agency securities or bank repurchase agreements collateralized by these same securities. The fair values of these money market funds are established through quoted prices in active markets for identical assets (Level 1 inputs). The Company’s cash in U.S. banks is insured by the Federal Deposit Insurance Corporation up to the insurable limit of $250.

The Company had cash in foreign bank accounts of $3.6 million at September 30, 2021 and $2.9 million at December 31, 2020. The Company had $2.6 million and $2.9 million of cash and cash equivalents in bank accounts in China at September 30, 2021 and December 31, 2020, respectively. In addition, the Company had $0.9 million of cash in bank accounts in Sweden and $0.1 million of cash in bank accounts in France at September 30, 2021. The Company’s cash in its foreign bank accounts is not insured. At September 30, 2021, $1.1 million of the cash and cash equivalents in China was invested in a 90-day deposit account classified as cash equivalents and $1.5 million was in cash accounts. As of September 30, 2021, the Company has no intention of repatriating the cash in its foreign bank accounts. If the Company decides to repatriate the cash in the foreign bank accounts, it may have trouble doing so in a timely manner. The Company may also be exposed to foreign currency fluctuations and taxes if it repatriates these funds.

Investments

At September 30, 2021 and December 31, 2020, the Company’s investments consisted of corporate bonds with ratings at the purchase date of A or higher and certificates of deposit. All the investments at September 30, 2021 and December 31, 2020 were classified as held-to-maturity. The bonds and certificates of deposit classified as short-term investments have original maturities greater than 90 days and mature within one year and the bonds and certificates of deposit classified as long-term investments have maturities greater than one year but less than two years. The Company’s bond investments are recorded at the purchase price and carried at amortized cost.

Effective January 1, 2020, the Company adopted ASU 2016-13. This ASU replaces the incurred loss impairment model with an expected loss impairment model for financial instruments, including short-term investments. The amendment requires entities to consider forward-looking information to estimate expected credit losses. Under ASU 2016-13, the Company classifies its held-to-maturity investment portfolio by the investment type and further classifies the corporate bonds by the bond ratings. For estimating potential credit losses, the Company considers the historical loss data, the bond ratings, as well as and current and future economic conditions.

Cash equivalents and investments were as follows at September 30, 2021 and December 31, 2020:

	September 30, 2021						December 31, 2020
	Level 1		Level 2		Total		Level 1			Level 2			Total
Cash equivalents:
Certificates of deposit	$	0	$	0	$	0	$	300		$	0		$	300
Money market funds		1,430		0		1,430		721			0			721
Total Cash Equivalents	$	1,430	$	0	$	1,430	$	1,021		$	0		$	1,021
Short-Term Investments:
Corporate bonds	$	0	$	21,274	$	21,274	$	0		$	26,318		$	26,318
Certificates of deposit		1,406		0		1,406		4,264			0			4,264
Total Short-Term Investments	$	1,406	$	21,274	$	22,680	$	4,264		$	26,318		$	30,582
Long-Term Investments:
Corporate bonds	$	0	$	0	$	0	$	0		$	4,382		$	4,382
Certificates of deposit		0		0		0		258			0			258
Total Long-Term Investments	$	0	$	0	$	0	$	258		$	4,382		$	4,640
Cash equivalents and Investments - book value	$	2,836	$	21,274	$	24,110	$	5,543		$	30,700		$	36,243
Unrealized gains (losses)	$	0	$	4	$	4	$	(1	)	$	(7	)	$	(8	)
Cash equivalents and Investments - fair value	$	2,836	$	21,278	$	24,114	$	5,542		$	30,693		$	36,235

The Company categorizes its financial instruments within a fair value hierarchy according to accounting guidance for fair value. The fair value hierarchy is described under the Fair Value of Financial Instruments in Note 2. For the Level 2 investments, the Company uses quoted prices of similar assets in active markets. The fair values in the table above reflect net unrealizable gains of $4 at September 30, 2021, and net unrealized losses of $8 at December 31, 2020.

Goodwill and Intangible Assets

9 Months Ended

Sep. 30, 2021

Goodwill And Intangible Assets Disclosure [Abstract]

Goodwill and Intangible Assets

6. Goodwill and Intangible Assets

Goodwill

The change in the carrying amount of goodwill during the nine months ended September 30, 2021 is as follows:

	Amount
Balance at December 31, 2020	$	3,332
Acquisition of Smarteq		3,244
Foreign currency translation		(147	)
Balance at September 30, 2021	$	6,429

The Company performs an annual impairment test of goodwill as of the end of the first month of the fourth fiscal quarter (October 31), or at an interim date if an event occurs or if circumstances change that would indicate that an impairment loss may have been incurred. In performing the annual impairment test, the Company may consider qualitative factors that would indicate possible impairment. A quantitative fair value assessment is also performed at the reporting unit level. If the fair value exceeds the carrying value, then goodwill is not impaired, and no further testing is performed. If the carrying value exceeds the fair value, the implied fair value of goodwill is then compared against the carrying value of goodwill to determine the amount of impairment. In addition to the annual impairment test, the Company is required to regularly assess whether a triggering event has occurred which would require interim impairment testing. The Company considered the current and expected future economic and market conditions surrounding the COVID-19 pandemic and its impact on each of the reporting units. Further, the Company assessed the current market capitalization and financial forecasts. There were no triggering events during the nine months ended September 30, 2021 and September 30, 2020. The Company will continue to monitor goodwill for impairment going forward.

Intangible Assets

The Company amortized intangible assets with finite lives on a straight-line basis over the estimated useful lives, which ranged from one to five years.

The summary of amortization expense in the condensed consolidated statement of operations is as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Cost of revenues	$	21	$	0	$	36	$