UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) |
For the quarterly period ended SeptemberJune 30, 20192020
OR
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR |
For the transition period from to
Commission File Number: 001-31588
COMMUNICATIONS SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
MINNESOTA | 41-0957999 |
|
|
(State or other jurisdiction of | (Federal Employer |
incorporation or organization) | Identification No.) |
|
|
10900 Red Circle Drive, Minnetonka, MN | 55343 |
(Address of principal executive offices) | (Zip Code) |
(952) 996-1674
Registrant’s telephone number, including area code
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ☒ NO ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). YES ☒ NO ☐
Indicate by a 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 (as defined by Rule 12b-2 of the Exchange Act).
Large Accelerated Filer ☐ Accelerated Filer ☐ Non-Accelerated Filer ☐ ☒
Smaller Reporting Company ☒ Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act. YES ☐ NO ☒
Securities Registered Pursuant to Section 12(b) of the Act
Title of Each Class | Trading Symbol | Name of each exchange on which registered |
Common Stock, par value , $.05 per share | JCS | Nasdaq |
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Outstanding at |
|
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
INDEX
Page No. | |||||
Part I. | Financial Information | ||||
|
| ||||
3 | |||||
Condensed Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) | 4 | ||||
Condensed Consolidated Statements of Changes in Stockholders’ Equity | 5 | ||||
7 | |||||
8 | |||||
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
| 23 | |||
Item 3. Quantitative and Qualitative Disclosures about Market Risk |
| 33 | |||
| 33 | ||||
| 34 | ||||
35 | |||||
CERTIFICATIONS |
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
ASSETS | ||||||||||||||||
|
| September 30 |
|
| December 31 |
| June 30 | December 31 | ||||||||
|
| 2019 |
|
| 2018 |
| 2020 | 2019 | ||||||||
CURRENT ASSETS: |
|
|
|
|
|
|
|
| ||||||||
Cash and cash equivalents |
| $ | 14,621,921 |
|
| $ | 11,056,426 |
| $ | 20,546,013 | $ | 13,928,504 | ||||
Restricted cash |
|
| 677,269 |
|
|
| — |
| 479,644 | 679,006 | ||||||
Investments |
|
| 5,502,752 |
|
|
| — |
| 3,748,313 | 9,449,650 | ||||||
Trade accounts receivable, less allowance for doubtful accounts of $178,000 and $136,000, respectively |
|
| 12,950,442 |
|
|
| 13,401,042 |
| ||||||||
Trade accounts receivable, less allowance for doubtful accounts of $153,000 and $154,000, respectively | 8,189,950 | 10,242,405 | ||||||||||||||
Inventories |
|
| 12,586,500 |
|
|
| 16,175,616 |
| 9,941,657 | 8,531,112 | ||||||
Prepaid income taxes |
|
| 82,275 |
|
|
| 148,036 |
| 87,129 | 72,994 | ||||||
Other current assets |
|
| 1,568,326 |
|
|
| 1,553,972 |
| 879,127 | 1,160,865 | ||||||
Current assets held for sale | — | 5,337,274 | ||||||||||||||
TOTAL CURRENT ASSETS |
|
| 47,989,485 |
|
|
| 42,335,092 |
| 43,871,833 | 49,401,810 | ||||||
|
|
|
|
|
|
|
|
| ||||||||
PROPERTY, PLANT AND EQUIPMENT, net |
|
| 9,303,323 |
|
|
| 10,962,239 |
| 7,903,542 | 8,238,089 | ||||||
OTHER ASSETS: |
|
|
|
|
|
|
|
| ||||||||
Investments | 1,253,855 | 250,000 | ||||||||||||||
Goodwill | 410,918 | — | ||||||||||||||
Deferred income taxes |
|
| 19,068 |
|
|
| 19,068 |
| — | 9,534 | ||||||
Operating lease right of use asset |
|
| 395,574 |
|
|
| — |
| 513,276 | 367,909 | ||||||
Intangible assets | 3,190,000 | — | ||||||||||||||
Other assets, net |
|
| — |
|
|
| 4,765 |
| 207,439 | — | ||||||
Non-current assets held for sale | — | 883,370 | ||||||||||||||
TOTAL OTHER ASSETS |
|
| 414,642 |
|
|
| 23,833 |
| 5,575,488 | 1,510,813 | ||||||
TOTAL ASSETS |
| $ | 57,707,450 |
|
| $ | 53,321,164 |
| $ | 57,350,863 | $ | 59,150,712 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||||||
CURRENT LIABILITIES: |
|
|
|
|
|
|
|
| ||||||||
Accounts payable |
| $ | 4,510,344 |
|
| $ | 5,394,981 |
| $ | 4,639,862 | $ | 3,720,445 | ||||
Accrued compensation and benefits |
|
| 2,934,110 |
|
|
| 2,892,199 |
| 2,610,933 | 3,517,331 | ||||||
Operating lease liability |
|
| 109,354 |
|
|
| — |
| 199,993 | 115,935 | ||||||
Other accrued liabilities |
|
| 3,344,177 |
|
|
| 3,168,049 |
| 2,003,821 | 2,602,752 | ||||||
Dividends payable |
|
| 197,220 |
|
|
| 184,541 |
| 205,878 | 200,363 | ||||||
Deferred revenue | 220,649 | — | ||||||||||||||
Current liabilities held for sale | — | 1,193,218 | ||||||||||||||
TOTAL CURRENT LIABILITIES |
|
| 11,095,205 |
|
|
| 11,639,770 |
| 9,881,136 | 11,350,044 | ||||||
LONG TERM LIABILITIES: |
|
|
|
|
|
|
|
| ||||||||
Long-term compensation plans |
|
| 90,642 |
|
|
| — |
| 67,175 | 164,348 | ||||||
Uncertain tax positions |
|
| — |
|
|
| 28,267 |
| ||||||||
Operating lease liability |
|
| 265,192 |
|
|
| — |
| 294,310 | 244,038 | ||||||
Deferred revenue | 144,063 | — | ||||||||||||||
TOTAL LONG-TERM LIABILITIES |
|
| 355,834 |
|
|
| 28,267 |
| 505,548 | 408,386 | ||||||
COMMITMENTS AND CONTINGENCIES (Footnote 9) |
|
|
|
|
|
|
|
| ||||||||
COMMITMENTS AND CONTINGENCIES (Footnote 8) | ||||||||||||||||
STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
|
| ||||||||
Preferred stock, par value $1.00 per share; 3,000,000 shares authorized; none issued |
|
|
|
|
|
|
|
| ||||||||
Common stock, par value $.05 per share; 30,000,000 shares authorized; 9,308,820 and 9,158,438 shares issued and outstanding, respectively |
|
| 465,441 |
|
|
| 457,922 |
| ||||||||
Common stock, par value $.05 per share; 30,000,000 shares authorized; 9,351,486 and 9,252,749 shares issued and outstanding, respectively | 467,573 | 462,637 | ||||||||||||||
Additional paid-in capital |
|
| 43,189,025 |
|
|
| 42,680,499 |
| 43,495,046 | 42,977,914 | ||||||
Retained earnings (accumulated deficit) |
|
| 3,435,845 |
|
|
| (734,001 | ) | ||||||||
Retained earnings | 3,830,132 | 4,649,395 | ||||||||||||||
Accumulated other comprehensive loss |
|
| (833,900 | ) |
|
| (751,293 | ) | (828,572 | ) | (697,664 | ) | ||||
TOTAL STOCKHOLDERS’ EQUITY |
|
| 46,256,411 |
|
|
| 41,653,127 |
| 46,964,179 | 47,392,282 | ||||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY |
| $ | 57,707,450 |
|
| $ | 53,321,164 |
| $ | 57,350,863 | $ | 59,150,712 |
The accompanying notes are an integral part of the condensed consolidated financial statements.
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
| Three Months Ended September 30 |
|
| Nine Months Ended September 30 |
| ||||||||||
|
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales |
| $ | 18,222,980 |
|
| $ | 15,291,993 |
|
| $ | 50,346,350 |
|
| $ | 47,103,837 |
|
Cost of sales |
|
| 10,485,429 |
|
|
| 10,051,419 |
|
|
| 30,473,832 |
|
|
| 32,699,559 |
|
Gross profit |
|
| 7,737,551 |
|
|
| 5,240,574 |
|
|
| 19,872,518 |
|
|
| 14,404,278 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses |
|
| 6,108,756 |
|
|
| 6,842,348 |
|
|
| 18,327,186 |
|
|
| 20,702,476 |
|
Total operating expenses |
|
| 6,108,756 |
|
|
| 6,842,348 |
|
|
| 18,327,186 |
|
|
| 20,702,476 |
|
Operating profit (loss) |
|
| 1,628,795 |
|
|
| (1,601,774 | ) |
|
| 1,545,332 |
|
|
| (6,298,198 | ) |
Other income (expenses): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment and other income |
|
| 108,349 |
|
|
| 70,638 |
|
|
| 229,981 |
|
|
| 263,890 |
|
(Loss) gain on sale of assets |
|
| (6,717 | ) |
|
| (6,147 | ) |
|
| 2,008 |
|
|
| 10,904 |
|
Gain on sale of FutureLink Fiber business line |
|
| — |
|
|
| — |
|
|
| 2,966,906 |
|
|
| — |
|
Interest and other expense |
|
| (9,696 | ) |
|
| (9,586 | ) |
|
| (28,734 | ) |
|
| (28,774 | ) |
Other income, net |
|
| 91,936 |
|
|
| 54,905 |
|
|
| 3,170,161 |
|
|
| 246,020 |
|
Income (Loss) from operations before income taxes |
|
| 1,720,731 |
|
|
| (1,546,869 | ) |
|
| 4,715,493 |
|
|
| (6,052,178 | ) |
Income tax expense (benefit) |
|
| (17,128 | ) |
|
| (2,137 | ) |
|
| (35,657 | ) |
|
| (6,092 | ) |
Net income (loss) |
|
| 1,737,859 |
|
|
| (1,544,732 | ) |
|
| 4,751,150 |
|
|
| (6,046,086 | ) |
Other comprehensive (loss) income, net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss (gain) on available-for-sale securities |
|
| (925 | ) |
|
| 2,403 |
|
|
| (522 | ) |
|
| 405 |
|
Foreign currency translation adjustment |
|
| (63,037 | ) |
|
| (15,357 | ) |
|
| (82,085 | ) |
|
| (86,262 | ) |
Total other comprehensive loss |
|
| (63,962 | ) |
|
| (12,954 | ) |
|
| (82,607 | ) |
|
| (85,857 | ) |
Comprehensive income (loss) |
| $ | 1,673,897 |
|
| $ | (1,557,686 | ) |
| $ | 4,668,543 |
|
| $ | (6,131,943 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share: |
| $ | 0.19 |
|
| $ | (0.17 | ) |
| $ | 0.51 |
|
| $ | (0.66 | ) |
Diluted net income (loss) per share: |
| $ | 0.19 |
|
| $ | (0.17 | ) |
| $ | 0.51 |
|
| $ | (0.66 | ) |
Weighted Average Basic Shares Outstanding |
|
| 9,317,129 |
|
|
| 9,146,184 |
|
|
| 9,270,125 |
|
|
| 9,093,609 |
|
Weighted Average Dilutive Shares Outstanding |
|
| 9,368,171 |
|
|
| 9,146,184 |
|
|
| 9,278,803 |
|
|
| 9,093,609 |
|
Dividends declared per share |
| $ | 0.02 |
|
| $ | 0.04 |
|
| $ | 0.06 |
|
| $ | 0.12 |
|
Three Months Ended June 30 | Six Months Ended June 30 | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Sales | $ | 9,627,952 | $ | 10,704,467 | $ | 18,790,694 | $ | 21,920,637 | ||||||||
Cost of sales | 6,147,904 | 6,463,930 | 11,573,499 | 13,053,884 | ||||||||||||
Gross profit | 3,480,048 | 4,240,537 | 7,217,195 | 8,866,753 | ||||||||||||
Operating expenses: | ||||||||||||||||
Selling, general and administrative expenses | 4,731,887 | 5,369,869 | 9,672,558 | 10,817,464 | ||||||||||||
Acquisition costs | 394,366 | — | 414,585 | — | ||||||||||||
Total operating expenses | 5,126,253 | 5,369,869 | 10,087,143 | 10,817,464 | ||||||||||||
Operating loss from continuing operations | (1,646,205 | ) | (1,129,332 | ) | (2,869,948 | ) | (1,950,711 | ) | ||||||||
Other income (expenses): | ||||||||||||||||
Investment and other income | 288,481 | 85,742 | 400,238 | 121,632 | ||||||||||||
Gain (loss) on sale of assets | — | (9,000 | ) | 308,403 | (9,935 | ) | ||||||||||
Interest and other expense | (9,498 | ) | (9,594 | ) | (19,091 | ) | (19,038 | ) | ||||||||
Other income, net | 278,983 | 67,148 | 689,550 | 92,659 | ||||||||||||
Operating loss from continuing operations before income taxes | (1,367,222 | ) | (1,062,184 | ) | (2,180,398 | ) | (1,858,052 | ) | ||||||||
Income tax benefit | (446 | ) | (11,869 | ) | (4,903 | ) | (15,841 | ) | ||||||||
Net loss from continuing operations | (1,366,776 | ) | (1,050,315 | ) | (2,175,495 | ) | (1,842,211 | ) | ||||||||
Net (loss) income from discontinued operations, net of tax | (568,745 | ) | 3,823,493 | 1,744,607 | 4,855,502 | |||||||||||
Net (loss) income | (1,935,521 | ) | 2,773,178 | (430,888 | ) | 3,013,291 | ||||||||||
Other comprehensive (loss) income, net of tax: | ||||||||||||||||
Unrealized gain on available-for-sale securities | 24,549 | 403 | 10,097 | 403 | ||||||||||||
Foreign currency translation adjustment | (8,902 | ) | (47,666 | ) | (141,005 | ) | (19,048 | ) | ||||||||
Total other comprehensive income (loss) | 15,647 | (47,263 | ) | (130,908 | ) | (18,645 | ) | |||||||||
Comprehensive (loss) income | $ | (1,919,874 | ) | $ | 2,725,915 | $ | (561,796 | ) | $ | 2,994,646 | ||||||
Basic net (loss) income per share: | ||||||||||||||||
Continuing operations | $ | (0.15 | ) | $ | (0.11 | ) | $ | (0.24 | ) | $ | (0.20 | ) | ||||
Discontinued operations | (0.06 | ) | 0.41 | 0.19 | 0.53 | |||||||||||
$ | (0.21 | ) | $ | 0.30 | $ | (0.05 | ) | $ | 0.33 | |||||||
Diluted net (loss) income per share: | ||||||||||||||||
Continuing operations | $ | (0.15 | ) | $ | (0.11 | ) | $ | (0.24 | ) | $ | (0.20 | ) | ||||
Discontinued operations | (0.06 | ) | 0.41 | 0.19 | 0.53 | |||||||||||
$ | (0.21 | ) | $ | 0.30 | $ | (0.05 | ) | $ | 0.33 | |||||||
Weighted Average Basic Shares Outstanding | 9,350,344 | 9,316,576 | 9,307,967 | 9,246,233 | ||||||||||||
Weighted Average Dilutive Shares Outstanding | 9,350,344 | 9,319,106 | 9,307,967 | 9,246,233 | ||||||||||||
Dividends declared per share | $ | 0.02 | $ | 0.02 | $ | 0.04 | $ | 0.04 |
The accompanying notes are an integral part of the condensed consolidated financial statements.
4
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)
For the Six Months Ended June 30, 2020
Accumulated | ||||||||||||||||||||||||
Additional | Other | |||||||||||||||||||||||
Common Stock | Paid-in | Retained | Comprehensive | |||||||||||||||||||||
Shares | Amount | Capital | Earnings | Loss | Total | |||||||||||||||||||
BALANCE AT DECEMBER 31, 2019 | 9,252,749 | $ | 462,637 | $ | 42,977,914 | $ | 4,649,395 | $ | (697,664 | ) | $ | 47,392,282 | ||||||||||||
Net loss | — | — | — | (430,888 | ) | — | (430,888 | ) | ||||||||||||||||
Issuance of common stock under Employee Stock Purchase Plan | 8,069 | 403 | 41,653 | — | — | 42,056 | ||||||||||||||||||
Issuance of common stock to Employee Stock Ownership Plan | 66,059 | 3,303 | 404,281 | — | — | 407,584 | ||||||||||||||||||
Issuance of common stock under Executive Stock Plan | 48,584 | 2,429 | 5,180 | — | — | 7,609 | ||||||||||||||||||
Share based compensation | — | — | 176,627 | — | — | 176,627 | ||||||||||||||||||
Other share retirements | (23,975 | ) | (1,199 | ) | (110,609 | ) | (7,117 | ) | — | (118,925 | ) | |||||||||||||
Shareholder dividends ($0.04 per share) | — | — | — | (381,258 | ) | — | (381,258 | ) | ||||||||||||||||
Other comprehensive loss | — | — | — | — | (130,908 | ) | (130,908 | ) | ||||||||||||||||
BALANCE AT JUNE 30, 2020 | 9,351,486 | $ | 467,573 | $ | 43,495,046 | $ | 3,830,132 | $ | (828,572 | ) | $ | 46,964,179 |
For the Three Months Ended June 30, 2020
Accumulated | ||||||||||||||||||||||||
Additional | Other | |||||||||||||||||||||||
Common Stock | Paid-in | Retained | Comprehensive | |||||||||||||||||||||
Shares | Amount | Capital | Earnings | Loss | Total | |||||||||||||||||||
BALANCE AT MARCH 31, 2020 | 9,346,966 | $ | 467,347 | $ | 43,381,778 | $ | 5,957,796 | $ | (844,219 | ) | $ | 48,962,702 | ||||||||||||
Net loss | — | — | — | (1,935,521 | ) | — | (1,935,521 | ) | ||||||||||||||||
Issuance of common stock under Employee Stock Purchase Plan | 4,520 | 226 | 19,933 | — | — | 20,159 | ||||||||||||||||||
Issuance of common stock under Executive Stock Plan | 2,000 | 100 | 5,180 | — | — | 5,280 | ||||||||||||||||||
Share based compensation | — | — | 97,459 | — | — | 97,459 | ||||||||||||||||||
Other share retirements | (2,000 | ) | (100 | ) | (9,304 | ) | (735 | ) | — | (10,139 | ) | |||||||||||||
Shareholder dividends ($0.02 per share) | — | — | — | (191,408 | ) | — | (191,408 | ) | ||||||||||||||||
Other comprehensive income | — | — | — | — | 15,647 | 15,647 | ||||||||||||||||||
BALANCE AT JUNE 30, 2020 | 9,351,486 | $ | 467,573 | $ | 43,495,046 | $ | 3,830,132 | $ | (828,572 | ) | $ | 46,964,179 |
The accompanying notes are an integral part of the condensed consolidated financial statements.
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)
For the NineSix Months Ended SeptemberJune 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
| Accumulated |
|
|
|
| Accumulated | |||||||||||||||||||||||||||||
|
|
|
|
|
|
|
| Additional |
|
|
|
|
| Other |
|
|
|
| Additional | Other | ||||||||||||||||||||||||||||
|
| Common Stock |
|
| Paid-in |
|
| Retained |
|
| Comprehensive |
|
|
|
| Common Stock | Paid-in | Retained | Comprehensive | |||||||||||||||||||||||||||||
|
| Shares |
|
| Amount |
|
| Capital |
|
| Earnings |
|
| Loss |
|
| Total |
| Shares | Amount | Capital | Earnings | Loss | Total | ||||||||||||||||||||||||
BALANCE AT DECEMBER 31, 2018 |
|
| 9,158,438 |
|
| $ | 457,922 |
|
| $ | 42,680,499 |
|
| $ | (734,001 | ) |
| $ | (751,293 | ) |
| $ | 41,653,127 |
| 9,158,438 | $ | 457,922 | $ | 42,680,499 | $ | (734,001 | ) | $ | (751,293 | ) | $ | 41,653,127 | |||||||||||
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 4,751,150 |
|
|
| — |
|
|
| 4,751,150 |
| — | — | — | 3,013,291 | — | 3,013,291 | ||||||||||||||||||
Issuance of common stock under Employee Stock Purchase Plan |
|
| 29,686 |
|
|
| 1,484 |
|
|
| 71,818 |
|
|
| — |
|
|
| — |
|
|
| 73,302 |
| 21,477 | 1,074 | 47,520 | — | — | 48,594 | ||||||||||||||||||
Issuance of common stock to Employee Stock Ownership Plan |
|
| 132,826 |
|
|
| 6,641 |
|
|
| 262,995 |
|
|
| — |
|
|
| — |
|
|
| 269,636 |
| 132,826 | 6,641 | 262,995 | — | — | 269,636 | ||||||||||||||||||
Issuance of common stock under Executive Stock Plan |
|
| 27,075 |
|
|
| 1,354 |
|
|
| 80,100 |
|
|
| — |
|
|
| — |
|
|
| 81,454 |
| 4,575 | 229 | — | — | — | 229 | ||||||||||||||||||
Share based compensation |
|
| — |
|
|
| — |
|
|
| 276,236 |
|
|
| — |
|
|
| — |
|
|
| 276,236 |
| — | — | 188,587 | — | — | 188,587 | ||||||||||||||||||
Other share retirements |
|
| (39,205 | ) |
|
| (1,960 | ) |
|
| (182,623 | ) |
|
| (11,659 | ) |
|
| — |
|
|
| (196,242 | ) | (740 | ) | (37 | ) | (3,422 | ) | 1,494 | — | (1,965 | ) | ||||||||||||||
Shareholder dividends ($0.06 per share) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (569,645 | ) |
|
| — |
|
|
| (569,645 | ) | ||||||||||||||||||||||||
Shareholder dividends ($0.04 per share) | — | — | — | (379,411 | ) | — | (379,411 | ) | ||||||||||||||||||||||||||||||||||||||||
Other comprehensive loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (82,607 | ) |
|
| (82,607 | ) | — | — | — | — | (18,645 | ) | (18,645 | ) | ||||||||||||||||
BALANCE AT SEPTEMBER 30, 2019 |
|
| 9,308,820 |
|
| $ | 465,441 |
|
| $ | 43,189,025 |
|
| $ | 3,435,845 |
|
| $ | (833,900 | ) |
| $ | 46,256,411 |
| ||||||||||||||||||||||||
BALANCE AT JUNE 30, 2019 | 9,316,576 | $ | 465,829 | $ | 43,176,179 | $ | 1,901,373 | $ | (769,938 | ) | $ | 44,773,443 |
For the Three Months Ended SeptemberJune 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
| Accumulated |
|
|
|
| ||||||
|
|
|
|
|
|
|
| Additional |
|
|
|
|
| Other |
|
|
|
| ||||||
|
| Common Stock |
|
| Paid-in |
|
| Retained |
|
| Comprehensive |
|
|
|
| |||||||||
|
| Shares |
|
| Amount |
|
| Capital |
|
| Earnings |
|
| Loss |
|
| Total |
| ||||||
BALANCE AT JUNE 30, 2019 |
|
| 9,316,576 |
|
| $ | 465,829 |
|
| $ | 43,176,179 |
|
| $ | 1,901,373 |
|
| $ | (769,938 | ) |
| $ | 44,773,443 |
|
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,737,859 |
|
|
| — |
|
|
| 1,737,859 |
|
Issuance of common stock under Employee Stock Purchase Plan |
|
| 8,209 |
|
|
| 410 |
|
|
| 24,298 |
|
|
| — |
|
|
| — |
|
|
| 24,708 |
|
Issuance of common stock under Executive Stock Plan |
|
| 22,500 |
|
|
| 1,125 |
|
|
| 80,100 |
|
|
| — |
|
|
| — |
|
|
| 81,225 |
|
Share based compensation |
|
| — |
|
|
| — |
|
|
| 87,649 |
|
|
| — |
|
|
| — |
|
|
| 87,649 |
|
Other share retirements |
|
| (38,465 | ) |
|
| (1,923 | ) |
|
| (179,201 | ) |
|
| (13,153 | ) |
|
| — |
|
|
| (194,277 | ) |
Shareholder dividends ($0.02 per share) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (190,234 | ) |
|
| — |
|
|
| (190,234 | ) |
Other comprehensive loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (63,962 | ) |
|
| (63,962 | ) |
BALANCE AT SEPTEMBER 30, 2019 |
|
| 9,308,820 |
|
| $ | 465,441 |
|
| $ | 43,189,025 |
|
| $ | 3,435,845 |
|
| $ | (833,900 | ) |
| $ | 46,256,411 |
|
For the Nine Months Ended September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
| Accumulated |
|
|
|
| ||||||
|
|
|
|
|
|
|
| Additional |
|
|
|
|
| Other |
|
|
|
| ||||||
|
| Common Stock |
|
| Paid-in |
|
| Retained |
|
| Comprehensive |
|
|
|
| |||||||||
|
| Shares |
|
| Amount |
|
| Capital |
|
| Earnings |
|
| Loss |
|
| Total |
| ||||||
BALANCE AT DECEMBER 31, 2017 |
|
| 8,973,708 |
|
| $ | 448,685 |
|
| $ | 42,006,750 |
|
| $ | 7,328,671 |
|
| $ | (613,379 | ) |
| $ | 49,170,727 |
|
Net loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (6,046,086 | ) |
|
| — |
|
|
| (6,046,086 | ) |
Issuance of common stock under Employee Stock Purchase Plan |
|
| 21,053 |
|
|
| 1,053 |
|
|
| 76,964 |
|
|
| — |
|
|
| — |
|
|
| 78,017 |
|
Issuance of common stock to Employee Stock Ownership Plan |
|
| 119,632 |
|
|
| 5,982 |
|
|
| 419,908 |
|
|
| — |
|
|
| — |
|
|
| 425,890 |
|
Issuance of common stock under Executive Stock Plan |
|
| 43,501 |
|
|
| 2,175 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 2,175 |
|
Share based compensation |
|
| — |
|
|
| — |
|
|
| 156,214 |
|
|
| — |
|
|
| — |
|
|
| 156,214 |
|
Other share retirements |
|
| (8,017 | ) |
|
| (401 | ) |
|
| (37,387 | ) |
|
| 9,325 |
|
|
| — |
|
|
| (28,463 | ) |
Shareholder dividends ($0.12 per share) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,098,502 | ) |
|
| — |
|
|
| (1,098,502 | ) |
Other comprehensive loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (85,857 | ) |
|
| (85,857 | ) |
BALANCE AT SEPTEMBER 30, 2018 |
|
| 9,149,877 |
|
| $ | 457,494 |
|
| $ | 42,622,449 |
|
| $ | 193,408 |
|
| $ | (699,236 | ) |
| $ | 42,574,115 |
|
For the Three Months Ended September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
| Accumulated |
|
|
|
| ||||||
|
|
|
|
|
|
|
| Additional |
|
|
|
|
| Other |
|
|
|
| ||||||
|
| Common Stock |
|
| Paid-in |
|
| Retained |
|
| Comprehensive |
|
|
|
| |||||||||
|
| Shares |
|
| Amount |
|
| Capital |
|
| Earnings |
|
| Loss |
|
| Total |
| ||||||
BALANCE AT JUNE 30, 2018 |
|
| 9,142,649 |
|
| $ | 457,132 |
|
| $ | 42,548,812 |
|
| $ | 2,104,414 |
|
| $ | (686,282 | ) |
| $ | 44,424,076 |
|
Net loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,544,732 | ) |
|
| — |
|
|
| (1,544,732 | ) |
Issuance of common stock under Employee Stock Purchase Plan |
|
| 7,228 |
|
|
| 362 |
|
|
| 27,206 |
|
|
| — |
|
|
| — |
|
|
| 27,568 |
|
Share based compensation |
|
| — |
|
|
| — |
|
|
| 46,431 |
|
|
| — |
|
|
| — |
|
|
| 46,431 |
|
Shareholder dividends ($0.04 per share) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (366,274 | ) |
|
| — |
|
|
| (366,274 | ) |
Other comprehensive loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (12,954 | ) |
|
| (12,954 | ) |
BALANCE AT SEPTEMBER 30, 2018 |
|
| 9,149,877 |
|
| $ | 457,494 |
|
| $ | 42,622,449 |
|
| $ | 193,408 |
|
| $ | (699,236 | ) |
| $ | 42,574,115 |
|
Accumulated | ||||||||||||||||||||||||
Additional | Other | |||||||||||||||||||||||
Common Stock | Paid-in | Retained | Comprehensive | |||||||||||||||||||||
Shares | Amount | Capital | Earnings | Loss | Total | |||||||||||||||||||
BALANCE AT MARCH 31, 2019 | 9,308,520 | $ | 465,426 | $ | 43,036,333 | $ | (677,819 | ) | $ | (722,675 | ) | $ | 42,101,265 | |||||||||||
Net income | — | — | — | 2,773,178 | — | 2,773,178 | ||||||||||||||||||
Issuance of common stock under Employee Stock Purchase Plan | 8,056 | 403 | 20,946 | — | — | 21,349 | ||||||||||||||||||
Share based compensation | — | — | 118,900 | — | — | 118,900 | ||||||||||||||||||
Shareholder dividends ($0.02 per share) | — | — | — | (193,986 | ) | — | (193,986 | ) | ||||||||||||||||
Other comprehensive loss | — | — | — | — | (47,263 | ) | (47,263 | ) | ||||||||||||||||
BALANCE AT JUNE 30, 2019 | 9,316,576 | $ | 465,829 | $ | 43,176,179 | $ | 1,901,373 | $ | (769,938 | ) | $ | 44,773,443 |
The accompanying notes are an integral part of the condensed consolidated financial statements.
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
|
|
|
|
| ||
|
| Nine Months Ended September 30 |
| |||||
|
| 2019 |
|
| 2018 |
| ||
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
Net income (loss) |
| $ | 4,751,150 |
|
| $ | (6,046,086 | ) |
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
| 1,088,684 |
|
|
| 1,695,451 |
|
Share based compensation |
|
| 276,236 |
|
|
| 156,214 |
|
Gain on sale of FutureLink Fiber business line |
|
| (2,966,906 | ) |
|
| — |
|
Gain on sale of assets |
|
| (2,008 | ) |
|
| (10,904 | ) |
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
Trade accounts receivable |
|
| 434,618 |
|
|
| 704,698 |
|
Inventories |
|
| 2,509,977 |
|
|
| (2,181,679 | ) |
Prepaid income taxes |
|
| 65,772 |
|
|
| 29,375 |
|
Other assets, net |
|
| (24,152 | ) |
|
| (559,003 | ) |
Accounts payable |
|
| (872,027 | ) |
|
| (893,578 | ) |
Accrued compensation and benefits |
|
| 404,422 |
|
|
| 702,267 |
|
Other accrued liabilities |
|
| 171,215 |
|
|
| 1,441,020 |
|
Income taxes payable |
|
| (28,267 | ) |
|
| (4,065 | ) |
Net cash provided by (used in) operating activities |
|
| 5,808,714 |
|
|
| (4,966,290 | ) |
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
Capital expenditures |
|
| (342,788 | ) |
|
| (699,818 | ) |
Purchases of investments |
|
| (8,593,711 | ) |
|
| (6,580,917 | ) |
Proceeds from the sale of FutureLink Fiber business line |
|
| 4,857,214 |
|
|
| — |
|
Proceeds from the sale of property, plant and equipment |
|
| 63,139 |
|
|
| 33,763 |
|
Proceeds from the sale of investments |
|
| 3,090,437 |
|
|
| 9,503,744 |
|
Net cash (used in) provided by investing activities |
|
| (925,709 | ) |
|
| 2,256,772 |
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
Cash dividends paid |
|
| (556,966 | ) |
|
| (1,126,870 | ) |
Proceeds from issuance of common stock, net of shares withheld |
|
| (41,486 | ) |
|
| 51,729 |
|
Net cash used in financing activities |
|
| (598,452 | ) |
|
| (1,075,141 | ) |
EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH |
|
| (41,789 | ) |
|
| (36,210 | ) |
NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH |
|
| 4,242,764 |
|
|
| (3,820,869 | ) |
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH AT BEGINNING OF PERIOD |
|
| 11,056,426 |
|
|
| 12,453,663 |
|
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH AT END OF PERIOD |
| $ | 15,299,190 |
|
| $ | 8,632,794 |
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: |
|
|
|
|
|
|
|
|
Income taxes refunded |
| $ | (73,151 | ) |
| $ | (31,402 | ) |
Interest paid |
|
| 28,508 |
|
|
| 18,969 |
|
Dividends declared not paid |
|
| 197,220 |
|
|
| 368,783 |
|
Capital expenditures in accounts payable |
|
| — |
|
|
| 33,934 |
|
Operating right of use assets obtained in exchange for lease obligations |
|
| 449,995 |
|
|
| — |
|
COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES |
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS |
(Unaudited) |
The accompanying notes are an integral part of the condensed consolidated financial statements.
Six Months Ended June 30 | ||||||||
2020 | 2019 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net (loss) income | $ | (430,888 | ) | $ | 3,013,291 | |||
Net income from discontinued operations, net of tax | 1,744,607 | 4,855,502 | ||||||
Net loss from continuing operations | (2,175,495 | ) | (1,842,211 | ) | ||||
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities: | ||||||||
Depreciation and amortization | 429,800 | 540,867 | ||||||
Share based compensation | 176,627 | 188,587 | ||||||
Deferred taxes | 9,534 | — | ||||||
(Gain) loss on sale of assets | (303,898 | ) | 9,935 | |||||
Changes in assets and liabilities: | ||||||||
Trade accounts receivable | 2,200,300 | 1,698,214 | ||||||
Inventories | (1,372,814 | ) | 1,601,413 | |||||
Prepaid income taxes | (14,136 | ) | 86,709 | |||||
Other assets, net | 409,003 | (98,501 | ) | |||||
Accounts payable | 879,851 | (1,358,635 | ) | |||||
Accrued compensation and benefits | (671,164 | ) | (459,520 | ) | ||||
Other accrued liabilities | (488,731 | ) | (162,780 | ) | ||||
Income taxes payable | — | (28,267 | ) | |||||
Net cash (used in) provided by operating activities - continuing operations | (921,123 | ) | 175,811 | |||||
Net cash (used in) provided by operating activities - discontinued operations | (1,216,374 | ) | 2,224,488 | |||||
Net cash (used in) provided by operating activities | (2,137,497 | ) | 2,400,299 | |||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Capital expenditures | (89,240 | ) | (243,000 | ) | ||||
Acquisition of business, net of cash acquired | (3,984,447 | ) | — | |||||
Purchases of investments | (9,316,544 | ) | (4,000,571 | ) | ||||
Proceeds from the sale of property, plant and equipment | 420,000 | — | ||||||
Proceeds from the sale of investments | 14,024,125 | — | ||||||
Net cash provided by (used in) investing activities - continuing operations | 1,053,894 | (4,243,571 | ) | |||||
Net cash provided by (used in) investing activities - discontinued operations | 7,992,340 | 4,900,356 | ||||||
Net cash provided by investing activities | 9,046,234 | 656,785 | ||||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Cash dividends paid | (375,742 | ) | (370,658 | ) | ||||
Proceeds from issuance of common stock, net of shares withheld | 49,665 | 46,858 | ||||||
Purchase of common stock | (118,925 | ) | — | |||||
Net cash used in financing activities | (445,002 | ) | (323,800 | ) | ||||
EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH | (45,588 | ) | (11,594 | ) | ||||
NET INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH | 6,418,147 | 2,721,690 | ||||||
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH AT BEGINNING OF PERIOD | 14,607,510 | 11,056,426 | ||||||
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH AT END OF PERIOD | $ | 21,025,657 | $ | 13,778,116 | ||||
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: | ||||||||
Income taxes paid (refunded) | $ | 4,602 | $ | (76,151 | ) | |||
Interest paid | 19,036 | 18,939 | ||||||
Dividends declared not paid | 205,878 | 193,294 | ||||||
Capital expenditures in accounts payable | — | 39,129 | ||||||
Operating right of use assets obtained in exchange for lease obligations | 208,650 | 449,995 | ||||||
The accompanying notes are an integral part of the condensed consolidated financial statements. |
COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Communications Systems, Inc. (herein collectively referred to as “CSI,” “our,” “we” or the “Company”) is a Minnesota corporation organized in 1969 that operates directly and through its subsidiaries located in the United States (U.S.) and the United Kingdom (U.K.). CSI is principally engaged in operations through its subsidiaries Transition Networks, Inc. (“Transition Networks” or “Transition”) subsidiary and business unit in the manufacture and sale of core media conversion products, Ethernet switches, and other connectivity and data transmission products, and through its Suttle, Inc., U.K.-based Net2Edge Limited (“Suttle”Net2Edge”) subsidiary and business unit in the manufacture and sale of connectivity infrastructure products for broadband and voice communications. Through its, JDL Technologies, Inc. (“JDL Technologies” or “JDL”), and Ecessa Corporation (“Ecessa”). During the second quarter of 2020, following the May 2020 acquisition of Ecessa and the consolidation of operations within the Transition Networks and Net2Edge divisions, the Company realigned its business unit, CSIoperations. Following this realignment, the Company now classifies its business into two segments: (1) the Electronics & Software segment (consisting of Transition Networks and Net2Edge), which (i) manufactures and sells solutions that provide actionable intelligence, power and connectivity at the edge of networks through Power over Ethernet (“PoE”) products, software and services as well as traditional products such as media converters, network adapters and other connectivity products and (ii) designs, develops, and sells edge network access products, TDM (time-division multiplexing) over IP and other circuit emulation solutions, along with specialized cloud-based software solutions, primarily within the telecommunications market; and (2) the Services and Support segment (consisting of JDL and Ecessa), which (i) provides technology solutions including virtualization, managed services, wired and wireless network design and implementation, and hybrid cloud infrastructure and deployment. Through its Net2Edge Limited (“Net2Edge”) U.K.-based business unit, the Companydeployment and (ii) designs, develops, manufactures and sells Ethernet-based edge network access products to telecommunications carriers.SD-WAN (software-designed wide-area network) solutions.
The Company classifies its businesses into four segments corresponding to the Transition Networks, Suttle, JDL Technologies, and Net2Edge business units. Non-allocated general and administrative expenses are separately accounted for as “Other” in the Company’s segment reporting. Intersegment revenues are eliminated upon consolidation.
Financial Statement Presentation
The condensed consolidated balance sheets and condensed consolidated statement of changes in stockholders’ equity as of SeptemberJune 30, 20192020 and the related condensed consolidated statements of income (loss) and comprehensive income (loss), and the condensed consolidated statements of cash flows for the periods ended SeptemberJune 30, 20192020 and 20182019 have been prepared by Company management. In the opinion of management, all adjustments (which include only normal recurring adjustments, except where noted) necessary to present fairly the financial position, results of operations, and cash flows at SeptemberJune 30, 20192020 and 20182019 and for the periods then ended have been made.
Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with generally accepted accounting principles in the United States of America have been condensed or omitted. We recommend these condensed consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the Company’s December 31, 20182019 Annual Report to Shareholders on Form 10-K. The results of operations for the period ended SeptemberJune 30, 20192020 are not necessarily indicative of operating results for the entire year.
The presentation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the balance sheet date, and the reported amounts of revenues and expenses during the reporting period. The estimates and assumptions used in the accompanying condensed consolidated financial statements are based upon management’s evaluation of the relevant facts and circumstances as of the time of the financial statements. Actual results could differ from those estimates.
Except to the extent updated or described below, the significant accounting policies set forth in Note 1 to the consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018,2019, appropriately represent, in all material respects, the current status of accounting policies, and are incorporated herein by reference.
Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive loss, net of tax, are as follows:
|
| Foreign Currency Translation |
|
| Unrealized gain on securities |
|
| Accumulated Other Comprehensive Loss |
| |||
December 31, 2018 |
| $ | (764,000 | ) |
| $ | 13,000 |
|
| $ | (751,000 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net current period change |
|
| (83,000 | ) |
|
| 0 |
|
|
| (83,000 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019 |
| $ | (847,000 | ) |
| $ | 13,000 |
|
| $ | (834,000 | ) |
Foreign Currency Translation | Unrealized gain (loss) on securities | Accumulated Other Comprehensive Loss | ||||||||||
December 31, 2019 | $ | (709,000 | ) | $ | 11,000 | $ | (698,000 | ) | ||||
Net current period change | (141,000 | ) | 10,000 | (131,000 | ) | |||||||
June 30, 2020 | $ | (850,000 | ) | $ | 21,000 | $ | (829,000 | ) |
NOTE 2 – REVENUE RECOGNITION
Transition NetworksElectronics & Suttle, Inc.Software
The Company has determined that the revenue recognition for its Suttle and Transition Networks divisionsElectronics & Software segment occurs upon delivery of the Company’s connectivity infrastructure and data transmission products. To determine when revenue should be recognized, it is important to determine when the transfer of control has occurred. The Company has determined that control transfers for these products upon shipment or delivery to the customer, in accordance with the agreed upon shipping terms. As such, the timing of revenue recognition occurs at a specific point in time.
JDL Technologies, Inc.Services & Support
The Company has determined that the following performance obligations identified in its JDL Technologies, Inc. divisionServices & Support segment are transferred over time: managed services and professional services (time and materials (“T&M”) and fixed price). JDL’s as well as services under maintenance and service contracts. The managed services performance obligation is a bundled solution consisting of a series of distinct services that are substantially the same and that have the same pattern of transfer to the customer and are therefore recognized evenly over the term of the contract. T&M professional services arrangements are measuredrecognized over time with an input method based on hours expended towards satisfying the performance obligation. Fixed price professional service arrangements under a relatively longer-term service will also be measuredrecognized over time with an input method based on hours expended. Maintenance and service contracts are recognized evenly over the life of the contract.
The Company has also identified the following performance obligations within its JDL Technologies divisionServices & Support segment that are recognized at a point in time which include resale of third-party hardware and software, installation, arranging for another party to transfer services to the customer, and certain professional services. The resale of third-party hardware and software is recognized at a point in time, when the goods are shipped or delivered to the customer’s location, in accordance with the shipping terms. Installation services are recognized at a point in time when the services are completed. The service the Company provides to arrange for another party to transfer services to the customer is satisfied at a point in time whenafter the Company has transferred control uponwhen the service is first being made available to the customer by the third partythird-party vendor. The Company reports revenue from these third partythird-party services on a net basis in its financial statements. Depending on the nature of the service, certain professional services transfer control at a point in time. The Company evaluates these circumstances on a case by case basis to determine if revenue should be recognized over time or at a point in time.
Net2Edge Limited
The Company’s Net2Edge division manufactures and markets Ethernet based edge network access devices. The Company principally sells these products through approved partners and integrators outside the United States. The Company has determined that the performance obligation in the Net2Edge division occurs at a point in time, upon the delivery of its connectivity infrastructure and data transmission products.
Disaggregation of revenue
Revenues are recognized when control of the promised goods or services is transferred to our customers, in an amount that best reflects the consideration we expect to receive in exchange for those goods or services. In accordance with ASC 606-10-50-5, the following tables present how we disaggregate our revenues, which is different for each segment. During the second quarter of 2020, following the May 2020 acquisition of Ecessa and the consolidation of operations within the Transition Networks and Net2Edge divisions, the Company realigned its business operations. Following this realignment, the Company now classifies its businesses into two segments, Electronics & Software and Services & Support. To conform to the presentation, the Company has reclassified the 2019 information within its financial statements in this Form 10-Q.
For Transition Networks,the Electronics & Software segment, we analyze revenue by region and product group, which is as follows for the three and ninesix months ended SeptemberJune 30, 20192020 and 2018:2019:
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
| Transition Networks Sales by Region |
| |||||||||||||
|
| Three Months Ended September 30 |
|
| Nine Months Ended September 30 |
| ||||||||||
|
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||
North America |
| $ | 11,479,000 |
|
| $ | 8,015,000 |
|
| $ | 26,442,000 |
|
| $ | 22,107,000 |
|
Rest of World |
|
| 426,000 |
|
|
| 690,000 |
|
|
| 1,822,000 |
|
|
| 2,530,000 |
|
Europe, Middle East, Africa (“EMEA”) |
|
| 578,000 |
|
|
| 526,000 |
|
|
| 2,284,000 |
|
|
| 1,582,000 |
|
|
| $ | 12,483,000 |
|
| $ | 9,231,000 |
|
| $ | 30,548,000 |
|
| $ | 26,219,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
| Transition Networks Sales by Product Group |
| |||||||||||||
|
| Three Months Ended September 30 |
|
| Nine Months Ended September 30 |
| ||||||||||
|
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||
Media converters |
| $ | 5,031,000 |
|
| $ | 5,059,000 |
|
| $ | 15,092,000 |
|
| $ | 14,735,000 |
|
Ethernet switches and adapters |
|
| 5,957,000 |
|
|
| 2,563,000 |
|
|
| 10,788,000 |
|
|
| 6,650,000 |
|
Other products |
|
| 1,495,000 |
|
|
| 1,609,000 |
|
|
| 4,668,000 |
|
|
| 4,834,000 |
|
|
| $ | 12,483,000 |
|
| $ | 9,231,000 |
|
| $ | 30,548,000 |
|
| $ | 26,219,000 |
|
Electronics & Software Sales by Region | ||||||||||||||||
Three Months Ended June 30 | Six Months Ended June 30 | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
North America | $ | 6,898,000 | $ | 8,055,000 | $ | 14,346,000 | $ | 14,969,000 | ||||||||
International | 1,389,000 | 1,881,000 | 2,477,000 | 4,258,000 | ||||||||||||
$ | 8,287,000 | $ | 9,936,000 | $ | 16,823,000 | $ | 19,227,000 |
Electronics & Software Sales by Product Group | ||||||||||||||||
Three Months Ended June 30 | Six Months Ended June 30 | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Intelligent edge solutions | $ | 3,023,000 | $ | 2,747,000 | $ | 6,377,000 | $ | 5,055,000 | ||||||||
Traditional products | 5,264,000 | 7,189,000 | 10,446,000 | 14,172,000 | ||||||||||||
$ | 8,287,000 | $ | 9,936,000 | $ | 16,823,000 | $ | 19,227,000 |
10
For Suttle,the Services & Support segment, we analyze revenuesrevenue by productcustomer group and customer group,type, which is as follows for the three and ninesix months ended SeptemberJune 30, 20192020 and 2018: 2019:
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
| Suttle Sales by Product Group |
| |||||||||||||
|
| Three Months Ended September 30 |
|
| Nine Months Ended September 30 |
| ||||||||||
|
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||
Structured cabling and connecting system products |
| $ | 3,706,000 |
|
| $ | 4,748,000 |
|
| $ | 12,549,000 |
|
| $ | 16,490,000 |
|
DSL and other products |
|
| 945,000 |
|
|
| 261,000 |
|
|
| 2,369,000 |
|
|
| 1,365,000 |
|
|
| $ | 4,651,000 |
|
| $ | 5,009,000 |
|
| $ | 14,918,000 |
|
| $ | 17,855,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
| Suttle Sales by Customer Group |
| |||||||||||||
|
| Three Months Ended September 30 |
|
| Nine Months Ended September 30 |
| ||||||||||
|
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| ||||
Communication service providers |
| $ | 3,506,000 |
|
| $ | 4,258,000 |
|
| $ | 11,463,000 |
|
| $ | 14,705,000 |
|
International |
|
| 137,000 |
|
|
| 350,000 |
|
|
| 645,000 |
|
|
| 1,696,000 |
|
Distributors |
|
| 414,000 |
|
|
| 401,000 |
|
|
| 1,513,000 |
|
|
| 1,454,000 |
|
Other |
|
| 594,000 |
|
|
| — |
|
|
| 1,297,000 |
|
|
| — |
|
|
| $ | 4,651,000 |
|
| $ | 5,009,000 |
|
| $ | 14,918,000 |
|
| $ | 17,855,000 |
|
For JDL, we analyze revenue by customer group, which is as follows for the three and nine months ended September 30, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
|
| JDL Revenue by Customer Group |
| Services & Support Revenue by Customer Group | ||||||||||||||||||||||||||||
|
| Three Months Ended September 30 |
|
| Nine Months Ended September 30 |
| Three Months Ended June 30 | Six Months Ended June 30 | ||||||||||||||||||||||||
|
| 2019 |
|
| 2018 |
|
| 2019 |
|
| 2018 |
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||
Education |
| $ | 63,000 |
|
| $ | 185,000 |
|
| $ | 1,831,000 |
|
| $ | 574,000 |
| $ | 626,000 | $ | 295,000 | $ | 719,000 | $ | 1,768,000 | ||||||||
Healthcare and commercial clients |
|
| 720,000 |
|
|
| 674,000 |
|
|
| 2,111,000 |
|
|
| 1,908,000 |
| ||||||||||||||||
Healthcare | 240,000 | 183,000 | 430,000 | 376,000 | ||||||||||||||||||||||||||||
Financial and other commercial clients | 474,000 | 291,000 | 817,000 | 550,000 | ||||||||||||||||||||||||||||
CSI IT operations | 185,000 | 182,000 | 386,000 | 466,000 | ||||||||||||||||||||||||||||
|
| $ | 783,000 |
|
| $ | 859,000 |
|
| $ | 3,942,000 |
|
| $ | 2,482,000 |
| $ | 1,525,000 | $ | 951,000 | $ | 2,352,000 | $ | 3,160,000 |
The Company does not currently analyze revenue for Net2Edge on a disaggregated basis. Revenues from Net2Edge were $611,000 and $405,000 for the three months ended September 30, 2019 and 2018, respectively. Revenues were $1,856,000 and $1,251,000 for the nine months ended September 30, 2019 and 2018, respectively.
Services & Support Revenue by Type | ||||||||||||||||
Three Months Ended June 30 | Six Months Ended June 30 | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Project & product revenue | $ | 746,000 | $ | 355,000 | $ | 886,000 | $ | 1,994,000 | ||||||||
Services & support revenue | 779,000 | 596,000 | 1,466,000 | 1,166,000 | ||||||||||||
$ | 1,525,000 | $ | 951,000 | $ | 2,352,000 | $ | 3,160,000 |
NOTE 3 – LEASESDISCONTINUED OPERATIONS
In February 2016,On March 11, 2020, the Financial Accounting Standards BoardCompany sold the remainder of its Suttle business lines, including the SoHo, MediaMAX, and SpeedStar brands and inventory as well as working capital, certain capital equipment, intellectual property, and customer relationships to Oldcastle Infrastructure, Inc. (“FASB”Oldcastle”) issued ASU No. 2016-02, Leases (ASC Topic 842),for $8,000,000, with a working capital adjustment 90 days after close. Oldcastle will operate the majority of the acquired Suttle business through its wholly-owned subsidiary, Primex Technologies, Inc. The Company received proceeds of $8,190,000 and recorded a gain on the sale of $2,039,000 in the first six months of 2020.
Concurrent with the closing of the transaction, the Company and Oldcastle entered into a Transition Services Agreement (“TSA”) under which is intendedSuttle agreed to improve financial reportingcontinue to manufacture products for Oldcastle for up to six months, to ensure seamless supply and quality assurance to the existing customer base. Concurrently with the closing of leasing transactions by requiring organizations thatthe transaction and the TSA, the Company and Oldcastle also entered into a lease assetsagreement under which Oldcastle agreed to recognizelease two buildings in Hector, Minnesota, where Suttle had conducted operations. Base rents under the lease agreement range from $6,970 to $7,180 per month. The parties intend to work with Suttle’s existing suppliers to ensure continued support and delivery of all Suttle products during the transition period. The associated assets and liabilities related to this sale were classified as held for the rights and obligations created by leases that extend more than twelve months from the datesale at December 31, 2019. The presentation of the balance sheet. This accounting update also requires additional disclosures surrounding the amount, timing, and uncertainty of cash flows arising from leases. This standard is effective for financial statements issued for annual and interimdiscontinued operations has been retrospectively applied to all prior periods beginning after December 15, 2018 for public business entities.presented.
The Company adopted this standard with a cumulative-effect adjustment as of January 1, 2019, the beginning of the period of adoption. The Company has elected the package of practical expedients permitted in ASC Topic 842. Adoption of the new standard resulted in the recording of right of use (“ROU”) assets and lease liabilities of approximately $280,000 and $259,000, respectively as of January 1, 2019. ROU assets represent our right to use an underlying asset for the lease term, while lease liabilities represent our obligation to make lease payments arising from the lease. Lease ROU assets and liabilities are recognized at the commencement date of a lease based on the present value of lease payments over the lease term. Because the rate implicit in each individual lease is not readily determinable, the Company uses its incremental borrowing rate to determine the present value of the lease payments. Adoption of the standard did not materially impact the Company’s condensed consolidated balance sheets, consolidated statement of income (loss) and comprehensive income (loss) or condensed consolidated statements of cash flows.
The Company has entered into operating leasesdiscontinued operations that are classified as held for two office locations, including one in February 2019. These leases have remaining lease terms of 5 to 8 years. One of the leases includes two options to extend the lease for 5 years each, and the other lease includes an option to terminate the lease in 2022. One of the leases includes a 3% rent adjustment on each anniversary of the lease. As of September 30, 2019, total ROU assets and operating lease liabilities were $396,000 and $375,000, respectively. All operating lease expense is recognized on a straight-line basis over the lease term. In the three and nine months ended September 30, 2019, the Company recognized $31,000 and $92,000 in lease expense, respectively.
Information related to the Company’s ROU assets and related lease liabilities were as follows:
|
|
|
|
|
|
| ||
|
| Three Months Ended September 30, 2019 |
|
| Nine Months Ended September 30, 2019 |
| ||
Cash paid for operating leases |
| $ | 30,000 |
|
| $ | 80,000 |
|
Right-of-use assets obtained in exchange for new operating lease obligations (1) |
|
| — |
|
|
| 450,000 |
|
| ||||||||
|
| |||||||
|
|
|
|
|
Maturities of lease liabilities as of September 30, 2019 weresale are as follows:
Q4 2019 |
| $ | 31,000 |
|
2020 |
|
| 121,000 |
|
2021 |
|
| 126,000 |
|
2022 |
|
| 87,000 |
|
2023 |
|
| 47,000 |
|
Thereafter |
|
| 4,000 |
|
Total lease payments |
|
| 416,000 |
|
Less imputed interest |
|
| (41,000 | ) |
Total operating lease liabilities |
| $ | 375,000 |
|
June 30, 2020 | December 31, 2019 | |||||||
Trade accounts receivable | $ | — | $ | 2,235,000 | ||||
Inventories | — | 3,009,000 | ||||||
Other current assets | — | 93,000 | ||||||
Total current assets | $ | — | $ | 5,337,000 | ||||
Property, plant, and equipment | $ | — | $ | 883,000 | ||||
Total noncurrent assets | $ | — | $ | 883,000 | ||||
Total assets held for sale | $ | — | $ | 6,220,000 | ||||
Accounts payable | $ | — | $ | 1,111,000 | ||||
Other accrued liabilities | — | 82,000 | ||||||
Total liabilities held for sale | $ | — | $ | 1,193,000 |
The financial results of the discontinued operations are as follows:
Three Months Ended June 30 | Six Months Ended June 30 | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Sales | $ | — | $ | 4,696,000 | $ | 3,025,000 | $ | 10,203,000 | ||||||||
Cost of sales | — | 3,228,000 | 2,050,000 | 6,935,000 | ||||||||||||
Selling, general and administrative expenses | — | 602,000 | 500,000 | 1,401,000 | ||||||||||||
Restructuring expenses | 445,000 | — | 764,000 | — | ||||||||||||
Loss (gain) on sale of assets | 122,000 | (2,986,000 | ) | (2,039,000 | ) | (2,986,000 | ) | |||||||||
Other expense | — | 10,000 | — | — | ||||||||||||
Operating (loss) income before income taxes | (567,000 | ) | 3,842,000 | 1,750,000 | 4,853,000 | |||||||||||
Income tax expense (benefit) | 2,000 | 19,000 | 5,000 | (3,000 | ) | |||||||||||
(Loss) income from discontinued operations | $ | (569,000 | ) | $ | 3,823,000 | $ | 1,745,000 | $ | 4,856,000 |
During the six months ended June 30, 2020, the Company recorded $764,000 in restructuring expense. This consisted of severance and related benefits costs due to the sale of the remainder of Suttle’s business lines and the closure of the plant once the TSA is completed. We expect 2020 and 2021 restructuring costs to be $1,300,000 including remaining severance and other shut down costs. Any remaining assets will be held for sale at the completion of the TSA. The Company paid $122,000 in restructuring charges during the first six months of 2020 and had $642,000 in restructuring accruals recorded in accrued compensation and benefits at June 30, 2020 that are expected to be paid during 2020 and 2021.
Future minimum lease commitments under operating leases based on accounting standards applicable as of December 31, 2018 were as follows:
|
|
|
|
|
Year Ending December 31: |
|
|
|
|
2019 |
| $ | 106,000 |
|
2020 |
|
| 86,000 |
|
2021 |
|
| 86,000 |
|
2022 |
|
| 50,000 |
|
|
| $ | 328,000 |
|
As of September 30, 2019, the Company does not have any additional future operating lease obligations that have not yet commenced.
NOTE 4 – CASH EQUIVALENTS AND INVESTMENTS
The following tables show the Company’s cash equivalents and available –for-sale securities’ amortized cost, gross unrealized gains, gross unrealized losses and fair value by significant investment category recorded as cash and cash equivalents or shortshort- and long termlong-term investments as of SeptemberJune 30, 20192020 and December 31, 2018:2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
September 30, 2019 | ||||||||||||||||||||||||||||
|
| Amortized Cost |
|
| Gross Unrealized Gains |
|
| Gross Unrealized Losses |
|
| Fair Value |
|
| Cash Equivalents |
|
| Short-Term Investments |
|
| Long-Term Investments |
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money Market funds |
|
| 10,716,000 |
|
|
| — |
|
|
| — |
|
|
| 10,716,000 |
|
|
| 10,716,000 |
|
|
| — |
|
|
| — |
|
Subtotal |
|
| 10,716,000 |
|
|
| — |
|
|
| — |
|
|
| 10,716,000 |
|
|
| 10,716,000 |
|
|
| — |
|
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Paper |
|
| 4,491,000 |
|
|
| — |
|
|
| — |
|
|
| 4,491,000 |
|
|
| — |
|
|
| 4,491,000 |
|
|
| — |
|
Corporate Notes/Bonds |
|
| 1,012,000 |
|
|
| — |
|
|
| — |
|
|
| 1,012,000 |
|
|
| — |
|
|
| 1,012,000 |
|
|
| — |
|
Subtotal |
|
| 5,503,000 |
|
|
| — |
|
|
| — |
|
|
| 5,503,000 |
|
|
| — |
|
|
| 5,503,000 |
|
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
| $ | 16,219,000 |
|
| $ | — |
|
| $ | — |
|
| $ | 16,219,000 |
|
| $ | 10,716,000 |
|
| $ | 5,503,000 |
|
| $ | — |
|
13
June 30, 2020 | ||||||||||||||||||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | Cash Equivalents | Short-Term Investments | Long-Term Investments | ||||||||||||||||||||||
Cash equivalents: | ||||||||||||||||||||||||||||
Money Market funds | $ | 18,521,000 | $ | — | $ | — | $ | 18,521,000 | $ | 18,521,000 | $ | — | $ | — | ||||||||||||||
Subtotal | 18,521,000 | — | — | 18,521,000 | 18,521,000 | — | — | |||||||||||||||||||||
Investments: | ||||||||||||||||||||||||||||
Commercial Paper | 3,740,000 | 8,000 | — | 3,748,000 | — | 3,748,000 | — | |||||||||||||||||||||
Convertible Debt | 355,000 | — | — | 355,000 | — | — | 355,000 | |||||||||||||||||||||
Subtotal | 4,095,000 | 8,000 | — | 4,103,000 | — | 3,748,000 | 355,000 | |||||||||||||||||||||
Total | $ | 22,616,000 | $ | 8,000 | $ | — | $ | 22,624,000 | $ | 18,521,000 | $ | 3,748,000 | $ | 355,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||||
December 31, 2018 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Amortized Cost |
|
| Gross Unrealized Gains |
|
| Gross Unrealized Losses |
|
| Fair Value |
|
| Cash Equivalents |
|
| Short-Term Investments |
|
| Long-Term Investments |
| |||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
Cash equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
Money Market funds |
| $ | 8,428,000 |
|
| $ | — |
|
| $ | — |
|
| $ | 8,428,000 |
|
| $ | 8,428,000 |
|
| $ | — |
|
| $ | — |
| |||||||||||||||||||||
Total |
| $ | 8,428,000 |
|
| $ | — |
|
| $ | — |
|
| $ | 8,428,000 |
|
| $ | 8,428,000 |
|
| $ | — |
|
| $ | — |
|
The Company tests for other than temporary losses on a quarterly basis. The Company intends to hold the investments until it can recover the full principal amount and has the ability to do so based on other sources of liquidity. The Company expects such recoveries to occur prior to the contractual maturities. The Company did not have any unrealized losses as of September 30, 2019.
December 31, 2019 | ||||||||||||||||||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | Cash Equivalents | Short-Term Investments | Long-Term Investments | ||||||||||||||||||||||
Cash equivalents: | ||||||||||||||||||||||||||||
Money Market funds | $ | 8,761,000 | $ | — | $ | — | $ | 8,761,000 | $ | 8,761,000 | $ | — | $ | — | ||||||||||||||
Subtotal | 8,761,000 | — | — | 8,761,000 | 8,761,000 | — | — | |||||||||||||||||||||
Investments: | ||||||||||||||||||||||||||||
Commercial Paper | 8,695,000 | — | (1,000 | ) | 8,694,000 | — | 8,694,000 | — | ||||||||||||||||||||
Corporate Notes/Bonds | 756,000 | — | — | 756,000 | — | 756,000 | — | |||||||||||||||||||||
Convertible Debt | 250,000 | — | — | 250,000 | — | — | 250,000 | |||||||||||||||||||||
Subtotal | 9,701,000 | — | (1,000 | ) | 9,700,000 | — | 9,450,000 | 250,000 | ||||||||||||||||||||
Total | $ | 18,462,000 | $ | — | $ | (1,000 | ) | $ | 18,461,000 | $ | 8,761,000 | $ | 9,450,000 | $ | 250,000 |
The following table summarizes the estimated fair value of our investments, designated as available-for-sale and classified by the contractual maturity date of the securities as of SeptemberJune 30, 2019:2020:
|
|
|
|
|
|
| ||
|
| Amortized Cost |
|
| Estimated Market Value |
| ||
Due within one year |
| $ | 5,503,000 |
|
| $ | 5,503,000 |
|
Amortized Cost | Estimated Market Value | |||||||
Due within one year | $ | 3,740,000 | $ | 3,748,000 | ||||
Due after one year through five years | 355,000 | 355,000 | ||||||
$ | 4,095,000 | $ | 4,103,000 |
The Company did not recognize any gross realized gains or losses during either of the nine-monththree or six month periods ending SeptemberJune 30, 20192020 and 2018,2019, respectively. If the Company had realized gains or losses, they would be included within investment and other income in the accompanying condensed consolidated statement of income (loss) and comprehensive income (loss).income.
In April 2020, the Company made an $899,000 investment in the common stock of Quortus Ltd., a UK-based company that provides virtual core network software for Private LTE solutions for critical and secure communications. The Company believes this investment is important for its Electronics & Software segment because this business segment has begun exploring partnering with Quortus to integrate the Quortus Private LTE core in existing and new products for that segment’s federal business, network extensions, and private networks for enterprises. The Company’s investment represents less than 10% of the outstanding equity of Quortus Ltd. Investments in common stock or in-substance common stock of entities in which the Company does not have the ability to exercise significant influence over the operating and financial matters of the entity are accounted for using the cost method. Investments in companies that the Company does not control, which are not in the form of common stock or in-substance common stock, are also accounted for using the cost method.
NOTE 5 - STOCK-BASED COMPENSATION
Employee Stock Purchase Plan
Under the Company’s Employee Stock Purchase Plan (“ESPP”), employees are able to acquire shares of common stock at 85% of the price at the end of each current quarterly plan term. The most recent term ended SeptemberJune 30, 2019.2020. The ESPP is considered compensatory under current Internal Revenue Service rules. At SeptemberJune 30, 2019,2020, after giving effect to the shares issued as of that date, 93,90581,053 shares remain available for future issuance under the ESPP.
2011 Executive Incentive Compensation Plan
On March 28, 2011 the Board adopted and on May 19, 2011 the Company’s shareholders approved the Company’s 2011 Executive Incentive Compensation Plan (“2011 Incentive Plan”). The 2011 Incentive Plan authorizes incentive awards to officers, key employees and non-employee directors in the form of options (incentive and non-qualified), stock appreciation rights, restricted stock, restricted stock units, performance stock units (“deferred stock”), performance cash units, and other awards in stock, cash, or a combination of stock and cash. The 2011 Incentive Plan, as amended, allows the issuance of up to 2,500,000 shares of common stock.
14
During 2019, stock options covering 100,769 shares have been awarded to key executive employees and directors. These options expire seven years from the date of award and generally vest 25% each year beginning one year after the date of award. The Company also granted deferred stock awards of 157,907 shares to key employees during the first quarter of 2019 under the Company’s long-term incentive plan. These awards vest over three years with the first vesting date being March 28, 2020.
At SeptemberJune 30, 2019, 235,6302020, 413,664 shares have been issued under the 2011 Incentive Plan, 1,651,8011,519,088 shares are subject to currently outstanding options, deferred stock awards, and unvested restricted stock units, and 612,569567,248 shares are eligible for grant under future awards.
Stock Option Plan for Directors
Shares of common stock are reserved for issuance to non-employee directors under options granted by the Company prior to 2011 under its Stock Option Plan for Non-Employee Directors (the “Director Plan”). Under the Director Plan nonqualified stock options to acquire shares of common stock were automatically granted to each non-employee director concurrent with annual meetings of shareholders in 2010 and earlier years, with the exercise price of options granted being the fair market value of the common stock on the date of the respective shareholder meetings. Options granted under the Director Plan expire 10 years from date of grant. No options have been granted under the Director Plan since 2011 when the Company amended the Director Plan to prohibit future option grants. As of September 30, 2019, there were 18,000 shares subject to outstanding options under the Director Plan.
Changes in Stock Options Outstanding
The following table summarizes changes in the number of outstanding stock options under the 2011 Incentive Plan and the Director Plan over the period December 31, 20182019 to SeptemberJune 30, 2019:2020:
|
|
|
|
|
|
|
|
| Weighted average |
| ||
|
|
|
|
| Weighted average |
|
| remaining |
| |||
|
|
|
|
| exercise price |
|
| contractual term |
| |||
|
| Options |
|
| per share |
|
| in years |
| |||
Outstanding – December 31, 2018 |
|
| 1,380,492 |
|
| $ | 7.56 |
|
|
| 4.18 |
|
Awarded |
|
| 100,769 |
|
|
| 2.69 |
|
|
|
|
|
Exercised |
|
| (22,500 | ) |
|
| 3.61 |
|
|
|
|
|
Forfeited |
|
| (147,127 | ) |
|
| 10.84 |
|
|
|
|
|
Outstanding – September 30, 2019 |
|
| 1,311,634 |
|
|
| 6.89 |
|
|
| 3.88 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2019 |
|
| 960,165 |
|
| $ | 8.04 |
|
|
| 3.30 |
|
Expected to vest September 30, 2019 |
|
| 1,268,303 |
|
|
| 6.98 |
|
|
| 3.83 |
|
Options | Weighted average exercise price per share | Weighted average remaining contractual term in years | |||||||||||
Outstanding – December 31, 2019 | 1,130,472 | $ | 7.28 | 3.48 | |||||||||
Awarded | 133,801 | 5.25 | |||||||||||
Exercised | (2,000 | ) | 2.64 | ||||||||||
Forfeited | (46,369 | ) | 11.11 | ||||||||||
Outstanding – June 30, 2020 | 1,215,904 | 6.92 | 3.52 | ||||||||||
Exercisable at June 30, 2020 | 956,317 | $ | 7.59 | 2.90 | |||||||||
Expected to vest June 30, 2020 | 1,215,904 | 6.92 | 3.52 |
The aggregate intrinsic value of all options (the amount by which the market price of the stock on the last day of the period exceeded the market price of the stock on the date of grant) outstanding at SeptemberJune 30, 20192020 was $539,000.$674,000. The intrinsic value of all options exercised during the ninethree months ended SeptemberJune 30, 20192020 was $33,000.$5,000. Net cash proceeds from the exercise of all stock options were $0 in each of the nine-monththree-month periods ended SeptemberJune 30, 20192020 and 2018.2019.
Changes in Deferred Stock Outstanding
The following table summarizes the changes in the number of deferred stock shares under the 2011 Incentive Plan over the period December 31, 20182019 to SeptemberJune 30, 2019: 2020:
|
|
|
|
|
|
| ||
|
| Shares |
|
| Weighted Average |
| ||
Outstanding – December 31, 2018 |
|
| 270,066 |
|
| $ | 4.48 |
|
Granted |
|
| 157,907 |
|
|
| 2.64 |
|
Vested |
|
| (4,575 | ) |
|
| 4.56 |
|
Forfeited |
|
| (65,231 | ) |
|
| 4.28 |
|
Outstanding – September 30, 2019 |
|
| 358,167 |
|
|
| 3.31 |
|
Weighted Average | |||||||||
Grant Date | |||||||||
Shares | Fair Value | ||||||||
Outstanding – December 31, 2019 | 321,227 | $ | 3.37 | ||||||
Granted | 89,131 | 5.39 | |||||||
Vested | (46,584 | ) | 2.64 | ||||||
Forfeited | (60,590 | ) | 4.40 | ||||||
Outstanding – June 30, 2020 | 303,184 | 3.87 |
Compensation Expense
Share-based compensation expense recognized for the nine monthssix-months ended SeptemberJune 30, 20192020 was $276,000$177,000 before income taxes and $218,000$140,000 after income taxes. Share-based compensation expense recognized for the nine monthssix-months ended SeptemberJune 30, 20182019 was $156,000$189,000 before income taxes and $123,000$149,000 after income taxes. Unrecognized compensation expense for the Company’s plans was $427,000$833,000 at SeptemberJune 30, 20192020 and is expected to be recognized over a weighted-average period of 2.32.6 years. Share-based compensation expense is recorded as a part of selling, general and administrative expenses.
NOTE 6 - INVENTORIES
Inventories summarized below are priced at the lower of first-in, first-out cost or net realizable value:
|
|
|
|
|
|
| ||
|
| September 30 |
|
| December 31 |
| ||
|
| 2019 |
|
| 2018 |
| ||
Finished goods |
| $ | 8,110,000 |
|
| $ | 9,608,000 |
|
Raw and processed materials |
|
| 4,477,000 |
|
|
| 6,568,000 |
|
|
| $ | 12,587,000 |
|
| $ | 16,176,000 |
|
June 30 | December 31 | |||||||
2020 | 2019 | |||||||
Finished goods | $ | 8,741,000 | $ | 6,728,000 | ||||
Raw and processed materials | 1,201,000 | 1,803,000 | ||||||
$ | 9,942,000 | $ | 8,531,000 |
NOTE 7 –INTANGIBLE ASSETS– ACQUISITION
On May 14, 2020, in a reverse triangular merger, the Company completed the acquisition of 100% of Ecessa Corporation (“Ecessa”), based in Plymouth, Minnesota. The purchase price was $4,650,000, with cash acquired totaling $666,000. The purchase price includes initial consideration of $4,666,000 and $ (16,000) in working capital adjustments.
The Company’s identifiable intangibleestimated assets with finite lives, includedand liabilities of Ecessa are recorded in other assets, net on the condensed consolidated balance sheets, are being amortized over theirsheet within the Services & Support segment at June 30, 2020. The preliminary purchase price allocation was based on estimates of the fair value of assets acquired and liabilities assumed, and included total assets of $5,249,000, including estimated useful livesgoodwill of $411,000 and were as follows:
|
|
|
|
|
|
|
|
|
| |||||||||||
| September 30, 2019 |
| ||||||||||||||||||
| Gross |
|
| Accumulated |
|
| Impairment |
|
| Foreign |
|
| Net |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks |
| $ | 98,000 |
|
| $ | (78,000 | ) |
| $ | — |
|
| $ | (20,000 | ) |
| $ | — |
|
Customer relationships |
|
| 491,000 |
|
|
| (230,000 | ) |
|
| (154,000 | ) |
|
| (107,000 | ) |
|
| — |
|
Technology |
|
| 229,000 |
|
|
| (189,000 | ) |
|
| — |
|
|
| (40,000 | ) |
|
| — |
|
|
| $ | 818,000 |
|
| $ | (497,000 | ) |
| $ | (154,000 | ) |
| $ | (167,000 | ) |
| $ | — |
|
16
|
|
|
|
|
|
|
|
|
| |||||||||||
| December 31, 2018 |
| ||||||||||||||||||
| Gross |
|
| Accumulated |
|
| Impairment |
|
| Foreign |
|
| Net |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks |
| $ | 98,000 |
|
| $ | (74,000 | ) |
| $ | — |
|
| $ | (19,000 | ) |
| $ | 5,000 |
|
Customer relationships |
|
| 491,000 |
|
|
| (230,000 | ) |
|
| (154,000 | ) |
|
| (107,000 | ) |
|
| — |
|
Technology |
|
| 229,000 |
|
|
| (178,000 | ) |
|
| — |
|
|
| (51,000 | ) |
|
| — |
|
|
| $ | 818,000 |
|
| $ | (482,000 | ) |
| $ | (154,000 | ) |
| $ | (177,000 | ) |
| $ | 5,000 |
|
Amortization expense on theseestimated intangibles of $3,190,000, and total liabilities of $599,000. The fair value of acquired identifiable intangible assets of $3,190,000 is provisional depending on the final valuations for those assets. All balances recorded are estimated amounts and the Company expects to finalize the purchase price allocation during the third quarter of 2020 as the valuation of identifiable assets and liabilities is completed. The pro forma impact of Ecessa was $5,000 and $9,000not significant to the Company’s results for the ninethree and six months ended SeptemberJune 30, 2019 and 2018, respectively. The amortization expense is included in selling, general and administrative expenses.2020.
NOTE 8 – WARRANTY
We provide reserves for the estimated cost of product warranties at the time revenue is recognized. We estimate the costs of our warranty obligations based on our warranty policy or applicable contractual warranty, historical experience of known product failure rates, and use of materials and service delivery costs incurred in correcting product failures. Management reviews the estimated warranty liability on a quarterly basis to determine its adequacy. The actual warranty expense could differ from the estimates made by the Company based on product performance. The warranty liability is included in other accrued liabilities on the condensed consolidated balance sheet.
The following table presents the changes in the Company’s warranty liability for the nine-month periods ended September 30, 2019 and 2018, respectively, the majority of which relates to a five-year obligation to provide for potential future liabilities for network equipment sales.
|
|
|
|
|
|
| ||
|
| 2019 |
|
| 2018 |
| ||
Beginning balance |
| $ | 594,000 |
|
| $ | 603,000 |
|
Amounts charged (credited) to expense |
|
| (40,000 | ) |
|
| 116,000 |
|
Actual warranty costs paid |
|
| (28,000 | ) |
|
| (75,000 | ) |
Ending balance |
| $ | 526,000 |
|
| $ | 644,000 |
|
NOTE 9 – CONTINGENCIES
In the ordinary course of business, the Company is exposed to legal actions and claims and incurs costs to defend against these actions and claims. Company management is not aware of any outstanding or pending legal actions or claims that could materially affect the Company’s financial position or results of operations.
NOTE 109 – DEBT
Line of Credit
The Company has a $15,000,000 line of credit from Wells Fargo Bank, N.A. The Company had no outstanding borrowings against the line of credit at SeptemberJune 30, 20192020 or December 31, 2018.2019. Due to the revolving nature of loans under our credit facility, additional borrowings and periodic repayments and re-borrowings may be made until the maturity date. The total amount available for borrowings under our credit facility at SeptemberJune 30, 20192020 was $7,018,000,$4,052,000, based on the borrowing base calculation. Interest on borrowings on the credit line is at LIBOR plus 2.0% (4.0%(2.2% at SeptemberJune 30, 2019)2020). The credit agreement expires August 12, 2021 and is secured by assets of the Company. Our credit agreement contains financial covenants including a minimum liquidity balance of $10,000,000. Liquidity is calculated as the sum of unrestricted cash, marketable securities and the availability on the line of credit. The Company was in compliance with its financial covenants at SeptemberJune 30, 2019.2020.
17
NOTE 1110 – INCOME TAXES
In the preparation of the Company’s consolidated financial statements, management calculates income taxes based upon the estimated effective rate applicable to operating results for the full fiscal year. This includes estimating the current tax liability as well as assessing differences resulting from different treatment of items for tax and book accounting purposes. These differences result in deferred tax assets and liabilities, which are recorded on the balance sheet. Management analyzes these assets and liabilities regularly and assesses the likelihood that deferred tax assets will be recovered from future taxable income.
At SeptemberJune 30, 20192020 there was $90,000$111,000 of net uncertain tax benefit positions that would reduce the effective income tax rate if recognized. The Company records interest and penalties related to income taxes as income tax expense in the condensed consolidated statements of income (loss) and comprehensive income (loss).
The Company is subject to U.S. federal income tax as well as income tax of multiple state and foreign jurisdictions. The tax years 2016-20182016-2019 remain open to examination by the Internal Revenue Service and the years 2015-20182015-2019 remain open to examination by various state tax departments. The tax years from 2015-20182016-2018 remain open in Costa Rica.
The Company’s effective income tax rate was (0.8%)0.2% for the first ninesix months of 2019.2020. The effective tax rate differs from the federal tax rate of 21% due primarily to state income taxes, foreign tax rate differences, foreign losses not deductible for U.S. income tax purposes, the effect of uncertain income tax positions, stock compensation windfalls and changes in valuation allowances related to deferred tax assets. The foreign operating losses may ultimately be deductible in the countries in which they occurred; however, the Company has not recorded a deferred tax asset for these losses due to uncertainty regarding the eventual realization of the benefit. The effect of the foreign operations was an overall rate decrease of approximately 7.2%(31.8%) for the ninesix months ended SeptemberJune 30, 2019.2020. There were no additional uncertain tax positions identified in the first nine monthshalf of 2019.2020. The Company’s effective income tax rate for the nine six months ended SeptemberJune 30, 20182019 was 0.1%0.9%, and differed from the federal tax rate due to state income taxes, foreign tax rate differences, foreign losses not deductible for U.S. income tax purposes, changes in the reserve for uncertain income tax positions, provisions for interest charges for uncertain income tax positions, stock compensation shortfalls and changes in valuation allowances related to deferred tax assets.
18
NOTE 1211 – SEGMENT INFORMATION
Effective January 1, 2019,Following the Company realignedacquisition of Ecessa during the financial reporting for its business units. As a resultquarter and the merging of this realignment, certain corporate general and administrative expenses that were previously included withinoperations, the business unit level as fully allocated costs are now categorized as “Other”. The Company classifies its remaining businesses into the fourtwo segments as follows:
● |
|
● |
|
|
|
|
|
Management has chosen to organize the Company and disclose reportable segments based on our products and services. Intersegment revenues are eliminated upon consolidation. In order“Other” includes non-allocated corporate overhead costs. As a result of our treatment of Suttle as discontinued operations, “Other” includes amounts previously allocated to Suttle that do not meet the criteria to be included in income from discontinued operations. The Company has reclassified its 2019 financial statements to conform to the 2019 presentation, the Company has reclassified the 2018 corporate expenses previously allocated to reportable segments to the “Other” section.its new segment reporting.
Information concerning the Company’s continuing operations in the variousthese two segments for the three and nine-monthsix-month periods ended SeptemberJune 30, 20192020 and 20182019 are as follows:
| Transition |
|
| Suttle |
|
| JDL |
|
| Net2Edge |
|
| Other |
|
| Intersegment |
|
| Total |
| Electronics & | Services & | Intersegment | |||||||||||||||||||||||||
Three Months Ended September 30, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||
Software | Support | Other | Eliminations | Total | ||||||||||||||||||||||||||||||||||||||||||||
Three Months Ended June 30, 2020 | ||||||||||||||||||||||||||||||||||||||||||||||||
Sales |
| $ | 12,483,000 |
|
| $ | 4,651,000 |
|
| $ | 783,000 |
|
| $ | 611,000 |
|
| $ | — |
|
| $ | (305,000 | ) |
| $ | 18,223,000 |
| $ | 8,287,000 | $ | 1,525,000 | $ | — | $ | (184,000 | ) | $ | 9,628,000 | |||||||||
Cost of sales |
|
| 6,441,000 |
|
|
| 3,198,000 |
|
|
| 603,000 |
|
|
| 328,000 |
|
|
| — |
|
|
| (85,000 | ) |
|
| 10,485,000 |
| 5,192,000 | 982,000 | — | (26,000 | ) | 6,148,000 | ||||||||||||||
Gross profit |
|
| 6,042,000 |
|
|
| 1,453,000 |
|
|
| 180,000 |
|
|
| 283,000 |
|
|
| — |
|
|
| (220,000 | ) |
|
| 7,738,000 |
| 3,095,000 | 543,000 | — | (158,000 | ) | 3,480,000 | ||||||||||||||
Selling, general and administrative expenses |
|
| 3,810,000 |
|
|
| 888,000 |
|
|
| 349,000 |
|
|
| 653,000 |
|
|
| 629,000 |
|
|
| (220,000 | ) |
|
| 6,109,000 |
| 3,638,000 | 483,000 | 769,000 | (158,000 | ) | 4,732,000 | ||||||||||||||
Operating income (loss) |
|
| 2,232,000 |
|
|
| 565,000 |
|
|
| (169,000 | ) |
|
| (370,000 | ) |
|
| (629,000 | ) |
|
| — |
|
|
| 1,629,000 |
| ||||||||||||||||||||
Other income (expense) |
|
| (11,000 | ) |
|
| 5,000 |
|
|
| — |
|
|
| 22,000 |
|
|
| 76,000 |
|
|
| — |
|
|
| 92,000 |
| ||||||||||||||||||||
Acquisition costs | — | — | 394,000 | — | 394,000 | |||||||||||||||||||||||||||||||||||||||||||
Operating (loss) income | (543,000 | ) | 60,000 | (1,163,000 | ) | — | (1,646,000 | ) | ||||||||||||||||||||||||||||||||||||||||
Other income | 3,000 | — | 276,000 | — | 279,000 | |||||||||||||||||||||||||||||||||||||||||||
Income (loss) before income tax |
| $ | 2,221,000 |
|
| $ | 570,000 |
|
| $ | (169,000 | ) |
| $ | (348,000 | ) |
| $ | (553,000 | ) |
| $ | — |
|
| $ | 1,721,000 |
| $ | (540,000 | ) | $ | 60,000 | $ | (887,000 | ) | $ | — | $ | (1,367,000 | ) | |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
Depreciation and amortization |
| $ | 74,000 |
|
| $ | 223,000 |
|
| $ | 26,000 |
|
| $ | 11,000 |
|
| $ | — |
|
| $ | — |
|
| $ | 334,000 |
| $ | 76,000 | $ | 19,000 | $ | 123,000 | $ | — | $ | 218,000 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
Capital expenditures |
| $ | 7,000 |
|
| $ | — |
|
| $ | 4,000 |
|
| $ | — |
|
| $ | 72,000 |
|
| $ | — |
|
| $ | 83,000 |
| $ | 24,000 | $ | — | $ | 8,000 | $ | — | $ | 32,000 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
Assets |
| $ | 18,487,000 |
|
| $ | 9,212,000 |
|
| $ | 1,419,000 |
|
| $ | 2,627,000 |
|
| $ | 25,989,000 |
|
| $ | (27,000 | ) |
| $ | 57,707,000 |
| $ | 16,825,000 | $ | 6,569,000 | $ | 33,984,000 | $ | (27,000 | ) | $ | 57,351,000 |
| Transition |
|
| Suttle |
|
| JDL |
|
| Net2Edge |
|
| Other |
|
| Intersegment |
|
| Total |
| ||||||||
Three Months Ended September 30, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
Sales |
| $ | 9,231,000 |
|
| $ | 5,009,000 |
|
| $ | 859,000 |
|
| $ | 405,000 |
|
| $ | — |
|
| $ | (212,000 | ) |
| $ | 15,292,000 |
|
Cost of sales |
|
| 4,883,000 |
|
|
| 4,093,000 |
|
|
| 712,000 |
|
|
| 365,000 |
|
|
| — |
|
|
| (2,000 | ) |
|
| 10,051,000 |
|
Gross profit |
|
| 4,348,000 |
|
|
| 916,000 |
|
|
| 147,000 |
|
|
| 40,000 |
|
|
| — |
|
|
| (210,000 | ) |
|
| 5,241,000 |
|
Selling, general and administrative expenses |
|
| 3,481,000 |
|
|
| 1,756,000 |
|
|
| 380,000 |
|
|
| 809,000 |
|
|
| 627,000 |
|
|
| (210,000 | ) |
|
| 6,843,000 |
|
Operating (loss) income |
|
| 867,000 |
|
|
| (840,000 | ) |
|
| (233,000 | ) |
|
| (769,000 | ) |
|
| (627,000 | ) |
|
| — |
|
|
| (1,602,000 | ) |
Other income (expense) |
|
| (1,000 | ) |
|
| (5,000 | ) |
|
| — |
|
|
| 19,000 |
|
|
| 42,000 |
|
|
| — |
|
|
| 55,000 |
|
Income (loss) before income tax |
| $ | 866,000 |
|
| $ | (845,000 | ) |
| $ | (233,000 | ) |
| $ | (750,000 | ) |
| $ | (585,000 | ) |
| $ | — |
|
| $ | (1,547,000 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
| $ | 96,000 |
|
| $ | 374,000 |
|
| $ | 40,000 |
|
| $ | 13,000 |
|
| $ | — |
|
| $ | — |
|
| $ | 523,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
| $ | 31,000 |
|
| $ | 48,000 |
|
| $ | — |
|
| $ | (7,000 | ) |
| $ | 14,000 |
|
| $ | — |
|
| $ | 86,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets |
| $ | 17,644,000 |
|
| $ | 13,277,000 |
|
| $ | 1,177,000 |
|
| $ | 2,421,000 |
|
| $ | 17,764,000 |
|
| $ | (27,000 | ) |
| $ | 52,256,000 |
|
19
Electronics & | Services & | Intersegment | ||||||||||||||||||
Software | Support | Other | Eliminations | Total | ||||||||||||||||
Three Months Ended June 30, 2019 | ||||||||||||||||||||
Sales | $ | 9,936,000 | $ | 951,000 | $ | — | $ | (182,000 | ) | $ | 10,705,000 | |||||||||
Cost of sales | 5,775,000 | 700,000 | — | (11,000 | ) | 6,464,000 | ||||||||||||||
Gross profit | 4,161,000 | 251,000 | — | (171,000 | ) | 4,241,000 | ||||||||||||||
Selling, general and administrative expenses | 4,300,000 | 331,000 | 910,000 | (171,000 | ) | 5,370,000 | ||||||||||||||
Operating loss | (139,000 | ) | (80,000 | ) | (910,000 | ) | — | (1,129,000 | ) | |||||||||||
Other income | 2,000 | — | 65,000 | — | 67,000 | |||||||||||||||
Loss before income tax | $ | (137,000 | ) | $ | (80,000 | ) | $ | (845,000 | ) | $ | — | $ | (1,062,000 | ) | ||||||
Depreciation and amortization | $ | 89,000 | $ | 26,000 | $ | 147,000 | $ | — | $ | 262,000 | ||||||||||
Capital expenditures | $ | 5,000 | $ | — | $ | 28,000 | $ | — | $ | 33,000 | ||||||||||
Assets | $ | 19,421,000 | $ | 1,658,000 | $ | 33,024,000 | $ | (27,000 | ) | $ | 54,076,000 |
Electronics & | Services & | Intersegment | ||||||||||||||||||
Software | Support | Other | Eliminations | Total | ||||||||||||||||
Six Months Ended June 30, 2020 | ||||||||||||||||||||
Sales | $ | 16,823,000 | $ | 2,352,000 | $ | — | $ | (384,000 | ) | $ | 18,791,000 | |||||||||
Cost of sales | 9,999,000 | 1,602,000 | — | (27,000 | ) | 11,574,000 | ||||||||||||||
Gross profit | 6,824,000 | 750,000 | — | (357,000 | ) | 7,217,000 | ||||||||||||||
Selling, general and administrative expenses | 7,535,000 | 811,000 | 1,683,000 | (357,000 | ) | 9,672,000 | ||||||||||||||
Acquisition costs | — | — | 415,000 | — | 415,000 | |||||||||||||||
Operating loss | (711,000 | ) | (61,000 | ) | (2,098,000 | ) | — | (2,870,000 | ) | |||||||||||
Other income | 17,000 | — | 673,000 | — | 690,000 | |||||||||||||||
Loss before income tax | $ | (694,000 | ) | $ | (61,000 | ) | $ | (1,425,000 | ) | $ | — | $ | (2,180,000 | ) | ||||||
Depreciation and amortization | $ | 147,000 | $ | 32,000 | $ | 251,000 | $ | — | $ | 430,000 | ||||||||||
Capital expenditures | $ | 68,000 | $ | 1,000 | $ | 20,000 | $ | — | $ | 89,000 |
| Transition |
|
| Suttle |
|
| JDL |
|
| Net2Edge |
|
| Other |
|
| Intersegment |
|
| Total |
| ||||||||
Nine Months Ended September 30, 2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
Sales |
| $ | 30,548,000 |
|
| $ | 14,918,000 |
|
| $ | 3,942,000 |
|
| $ | 1,856,000 |
|
| $ | — |
|
| $ | (918,000 | ) |
| $ | 50,346,000 |
|
Cost of sales |
|
| 16,809,000 |
|
|
| 10,198,000 |
|
|
| 2,643,000 |
|
|
| 1,099,000 |
|
|
| — |
|
|
| (275,000 | ) |
|
| 30,474,000 |
|
Gross profit |
|
| 13,739,000 |
|
|
| 4,720,000 |
|
|
| 1,299,000 |
|
|
| 757,000 |
|
|
| — |
|
|
| (643,000 | ) |
|
| 19,872,000 |
|
Selling, general and administrative expenses |
|
| 11,080,000 |
|
|
| 2,883,000 |
|
|
| 1,056,000 |
|
|
| 2,162,000 |
|
|
| 1,789,000 |
|
|
| (643,000 | ) |
|
| 18,327,000 |
|
Operating (loss) income |
|
| 2,659,000 |
|
|
| 1,837,000 |
|
|
| 243,000 |
|
|
| (1,405,000 | ) |
|
| (1,789,000 | ) |
|
| — |
|
|
| 1,545,000 |
|
Other income (expense) |
|
| (12,000 | ) |
|
| 2,994,000 |
|
|
| (10,000 | ) |
|
| 25,000 |
|
|
| 173,000 |
|
|
| — |
|
|
| 3,170,000 |
|
Income (loss) before income tax |
| $ | 2,647,000 |
|
| $ | 4,831,000 |
|
| $ | 233,000 |
|
| $ | (1,380,000 | ) |
| $ | (1,616,000 | ) |
| $ | — |
|
| $ | 4,715,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
| $ | 224,000 |
|
| $ | 735,000 |
|
| $ | 80,000 |
|
| $ | 50,000 |
|
| $ | — |
|
| $ | — |
|
| $ | 1,089,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
| $ | 11,000 |
|
| $ | 16,000 |
|
| $ | 40,000 |
|
| $ | 8,000 |
|
| $ | 268,000 |
|
| $ | — |
|
| $ | 343,000 |
|
| Transition |
|
| Suttle |
|
| JDL |
|
| Net2Edge |
|
| Other |
|
| Intersegment |
|
| Total |
| Electronics & | Services & | Intersegment | |||||||||||||||||||||||||
Nine Months Ended September 30, 2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||
Software | Support | Other | Eliminations | Total | ||||||||||||||||||||||||||||||||||||||||||||
Six Months Ended June 30, 2019 | ||||||||||||||||||||||||||||||||||||||||||||||||
Sales |
| $ | 26,219,000 |
|
| $ | 17,855,000 |
|
| $ | 2,482,000 |
|
| $ | 1,251,000 |
|
| $ | — |
|
| $ | (703,000 | ) |
| $ | 47,104,000 |
| $ | 19,227,000 | $ | 3,160,000 | $ | — | $ | (466,000 | ) | $ | 21,921,000 | |||||||||
Cost of sales |
|
| 14,436,000 |
|
|
| 15,105,000 |
|
|
| 2,281,000 |
|
|
| 929,000 |
|
|
| — |
|
|
| (51,000 | ) |
|
| 32,700,000 |
| 11,139,000 | 2,040,000 | — | (125,000 | ) | 13,054,000 | ||||||||||||||
Gross profit |
|
| 11,783,000 |
|
|
| 2,750,000 |
|
|
| 201,000 |
|
|
| 322,000 |
|
|
| — |
|
|
| (652,000 | ) |
|
| 14,404,000 |
| 8,088,000 | 1,120,000 | — | (341,000 | ) | 8,867,000 | ||||||||||||||
Selling, general and administrative expenses |
|
| 10,212,000 |
|
|
| 5,633,000 |
|
|
| 1,225,000 |
|
|
| 2,533,000 |
|
|
| 1,751,000 |
|
|
| (652,000 | ) |
|
| 20,702,000 |
| 8,696,000 | 707,000 | 1,756,000 | (341,000 | ) | 10,818,000 | ||||||||||||||
Operating (loss) income |
|
| 1,571,000 |
|
|
| (2,883,000 | ) |
|
| (1,024,000 | ) |
|
| (2,211,000 | ) |
|
| (1,751,000 | ) |
|
| — |
|
|
| (6,298,000 | ) | (608,000 | ) | 413,000 | (1,756,000 | ) | — | (1,951,000 | ) | ||||||||||||
Other income |
|
| 3,000 |
|
|
| 15,000 |
|
|
| 3,000 |
|
|
| 31,000 |
|
|
| 194,000 |
|
|
| — |
|
|
| 246,000 |
| ||||||||||||||||||||
Income (loss) before income tax |
| $ | 1,574,000 |
|
| $ | (2,868,000 | ) |
| $ | (1,021,000 | ) |
| $ | (2,180,000 | ) |
| $ | (1,557,000 | ) |
| $ | — |
|
| $ | (6,052,000 | ) | ||||||||||||||||||||
Other income (expense) | 1,000 | (10,000 | ) | 102,000 | — | 93,000 | ||||||||||||||||||||||||||||||||||||||||||
(Loss) income before income tax | $ | (607,000 | ) | $ | 403,000 | $ | (1,654,000 | ) | $ | — | $ | (1,858,000 | ) | |||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
Depreciation and amortization |
| $ | 337,000 |
|
| $ | 1,173,000 |
|
| $ | 144,000 |
|
| $ | 41,000 |
|
| $ | — |
|
| $ | — |
|
| $ | 1,695,000 |
| $ | 188,000 | $ | 54,000 | $ | 299,000 | $ | — | $ | 541,000 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
Capital expenditures |
| $ | 69,000 |
|
| $ | 508,000 |
|
| $ | — |
|
| $ | 109,000 |
|
| $ | 14,000 |
|
| $ | — |
|
| $ | 700,000 |
| $ | 12,000 | $ | 36,000 | $ | 195,000 | $ | — | $ | 243,000 |
NOTE 1312 – NET INCOME (LOSS) PER SHARE
Basic net income (loss) per common share is based on the weighted average number of common shares outstanding during each period and year. Diluted net income per common share takes into effect the dilutive effect of potential common shares outstanding. The Company’s only potential common shares outstanding are stock options and shares associated with the long-term incentive compensation plans, which resulted in ano dilutive effect of 51,042 and 8,678 for the three and nine-monthsix months ended June 30, 2020. The dilutive effect for the three and six-month periods ended SeptemberJune 30, 2019 was 2,530 and 0 shares, respectively. Due to the net losses in the first three and nine months of 2018, there was no dilutive impact from stock options or unvested shares. The Company calculates the dilutive effect of outstanding options using the treasury stock method. Due to the net losses in the first three and six months of 2020, there was no dilutive impact from stock options or unvested shares. Options totaling 936,817614,114 and 1,150,865634,114 were excluded from the calculation of diluted earnings per share for the three and ninesix months ended SeptemberJune 30, 20192020, respectively because the exercise price was greater than the average market price of common stock during the period and deferred stock awards totaling 200,260117,688 shares would not have been included for the three and ninesix months ended SeptemberJune 30, 20192020, because of unmet performance conditions. Options totaling 1,144,6071,173,365 and 1,351,7721,223,365 were excluded from the calculation of diluted earnings per share for the three and ninesix months ended SeptemberJune 30, 20182019, respectively because the exercise price was greater than the average market price of common stock during the period and deferred stock awards totaling 309,819207,573 shares would not have been included for the three and ninesix months ended SeptemberJune 30, 20182019, because of unmet performance conditions.
NOTE 1413 – FAIR VALUE MEASUREMENTS
The accounting guidance establishes a valuation hierarchy for disclosure of the inputs to valuation used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows:
Level 1 – Observable inputs that reflect unadjusted quoted prices for identical assets or liabilities in active markets that the Company has the ability to access at the measurement date.
Level 2 – Observable inputs such as quoted prices for similar instruments and quoted prices in markets that are not active, and inputs that are directly observable or can be corroborated by observable market data. The types of assets and liabilities included in Level 2 are typically either comparable to actively traded securities or contracts, such as treasury securities with pricing interpolated from recent trades of similar securities, or priced with models using highly observable inputs, such as commodity options priced using observable forward prices and volatilities.
Level 3 – Significant inputs to pricing that have little or no observability as of the reporting date. The types of assets and liabilities included in Level 3 are those with inputs requiring significant management judgment or estimation, such as the complex and subjective models and forecasts used to determine the fair value of financial instruments.
Financial assets and liabilities measured at fair value on a recurring basis as of SeptemberJune 30, 20192020 and December 31, 2018,2019, are summarized below:
|
| September 30, 2019 |
|
|
|
| June 30, 2020 | |||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
|
| Total Fair Value |
| Level 1 | Level 2 | Level 3 | Total Fair Value | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Cash equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Money Market Funds |
|
| 10,716,000 |
|
|
| — |
|
|
| — |
|
|
| 10,716,000 |
| $ | 18,521,000 | $ | — | $ | — | $ | 18,521,000 | ||||||||
Subtotal |
|
| 10,716,000 |
|
|
| — |
|
|
| — |
|
|
| 10,716,000 |
| 18,521,000 | — | — | 18,521,000 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Short-term investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Commercial Paper |
|
| — |
|
|
| 4,491,000 |
|
|
| — |
|
|
| 4,491,000 |
| — | 3,748,000 | — | 3,748,000 | ||||||||||||
Corporate Notes/Bonds |
|
| — |
|
|
| 1,012,000 |
|
|
| — |
|
|
| 1,012,000 |
| ||||||||||||||||
Subtotal |
|
| — |
|
|
| 5,503,000 |
|
|
| — |
|
|
| 5,503,000 |
| — | 3,748,000 | — | 3,748,000 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Long-term investments: | ||||||||||||||||||||||||||||||||
Convertible debt | — | — | 355,000 | 355,000 | ||||||||||||||||||||||||||||
Subtotal | — | — | 355,000 | 355,000 | ||||||||||||||||||||||||||||
Total |
| $ | 10,716,000 |
|
| $ | 5,503,000 |
|
| $ | — |
|
| $ | 16,219,000 |
| $ | 18,521,000 | $ | 3,748,000 | $ | 355,000 | $ | 22,624,000 |
December 31, 2019 | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total Fair Value | |||||||||||||
Cash equivalents: | ||||||||||||||||
Money Market Funds | $ | 8,761,000 | $ | — | $ | — | $ | 8,761,000 | ||||||||
Subtotal | 8,761,000 | — | — | 8,761,000 | ||||||||||||
Short-term investments: | ||||||||||||||||
Commercial Paper | — | 8,694,000 | — | 8,694,000 | ||||||||||||
Corporate Notes/Bonds | — | 756,000 | — | 756,000 | ||||||||||||
Subtotal | — | 9,450,000 | — | 9,450,000 | ||||||||||||
Long-term investments: | ||||||||||||||||
Convertible debt | — | — | 250,000 | 250,000 | ||||||||||||
Subtotal | — | — | 250,000 | 250,000 | ||||||||||||
Total | $ | 8,761,000 | $ | 9,450,000 | $ | 250,000 | $ | 18,461,000 |
|
| December 31, 2018 |
|
|
|
| ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
|
| Total Fair Value |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money Market Funds |
| $ | 8,428,000 |
|
| $ | — |
|
| $ | — |
|
| $ | 8,428,000 |
|
Total |
| $ | 8,428,000 |
|
| $ | — |
|
| $ | — |
|
| $ | 8,428,000 |
|
We record transfers between levels of the fair value hierarchy, if necessary, at the end of the reporting period. There were no transfers between levels during the ninethree and six months ended SeptemberJune 30, 2019.2020.
NOTE 1514 – GENERAL COMMITMENTS
On August 2, 2018, the Company entered into a purchase agreement with Launch Properties, LLC for the sale of the Company’s building located at 10900 Red Circle Drive, Minnetonka, MN for $10,000,000. The building currently includes the Company’s corporate administrative offices, as well as some operations for Transition Networks Suttle and JDL Technologies. The closing of the transaction iswas subject to several closing conditions, including the buyer’s ability to complete due diligence within 180 days and the buyer’s ability to obtain regulatory approval for its intended use of the property. The original due diligence period lapsed on January 29, 2019, and through two amendments to the original agreement, the due diligence period was extended to June 30, 2020, and the buyer has met certain required obligations.obligations under these amendments. One of the conditions of the agreement and amendments included non-refundable deposits into an escrow account. As of SeptemberJune 30, 2019,2020, the balance withinin this escrow accountsaccount was $175,000$225,000 and is included within restricted cash within the condensed consolidated balance sheet. IfOn July 28, 2020, the sale proceeds,parties executed an agreement terminating the Company currently expects the transaction to closeoriginal purchase agreement. The $225,000 in earnest money in the second half of 2020.
NOTE 16 – DISPOSITION OF ASSETS
On April 5, 2019, the Company sold its Suttle FutureLink™ Fiber business line, including inventory, equipment, and customer relationships, to PPC Broadband Inc. (“PPC”). The transaction was structured as an Asset Purchase Agreement with a simultaneous signing and closing. The sale price was $5,000,000 cash, of which $500,000 was deferred into an escrow account until certain criteria are met and is recorded as restricted cash within the condensed consolidated balance sheet. The Company recognized a gain on the sale of inventory and capital equipment totaling $2,967,000 during the second quarter of 2019. Concurrent with the closing of the transaction, Suttle and PPC entered into a Transition Services Agreement under which Suttle agreed to manufacture products relatedwas transferred to the FutureLink™ Fiber business line until September 30, 2019, to ensure seamless supply to the customer base.Company.
NOTE 1715 – RECENT ACCOUNTING PRONOUNCEMENTS
In February 2016,December 2019, the FASB issued ASU 2016-02, “Leases” (Topic 842)2019-12, “Simplifying the Accounting for Income Taxes”, which, as part of its Simplification Initiative to reduce the cost and complexity in accounting for income taxes, removes certain exceptions related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. ASU 2019-12 also amends existingother aspects of the guidance to help simplify and requires an entity to recognize both assets and liabilities arising from financing and operating leases, along with additional qualitative and quantitative disclosures.promote consistent application of GAAP. The new standardguidance is effective for fiscal yearsinterim and annual periods beginning after December 15, 2018, including interim periods within that reporting period, and2020, with early adoption is permitted. The Company adopted this standard during the accounting standard effective January 1, 2019. Please see Note 3 for the required disclosures relatedfirst quarter of 2020 with an immaterial impact to the impact of adopting this standard.our consolidated financial statements.
In June 2016, FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments.” The amendments in this update replace the incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects expected credit losses. This ASU is intended to provide financial statement users with more decision-useful information about the expected credit losses and is effective for annual periods and interim periods for those annual periods beginning after December 15, 2022, which for us is the first quarter ending March 31, 2023. Entities may early adopt beginning after December 15, 2018. We are currently evaluating the impact of the adoption of ASU 2016-13 on our consolidated financial statements.
NOTE 1816 – SUBSEQUENT EVENTS
The Company has evaluated subsequent events through the date of this filing. WeOther than the termination of the purchase agreement in Note 14, we do not believe there are any material subsequent events other than those disclosed in the footnotes to these financial statements that require further disclosure.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Communications Systems, Inc. provides physical connectivity infrastructure and services for global deployments of broadband networks through the following business units:segments:
Electronics & Software
This segment is initially comprised of CSI’s Transition Networks and Net2Edge businesses. With over 30 years of growth and expertise in hardware and software development in this segment, the Company offers customers:
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● | Network edge devices that range from traditional Ethernet based switches, to circuit emulation devices, to bespoke niche solutions deploying LTE (long-term evolution) technology, for example. The circuit emulation products range from legacy over packet interfaces such as Serial, TDM or ISDN. The Company targets these products at telecommunications service providers, enterprises and system integrators. These solutions assist in resolving challenges in the areas of bandwidth constraints, security risks, and distance limitations as networks extend from local area to wide area networks and adapt to ever increasing end-user demands. |
As enterprise networks continue to change and evolve, our solutions enable customers to integrate multiple services into their existing infrastructure. Products incorporate features for performing advanced levels of management and automated provisioning minimizing the administrative burden of the operator. The Company distributes hardware-based connectivity solutions through a network of resellers in over 90 countries. |
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Services & Support
This segment is initially comprised of CSI’s JDL Technologies and Ecessa Corporation businesses. With over 30 years of growth and expertise in managed services and SD-WAN solutions in this segment, the Company offers customers:
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● | SD-WAN Never Down® networks by deploying automatic failover and leveraging up to 25 communication links ranging from MPLS, lower cost broadband, cable, satellite, microwave or cellular 4G/LTE – and soon 5G. |
Except as otherwise expressly discussed, all operating results for 2019 and 2020 only reflect the Company’s continuing operations and exclude the discontinued operations of the Company’s former Suttle business. Operating results for 2019 have been reclassified to reflect the Company’s new segment reporting.
Second Quarter 2020 Summary
● | Consolidated sales were $9.6 million in Q2 2020 compared to $10.7 million in Q2 2019. |
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Third Quarter 2019 Summary
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● | Net |
Forward-looking statements
In this report and, from time to time, in reports filed with the Securities and Exchange Commission (“SEC”), in press releases, and in other communications to shareholders or the investing public, the Company may make “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. We may make these forward-looking statements concerning possible or anticipated future financial performance, business activities, plans, pending claims, investigations or litigation, which are typically preceded by the words “believes,” “expects,” “anticipates,” “intends” or similar expressions. For these forward-looking statements, the Company claims the protection of the safe harbor for forward-looking statements contained in federal securities laws. Shareholders and the investing public should understand that these forward-looking statements are subject to risks and uncertainties that could cause actual performance, activities, anticipated results, outcomes or plans to differ significantly from those indicated in the forward-looking statements. These risks and uncertainties include, but are not limited to:
General Risks and Uncertainties:
● | The ability of the Company’s |
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● | Our ability to successfully and profitably integrate our new Ecessa subsidiary into our existing operations, particularly in the Services & Support segment; |
● | Our ability to manage corporate costs incurred as a public company in an effective manner given our lower revenues and smaller scale as a result of the sale of Suttle operations; |
● | The ability of the Special Committee of the Board of Directors and our management leadership team to |
● | The impact of changing government expenditures in our markets; and |
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| The fact that our information technology systems may be exposed to various cybersecurity risks and other disruptions that could impair our ability to operate. |
Transition NetworksElectronics & Software Segment Risks and Uncertainties:
● | The ability of |
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● | The ability to sustain meaningful product differentiation and achieve substantial gross margins; |
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● | The fact that as |
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SuttleServices & Support Segment Risks and Uncertainties:
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25
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JDL Technologies Risks and Uncertainties:
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● | Our ability to expand to other educational prospects; |
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● | Our ability to successfully and profitably manage a large number of small accounts; |
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Net2Edge’s Risks and Uncertainties:
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● | Our ability to integrate the Ecessa SD-WAN business into the Services & Support operating segment. |
The Company discusses these and other risk factors from time to time in its filings with the SEC, including risk factors presented under Item 1A of the Company’s most recently filed Annual Report on Form 10-K and Quarterly Reports on Form 10-Q.
Company ResultsImpact of COVID-19 Pandemic
We are subject to risks and uncertainties as a result of the COVID-19 pandemic. In response to the pandemic, we instituted temporary office closures, implemented shelter-in-place orders and restrictions and instituted a mandatory work from home policy for substantially all office employees, and instituted social distancing work rules for operations personnel that continued to work in our facilities to satisfy customer orders. We experienced supply chain and demand disruptions during the first and second quarters of 2020 and expect the disruption to our supply to continue throughout 2020, as well as higher logistics and operational costs due to the COVID-19 pandemic. At the same time, we have seen an increase in demand for our fiber and high-speed products as customers are looking to upgrade their networks. As noted below, we are also seeing delays in orders as some projects are pushed out due to the inability to access locations due to the shutdowns. We may also see a slowdown in our business if one or more of our major customer or suppliers delays its purchase or supplies due to uncertainty in its business operations, encounters difficulties in its production due to employee safety or workforce concerns, is unable to obtain materials or labor from third parties that it needs to complete its projects, and may see a slowdown in our collection of receivables if our customers encounter cash flow difficulties or delay payments to preserve their cash resources. We are continuing to actively monitor the effects and potential impacts of the COVID-19 pandemic on all aspects of our business, liquidity and capital resources. The extent to which the COVID-19 pandemic may materially impact our financial condition, liquidity or results of operations is uncertain at this time.
Three Months Ended SeptemberJune 30, 20192020 Compared to
Three Months Ended SeptemberJune 30, 20182019
Consolidated sales increased 19%declined 10.1% in the thirdsecond quarter of 20192020 to $18,223,000$9,628,000 compared to $15,292,000$10,705,000 in the same period of 2018.2019. Consolidated operating incomeloss from continuing operations in the thirdsecond quarter of 2019 was $1,629,000 compared2020 increased to $1,646,000 from an operating loss from continuing operations of $1,602,000$1,129,000 in the thirdsecond quarter of 2018.2019. Net incomeloss from continuing operations in the thirdsecond quarter of 20192020 was $1,738,000$1,367,000 or $0.19$ (0.15) per share compared to net loss from continuing operations of $1,545,000$1,050,000 or $ (0.17)(0.11) per share in the thirdsecond quarter of 2018.
26
Transition Networks Results2019.
Transition NetworksElectronics & Software
Electronics & Software sales increased 35%decreased 17% to $12,483,000$8,287,000 in the thirdsecond quarter of 20192020 compared to $9,231,000$9,936,000 in 2018. Transition Networks2019. The Electronics & Software segment organizes its sales force by vertical markets and segments its customers geographically. Third Second quarter sales by region are presented in the following table:
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| Transition Networks Sales by Region |
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| 2019 |
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| 2018 |
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North America |
| $ | 11,479,000 |
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| $ | 8,015,000 |
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Rest of World |
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| 426,000 |
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| 690,000 |
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Europe, Middle East, Africa (“EMEA”) |
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| 578,000 |
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| 526,000 |
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| $ | 12,483,000 |
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| $ | 9,231,000 |
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Electronics & Software Sales by Region | ||||||||
2020 | 2019 | |||||||
North America | $ | 6,898,000 | $ | 8,055,000 | ||||
International | 1,389,000 | 1,881,000 | ||||||
$ | 8,287,000 | $ | 9,936,000 |
The following table summarizes Transition Networks’the 2020 and 2019 and 2018 thirdsecond quarter sales by its major product groups:
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| Transition Networks Sales by Product Group |
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| 2019 |
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| 2018 |
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Media converters |
| $ | 5,031,000 |
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| $ | 5,059,000 |
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Ethernet switches and adapters |
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| 5,957,000 |
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| 2,563,000 |
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Other products |
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| 1,495,000 |
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| 1,609,000 |
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| $ | 12,483,000 |
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| $ | 9,231,000 |
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Electronics & Software Sales by Product Group | ||||||||
2020 | 2019 | |||||||
Intelligent edge solutions | $ | 3,023,000 | $ | 2,747,000 | ||||
Traditional products | 5,264,000 | 7,189,000 | ||||||
$ | 8,287,000 | $ | 9,936,000 |
Sales in North America increased $3,464,000,decreased $1,157,000, or 43%14%, primarily due to deliveries for a decline in sales to one major metropolitan smart city IoTtelecommunications customer and overall delayed project that should be substantially completespending by customers due to the end of 2019 and smaller security and surveillance projects, partially offset by reduced spend from a major Tier 1 telecommunications provider.COVID-19 pandemic. International sales decreased $212,000,$492,000, or 17%26%, primarily due to decliningan overall drop in demand for traditional products and delayed project spending by customers due to the economic effects of the COVID-19 pandemic. Sales of Intelligent edge solutions (“IES”) products increased 10% or $276,000 due to higher sales of legacy media converters in Asia, while EMEA improved year-to-date with growth of 10% driven by IoT. Sales of Ethernet switches and adapters increased 132% or $3,394,000 related to the major metropolitan smart city IoT project and smaller security and surveillance projects. Otherproducts and sales to Federal agencies. Traditional product sales decreased 7%27% or $114,000$1,925,000 due mainly to reduced spenda decline in media converter and optical device orders from aone major Tier 1 telecommunications provider.customer.
Gross profit on thirdsecond quarter sales increaseddecreased to $6,042,000$3,095,000 in 2019 as compared to $4,348,0002020 from $4,161,000 in 2018.2019. Gross margin increaseddecreased to 48.4% in the third quarter of 2019 from 47.1% in 2018 primarily due to reduced costs for larger volume product purchases and supply chain efficiencies, offset partially by higher inventory adjustments and royalty expense. Selling, general and administrative expenses increased 9% to $3,810,000, or 30.5% of sales, in the third quarter of 2019 compared to $3,481,000, or 37.7% of sales, in 2018 due to higher employee related expenses.
Transition Networks had operating income of $2,232,000 in the third quarter of 2019 compared to operating income of $867,000 in 2018.
Suttle Results
Suttle sales decreased 7% in the third quarter of 2019 to $4,651,000 compared to $5,009,000 in the same period of 2018 due mainly to the sale of the FutureLink fiber business line, reduced spend from a Tier 1 telecommunications provider, and a decrease in DSL products sold internationally.
Sales by customer groups in the third quarter of 2019 and 2018 were:
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| Suttle Sales by Customer Group |
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| 2019 |
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| 2018 |
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Communication service providers |
| $ | 3,506,000 |
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| $ | 4,258,000 |
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International |
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| 137,000 |
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| 350,000 |
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Distributors |
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| 414,000 |
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| 401,000 |
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Other |
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| 594,000 |
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| — |
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| $ | 4,651,000 |
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| $ | 5,009,000 |
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Suttle’s sales by product groups in third quarter of 2019 and 2018 were:
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| Suttle Sales by Product Group |
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| 2019 |
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| 2018 |
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Structured cabling and connecting system products |
| $ | 3,706,000 |
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| $ | 4,748,000 |
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DSL and other products |
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| 945,000 |
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| 261,000 |
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| $ | 4,651,000 |
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| $ | 5,009,000 |
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Sales to communication service providers decreased 18% in the third quarter of 2019 due to the sale of the FutureLink fiber business line and a shift in purchasing decisions from Tier 1 telecommunications suppliers to installers. Sales to communication service providers accounted for 75% of Suttle’s sales in the third quarter of 2019 compared to 85% of sales in 2018. Sales to distributors increased 3% in the third quarter of 2019, and accounted for 9% and 8% of sales in the third quarters of 2019 and 2018, respectively. International sales decreased 61% in the third quarter of 2019 due to lower sales of legacy products and the sale of the FutureLink fiber business early37.3% in the second quarter of 2019. Other sales were $594,0002020 from 41.9% in the third quarter of 2019 and consisted of transition service revenue pursuantprimarily due to the April 2019 Transition Services Agreement entered into in connection with thea larger sale of the FutureLink fiber business line.
Sales of structured cablingmedia converters at lower margins and connecting system products decreased 22% in the third quarter of 2019 due to the sale of the FutureLink fiber business line. Sales of DSL and other products increased 262% in the third quarter of 2019 due to transition service revenue pursuant to the April 2019 Transition Services Agreement as a result of the sale of the FutureLink product line, partially offset by a decline in DSL product sold internationally.
Suttle’s gross profit increased 59% in the third quarter of 2019 to $1,453,000 compared to $916,000 in the same period of 2018. Gross margin increased to 31.2% from 18.3% in the same period of 2018 due tooverall lower inventory write-downs, workforce reductions, lower depreciation due to the sale of FutureLink assets, and product price increases. pricing on our optical devices. Selling, general and administrative expenses decreased 49%15% to $888,000,$3,638,000, or 19.1%43.9% of sales, in the thirdsecond quarter of 20192020 compared to $1,756,000,$4,300,000, or 35.1%43.3% of sales, in the same period in 20182019 due to workforce reductions made atreduced travel, marketing and personnel expenses, in part due to steps taken by management in response to the end of 2018. COVID-19 pandemic.
Suttle achievedElectronics & Software incurred an operating incomeloss of $565,000$543,000 in the thirdsecond quarter of 20192020 compared to an operating loss of $840,000$139,000 in 2018.2019, primarily due to lower sales and gross margin.
JDL Technologies ResultsServices & Support
JDL TechnologiesServices & Support sales decreased 9%increased 60% to $783,000$1,525,000 in the thirdsecond quarter of 20192020 compared to $859,000$951,000 in 2018.2019.
JDL’s revenues
Revenues by customer group were as follows:
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| JDL Revenue by Customer Group |
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| 2019 |
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| 2018 |
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Education |
| $ | 63,000 |
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| $ | 185,000 |
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Healthcare and commercial clients |
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| 720,000 |
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| 674,000 |
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| $ | 783,000 |
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| $ | 859,000 |
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Services & Support Revenue by Customer Group | ||||||||
2020 | 2019 | |||||||
Education | $ | 626,000 | $ | 295,000 | ||||
Healthcare | 240,000 | 183,000 | ||||||
Financial and other commercial clients | 474,000 | 291,000 | ||||||
CSI IT operations | 185,000 | 182,000 | ||||||
$ | 1,525,000 | $ | 951,000 |
Revenues by revenue type were as follows:
Services & Support Revenue by Type | ||||||||
2020 | 2019 | |||||||
Project & product | $ | 746,000 | $ | 355,000 | ||||
Services & support | 779,000 | 596,000 | ||||||
$ | 1,525,000 | $ | 951,000 |
Revenues from the education sector decreased $122,000increased $331,000 or 66%112% in the thirdsecond quarter of 20192020 as compared to the 2018 third quarter. Sales were below expectations2019 second quarter due primarily to the commencement of projects that had been previously delayed due to ongoing funding related delays at our largest education customer.issues. Revenue from sales to small and medium-sized commercial businesses (“SMBs”), which are primarily healthcare and commercialfinancial clients increased $46,000,$240,000 or 7%51% in the second quarter of 2020 as compared to 2019 due to new client acquisition in our commercial services division as well as the acquisition of Ecessa effective May 14, 2020. Project and product revenue increased $391,000 or 110% in the second quarter of 2020 as compared to the second quarter of 2019 due primarily to the increase in the education sector. Services and support revenue increased $183,000 or 31% as compared to the same quarter of the prior year due to new client acquisition within managed services and rate increasesthe Company’s acquisition of Ecessa, which has service and support revenue on its SD-WAN products. Overall, Ecessa contributed $263,000 in our commercial services division.revenue during the quarter.
Gross profit increased 22%116% to $180,000$543,000 in the thirdsecond quarter of 20192020 compared to $147,000$251,000 in the same period in 2018.2019. Gross margin increased to 23.0%35.6% in the thirdsecond quarter of 20192020 compared to 17.1%26.4% in 20182019 due to efficiencies realizedthe commencement of projects in our managed services practice.the education sector during the second quarter of 2020, while there was limited project revenue in the prior year, resulting in lower 2019 gross margins. Selling, general and administrative expenses decreased 8%increased 46% in the thirdsecond quarter of 20192020 to $349,000,$483,000, or 44.6%31.7% of sales, compared to $380,000,$331,000, or 44.2%34.8% of sales, in 20182019 due to cost saving measures putthe May 14, 2020 acquisition of Ecessa and the inclusion of its general and administrative costs that are not included in place and lower facility costs due to an office move during 2019.the prior year.
JDL TechnologiesServices & Support reported an operating lossincome of $169,000$60,000 in the thirdsecond quarter of 20192020 compared to an operating loss of $233,000$80,000 in the same period of 20182019.
Net2Edge ResultsOther
Net2Edge’s sales increased 51%As a result of our treatment of Suttle as discontinued operations, “Other” includes non-allocated corporate overhead costs as well as costs allocated to $611,000Suttle that are not considered discontinued operations. In the past, the Company would estimate annual revenue and headcount for each principal business unit and then allocate a portion of shared service corporate overhead costs based on these metrics. Because Suttle is now treated as discontinued operations, these costs are now included within Other. The Company is currently examining how to allocate these costs in the third quarterfuture given its sale of 2019 compared to $405,000 in 2018 primarily due to revenue from established CSI accounts for carrier Ethernet products. Gross profit increased 608% to $283,000 in the third quarterSuttle, acquisition of 2019 compared to $40,000 in the same periodEcessa and realignment of 2018. Gross margin increased to 46.3% in 2019 from 9.9% in 2018 due to favorable product mix at a key carrier customerits operation into its Electronics & Software and higher costs to expedite product in 2018. Selling, general and administrative expenses decreased 19% in 2019 to $653,000 compared to $809,000 in 2018 due to a reduction in selling expenses. Net2Edge reported an operating loss of $370,000 in the third quarter of 2019 compared to an operating loss of $769,000 in the same period of 2018.Services & Support segments.
Income Taxes
The Company’s incomeloss from continuing operations before income taxes was $1,721,000$1,367,000 in the thirdsecond quarter of 20192020 compared to a loss from continuing operations before income taxes of $1,547,000$1,062,000 in the third quartersecond three months of 2018.2019. The Company’s effective income tax rate was (1.0%)0.0% in the thirdsecond quarter of 2020 and 1.1% in 2019. This effective tax rate for 2020 differs from the federal tax rate of 21% due to state income taxes, foreign tax rate differences, foreign losses not deductible for U.S. income tax purposes, the effect of uncertain income tax positions, stock compensation windfalls and changes in valuation allowances related to deferred tax assets. As of December 31, 2019, the Company had a federal net operating loss carryforward from 2015 through 2019 activity of approximately $7,687,000 that is available to offset future taxable income and 0.1%begins to expire in 2018.2035. The Company also has a federal capital loss carryforward from 2018 of approximately $1,930,000 that is available to offset future capital gains and expires in 2023.
NineSix Months Ended SeptemberJune 30, 20192020 Compared to
NineSix Months Ended SeptemberJune 30, 20182019
Consolidated sales increased 7%decreased 14% in the first ninesix months of 20192020 to $50,346,000$18,791,000 compared to $47,104,000$21,921,000 in the same period of 2018.2019. Consolidated operating incomeloss from continuing operations in the first ninesix months of 20192020 was $1,545,000$2,870,000 compared to an operating loss from continuing operations of $6,298,000$1,950,000 in the same period of 2019. Net loss from continuing operations in the first ninesix months of 2018. Net income in the first nine months of 20192020 was $4,751,000$2,175,000 or $0.51$ (0.24) per share compared to a net loss from continuing operations of $6,046,000$1,842,000 or $ (0.66)(0.20) per share in the first ninesix months of 2018.
29
Transition Networks Results2019.
Transition NetworksElectronics & Software
Electronics & Software sales increased 17%decreased 13% to $30,548,000$16,823,000 in the first ninesix months of 20192020 compared to $26,219,000$19,227,000 in 2018. Transition Networks2019. The Electronics & Software segment organizes its sales force by vertical markets and segments its customers geographically. First nine monthsix-month sales by region are presented in the following table:
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| Transition Networks Sales by Region |
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| 2019 |
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| 2018 |
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North America |
| $ | 26,442,000 |
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| $ | 22,107,000 |
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Rest of World |
|
| 1,822,000 |
|
|
| 2,530,000 |
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Europe, Middle East, Africa (“EMEA”) |
|
| 2,284,000 |
|
|
| 1,582,000 |
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|
| $ | 30,548,000 |
|
| $ | 26,219,000 |
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Electronics & Software Sales by Region | ||||||||
2020 | 2019 | |||||||
North America | $ | 14,346,000 | $ | 14,969,000 | ||||
International | 2,477,000 | 4,258,000 | ||||||
$ | 16,823,000 | $ | 19,227,000 |
The following table summarizes Transition Networks’the segment’s 2020 and 2019 and 2018 first nine monthsix-month sales by its major product groups:
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| Transition Networks Sales by Product Group |
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| 2019 |
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| 2018 |
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Media converters |
| $ | 15,092,000 |
|
| $ | 14,735,000 |
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Ethernet switches and adapters |
|
| 10,788,000 |
|
|
| 6,650,000 |
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Other products |
|
| 4,668,000 |
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|
| 4,834,000 |
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| $ | 30,548,000 |
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| $ | 26,219,000 |
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Electronics & Software Sales by Product Group | ||||||||
2020 | 2019 | |||||||
Intelligent edge solutions | $ | 6,377,000 | $ | 5,055,000 | ||||
Traditional products | 10,446,000 | 14,172,000 | ||||||
$ | 16,823,000 | $ | 19,227,000 |
Sales in North America increased $4,335,000,decreased $623,000, or 20%4%, primarily due to a decline in sales related to aone major metropolitan smart city IoTtelecommunications customer and overall delayed project that should be substantially completespending by customers due to the endeffect of 2019, smallerthe COVID-19 pandemic, partially offset by strong sales to Federal agencies. International sales decreased $1,781,000, or 42%, primarily due to an overall drop in demand for traditional products and the economic effects of the COVID-19 pandemic. Sales of Intelligent edge solutions (“IES”) products increased 26% or $1,322,000 due to higher sales of security and surveillance projectsproducts and more typical buying patterns as compared to 2018, where we experienced slow demand from a carrier customer and disruptions in our product supply, partially offset by lower sales to a major Tier 1 telecommunications provider. International sales remained flat, with a significant project with a customer in our EMEA region for media converter products in the first quarter of this year, offset by weakness in our rest of world region. Media converter sales increased 2% or $357,000 due to a large EMEA project in the first quarter. Sales of Ethernet switches and adapters increased 62% or $4,138,000 due to involvement in a major metropolitan smart city IoT project and strong demand for new products in North America for smaller security and surveillance projects. All otherFederal agencies. Traditional product sales decreased 3%26% or $166,000$3,726,000 due mainly to slower activitya decline in our ancillary products business during the first quarter and reduced purchasesmedia converter orders from aone major Tier 1 telecommunications provider.customer.
Gross profit on first nine monthssix-month sales increased 17%decreased to $13,739,000$6,824,000 in 20192020 as compared to $11,783,000$8,088,000 in 2018.2019. Gross margin increased slightlydecreased to 45.0%40.6% in the first ninesix months of 20192020 from 44.9%42.1% in 20182019 primarily due to reduced costs for larger volume product purchasesincreased sales of lower margin network adapters and supply chain efficiencies, offset partially by higher inventory adjustments for aged inventory and higher royalty expense. Selling, general and administrative expenses increased 8% to $11,080,000, or 36.3% of sales, in the first nine months of 2019 compared to $10,212,000, or 38.9% of sales, in 2018 due to higher employee related expenses, higher marketing spend, and an increase in engineering expenses related to prototype development.
Transition Networks had operating income of $2,659,000 in the first nine months of 2019 compared to operating income of $1,571,000 in 2018.
Suttle Results
Suttle sales decreased 16% in the first nine months of 2019 to $14,918,000 compared to $17,855,000 in the same period of 2018 due to mainly the sale of the FutureLink fiber business line and reduced spend from Tier 1 telecommunications providers, volume declines in legacy products, and a shift in purchasing decisions from Tier 1 telecommunications suppliers to installers.
Sales by customer groups in the first nine months of 2019 and 2018 were:
|
|
|
|
|
|
| ||
|
| Suttle Sales by Customer Group |
| |||||
|
| 2019 |
|
| 2018 |
| ||
Communication service providers |
| $ | 11,463,000 |
|
| $ | 14,705,000 |
|
International |
|
| 645,000 |
|
|
| 1,696,000 |
|
Distributors |
|
| 1,513,000 |
|
|
| 1,454,000 |
|
Other |
|
| 1,297,000 |
|
|
| — |
|
|
| $ | 14,918,000 |
|
| $ | 17,855,000 |
|
Suttle’s sales by product groups in first nine months of 2019 and 2018 were:
|
|
|
|
|
|
| ||
|
| Suttle Sales by Product Group |
| |||||
|
| 2019 |
|
| 2018 |
| ||
Structured cabling and connecting system products |
| $ | 12,549,000 |
|
| $ | 16,490,000 |
|
DSL and other products |
|
| 2,369,000 |
|
|
| 1,365,000 |
|
|
| $ | 14,918,000 |
|
| $ | 17,855,000 |
|
Sales to communication service providers decreased 22% in the first nine months of 2019 due to the sale of the FutureLink fiber business line, reduced spend from Tier 1 telecommunications providers, and volume declines in legacy products. Sales to communication service providers accounted for 77% of Suttle’s sales in the first nine months of 2019 compared to 82% of sales in 2018. Sales to distributors increased 4% in the first nine months of 2019 due to the Company’ success in selling product through to installers, who have increasingly become Tier 1 suppliers, and accounted for 10% and 8% of sales in the first nine months of 2019 and 2018, respectively. International sales decreased 62% in the first nine months of 2019 due to a decrease in legacy DSL product sales in Latin America, and accounted for 4% of Suttle’s first nine months 2019 sales. Other sales increased $1,297,000 in the first nine months of 2019 due to transition service revenue pursuant to the April 2019 Transition Services Agreement as a result of the sale of the FutureLink fiber business line.
Sales of structured cabling and connecting system products decreased 24% in the first nine months of 2019 due to the sale of the FutureLink fiber business line and a shift in purchasing decisions from Tier 1 telecommunications suppliers to installers. Sales of DSL and other products increased 74% in the first nine months of 2019 due to transition service revenue pursuant to the April 2019 Transition Services Agreement,lower pricing on optical devices, partially offset by a decline in DSL product sold internationally.
31
Suttle’s gross profit increased 72% in the first nine months of 2019 to $4,720,000 compared to $2,750,000 in the same period of 2018. Gross margin increased to 31.6% from 15.4% in the same period of 2018 due to lower inventory adjustments, favorable product mix changes, price increases at certain Tier 1 suppliers, workforce reductions made at the end of 2018, lower depreciation due to the sale of FutureLink assets, and lower inventory adjustments. write-offs year over year. Selling, general and administrative expenses decreased 49%13% to $2,883,000,$7,535,000, or 19.3%44.8% of sales, in the first ninesix months of 20192020 compared to $5,633,000,$8,696,000, or 31.5%45.2% of sales, in the same period in 20182019 due primarily to workforce reductions made at the end of 2018. reduced travel, marketing and personnel expenses.
Suttle achievedElectronics & Software had an operating incomeloss of $1,837,000$711,000 in the first ninesix months of 20192020 compared to an operating loss of $2,883,000$608,000 in 2018.the same period of 2019.
As noted above in Note 16, on April 5, 2019, the Company sold its Suttle FutureLink™ Fiber business line, including inventory, equipment, and customer relationships, to PPC Broadband Inc. (“PPC”). The transaction was structured as an Asset Purchase Agreement with a simultaneous signing and closing. The sale price was $5,000,000 cash and the Company recognized a gain of $2,967,000 on the sale of the assets.Services & Support
JDL Technologies Results
JDL TechnologiesServices & Support sales increased 59%decreased 26% to $3,942,000$2,352,000 in the first ninesix months of 20192020 compared to $2,482,000$3,160,000 in 2018.2019.
JDL’s revenuesRevenues by customer group were as follows:
|
|
|
|
|
|
| ||
|
| JDL Revenue by Customer Group |
| |||||
|
| 2019 |
|
| 2018 |
| ||
Education |
| $ | 1,831,000 |
|
| $ | 574,000 |
|
Healthcare and commercial clients |
|
| 2,111,000 |
|
|
| 1,908,000 |
|
|
| $ | 3,942,000 |
|
| $ | 2,482,000 |
|
Services & Support Revenue by Customer Group | ||||||||
2020 | 2019 | |||||||
Education | $ | 719,000 | $ | 1,768,000 | ||||
Healthcare | 430,000 | 376,000 | ||||||
Financial and other commercial clients | 817,000 | 550,000 | ||||||
CSI IT operations | 386,000 | 466,000 | ||||||
$ | 2,352,000 | $ | 3,160,000 |
Revenues by revenue type were as follows:
Services & Support Revenue by Type | ||||||||
2020 | 2019 | |||||||
Project & product revenue | $ | 886,000 | $ | 1,994,000 | ||||
Services & support revenue | 1,466,000 | 1,166,000 | ||||||
$ | 2,352,000 | $ | 3,160,000 |
Revenues from the education sector increased $1,257,000decreased $1,049,000 or 219%59% in the first ninesix months of 20192020 as compared to the 2018 first nine monthssame period in 2019. Sales were below expectations due to ongoing funding related delays at our largest education customer. Projects for this customer commenced at the resumptionend of scheduled education projects funded by the federal government in the firstsecond quarter of 2019 that were delayed in the prior year.2020. Revenue from sales to small and medium-sized commercial businesses (“SMBs”), which are primarily healthcare, financial and commercial clients increased $203,000,$321,000 or 11%35% in the first six months of 2020 as compared to 2019 due to ongoing effortsnew client acquisition and rate increases in our commercial services division as well as the acquisition of Ecessa on May 14, 2020. The decrease in the CSI IT operations revenue as compared to expandthe first six months of 2019 is related to hardware refresh revenue in the prior year that was not repeated in the current year. Project and product revenue decreased $1,108,000 or 56% in the second quarter of 2020 as compared to the second quarter of 2019 due primarily to the decrease in the education sector. Services and support revenue increased $300,000 or 26% as compared to the same quarter of the prior year due to new client acquisition within managed services and infrastructure sales to these markets.the Company’s acquisition of Ecessa, which has service and support revenue on its SD-WAN products.
Gross profit increased 546%decreased 33% to $1,299,000$750,000 in the first ninesix months of 20192020 compared to $201,000$1,120,000 in the same period in 2018.2019. Gross margin increaseddecreased to 33.0%31.9% in the first ninesix months of 20192020 compared to 8.1%35.4% in 20182019 due to the increase in revenue in ourcost of maintaining the specialized education sector andengineering team during the prior year having certain fixed costs on lower revenue.first quarter in anticipation of pending projects that began in the second quarter of 2020. Selling, general and administrative expenses decreased 14%increased 15% in the first ninesix months of 20192020 to $1,056,000,$811,000, or 26.8%34.5% of sales, compared to $1,225,000,$707,000, or 49.4%22.4% of sales, in 20182019 due to cost saving measures putthe May 2020 acquisition of Ecessa and the inclusion of its general and administrative costs that are not included in place, lower facility costs due to an office move during 2019, and lower selling and marketing spend.the prior year.
JDL Technologies reportedThe operating loss was of $61,000 in the first six months of 2020 compared to operating income of $243,000 in the first nine months of 2019 compared to an operating loss of $1,024,000$413,000 in the same period of 20182019.
Net2Edge Results
Net2Edge’s sales increased 48%Other
As a result of our treatment of Suttle as discontinued operations, “Other” includes non-allocated corporate overhead costs as well as costs allocated to $1,856,000Suttle that are not considered discontinued operations. In the past, the Company would estimate annual revenue and headcount for each principal business unit and then allocate a portion of shared service corporate overhead costs based on these metrics. Because Suttle is now treated as discontinued operations, these costs are now included within Other. As noted above, the Company is currently examining how to allocate these costs in the first nine monthsfuture given its sale of 2019 compared to $1,251,000 in 2018 primarily due to revenue from established CSI accounts with new higher featured carrier Ethernet products. Gross profit increased 135% to $757,000 in the first nine monthsSuttle, acquisition of 2019 compared to $322,000 in the same periodEcessa and realignment of 2018. Gross margin increased to 40.8% in 2019 from 25.7% in 2018 due to favorable product mix at a key carrier customerits operations into its Electronics & Software and higher costs to expedite product in 2018. Selling, general and administrative expenses decreased 15% in 2019 to $2,162,000 compared to $2,533,000 in 2018 due to a reduction in selling expenses. Net2Edge reported an operating loss of $1,405,000 in the first nine months of 2019 compared to an operating loss of $2,211,000 in the same period of 2018.Services & Support segments.
Income Taxes
The Company’s incomeloss from continuing operations before income taxes was $4,715,000$2,180,000 in the first ninesix months of 20192020 compared to a loss from continuing operations before income taxes of $6,052,000$1,858,000 in the first ninesix months of 2018.2019. The Company’s effective income tax rate was (0.8%)0.2% in the first ninesix months of 20192020 and 0.1%0.9% in 2018.2019. This effective tax rate for 20192020 differs from the federal tax rate of 21% due primarily to state income taxes, foreign tax rate differences, foreign losses not deductible for U.S. income tax purposes, the effect of uncertain income tax positions, stock compensation windfalls and changes in valuation allowances related to deferred tax assets. As of December 31, 2018,2019, the Company had a federal net operating loss carryforward from 2015 through 20182019 activity of approximately $15,264,000$7,687,000 that is available to offset future taxable income and begins to expire in 2035. The Company also has a federal capital loss carryforward from 2018 of approximately $1,930,000 that is available to offset future capital gains and expires in 2023.
Liquidity and Capital Resources
As of SeptemberJune 30, 2019,2020, the Company had $20,802,000$24,774,000 in cash, cash equivalents, restricted cash, and investments. Of this amount, $10,716,000$18,521,000 was invested in short-term money market funds that are not considered to be bank deposits and are not insured or guaranteed by the FDIC or other government agency. These money market funds seek to preserve the value of the investment at $1.00 per share; however, it is possible to lose money investing in these funds. The remainder in cash and cash equivalents is operating cash. The Company also had $5,503,000$3,748,000 in investments consisting of commercial paper and corporate notes and bonds that are traded on the open market and are classified as available-for-sale at SeptemberJune 30, 2019.2020.
The Company had working capital of $36,894,000$33,991,000 at SeptemberJune 30, 2020, consisting of current assets of approximately $43,872,000 and current liabilities of $9,881,000 compared to working capital of $38,052,000 at December 31, 2019 consisting of current assets of approximately $47,989,000$49,402,000 and current liabilities of $11,095,000 compared to working capital of $30,695,000 at December 31, 2018 consisting of current assets of $42,335,000 and current liabilities of $11,640,000.$11,350,000.
Cash flow provided byused in operating activities was approximately $5,809,000$2,137,000 in the first ninesix months of 20192020 and $4,966,000 used$2,400,000 generated in the same period of 2018.2019. Significant working capital changes from December 31, 20182019 to SeptemberJune 30, 20192020 included a decrease in accounts receivable of $2,200,000, an increase in inventories of $2,510,000$1,373,000 and a decrease$1,216,000 used in accounts payable of $872,000. discontinued operations.
Net cash used inprovided by investing activities was $926,000$9,046,000 in first ninesix months of 20192020 compared to $2,257,000$657,000 provided in 2018,2019, due to proceeds from the Suttle sale, included in discontinued operations, and proceeds from the maturity of the FutureLink business line,investments, partially offset by additional investment purchases.purchases and net cash paid for the Ecessa acquisition.
Net cash used in financing activities was $598,000$445,000 in the first ninesix months of 20192020 compared to $1,075,000$324,000 used in financing activities in 2018.2019. Cash dividends paid on common stock decreasedincreased to $557,000$376,000 in 20192020 ($0.060.04 per common share) from $1,127,000$371,000 in 20182019 ($0.120.04 per common share). Proceeds from common stock issuances, principally shares sold to the Company’s Employee Stock Ownership Plan and issued under the Company’s Employee Stock Purchase Plan, totaled approximately $155,000$50,000 in 20192020 and $80,000$49,000 in 2018.2019. The Company acquired $55,000 and $2,000 in 2020 and $28,000 in 2019, and 2018, respectively, of Company stock from employees to satisfy withholding tax obligations related to share-based compensation, pursuant to terms of Board and shareholder-approved compensation plans. The Company also acquired $194,000$64,000 of Company stock under a $2,000,000 Stock Repurchase Program authorized by the Board of Directors in August 2019. The new 2019 Stock Repurchase Program replaced a 2008 Stock Repurchase Program that had authorized the repurchase of up to 411,910 additional shares, but had no specific dollar amount associated with it. The Company had not made any market repurchases under the 2008 Stock Repurchase Program in the past several years.At SeptemberJune 30, 2019,2020, there remained $1,806,000$562,000 under the 2019 Stock Repurchase Program. See “Issuer Purchases of Equity Securities” in Part II, Item 2 of this Form 10-Q.
The Company has a $15,000,000 line of credit from Wells Fargo Bank. Interest on borrowings on the credit line is at LIBOR plus 2.0% (4.0%(2.2% at SeptemberJune 30, 2019)2020). The Company had no outstanding borrowings against the line of credit at SeptemberJune 30, 2019.2020. The credit agreement expires August 12, 2021 and is secured by assets of the Company.
In the opinion of management, based on the Company’s current financial and operating position and projected future expenditures, sufficient funds are available to meet the Company’s anticipated operating and capital expenditure needs.
Critical Accounting Policies
Our critical accounting policies, including the assumptions and judgments underlying them, are discussed in our 20182019 Form 10-K in Note 1 Summary of Significant Accounting Policies included in our Consolidated Financial Statements. In February 2016, the FASB issued ASU 2016-02, “Leases” (Topic 842), which amends existing guidance and requires an entity to recognize both assets and liabilities arising from financing and operating leases, along with additional qualitative and quantitative disclosures. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within that reporting period, and early adoption is permitted. The Company adopted the accounting standard effective January 1, 2019. Please see Note 3 for the required disclosures related to the impact of adopting this standard. There were no other significant changes to our critical accounting policies during the ninesix months ended SeptemberJune 30, 2019.2020.
The Company’s accounting policies have been consistently applied in all material respects and disclose matters such as allowance for doubtful accounts, sales returns, inventory valuation, warranty expense, income taxes, revenue recognition, asset impairment recognition and foreign currency translation. On an ongoing basis, we evaluate our estimates based on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the result of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Results may differ from these estimates due to actual outcomes being different from those on which we based our assumptions. Management reviews these estimates and judgments on an ongoing basis.
Recently Issued Accounting Pronouncements
Recently issued accounting standards and their estimated effect on the Company’s condensed consolidated financial statements are also described in Note 17,15, Recent Accounting Pronouncements, to the Condensed Consolidated Financial Statements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
The Company has no freestanding or embedded derivatives. The Company’s policy is to not use freestanding derivatives and to not enter into contracts with terms that cannot be designated as normal purchases or sales.
The vast majority of our transactions are denominated in U.S. dollars; as such, fluctuations in foreign currency exchange rates have historically not been material to the Company. At SeptemberJune 30, 20192020 our bank line of credit carried a variable interest rate based on LIBOR plus 2.0%. As noted above, we had no outstanding borrowings at SeptemberJune 30, 2019.2020.
Based on the Company’s operations, in the opinion of management, no material future losses or exposure exist relative to market risk.
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) that are designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and (ii) accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of the disclosure controls and procedures, as defined in Rules 13a-15(e) under the Securities Exchange Act of 1934, as of the end of the period covered by this report. Based on that evaluation, as detailed below, management concluded that the Company’s disclosure controls and procedures are effective.
(b) Changes in Internal Controls
Beginning January 1, 2019, we adopted ASU No. 2016-02, “Leases (Topic 842),” which resulted in recording lease liabilities and right-of-use assets on our consolidated balance sheet. ASC 842 requires management to make significant judgments and estimates. As a result, we implementedThere have been no changes to our internal controls related to leases for the nine months ended September 30, 2019. These changes include implementing updated processes and controls affected by ASC 842. There was no other change in our internal control over financial reporting during our most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. As disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018,2019, we concluded that our internal control over financial reporting was effective.
Item 1. Legal Proceedings
Not Applicable.
Item 1A. Risk Factors
Not Applicable.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
Repurchases of the Company’s common stock are made to support the Company’s stock-based employee compensation plans and for other corporate purposes. In August 2019, the Company announced the adoption of a $2.0 million stock repurchase program running through the end of 2020. Under the stock repurchase program, repurchases can be made from time to time using a variety of methods, including through open market purchases or in privately negotiated transactions in compliance with the rules of the United States Securities and Exchange Commission and other applicable legal requirements. This new $2.0 million repurchase program replaces a stock repurchase program that the Company had adopted in 2008. The 2008 stock repurchase program had authorized the repurchase of up to 411,910 additional shares, but had no specific dollar amount associated with it. The Company had not made any market repurchases under the 2008 stock repurchase program in the past several years.
Issuer Purchases of Equity Securities (registered pursuant to Section 12 of the Exchange Act)
In the three months ending SeptemberJune 30, 2019,2020, the Company repurchased shares of stock as follows:
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|
|
|
|
|
|
|
|
|
|
|
| |||||
ISSUER PURCHASES OF EQUITY SECURITIES | |||||||||||||||||
Period |
| (a) Total Number of Shares Purchased (1) |
|
| Average Price Paid per Share |
|
| Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs |
|
| (b) Maximum Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs |
| |||||
July 2019 |
|
| — |
|
| $ | — |
|
|
| — |
|
| $ | — |
| |
August 2019 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 2,000,000 |
| |
September 2019 |
|
| 38,465 |
|
|
| 5.05 |
|
|
| 38,465 |
|
|
| 1,805,722 |
| |
Total |
|
| 38,465 |
|
| $ | 5.05 |
|
|
| 38,465 |
|
| $ | 1,805,722 |
|
ISSUER PURCHASES OF EQUITY SECURITIES | ||||||||||||||||
Period | (a) Total Number of Shares Purchased (1) | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | (b) Maximum Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs | ||||||||||||
April 2020 | — | $ | — | — | $ | 572,182 | ||||||||||
May 2020 | — | — | — | 572,182 | ||||||||||||
June 2020 | 2,000 | 5.07 | 2,000 | 562,042 | ||||||||||||
Total | 2,000 | $ | 5.07 | 2,000 | $ | 562,042 |
(1) | The total number of shares purchased includes: shares purchased under the Board’s authorization, |
Item 3. Defaults Upon Senior Securities
Not Applicable.
36
Item 4. Mine Safety Disclosures
Not Applicable.
Item 5. Other Information
Not Applicable.
Item 6. Exhibits.
The following exhibits are included herein:
31.1 |
31.2 |
32. | Certifications pursuant Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. §1350). |
99.1 |
37
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereto duly authorized.
Communications Systems, Inc. | |||
| By | /s/ Roger H.D. Lacey | |
Roger H.D. Lacey | |||
Date: | August 14, 2020 | Chief Executive Officer | |
/s/ Mark Fandrich | |||
Mark Fandrich | |||
Date: | August 14, 2020 | Chief Financial Officer |
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