Company Quick10K Filing
Communications Systems
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$0.00 9 $28
10-Q 2019-11-01 Quarter: 2019-09-30
10-Q 2019-08-02 Quarter: 2019-06-30
10-Q 2019-05-07 Quarter: 2019-03-31
10-K 2019-03-08 Annual: 2018-12-31
10-Q 2018-11-09 Quarter: 2018-09-30
10-Q 2018-08-03 Quarter: 2018-06-30
10-Q 2018-05-15 Quarter: 2018-03-31
10-K 2018-04-06 Annual: 2017-12-31
10-Q 2017-11-13 Quarter: 2017-09-30
10-Q 2017-08-18 Quarter: 2017-06-30
10-Q 2017-05-05 Quarter: 2017-03-31
10-K 2017-03-31 Annual: 2016-12-31
10-Q 2016-11-04 Quarter: 2016-09-30
10-Q 2016-08-05 Quarter: 2016-06-30
10-Q 2016-05-06 Quarter: 2016-03-31
10-K 2016-03-11 Annual: 2015-12-31
10-Q 2015-11-06 Quarter: 2015-09-30
10-Q 2015-08-07 Quarter: 2015-06-30
10-Q 2015-05-07 Quarter: 2015-03-31
10-K 2015-03-12 Annual: 2014-12-31
10-Q 2014-11-06 Quarter: 2014-09-30
10-Q 2014-08-07 Quarter: 2014-06-30
10-Q 2014-05-08 Quarter: 2014-03-31
10-K 2014-03-14 Annual: 2013-12-31
10-Q 2013-11-08 Quarter: 2013-09-30
10-Q 2013-08-08 Quarter: 2013-06-30
10-Q 2013-05-10 Quarter: 2013-03-31
10-K 2013-03-15 Annual: 2012-12-31
10-Q 2012-11-08 Quarter: 2012-09-30
10-Q 2012-08-09 Quarter: 2012-06-30
10-Q 2012-05-10 Quarter: 2012-03-31
10-K 2012-03-15 Annual: 2011-12-31
10-Q 2011-11-10 Quarter: 2011-09-30
10-Q 2011-08-10 Quarter: 2011-06-30
10-Q 2011-05-10 Quarter: 2011-03-31
10-K 2011-03-15 Annual: 2010-12-31
10-Q 2010-11-10 Quarter: 2010-09-30
10-Q 2010-08-10 Quarter: 2010-06-30
10-Q 2010-05-12 Quarter: 2010-03-31
10-K 2010-03-18 Annual: 2009-12-31
8-K 2019-09-19 Officers, Exhibits
8-K 2019-05-22 Shareholder Vote
8-K 2019-05-22 Regulation FD, Exhibits
8-K 2019-04-05 Enter Agreement, Exhibits
8-K 2019-03-26 Officers
8-K 2018-12-12 Officers, Other Events, Exhibits
8-K 2018-05-23 Shareholder Vote, Other Events, Exhibits
8-K 2018-04-02 Exhibits
8-K 2018-02-09 Officers
JCS 2019-09-30
Note 1 - Summary of Significant Accounting Policies
Note 2 - Revenue Recognition
Note 3 - Leases
Note 4 - Cash Equivalents and Investments
Note 5 - Stock-Based Compensation
Note 6 - Inventories
Note 7 -Intangible Assets
Note 8 - Warranty
Note 9 - Contingencies
Note 10 - Debt
Note 11 - Income Taxes
Note 12 - Segment Information
Note 13 - Net Income (Loss) per Share
Note 14 - Fair Value Measurements
Note 15 - General Commitments
Note 16 - Disposition of Assets
Note 17 - Recent Accounting Pronouncements
Note 18 - Subsequent Events
Item 2. Management’S Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits.
EX-31.1 csi192129_ex31-1.htm
EX-31.2 csi192129_ex31-2.htm
EX-32 csi192129_ex32.htm
EX-99.1 csi192129_ex99-1.htm

Communications Systems Earnings 2019-09-30

JCS 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

Comparables ($MM TTM)
Ticker M Cap Assets Liab Rev G Profit Net Inc EBITDA EV G Margin EV/EBITDA ROA
OTEL 40 118 103 64 34 9 23 107 53% 4.6 7%
MARK 39 25 42 64 44 -23 -8 37 68% -4.5 -88%
CLRO 37 56 8 27 12 -17 -7 34 44% -4.6 -31%
APWC 35 306 84 0 0 0 0 35 0%
JCS 28 54 9 66 24 1 3 14 37% 5.5 1%
OCC 25 42 20 73 20 -5 -3 30 27% -9.7 -13%
WSTL 22 47 8 40 16 -14 -13 -2 40% 0.2 -29%
SUNW 17 29 22 65 10 -7 -6 17 15% -2.6 -24%
NVMM 13 32 30 49 14 -10 -8 29 29% -3.6 -32%
ABIL 13 25 22 0 0 0 0 -69 0%

10-Q 1 csi192129_10q.htm FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2019

 

 

 

UNITED STATES

 SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549 

 

 

 

FORM 10-Q

 

 

(Mark One)

 

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

 

For the quarterly period ended September 30, 2019

 

OR

 

 

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

 

For the transition period from                                                             to                                                      

 

Commission File Number: 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 November 1, 2019

9,281,023

 

 

 

1

 

 

 

 

COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES

 

INDEX

 

 

 

 

 

Page No.

 

 

 

 

Part I.

Financial Information

 

 

 

 

 

Item 1. Financial Statements (Unaudited)

 

 

 

 

 

 

Condensed Consolidated Balance Sheets

3

 

 

 

 

 

 

Condensed Consolidated Statements of Income (Loss) and Comprehensive Income (Loss)

4

 

 

 

 

 

 

Condensed Consolidated Statements of Changes in Stockholders’ Equity

5

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows

7

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

8

 

 

 

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

24

 

 

 

 

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

35

 

 

 

 

 

Item 4. Controls and Procedures

35

 

 

 

 

Part II.

Other Information

36

 

 

 

 

SIGNATURES

 

CERTIFICATIONS

 

 

2

 

 

COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES 

CONDENSED CONSOLIDATED BALANCE SHEETS 

(Unaudited)

 

ASSETS

 

 

September 30

 

 

December 31

 

 

 

2019

 

 

2018

 

CURRENT ASSETS:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

14,621,921

 

 

$

11,056,426

 

Restricted cash

 

 

677,269

 

 

 

 

Investments

 

 

5,502,752

 

 

 

 

Trade accounts receivable, less allowance for doubtful accounts of $178,000 and $136,000, respectively

 

 

12,950,442

 

 

 

13,401,042

 

Inventories

 

 

12,586,500

 

 

 

16,175,616

 

Prepaid income taxes

 

 

82,275

 

 

 

148,036

 

Other current assets

 

 

1,568,326

 

 

 

1,553,972

 

TOTAL CURRENT ASSETS

 

 

47,989,485

 

 

 

42,335,092

 

 

 

 

 

 

 

 

 

 

PROPERTY, PLANT AND EQUIPMENT, net

 

 

9,303,323

 

 

 

10,962,239

 

OTHER ASSETS:

 

 

 

 

 

 

 

 

Deferred income taxes

 

 

19,068

 

 

 

19,068

 

Operating lease right of use asset

 

 

395,574

 

 

 

 

Other assets, net

 

 

 

 

 

4,765

 

TOTAL OTHER ASSETS

 

 

414,642

 

 

 

23,833

 

TOTAL ASSETS

 

$

57,707,450

 

 

$

53,321,164

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

CURRENT LIABILITIES:

 

 

 

 

 

 

 

 

Accounts payable

 

$

4,510,344

 

 

$

5,394,981

 

Accrued compensation and benefits

 

 

2,934,110

 

 

 

2,892,199

 

Operating lease liability

 

 

109,354

 

 

 

 

Other accrued liabilities

 

 

3,344,177

 

 

 

3,168,049

 

Dividends payable

 

 

197,220

 

 

 

184,541

 

TOTAL CURRENT LIABILITIES

 

 

11,095,205

 

 

 

11,639,770

 

LONG TERM LIABILITIES:

 

 

 

 

 

 

 

 

Long-term compensation plans

 

 

90,642

 

 

 

 

Uncertain tax positions

 

 

 

 

 

28,267

 

Operating lease liability

 

 

265,192

 

 

 

 

TOTAL LONG-TERM LIABILITIES

 

 

355,834

 

 

 

28,267

 

COMMITMENTS AND CONTINGENCIES (Footnote 9)

 

 

 

 

 

 

 

 

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

 

Additional paid-in capital

 

 

43,189,025

 

 

 

42,680,499

 

Retained earnings (accumulated deficit)

 

 

3,435,845

 

 

 

(734,001

)

Accumulated other comprehensive loss

 

 

(833,900

)

 

 

(751,293

)

TOTAL STOCKHOLDERS’ EQUITY

 

 

46,256,411

 

 

 

41,653,127

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

 

$

57,707,450

 

 

$

53,321,164

 

 

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

 

3

 

 

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

 

 

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 Nine Months Ended September 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

Other

 

 

 

 

 

 

Common Stock

 

 

Paid-in

 

 

Retained

 

 

Comprehensive

 

 

 

 

 

 

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

 

Net income

 

 

 

 

 

 

 

 

 

 

 

4,751,150

 

 

 

 

 

 

4,751,150

 

Issuance of common stock under Employee Stock Purchase Plan

 

 

29,686

 

 

 

1,484

 

 

 

71,818

 

 

 

 

 

 

 

 

 

73,302

 

Issuance of common stock to Employee Stock Ownership Plan

 

 

132,826

 

 

 

6,641

 

 

 

262,995

 

 

 

 

 

 

 

 

 

269,636

 

Issuance of common stock under Executive Stock Plan

 

 

27,075

 

 

 

1,354

 

 

 

80,100

 

 

 

 

 

 

 

 

 

81,454

 

Share based compensation

 

 

 

 

 

 

 

 

276,236

 

 

 

 

 

 

 

 

 

276,236

 

Other share retirements

 

 

(39,205

)

 

 

(1,960

)

 

 

(182,623

)

 

 

(11,659

)

 

 

 

 

 

(196,242

)

Shareholder dividends ($0.06 per share)

 

 

 

 

 

 

 

 

 

 

 

(569,645

)

 

 

 

 

 

(569,645

)

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(82,607

)

 

 

(82,607

)

BALANCE AT SEPTEMBER 30, 2019

 

 

9,308,820

 

 

$

465,441

 

 

$

43,189,025

 

 

$

3,435,845

 

 

$

(833,900

)

 

$

46,256,411

 

 

For the Three Months Ended September 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

 

 

 5

 

 

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

 

 

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

 

 6

 

 

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

 

 

 

 

 

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

 

 7

 

 

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 through its 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. (“Suttle”) 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”) business unit, CSI 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 Company develops, manufactures and sells Ethernet-based edge network access products to telecommunications carriers.

 

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 September 30, 2019 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 September 30, 2019 and 2018 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 September 30, 2019 and 2018 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, 2018 Annual Report to Shareholders on Form 10-K.  The results of operations for the period ended September 30, 2019 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.

 

 8

 

 

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, 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

)

 

NOTE 2 – REVENUE RECOGNITION

 

Transition Networks & Suttle, Inc.

 

The Company has determined that the revenue recognition for its Suttle and Transition Networks divisions 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.

 

The Company has determined that the following performance obligations identified in its JDL Technologies, Inc. division are transferred over time: managed services and professional services (time and materials (“T&M”) and fixed price). JDL’s 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 measured 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 measured over time with an input method based on hours expended. 

 

 9

 

 

The Company has also identified the following performance obligations within its JDL Technologies division 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 when the Company has transferred control upon the service first being made available to the customer by the third party vendor. The Company reports revenue from these third 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.

 

For Transition Networks, we analyze revenue by region and product group, which is as follows for the three and nine months ended September 30, 2019 and 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

10

 

For Suttle, we analyze revenues by product and customer group, which is as follows for the three and nine months ended September 30, 2019 and 2018: 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

Three Months Ended September 30

 

 

Nine Months Ended September 30

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Education

 

$

63,000

 

 

$

185,000

 

 

$

1,831,000

 

 

$

574,000

 

Healthcare and commercial clients

 

 

720,000

 

 

 

674,000

 

 

 

2,111,000

 

 

 

1,908,000

 

 

 

$

783,000

 

 

$

859,000

 

 

$

3,942,000

 

 

$

2,482,000

 

 

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.

 

NOTE 3 – LEASES

 

In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-02, Leases (ASC Topic 842), which is intended to improve financial reporting of leasing transactions by requiring organizations that lease assets to recognize assets and liabilities for the rights and obligations created by leases that extend more than twelve months from the date 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 interim periods beginning after December 15, 2018 for public business entities.

 

 

11

 

 

 

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 leases 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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of September
30, 2019

 

Weighted-average remaining lease term

 

 

 

 

 

 

3.5 years

 

Weighted-average discount rate

 

 

 

 

 

 

4.5

%

 

 

(1)

Includes $262,000 for operating leases existing on January 1, 2019 and $188,000 for operating leases that commenced in the first quarter of 2019.

 

Maturities of lease liabilities as of September 30, 2019 were 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

 

 

 

12

 

 

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 short and long term investments as of September 30, 2019 and December 31, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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.

 

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 September 30, 2019:

 

 

 

 

 

 

 

 

 

Amortized Cost

 

 

Estimated Market Value

 

Due within one year

 

$

5,503,000

 

 

$

5,503,000

 

 

The Company did not recognize any gross realized gains or losses during either of the nine-month periods ending September 30, 2019 and 2018, 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).

 

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 September 30, 2019.  The ESPP is considered compensatory under current Internal Revenue Service rules.  At September 30, 2019, after giving effect to the shares issued as of that date, 93,905 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 September 30, 2019, 235,630 shares have been issued under the 2011 Incentive Plan, 1,651,801 shares are subject to currently outstanding options, deferred stock awards, and unvested restricted stock units, and 612,569 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, 2018 to September 30, 2019:

 

 

 

 

 

 

 

 

 

 

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

 

 

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 September 30, 2019 was $539,000.  The intrinsic value of all options exercised during the nine months ended September 30, 2019 was $33,000. Net cash proceeds from the exercise of all stock options were $0 in each of the nine-month periods ended September 30, 2019 and 2018.

 

15

 

 

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, 2018 to September 30, 2019:    

 

 

 

 

 

 

 

 

 

Shares

 

 

Weighted Average
Grant Date
Fair Value

 

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

 

 

Compensation Expense

 

Share-based compensation expense recognized for the nine months ended September 30, 2019 was $276,000 before income taxes and $218,000 after income taxes. Share-based compensation expense recognized for the nine months ended September 30, 2018 was $156,000 before income taxes and $123,000 after income taxes.  Unrecognized compensation expense for the Company’s plans was $427,000 at September 30, 2019 and is expected to be recognized over a weighted-average period of 2.3 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

 

 

NOTE 7 –INTANGIBLE ASSETS

 

The Company’s identifiable intangible assets with finite lives, included in other assets, net on the condensed consolidated balance sheets, are being amortized over their estimated useful lives and were as follows:   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2019

 

 

 

Gross
Carrying
Amount

 

 

Accumulated
Amortization

 

 

Impairment
loss

 

 

Foreign
Currency
Translation

 

 

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
Carrying
Amount

 

 

Accumulated
Amortization

 

 

Impairment
loss

 

 

Foreign
Currency
Translation

 

 

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 these identifiable intangible assets was $5,000 and $9,000 for the nine months ended September 30, 2019 and 2018, respectively. The amortization expense is included in selling, general and administrative expenses.

 

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 10 – 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 September 30, 2019 or December 31, 2018. 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 September 30, 2019 was $7,018,000, based on the borrowing base calculation. Interest on borrowings on the credit line is at LIBOR plus 2.0% (4.0% at September 30, 2019). 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 September 30, 2019.

17

 

 

NOTE 11 – 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 September 30, 2019 there was $90,000 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 2016-2018 remain open to examination by the Internal Revenue Service and the years 2015-2018 remain open to examination by various state tax departments. The tax years from 2015-2018 remain open in Costa Rica.

 

The Company’s effective income tax rate was (0.8%) for the first nine months of 2019. The effective tax rate differs from the federal tax rate of 21% due primarily to foreign losses not deductible for U.S. income tax purposes, the effect of uncertain income tax positions, 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% for the nine months ended September 30, 2019. There were no additional uncertain tax positions identified in the first nine months of 2019.  The Company’s effective income tax rate for the nine months ended September 30, 2018 was 0.1%, 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, provisions for interest charges for uncertain income tax positions, stock compensation shortfalls and changes in valuation allowances related to deferred tax assets.

18

 

 

NOTE 12 – SEGMENT INFORMATION

 

Effective January 1, 2019, the Company realigned the financial reporting for its business units. As a result of this realignment, certain corporate general and administrative expenses that were previously included within the business unit level as fully allocated costs are now categorized as “Other”. The Company classifies its businesses into the four segments as follows:

 

 

Transition Networks manufactures media converters, NIDs, NICs, Ethernet switches and other connectivity products that offer customers the ability to affordably integrate the benefits of fiber optics into any data network;

 

Suttle manufactures and markets connectivity infrastructure products for broadband and voice communications;

 

JDL Technologies provides technology solutions that address prevalent IT challenges, including virtualization and cloud solutions, managed services, wired and wireless network design and implementation, and converged infrastructure configuration and deployment; and

 

Net2Edge develops, manufactures and sells edge network access products to telecommunications carriers.

 

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 to conform to the 2019 presentation, the Company has reclassified the 2018 corporate expenses previously allocated to reportable segments to the “Other” section.

 

Information concerning the Company’s continuing operations in the various segments for the three and nine-month periods ended September 30, 2019 and 2018 are as follows:

 

 

Transition
Networks

 

 

Suttle

 

 

JDL
Technologies

 

 

Net2Edge

 

 

Other

 

 

Intersegment
Eliminations

 

 

Total

 

Three Months Ended September 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales

 

$

12,483,000

 

 

$

4,651,000

 

 

$

783,000

 

 

$

611,000

 

 

$

 

 

$

(305,000

)

 

$

18,223,000

 

Cost of sales

 

 

6,441,000

 

 

 

3,198,000

 

 

 

603,000

 

 

 

328,000

 

 

 

 

 

 

(85,000

)

 

 

10,485,000

 

Gross profit

 

 

6,042,000

 

 

 

1,453,000

 

 

 

180,000

 

 

 

283,000

 

 

 

 

 

 

(220,000

)

 

 

7,738,000

 

Selling, general and administrative expenses

 

 

3,810,000

 

 

 

888,000

 

 

 

349,000

 

 

 

653,000

 

 

 

629,000

 

 

 

(220,000

)

 

 

6,109,000

 

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

 

Income (loss) before income tax

 

$

2,221,000

 

 

$

570,000

 

 

$

(169,000

)

 

$

(348,000

)

 

$

(553,000

)

 

$

 

 

$

1,721,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

$

74,000

 

 

$

223,000

 

 

$

26,000

 

 

$

11,000

 

 

$

 

 

$

 

 

$

334,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures

 

$

7,000

 

 

$

 

 

$

4,000

 

 

$

 

 

$

72,000

 

 

$

 

 

$

83,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

$

18,487,000

 

 

$

9,212,000

 

 

$

1,419,000

 

 

$

2,627,000

 

 

$

25,989,000

 

 

$

(27,000

)

 

$

57,707,000

 

 

 

Transition
Networks

 

 

Suttle

 

 

JDL
Technologies

 

 

Net2Edge

 

 

Other

 

 

Intersegment
Eliminations

 

 

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