Company Quick10K Filing
Communications Systems
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$0.00 9 $28
10-K 2020-03-17 Annual: 2019-12-31
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 2020-03-11 Enter Agreement, M&A, Earnings, Exit Costs, Exhibits
8-K 2019-09-19 Officers, Exhibits
8-K 2019-05-22 Regulation FD, Exhibits
8-K 2019-05-22 Shareholder Vote
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 2019-12-31
Part I
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Commentsnone.
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosures
Part II
Item 5. Market for Registrant’S Common Equity and Related Stockholder Matters and Issuer Purchase of Equity Securities
Item 6. Selected Financial Data
Item 7. Management’S Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Note 1 - Summary of Significant Accounting Policies
Note 2 - Revenue Recognition
Note 3 - Leases
Note 5 -Cash Equivalents and Investments
Note 6 - Inventories
Note 7 - Property, Plant and Equipment
Note 8 -Intangible Assets
Note 9 - Commitments and Contingencies
Note 10 - Stock Compensation
Note 11 - Common Stock
Note 12 - Income Taxes
Note 13 - Information Concerning Industry Segments and Major Customers
Note 14 - Fair Value Measurements
Note 15 - General Commitments
Note 16 - Subsequent Events
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A: Controls and Procedures
Item 9B. Other Information
Part III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13.Certain Relationships and Related Transactions, and Director Independence
Item 14.Principal Accounting Fees and Services
Part IV
Item 15.Exhibits and Financial Statement Schedules
Item 16. Form 10-K Summary
EX-4.1 csi200438_ex4-1.htm
EX-21 csi200438_ex21.htm
EX-23.1 csi200438_ex23-1.htm
EX-31.1 csi200438_ex31-1.htm
EX-31.2 csi200438_ex31-2.htm
EX-32 csi200438_ex32.htm

Communications Systems Earnings 2019-12-31

JCS 10K Annual 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 40 120 103 63 25 6 18 106 39% 6.0 5%
MARK 54 21 42 23 17 -17 -11 53 73% -4.8 -77%
CLRO 30 53 7 19 8 -6 -5 28 44% -5.8 -12%
APWC 35 306 84 0 0 0 0 35 0%
JCS 47 58 11 69 20 4 5 32 29% 6.4 7%
OCC 25 42 20 73 20 -5 -3 30 27% -9.7 -13%
WSTL 23 44 8 37 13 -15 -15 1 35% -0.1 -35%
SUNW 12 30 22 45 6 -6 -6 13 13% -2.3 -19%
NVMM 13 32 30 37 11 -8 -6 29 29% -4.8 -26%
ABIL 13 25 22 0 0 0 0 -69 0%

10-K 1 csi200438_10k.htm 10-K

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

 

 

FORM 10-K

 

 

 

(Mark One)

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

 

For the fiscal year ended December 31, 2019

 

Commission File Number: 001-31588

 

 

 

COMMUNICATIONS SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

 

Minnesota

 

41-0957999

(State or other jurisdiction

 

(Federal Employer

of incorporation or organization)

 

Identification No.)

 

10900 Red Circle Drive, Minnetonka, MN 55343

(Address of principal executive offices and zip code)

 

Registrant’s telephone number, including area code: (952) 996-1674

 

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, $.05 par value

JCS

NASDAQ

Preferred Stock Purchase Rights

 

 

 

Securities registered pursuant to Section 12(g) of the Act: None

 

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ☐  NO ☒

 

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

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  YES ☒  NO ☐

 

Indicate by 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 check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.

 

See the definitions of “ large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer ☐

Accelerated Filer ☐

Non-Accelerated Filer ☐

Smaller Reporting Company ☒

Emerging Growth Company ☐

 

 

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

 

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. ☐

 

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant was approximately $21,641,000 based upon the closing sale price of the Company’s common stock on the Nasdaq Capital Market on June 30, 2019.

 

As of March 1, 2020 there were outstanding 9,256,298 shares of the Registrant’s common stock.

 

Documents Incorporated by Reference:

Portions of the Company’s Proxy Statement for its Annual Meeting of Shareholders to be held on June 17, 2020 are incorporated by reference into Part III of this Form 10-K.

 

 

 

 

 

 

PART I

 

ITEM 1.  BUSINESS

 

(a) GENERAL DEVELOPMENT 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.). The Company maintains a website at www.commsystems.com. Our annual reports on Form 10-K, our quarterly reports on Form 10-Q and our periodic reports on Form 8-K (and any amendments to these reports) are available free of charge by linking from our website to the Securities and Exchange Commission website.

 

Recent Developments; Sale of Suttle Business; Continuing Operations

 

Suttle, Inc. was an important subsidiary of CSI since 1969. As a key element of the Company’s strategic plan, however, the Company sold substantially all of Suttle’s business, assets and operations pursuant to the following two transactions.

 

First, on April 5, 2019, Suttle sold its FutureLinkTM Fiber business line, including inventory and customer relationships, to PPC Broadband Inc. (“PPC”), a leading provider of high quality, end-to-end signal transmission solutions for mission-critical applications.  This 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. Concurrent with the closing of the Asset Purchase Agreement, Suttle and PPC entered into a Transition Services Agreement under which Suttle agreed to continue to manufacture products related to the FutureLinkTM Fiber business line, and provide certain related services, for PPC for a period of six months following the closing.

 

Second, on March 11, 2020, CSI sold the remainder of its Suttle business lines, including working capital, certain capital equipment and customer relationships to Oldcastle Infrastructure, Inc. (“Oldcastle”). Oldcastle, a wholly-owned subsidiary of Ireland based CRH PLC, will operate the majority of the acquired Suttle business through its wholly-owned subsidiary, Primex Technologies, Inc., (“Primex”), a leading provider of indoor and outdoor enclosure solutions to the smart home and telecommunications industries.

 

This transaction was structured as an Asset Purchase Agreement by and among Oldcastle, Suttle and Communications Systems, Inc., with a simultaneous signing and closing on March 11, 2020.  The sale price was $8,000,000 in cash, with a net working capital adjustment 90 days after closing. Under the Asset Purchase Agreement, CSI and Suttle agreed to indemnify Oldcastle for any breaches of representations, warranties, covenants or agreements contained in the Asset Purchase Agreement, as well as any liabilities arising out of the pre-closing operation of the business.  Concurrently with the closing of the transaction, CSI, Suttle and Oldcastle entered into a Transition Services Agreement (“TSA”) under which Suttle will continue to manufacture products for Oldcastle for a period of six months after closing, to ensure seamless supply and quality assurance to the existing customer base.  Concurrently with the closing of the transaction and the TSA, CSI and Oldcastle also entered into a two-year lease under which Oldcastle will lease two buildings in Hector, Minnesota, where Suttle had conducted operations.  The lease automatically renews for additional one-year periods unless either party gives notice of non-renewal.

 

As a result of the Suttle sale, unless otherwise noted, all information in this Form 10-K about Suttle will be discussed and presented as discontinued operations and the Company will report its remaining business operations as continuing operations as described below.

2

 

 

 

After giving effect to the Suttle transactions, CSI is principally engaged through its Transition Networks, Inc. (“Transition Networks” or “Transition”) business unit in the manufacture and sale of Ethernet switches, core media conversion products, and other connectivity and data transmission products. 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 products that enable telecommunications carriers to connect legacy networks to high-speed services.

 

(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS

 

The Company classifies its remaining businesses into the following three segments: 

Transition Networks develops and markets Ethernet switches, media conversion products, and other connectivity and data transmission products;

JDL Technologies is an IT managed services provider and value-added reseller; and

Net2Edge develops, manufactures and sells products to transmit packetized voice and data across networks and between copper-wired and fiber optic equipment.

 

As noted within this Form 10-K, we have classified the operations of Suttle as discontinued operations for 2019 and 2018. Non-allocated general and administrative expenses are separately accounted for as “Other” in the Company’s segment reporting. Additionally, any indirect general and administrative costs previously allocated to Suttle are also included in “Other.” Intersegment revenues are eliminated upon consolidation. Further information regarding these segments, including customer and industry concentration, is set forth in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in Note 13 of the Notes to Consolidated Financial Statements under Item 8.

 

(c) NARRATIVE DESCRIPTION OF BUSINESS

 

(1)  Information Regarding Business Segments

 

(i) Transition Networks, Inc.  

 

Transition Networks, Inc., based in Minnetonka, Minnesota, develops, markets and sells Power over Ethernet (PoE) switches, media converters, network interface cards (NICs), Ethernet switches, Small Form Factor Pluggable modules (SFP), and other connectivity products under the Transition Networks brand name. Transition sells its products through distributors, resellers, integrators, and original equipment manufacturers (“OEMs”). These media converters, NIDs, and Ethernet Switch products allow network operators to transmit voice and data across networks as well as provide connectivity and power in security and surveillance, smart building, smart city and intelligent transportation applications. Sales by Transition Networks were $44,860,000 in 2019 compared to $36,470,000 in 2018. International sales accounted for 11% of Transition’s sales, or $5,112,000 in 2019, compared to $5,411,000, or 15% of Transition’s sales in 2018. 

 

Products

 

Transition Networks develops, markets and sells PoE switches, media converter devices, Ethernet switches and other connectivity products that enable customers to transmit voice and data across networks as well as provide connectivity and power to end devices in the IoT ecosystem. Our growing PoE products support remote devices such as cameras and wireless access points by passing electrical power along with data on Ethernet cabling, eliminating the need for traditional AC/DC electrical power in hard-to-reach locations. Our media converters and other customer premise equipment (CPE) assist customers 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 more cities move to implement smart city technology, a major component will be solutions designed to protect and provide services to citizens, such as intelligent transportation and surveillance networks. Transition Networks switches deliver the necessary connectivity, bandwidth and power to enable these solutions. Many of our products incorporate features to perform advanced levels of fault management and diagnostics to troubleshoot networks and proactively fix problems.

 

3

 

 

Transition Networks develops product hardware and software internally, and expenses the related costs as they are incurred. In connection with the sale of its hardware products, Transition Networks provides its customers with a variety of software management options including Network Management System (NMS) software for providing superior provisioning and monitoring of its Ethernet switches and other managed devices. Transition has been developing and marketing Ethernet-based networking products for over 30 years. Transition Networks continues to develop products that address the enterprise, service provider, industrial, government, and security markets. Increasingly, Transition Networks Power-over-Ethernet products are used in smart building environments, intelligent transportation applications, and in security and surveillance networks.

 

Manufacturing and Sources of Supply

 

Transition Networks uses contract manufacturers to manufacture its products in different geographical locations, in addition to OEM partners through which the Company sources product and markets under its own name. In 2019, 81% of the total value of Transition Networks’ products was manufactured in or sourced from Asia and the remaining 19% was manufactured in the US. Offshore sources of supply are subject to certain risks, including political risk.

 

Markets and Marketing

 

Transition Networks’ products are used in a broad array of markets including federal government, enterprise, service provider, industrial, security, and surveillance markets. Transition Networks has a broad customer base that uses its products in a variety of applications.

 

The line of Ethernet switches (both PoE and non-PoE) is used in last-mile access, backhaul, wiring closets and at end-user stations. These are sold into security networks, intelligent transportation applications, smart buildings, corporate enterprise networks, and other Internet of Things (IoT) applications domestically and abroad. The media conversion product line is used in several applications. The ION chassis-based modular systems are used primarily in telecommunications closets for high-density applications or when multiple protocols need to be supported. Stand-alone media converters are used typically at customer premises or for lower density applications. The Carrier Ethernet NID line of products addresses the high-quality access requirements for both business services and wireless backhaul data communications and telecommunications applications.

 

Marketing primarily consists of direct marketing using a sales force, tradeshows, trade magazine advertising, on-line advertising, website, email, social media, and public relations activities. Transition Networks also provides and participates in advertising and cooperative marketing campaigns with distribution partners.

 

The “Transition Networks” brand name is important to the Company’s business. The Company believes the Transition Networks name is well known in the marketplace and with trade advertising.

 

Research and Development

 

Transition Networks develops products for the federal government, enterprise, service provider, security, and industrial markets. This includes developing commercial and hardened PoE switches, converters for emerging protocols and existing protocols in new markets, as well as new industry standards. Some of these products include devices built on the IEEE 802.3ah, 802.3ag, ITU-T Y.1731 standards, Metro Ethernet Forum (MEF)® standards, and PoE devices based on the IEEE 802.3af, 802.3at, 802.3bt standards. Some design efforts are paced by the development of critical components such as integrated circuits and optical transceivers.

 

Research and development consists primarily of designing, prototyping, and testing of equipment and supplies associated with developing new products and enhancing existing products. Research and development costs are expensed when incurred and were $3,026,000 in 2019 compared to $2,664,000 in 2018.

 

Transition Networks conducts its research and development operations in the United States, at its Minnetonka, Minnesota headquarters location. While this U.S. location has primary engineering and product development responsibility, Transition Networks occasionally uses third party design services and Original Design Manufacturers (“ODM”) to support specific product design requirements.

 

4

 

 

Competition

 

Transition Networks faces strong competition across its entire product line. A large number of competitors exist for high-volume products in Ethernet switches and media converters. Low-cost competitors from China and Taiwan are strongest in (i) Asian, (ii) European, Middle Eastern, and African (“EMEA”) and (iii) South American markets. Transition Networks also faces new competitors as it enters new markets for smart cities, smart buildings, intelligent transportation systems, and higher performance devices for the service provider market.

 

Order Book

 

Outstanding customer orders for Transition Networks products were approximately $2,600,000 at March 1, 2020 and $1,470,000 at March 1, 2019. Transition Networks orders are fulfilled on a relatively short-term basis and therefore the Company does not consider the order book as a significant indicator of longer-term future results.

 

(ii) JDL Technologies, Inc.

 

JDL Technologies, Inc., based in Fort Lauderdale, Florida, is a managed service provider and value-added reseller supplying information technology (“IT”) solutions focused on (a) IT managed services, which include (i) network design, deployment and integration; (ii) cloud hosted and virtualized services; and (iii) remote support and system management from our managed services operation center and (b) project revenue, which includes IT services project engagements. JDL’s 2019 sales were $4,741,000 compared to 2018 sales of $5,134,000. Project revenue totaled $2,348,000 in 2019 or 50% of JDL sales compared to $3,005,000 in 2018 or 59% of JDL sales. Managed service revenues increased to $2,393,000 in 2019 from $2,129,000 in 2018.

 

Markets and Marketing

 

JDL differentiates itself from its competitors by continuously adopting and adapting to changes in available IT services, ensuring it continues to provide new and innovative solutions to its clients and prospective clients. This ensures JDL remains well qualified to help clients with their use of technology and IT resources to meet business objectives and regulatory requirements.

 

JDL partners with clients to provide complete support for their information technology environments, from servers to software applications, from the network-level down to the desktop level. Under a typical managed services agreement, JDL provides virtual CIO services to client management, deploys, manages, secures, and supports client’s IT systems and services, provides helpdesk support to the client’s user community, and adds value to the client’s business by enabling the client to focus on its core competencies. JDL’s key avenues for delivering on this commitment—and its competitive advantages—include JDL’s on-premise managed services operations center and secure, state-of-the-art hosted datacenter and partnerships with industry leading solution providers. The managed services operations center leverages the best available tools, applications, practices, and resources to deliver a consistent, quality customer experience. JDL holds the MSP Trustmark credential from CompTIA and is a member of the MSP Alliance.

 

JDL’s portfolio of technology solutions reflects the regular introduction of new technologies and delivery methodologies and the increasing demand among businesses for innovative solutions to strengthen their competitive edge and address prevailing IT challenges. With its team of professionally certified engineers, more than 250 years of technical experience, and talented leadership, JDL Technologies develops IT solutions that effectively meet these demands. To sustain its leading-edge position, JDL also maintains robust partnerships with strategic manufacturers and is a 3CX VoIP Gold Partner, HP Enterprise Gold Partner, Microsoft Partner, eMDs Solution Provider, and Citrix Solutions Service Provider.

 

Customers

 

In 2019, JDL Technologies aggressively targeted its primary vertical markets, healthcare and commercial business.

 

Healthcare:

JDL continues to serve as a trusted partner to its healthcare clients, offering an array of services that address HIPAA Security Rule and Privacy Rule compliance requirements, including its flagship cloud-based service, HIPAA FastTrack. JDL’s managed services practice supports clients ranging from single-office providers, to multi-location regional specialists, to their regulated suppliers and business associates.

 

5

 

 

Commercial:

JDL Technologies provides support and service to a diverse commercial client set. In 2019, JDL continued to place emphasis on an expanded set of security solutions layered on top of its Cloud-Based IT Managed Services.  This enabled JDL to provide an even more secure total solution that included security awareness testing and training of client end users which has become increasingly important as threats to an organization’s security are focused more and more on end users as the weakest link.

 

Education:

JDL Technologies continues to support a multi-year project to provide wireless network services and datacenter upgrades for several hundred public K-12 schools in Florida. The education vertical remains an important element of JDL’s overall market strategy.

 

Products and Services

 

As a managed service provider and value-added reseller, JDL Technologies specializes in delivering technology solutions that free organizations to focus on the strategic business activities critical to their financial success. JDL’s technology solutions encompass an extensive range of networking, virtualization, cloud, cybersecurity, and infrastructure services, most of which are available under JDL managed services contracts. As technology continues its move to the cloud, JDL aggressively markets its portfolio of cloud-based service offerings to healthcare and commercial business. Its HIPAA FastTrack and Security FastTrack services, available in the JDL Cloud powered by Citrix, have won awards for product innovation, just as JDL Technologies has been recognized in the industry as a leading Managed Service Provider. JDL engineers are trained and certified in the newest cloud and other technology solutions.

 

Managed Services:

JDL Technologies continues to refine its Managed Services offering as the industry matures taking it from a traditional remote management model to a hosted service offering that grants JDL greater control, enables tighter service level agreements and increases margins while providing clients with a more service rich, cost effective, and secure environments for their IT systems. JDL serves a diverse base of clients with locations throughout the United States, offering managed service programs designed specifically for the healthcare and commercial markets. These robust programs meet HIPAA compliance standards and, while the majority of clients are supported remotely, independent of geographic borders, JDL is also able to provide on-site network management and help desk support for key enterprise clients in the South Florida and Atlanta, Georgia markets. JDL’s managed services include network management, availability assurance, event alerting and incident management services; server, workstation, mobile device, and other asset management services; security services including software patching, firewall, antivirus, antimalware, and cybersecurity intrusion detection and prevention services; help desk support for client users; SIP trunking, voice over IP and office management services; migration, conversion and vendor management; and technical consulting services and training.

 

Cloud Solutions:

With widespread adoption of cloud solutions on the rise, JDL continues to focus on these solutions as key offerings with significant revenue growth potential.  Azure® cloud solutions, wireless as a service, infrastructure as a service, and Citrix® as a service (sold as JDL FastTrack) are among JDL’s the most successful cloud offerings, with others including backup, storage, voice over IP, firewall and email as cloud or hosted services. The benefits to clients are numerous and include vertical and horizontal scalability, internal bandwidth conservation, and simplification of IT management within client organizations, while JDL benefits from substantial economies of scale and standardization. All JDL cloud offerings are billable as monthly recurring revenue under its managed service model, and JDL is committed to bringing the benefits of cloud services to all clients.

 

Network Services:

JDL’s roots are in network services, and these services remain central to its role as a managed service provider and value-added reseller. The JDL team has extensive experience and professional certifications in assessing, designing and implementing wired and wireless networks as well as entire technology infrastructures. Networking services also include network infrastructure as a service, network design and deployment, network and endpoint security, network tuning, and device installation/configuration services. 

 

6

 

 

Virtualization:

Whether hosted on premise, in JDL’s private cloud, or on third party platforms such as Azure or AWS (Amazon Web Services), using virtualization across an organization’s IT environment delivers greater agility, mobility and efficiency. JDL’s virtualization engineers assess, design, deploy, and manage virtualization programs that are designed to ensure user access to any workload, anytime, anywhere, on any device. JDL’s virtualization services encompass desktops, servers, applications, storage, and any combination thereof, including connectivity and software licensing. As JDL clients continue to adopt virtualization, they experience the economies of scale, reduced capital requirements, enhanced security, and disaster recovery protections that are inherent in virtualized environments.

 

Competition

 

The Managed Services market continues to promise significant growth over the next several years, making it a highly competitive industry.  In response to these pressures, JDL’s focus is to quickly adapt to the changing needs of its clients through the adoption and productizing of new IT Service technologies as they become available.  An example of this would be the addition of several security services to the JDL portfolio in 2019 including security tools to monitor the flow of sensitive data in and on the network, additional cloud-based services through Azure and AWS and enhanced end-point security services. By ensuring JDL continuously evaluates the services we offer with a focus on the changing market, we are able to provide a better range of services to our clients and prospects while increasing their reliance upon us as their IT service provider.

 

Order Book

 

Outstanding customer orders and contracts for JDL products and services were approximately $1,546,000 at March 1, 2020 and $1,203,000 at March 1, 2019. The Company does not consider current outstanding orders and contracts as a significant indicator of longer-term future results.

 

(iii) Net2Edge

 

Net2Edge Limited, based in Basingstoke, Hampshire, United Kingdom, designs and markets solutions for the Network Edge. Net2Edge™ uses a direct sales model and also markets its products through approved partners and integrators. Net2Edge also offers solutions that enable network operators to transmit packetized voice and data across networks and between copper-wired and fiber-optic equipment. Sales by Net2Edge were $2,330,000 in 2019 and $1,700,000 in 2018.

 

Products

 

Net2Edge designs and sells a range of solutions to address the needs of customers at the network edge. Specifically, this ranges from traditional Ethernet based switches, to circuit emulation devices, to bespoke niche solutions deploying LTE (Long Term Evolution) wireless communication standard products. The circuit emulation products range from legacy over packet interfaces such as Serial, TDM or ISDN. Net2Edge 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. All Net2Edge products incorporate features for performing advanced levels of management and automated provisioning minimizing the administrative burden of the operator.

 

Net2Edge products support a wide variety of protocols, including: 10 Gigabit Ethernet, Gigabit Ethernet, Fast Ethernet, Ethernet, T1/E1, DS3, Circuit Emulation Services (TDM or ISDN over Ethernet or IP), RS232, RS485, OC3, OC12, GFast, LTE, and more. Net2Edge develops product hardware and software internally, and expenses the related costs as they are incurred. 

 

7

 

 

Manufacturing and Sources of Supply

 

Net2Edge uses contract manufacturers to manufacture its products in the UK and in Asia. Because some of Net2Edge’s offshore sources of supply are subject to risks, including political, communication and logistic risk, and factors such as the coronavirus (COVID-19), when possible, Net2Edge takes steps to ensure it has multiple suppliers to ensure business continuity.

 

Markets and Marketing

 

Net2Edge’s products are used in a broad array of market sectors including the Government, Enterprise, Utility, Industrial, and Surveillance markets. Net2Edge has a growing international customer base outside the United Kingdom and customers use its products in a variety of applications.

 

Net2Edge’s marketing primarily consists of direct marketing using a sales force, tradeshows, trade magazine advertising, on-line advertising, website, email, social media, and public relations activities. Net2Edge also participates in advertising and cooperative marketing campaigns with its partners.

 

Research and Development

 

Net2Edge develops products for the service provider market including products for emerging protocols and existing protocols in new markets, as well as new industry standards. These products include remote management devices built on the IEEE® 802.3AH, 802.3AG, ITU-T Y.1731 standards, Metro Ethernet Forum (“MEF”)®, and MEF 2.0 standards. Some design efforts are paced by the development of critical components such as integrated circuits, System on Chip (“SoC”) silicon and optical transceivers.

 

Research and development consists primarily of designing, prototyping, testing equipment and supplies associated with enhancing existing products, and developing new products. Research and development costs are expensed when incurred and were $574,000 in 2019 and $878,000 in 2018.

 

Net2Edge conducts its research and development operations out of its Basingstoke, United Kingdom headquarters location. While this UK location has primary engineering and product development responsibility, Net2Edge will occasionally use third party design services and ODMs to support specific product design requirements.

 

Competition

 

Net2Edge faces strong competition across its entire product line. A large number of competitors exist for high volume products. There are low cost competitors from China and Taiwan and established competitors from the USA and Canada.

 

Order Book

 

Outstanding customer orders for Net2Edge products were approximately $213,000 at March 1, 2020 and $1,105,000 at March 1, 2019. Net2Edge orders are fulfilled on a relatively short-term basis and therefore the Company does not consider the order book as a significant indicator of longer-term future results.

 

(2)  Employment Levels

 

As of March 15, 2020, the Company employed 203 people. Of this number, 80 were employed by Transition Networks, Inc., 23 by JDL Technologies, Inc., 19 by Net2Edge in the U.K., 17 in corporate general and administrative positions, and 64 by Suttle, who are being employed through the end of the TSA.

 

(3)  Executive Officers of Registrant

 

The executive officers of the Company and their ages at March 1, 2020 are set forth below. See Item 9B of this Form 10-K for additional information on the Company’s management.

 

8

 

 

Name

 

 

Age

 

Position1

 

 

 

 

 

 

Roger H.D. Lacey

 

69

 

Executive Chairman of the Company’s Board and Chief Executive Officer2

 

 

 

 

 

Mark D. Fandrich

 

58

 

Group Business President, Treasurer and Chief Financial Officer 3

 

 

 

 

 

Scott Fluegge

 

50

 

President and General Manager, JDL Technologies, Inc 4

 

 

 

 

 

Kristin A. Hlavka

 

38

 

Corporate Controller 5

 

 

 

1

Additional footnotes indicate when officers began serving in their current capacity. Executive officers serve at the pleasure of the Board of Directors.

 

2

Mr. Lacey has served as the Company’s Chief Executive Officer since February 2015 and has served as the Executive Chairman of the Company’s Board of Directors since December 2018. Additional information about Mr. Lacey’s background will be contained in the 2020 Proxy Statement.

 

3

Mr. Fandrich was appointed Chief Financial Officer in August 2016, and effective January 1, 2019, was named Group President of the Suttle and JDL Technologies business segments. From July 2015 to August 2016, he served as Vice President of Finance of Suttle, Inc. From April 2004 to July 2015, he was Corporate Controller for The Bergquist Company, a global supplier of thermal interface material.   

 

4

Mr. Fluegge was appointed Vice President and General Manager of JDL Technologies in December 2011, and was named President and General Manager in September 2013. Prior to this, he was the Vice President of Workload Automation at GSS AMERICA / GSS INFOTECH / INFOSPECTRUM CONSULTING.

 

5

Ms. Hlavka was appointed Corporate Controller in May 2011. From July 2008 to April 2011, she served as the Assistant Corporate Controller. Prior to July 2008, she was an auditor for Deloitte and Touche LLP.

 

(d)FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES

 

Financial information about domestic and foreign operations and export sales may be obtained by reference to Note 13 of the “Notes to Consolidated Financial Statements” under Item 8 herein.

 

ITEM 1A.  RISK FACTORS

 

Forward Looking Statements

 

Certain statements contained in this Annual Report on Form 10-K are “forward-looking” statements within the meaning of and in reliance on the Private Securities Litigation Reform Act of 1995, which provides a “safe harbor” for forward-looking statements. Actual events and results may differ materially from those expressed or forecasted in forward-looking statements due to a number of factors. The principal important risk factors that could cause our actual performance and future events and actions to differ materially from these forward-looking statements include, but are not limited to, the risk factors discussed below.

 

9

 

 

Risks Related to Our Business

 

The primary markets we serve are highly competitive, and our ability to compete requires continual focus on delivering high-quality, competitively priced products and services and the regular introduction of new products and services that meet evolving customer requirements.

 

Competition in the markets for enterprise networks and voice and data communications products is intense. Our ability to compete with other manufacturers and marketers of these products depends primarily on our engineering, OEM/ODM relationships, manufacturing, and marketing skills; the price, quality and reliability of our products; our delivery and service capabilities; and our control of operating expenses. Our JDL subsidiary experiences intense competition from other providers of IT products and services. We have experienced, and anticipate continuing to experience, pricing pressures from our customers as well as our competitors. The markets we serve are characterized by rapid technological advances and evolving industry standards. These markets can be significantly affected by new product introductions and marketing activities of industry participants. Some of our current competitors and potential competitors have greater financial, technological, manufacturing, marketing, and personnel resources than we possess. These current and future competitors may be able to identify new markets and develop new products that are superior to those we develop. They may also adapt new technologies faster, devote greater resources to research and development, promote products more aggressively, and price products more competitively. We cannot ensure that competition will not intensify or that we will be able to compete effectively in the markets in which we compete.

 

Our gross margins have fluctuated year to year, and we face many challenges in maintaining acceptable margins.

 

Gross margins among our products and services vary and are subject to fluctuation from quarter to quarter and year to year. The factors that may affect our gross margins adversely are numerous and include:

 

Changes in customer, geographic, or product mix;

 

Our ability to reduce product costs

 

Royalties related to technology licensing

 

Increases in material or labor costs

 

Expediting costs incurred to meet customer delivery requirements

 

Excess inventory and inventory carrying charges

 

Tariffs on imported products

 

Obsolescence charges

 

Changes in shipment volume

 

Changes in component pricing

 

Changes in OEM/ODM pricing

 

Increased price competition

 

Changes in distribution channels

 

Lower margins on competitive-bid contracts

 

Increased warranty cost and

 

Our ability to manage the impact of foreign currency exchange rate fluctuations.

 

Consolidation among our customers has occurred and further consolidation may occur, resulting in the loss of some customers and reducing revenue during the pendency of business combinations and related integration activities.

 

We believe future consolidation may occur among our customers as they attempt to increase market share and achieve greater economies of scale. Consolidation has affected our business as our customers focus on completing business combinations and integrating their operations. In some instances, customers integrating large-scale acquisitions have reduced their purchases of our products as they integrate.

 

10

 

 

The business effect on us of significant customer mergers is likely to be unclear until sometime after these transactions are completed. After a consolidation occurs, a customer may choose to reduce the number of vendors from which it purchases equipment and services and may choose one of our competitors as its preferred vendor. We cannot ensure that we will continue to supply equipment to the surviving communications service provider after a business combination is completed.

 

We cannot guarantee the ability of the Special Committee of our Board of Directors to develop strategic options for the Company and the Company’s ability to implement these strategies.

 

In May of 2018 the Company announced it had appointed a special committee of the board to perform a strategic review of the Company’s businesses to explore opportunities for enhancing shareholder value and had engaged an investment banking firm to advise it in this process.  The disposition of the Suttle operations were a result of this initiative. Failure to develop a growth strategy, failure to maintain positive operating income or investing in technology ventures that do not enhance value or that we cannot incorporate into our products, could result in operating losses and lack of shareholder confidence, which could negatively impact cash flow and the trading price of our common stock.

 

Our information technology systems may be exposed to various cybersecurity risks and other disruptions that could impair our ability to operate, adversely affect our business, and damage our brand and reputation. Risks are particularly acute in the cloud-based technologies that we and other third parties operate and that form a part of our solutions.

 

We rely extensively on our information technology systems or on third parties for services including our enterprise resource planning (“ERP”) system, banking, payroll, shipping, and e-mail systems to conduct business.  We also collect, store and transmit sensitive data, including proprietary business information and personally identifiable information of our customers, suppliers and employees. 

 

Despite our investment in our information technology systems and data security program, the implementation of security measures to protect our data and infrastructure against breaches and other cyber threats, and our use of internal processes and controls designed to protect the security and availability of our systems, our information technology and communication systems may be vulnerable to cybersecurity risks such as computer viruses, hacking, malware, denial of service attacks, cyber terrorism, circumvention of security systems, malfeasance, breaches due to employee error, natural disasters, telecommunications failure, at our facilities or at third-party locations.

 

The General Data Protection Regulation, or GDPR, took effect on May 25, 2018, in the European Union and introduced direct compliance obligations for data controllers and data processors. National Data Protection Agencies, or NDPAs, are now able to impose fines for violations ranging from 2% to 4% of annual worldwide turnover, or 10 million to 20 million euro, whichever is greater. NDPAs have the power to carry out audits, request information, and obtain access to premises. Businesses must be able to demonstrate that the personal data of any data subject can be lawfully processed on one of the six specified grounds. The GDPR adopts a risk-based approach to compliance, under which businesses bear responsibility for assessing the degree of risk that their processing activities pose to data subjects. Businesses are required to perform data protection impact assessments before any processing that uses new technology and is likely to result in a high risk to data subjects. The GDPR requires businesses to maintain records of their processing activities. The GDPR establishes clear rules around data breach notifications and the processing of personal data in such a manner that the personal data can no longer be attributed to a specific individual have been set out by the GDPR. In addition, under the GDPR, data subjects have new rights, for example, the right to request that businesses delete their personal data (the right to be forgotten); to object to their personal data being processed; and to obtain a copy of their personal data within a set time frame.

 

Similar to the GDPR, the California Consumer Privacy Act of 2018 (“CCPA”), which became effective January 1, 2020, grants California residents with several new rights relating to their personal information. The CCPA applies to businesses that conduct business in California and satisfies one of three financial conditions, including a business that has a gross revenue greater than $25 million. The CCPA sets forth several data protection obligations for applicable businesses, including the obligation to inform a consumer, at or before collection, of the purpose and intended use of the collection, and the obligation to delete a consumer’s personal information upon request. The CCPA establishes a private right of action that allows consumers the right to seek damages for serious data breaches. The CCPA also allows the California Attorney General to bring actions against non-compliant businesses with fines of $2,500 per violation or, if intentional, up to $7,500 per violation. Any failure by us to comply with the GDPR or the CCPA could have a material adverse effect on our business, results of operations or financial condition.

 

11

 

 

Complying with these varying requirements could cause us to incur substantial costs or require us to change our business practices in a manner adverse to our business. Any failure, or perceived failure, by us to comply with any regulatory requirements or international privacy or consumer protection-related laws and regulations could result in proceedings or actions against us by governmental entities or others, subject us to significant penalties and negative publicity and adversely affect us. In addition, as noted above, we are subject to the possibility of security breaches, which themselves may result in a violation of these laws.

 

Any failure, breach or unauthorized access to our or third-party systems could result in the loss of confidential, sensitive or proprietary information, interruptions in our service or production or otherwise our ability to conduct business operations, and could result in potential reductions in revenue and profits, damage to our reputation or liability. There can be no assurance that our protective measures will prevent or timely detect security breaches that could have a significant impact on our business, reputation, operating results and financial condition.

 

In addition, our JDL Technologies subsidiary provides IT services for the Company internally and for third party customers.  As we continue to direct a portion of our JDL sales efforts toward Cloud solutions, we expect to store, convey and potentially process increasing amounts of data produced by customer devices. This data may include confidential or proprietary information, intellectual property or personally identifiable information of our customers or other third parties with whom they do business.  It is important that we maintain solutions and related infrastructure that are perceived by our customers and other parties with whom we do business as providing a reasonable level of reliability and security.  Despite any available security measures and other precautions that we deploy, the infrastructure and transmission methods we use directly or through third parties, may be vulnerable to interception, attack or other disruptive problems.  Continued high-profile data breaches at other companies evidence an external environment that is becoming increasingly hostile to information security.  Improper disclosure of data or perception that our data security is insufficient could harm our reputation, give rise to legal proceedings, and subject our company to liability under laws that protect data, any of which could result in increased costs and loss of revenue.

 

If a cyberattack or other security incident were to allow unauthorized access to or modification of our customers’ data or our own data, whether due to a failure with our systems or related systems operated by third parties, we could suffer damage to our brand and reputation. The costs we would incur to address and fix these incidents would increase our expenses. These types of security incidents could also lead to lawsuits, regulatory investigations and increased legal liability, including in some cases contractual costs related to customer notification and fraud monitoring. Further, as regulatory focus on privacy and data security issues continues to increase and worldwide laws and regulations concerning the protection of information become more complex, the potential risks and costs of compliance to our business will intensify.

 

Our financial results could be adversely affected if one or more of our key customers substantially reduces orders for our products.

 

Traditionally, we have derived a large portion of our revenues from a relatively small number of customers, with our top ten customers accounting for 74%, and 75% of net sales for 2019 and 2018, respectively. In fiscal 2019, two Transition Networks’ customers accounted for 21% and 16% of consolidated sales. In fiscal 2018, two Transition Networks’ customer accounted for 18% and 15% of consolidated sales. The loss of or a substantial reduction in purchases by any one or more of our top customers could have a material adverse effect on our business, financial position and results of operations.

 

Our market is subject to rapid technological change and, to compete effectively, we must continually introduce new products that achieve market acceptance.

 

The enterprise network and communications equipment industry is characterized by rapid technological changes, evolving industry standards, changing market conditions, short product life cycles, rapidly changing customer requirements, and frequent new product and service introductions and enhancements. The introduction of products using new technologies or the adoption of new industry standards can make our existing products, or products under development, obsolete or unmarketable. Our future success will depend on our ability to enhance our existing products, to introduce new products to meet changing customer requirements and emerging technologies, and to demonstrate the performance advantages and cost-effectiveness of our products over competing products. Our failure to modify our products to support alternative technologies or failure to achieve widespread customer acceptance of these modified products could cause us to lose market share and cause our revenues to decline.

 

12

 

 

We may not predict technological trends or the success of new products in the enterprise network and communications equipment markets accurately. New product development often requires forecasting of market trends, development and implementation of new technologies and processes and capital commitments. We do not know whether other new products we develop will gain market acceptance or result in profitable sales.

 

Some competitors have greater engineering and product development resources. Although we expect to continue to invest significant resources in product development activities, our efforts to achieve and maintain profitability will require us to be selective and focused with our research and development expenditures. If we fail to anticipate or respond in a cost-effective and timely manner to technological developments, changes in industry standards or customer requirements, or if we experience any significant delays in product development or introduction, our business, operating results and financial condition could be affected adversely.

 

We may experience delays in developing and marketing product enhancements or new products that respond to technological change, evolving industry standards and changing customer requirements. Specifically as we attempt to develop more software products and continue to expand our existing product set, we cannot ensure that we will not experience difficulties that could delay or prevent the successful development, introduction, and marketing of these products or product enhancements, or that our new products, including software-based products, and product enhancements will adequately meet the requirements of the marketplace and achieve any significant or sustainable degree of market acceptance in existing or additional markets. In addition, the future introductions or announcements of products by us or one of our competitors embodying new technologies or changes in industry standards or customer requirements could render our then-existing products obsolete or unmarketable. We cannot ensure that the introduction or announcement of new product offerings by us or one or more of our competitors will not cause customers to defer their purchase of our existing products, which could cause our revenues to decline.

 

Our business units are dependent upon federal government spending.

 

Our JDL Technologies and Transition Networks business units are involved in projects that receive much of their funding from the United States federal government. To the extent that federal government spending is delayed or curtailed by government actions, our revenues and operating results may be adversely affected.

 

We evaluate and frequently pursue acquisitions, but we may not successfully close these acquisitions and, if these acquisitions are completed, we may have difficulty integrating the acquired businesses with our existing operations.

 

We regularly consider the acquisition of complementary companies and product lines. We cannot, however, ensure that we will be able to find appropriate candidates for acquisitions, reach agreement to acquire them, or obtain any required shareholder or regulatory approvals needed to close strategic acquisitions, despite the effort and management attention invested.

 

The impact of future acquisitions on our business, operating results and financial condition is uncertain. In the case of businesses we may acquire in the future, we may have difficulty assimilating these businesses and their products, services, technologies and personnel into our operations. These difficulties could disrupt our ongoing business, distract our management and workforce, increase our expenses and materially adversely affect our operating results and financial condition. Also, we may not be able to retain key management and other critical employees after an acquisition. We may also acquire unanticipated liabilities. In addition to these risks, we may not realize all of the anticipated benefits of these acquisitions.

 

Our operating results fluctuate from quarter to quarter.

 

Our operating results are difficult to predict and may fluctuate significantly from quarter to quarter. Fluctuations in our quarterly operating results may be caused by many factors, including the following:

 

the volume and timing of customer orders and our ability to fulfill those orders in a timely manner

 

the overall level of capital expenditures by our customers

 

13

 

 

factors such as the coronavirus (COVID-19), which may affect our supply stream, our employee work force, our customers, or the general United States and world economy

 

work stoppages and other developments affecting the operations of our customers

 

our ability to obtain new customers and customer contracts

 

the timing of our revenue recognition

 

the timing of our new product and service introductions

 

the availability of products and services we need from our suppliers

 

market acceptance of new and enhanced versions of our products and services

 

variations in the mix of products and services we sell

 

the timing of federal and state government funding of projects

 

the location and utilization of our production capacity and employees and

 

the availability and cost of key components of our products.

 

Our expense levels are based in part on expectations of future revenues. If revenue levels in a particular quarter are lower than expected, our operating results will be affected adversely.

 

We depend on OEM/ODM relationships and on limited-source suppliers and any disruptions in these relationships may cause damage to our customer relationships.

 

We procure all parts and certain services involved in the production of our products from, and subcontract much of our product manufacturing to outside firms that specialize in these services. Although most of the components of our products are available from multiple vendors, we have several single-source supplier relationships, either because alternative sources are not available or because the relationship is advantageous to us. We cannot ensure that our suppliers will be able to meet our future requirements for products and components in a timely fashion. In addition, the availability of many of these components to us is dependent in part on our ability to provide our suppliers with accurate forecasts of our future requirements. Delays or lost sales could be caused by other factors beyond our control, including defects in the quality of components or products supplied by others. 

 

We are dependent upon our senior management and other critical employees.

 

Like all companies, our success depends on the efforts and abilities of our senior management personnel and other critical employees, including those in sales, marketing and product development functions. Our ability to attract, retain and motivate these employees is critical to our success. In addition, because we may acquire one or more businesses in the future, our success may depend, in part, upon our ability to retain and integrate our own personnel with personnel from acquired entities that are necessary to the continued success or the successful integration of the acquired businesses.

 

Managing our inventory is complex and may include write-downs of excess or obsolete inventory.

 

Managing our inventory of components and finished products is complicated by a number of factors, including the need to maintain a significant inventory of finished goods for orders we anticipate but do not receive. These issues may cause us to purchase and maintain significant amounts of inventory. If this inventory is not used as expected based on anticipated requirements, it may become excess or obsolete. The existence of excess or obsolete inventory can result in sales price reductions or inventory write-downs, which could adversely affect our business and results of operations.

 

We face risks associated with expanding our sales outside of the United States.

 

We believe that our future growth depends in part upon our ability to increase sales in international markets. These sales are subject to a variety of risks, including fluctuations in currency exchange rates, tariffs, import restrictions and other trade barriers, unexpected changes in regulatory requirements, longer accounts receivable payment cycles, potentially adverse tax consequences, and export license requirements. In addition, we are subject to the risks inherent in conducting business internationally, including political and economic instability and unexpected changes in diplomatic and trade relationships. We cannot ensure that one or more of these factors will not have a material adverse effect on our business strategy and financial condition.

 

14

 

 

Our failure to achieve and maintain effective internal controls could limit our ability to detect and prevent fraud and thereby adversely affect our business and stock price.

 

We have incurred, and expect to continue to incur, significant continuing costs, including accounting fees and staffing costs, to maintain compliance with the internal control requirements of the Sarbanes-Oxley Act of 2002. Expansion of our business, particularly internationally, would require ongoing changes to our internal control systems, processes and information systems. In addition, if we complete future acquisitions, our ability to integrate operations of the acquired company could affect our continued compliance with the internal control requirements of the Sarbanes-Oxley Act.

 

We maintain internal controls to generate reliable financial reports. All internal control systems, no matter how well designed, have inherent limitations. Even those systems determined to be effective can provide only reasonable assurance with respect to the consolidated financial system preparation and presentation. Our inability to maintain an effective control environment may cause investors to lose confidence in our reported financial information, which could in turn have a material adverse effect on our stock price.

 

Product defects or the failure of our products to meet specifications could cause us to lose customers and revenue or to incur unexpected expenses.

 

If our products do not meet our customers’ performance requirements, our customer relationships may suffer. Also, our products may contain defects or fail to meet product specifications. Any failure or poor performance of our products could result in:

 

delayed market acceptance of our products

 

delayed product shipments

 

unexpected expenses and diversion of resources to replace defective products or identify and correct the source of errors

 

damage to our reputation and our customer relationships

 

delayed recognition of sales or reduced sales, and

 

product liability claims or other claims for damages that may be caused by any product defects or performance failures.

 

Our sales and operations may continue to be adversely affected by current global economic conditions.

 

Over the past several years, financial markets globally have experienced periods of extreme disruption. These have included, among other things, extreme volatility in securities prices, severely diminished liquidity and credit availability, ratings downgrades of some investments and declining valuations of others, tariffs on imports and exports. The frequency, severity and duration of these disruptions in the financial markets and the global economy are unknown. We cannot ensure that there will not be a further deterioration in financial markets and in business conditions generally. These economic developments have adversely affected our business in a number of ways and will likely continue to adversely affect our business during the foreseeable future.

 

Our sales and operations may be adversely affected by the coronavirus (COVID-19) epidemic.

 

While over 96% of our Transition Networks products are TAA compliant and therefore manufactured outside of China, there are some passive components and metals that may be sourced from China.  We are making supply chain adjustments to source these components elsewhere.  We are monitoring the situation very closely and will be proactive to maintain our supply chain.

 

Risks Related to Our Common Stock

 

Our stock price has been volatile historically and the price of our common stock may fluctuate significantly in the future.

 

The trading price of our common stock has been and may continue to be subject to wide fluctuations. Our stock price may fluctuate in response to a number of events and factors, such as quarterly variations in operating results, announcements of technological innovations or new products by us or our competitors, the operating and stock price performance of other companies that investors may deem comparable to us, and new reports relating to trends in our markets or general economic conditions.

15

 

 

In addition, the stock market in general, and prices for companies in our industry in particular, have experienced extreme volatility that often has been unrelated to the operating performance of these companies. These broad market and industry fluctuations may adversely affect the price of our common stock, regardless of our operating performance.

 

Anti-takeover provisions in our charter documents, our shareholder rights agreement and Minnesota law could prevent or delay a change in control of our company.

 

Provisions of our articles of incorporation and bylaws and Minnesota law may discourage, delay or prevent a merger or acquisition that a shareholder may consider favorable, and could limit the price that investors are willing to pay for our common stock. These provisions include the following:

 

advance notice requirements for shareholder proposals

 

authorization for our Board of Directors to issue preferred stock without shareholder approval

 

limitations on business combinations with interested shareholders and

 

a super majority vote by shareholders is required to approve certain corporate actions, including merger transactions.

 

Some of these provisions may discourage a future acquisition of our company even though our shareholders would receive an attractive value for their shares, or a significant number of our shareholders believe such a proposed transaction would be in their best interest.

 

The payment and amount of future dividends and number of shares we repurchase in the future under our Stock Repurchase Program is subject to Board of Director discretion and to various risks and uncertainties.  

 

            The payment and amount of future quarterly dividends is within the discretion of the Board of Directors and will depend on factors the Board deems relevant at the time declaration of a dividend is considered.  These factors include, but are not limited to: available cash; management’s expectations regarding future performance and free cash flow; alternative uses of cash to fund R&D expenditures and capital expenditures required to fund future growth; and, the effect of various risks and uncertainties described in this “Risk Factors” section. In addition, we adopted a Stock Repurchase Program in 2019. Our ability to continue this program or conduct future stock repurchase programs will depend on some of these same factors.

 

ITEM 1B.  UNRESOLVED STAFF COMMENTS
None.

 

ITEM 2.  PROPERTIES

 

CSI conducts administrative, manufacturing and engineering functions at the following facilities:

 

-

The Company owns a 105,000 square foot building in Minnetonka, Minnesota where its executive and administrative offices are located. Transition Networks uses this facility for its warehouse, assembly, engineering and administrative operations. JDL Technologies uses this facility for some administrative operations. In August of 2018, the Company entered into an agreement to sell its Minnetonka headquarters. There are several contingencies because of the due diligence to be completed by the buyer. If the sale proceeds, the Company expects the closing would occur late in 2020 or early in 2021.

 

-

The Company owns three buildings in Hector, Minnesota totaling 109,000 square feet of manufacturing space situated on approximately 5 acres. Beginning in March 2020, two of these buildings totaling 26,000 square feet of manufacturing space, are being leased to Oldcastle as part of the March 2020 Suttle transaction. 

 

-

JDL leases 3,700 square feet of office space in Fort Lauderdale, Florida.

 

16

 

 

-

Net2Edge leases 5,500 square feet of office space in Basingstoke, Hampshire, U.K.

 

CSI believes these facilities will be adequate to accommodate its administrative, manufacturing and distribution needs for the foreseeable future.

 

ITEM 3.  LEGAL PROCEEDINGS

 

The Company is subject to claims and lawsuits that have been filed in the ordinary course of business. From time to time, the Company brings suit against others to enforce contract rights or property rights, or to collect debts in the ordinary course of business. Management believes that the resolution or settlement of any pending litigation will not have a material adverse effect on the results of operations or liquidity of the Company.

 

ITEM 4.  MINE SAFETY DISCLOSURES

 

Not applicable.

 

PART II

 

ITEM 5.  MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASE OF EQUITY SECURITIES

 

Market Information

 

The Company’s common stock trades on the Nasdaq Capital Market under the trading symbol JCS. 

 

Holders

 

At March 1, 2020, there were approximately 494 registered holders of record of Communications Systems, Inc. common stock.

 

Information Regarding Equity Compensation Plans

 

The following table presents information about the Company’s equity compensation plans, under which equity securities of the Company are authorized for issuance, as of December 31, 2019:

 

Securities Authorized for Issuance Under Equity Compensation Plans

 

Plan Category (1)   

Number of shares

of common stock

to be issued upon exercise of outstanding options, warrants

and rights

    Weighted-average exercise price of outstanding options warrants and rights    Number of shares of common stock available for future issuance under equity compensation plans (excluding shares in column (a)) 
                
Equity compensation plans approved by security holders:               
                
1992 Stock Plan-Nonemployee Director Plan   18,000   $11.82    —  
1990 Employee Stock Purchase Plan   3,549   $5.24    89,122 
2011 Executive Incentive Compensation Plan   1,433,699   $6.35    701,221 
                
Equity compensation plans not approved by security holders:               

  

None

 

(1)

The Company does not have individual compensation arrangements involving the grant of options, warrants and rights, but only grants equity awards under shareholder-approved plans.

 

17

 

 

Five-year Performance Graph

 

Not applicable because the Company is a smaller reporting company.

 

Recent Sales of Unregistered Securities

 

None.

 

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

 

In the three months ended December 31, 2019, the company repurchased shares of stock as follows:

 

ISSUER PURCHASES OF EQUITY SECURITIES

Period

(a) Total Number of Shares Purchased (1)

Average Price Paid per Share (or Unit)

Total Number of Shares (or Units) 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

October 2019

55,080 

$

         5.05 

55,080 

$

                         1,527,801

November 2019

39,941 

6.42 

39,941 

1,271,385 

December 2019

95,283 

7.26 

95,283 

625,583 

Total

190,304 

$

         6.44 

190,304 

$

                           625,583

 

(1)

The total number of shares purchased includes shares purchased under the Board’s authorization described above, including market purchases and privately negotiated purchases.

 

18

 

ITEM 6.                SELECTED FINANCIAL DATA

 

Not applicable because the Company is a smaller reporting company.

 

19

 

 

ITEM 7.                MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Overview

 

Communications Systems, Inc. provides physical connectivity infrastructure products and services for global deployments of broadband networks through the following business units:

 

Transition Networks

With over 30 years of growth and expertise in hardware and software development, Transition Networks offers customers the ability to securely and reliably connect, power and manage edge devices in an IoT (“Internet of Things”) ecosystem as well as affordably integrate the benefits of fiber optics into any data network, in any application, and in any environment. Offering support for multiple speeds and protocols, multiple Power over Ethernet options, any interface, and a multitude of hardware platforms, Transition Networks’ portfolio gives customers simple, secure and intelligent solutions for the network edge. Transition Networks distributes hardware-based connectivity solutions through a network of resellers in over 90 countries.

 

JDL Technologies

JDL Technologies provides technology services and infrastructure to the commercial, healthcare and education market segments. JDL’s portfolio of technology solutions includes managed services, virtualization and cloud solutions, wired and wireless network design and implementation services, and converged infrastructure configuration and deployment. JDL has provided many of these technology services to the education space, including one of the largest school districts in the US for more than 30 years, and also provides these services to a number of commercial and healthcare clients.

 

Net2Edge

Net2Edge designs and sells a range of solutions to address the needs of customers at the network edge. Specifically, this ranges from traditional Ethernet based switches, to circuit emulation devices, to bespoke niche solutions deploying LTE for example. The circuit emulation products range from legacy over packet interfaces such as Serial, TDM or ISDN. Net2Edge 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. All Net2Edge products incorporate features for performing advanced levels of management and automated provisioning minimizing the administrative burden of the operator.

 

Key 2019 Developments

 

The Company’s 2019 sales were $50.9 million, a 20% increase from 2018 sales of $42.4 million.

 

The Company’s 2019 net income from continuing operations was $251,000, or $0.03 per diluted share, compared to a net loss from continuing operations of $4.9 million or ($0.54) per diluted share in fiscal 2018. 

 

At 2019 year end, the Company had cash, cash equivalents and investments of $24.1 million and working capital of $38.1 million compared to cash, cash equivalents and investments of $11.1 million and working capital of $30.7 million at December 31, 2018.

 

Transition Networks sales increased 23% to $44.9 million in 2019 from $36.5 million in 2018. Transition had increased operating income of $5.6 million in 2019, compared to operating income of $3.0 million in 2018.

 

JDL Technologies sales decreased 8% to $4.7 million in 2019 from $5.1 million in 2018. JDL had an operating loss of $3,000 in 2019 compared to an operating loss of $300,000 in 2018.

 

Net2Edge sales increased 37% to $2.3 million in 2019 from $1.7 million in 2018. Net2Edge had an operating loss of $1.5 million in 2019 compared to an operating loss of $2.8 million in 2018.

 

20

 

 

Forward Looking Statements

 

In this report and from time to time, in reports filed with the Securities and Exchange Commission, in press releases, and in other communications to shareholders or the investing public, we 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. For a detailed discussion of a number of these risk factors, please see Item 1A above.

 

Critical Accounting Policies

 

Inventory Valuation: We value inventories at the lower of cost or net realizable value. Reserves for excess and obsolescence are estimated and recorded to reduce the carrying value to estimated net realizable value. The amount of the reserve is determined based on historical usage, projected sales information, plans for discontinued products, and other factors. Though management considers these reserves adequate and proper, changes in sales volumes due to unexpected economic or competitive conditions are among the factors that could materially affect the adequacy of this reserve.

 

Income Taxes: In the preparation of the Company’s consolidated financial statements, management calculates income taxes. This includes estimating the Company’s current tax liability as well as assessing temporary 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. These assets and liabilities are analyzed regularly and management assesses the likelihood it will realize these deferred assets from future taxable income. We determine the valuation allowance for deferred income tax benefits based upon the expectation of whether the benefits are more likely than not to be realized. The Company records interest and penalties related to income taxes as income tax expense in the Consolidated Statements of Income.

 

Revenue Recognition: The Company recognizes revenue when a customer obtains control of promised goods or services. The amount of revenue recognized reflects the consideration that the Company expects to receive in exchange for these goods or services. In the Transition Networks and Net2Edge segments, revenue is recognized 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.

 

The Company has determined that the following performance obligations identified in its JDL Technologies, Inc. business unit 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, a series of distinct services that are substantially the same and that have the same pattern of transfer to the customer and are 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 this 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.

 

The Company has also identified the following performance obligations within its JDL Technologies business unit 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 as the Company has transferred control upon the service first being made available to the customer by the third party vendor, which are required to be presented on a net basis. 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.   

21

 

 

Results of Operations

 

2019 Compared to 2018

 

Consolidated sales were $50,906,000 in 2019, a 20% increase from sales of $42,369,000 in 2018. Net income from continuing operations in 2019 was $251,000, or $0.03 per share compared to net loss of $4,931,000 or ($0.54) per share in 2018.

 

Transition Networks Results

 

Transition Networks develops, markets, and sells active networking hardware devices. Characteristics of this business include a rapid pace of change in technologies and alternative solutions to our products. Transition Networks derives the majority of its revenues from new installations and network upgrade projects, which tend not to recur frequently. The core markets for these products are enterprise, service providers, government, and industrial users. In 2019, roughly 89% of Transition Networks revenue came from North America, but we continue to see opportunity for long-term growth outside of North America and we continue to invest resources in sales, marketing, and infrastructure to grow that business.

 

Transition Networks sales increased 23% to $44,860,000 in 2019 compared to $36,470,000 in 2018. Transition Networks organizes its sales force by vertical markets and segments its customers geographically. Sales by customer groups in 2019 and 2018 were:

 

 

 

Transition Networks Sales by Region

 

 

 

2019

 

 

2018

 

North America

 

$

39,748,000

 

 

$

31,059,000

 

Europe, Middle East, Africa (“EMEA”)

 

 

2,651,000

 

 

 

2,017,000

 

Rest of world (“ROW”)

 

 

2,461,000

 

 

 

3,394,000

 

 

 

$

44,860,000

 

 

$

36,470,000

 

 

The following table summarizes Transition Networks’ 2019 and 2018 sales by product group:

 

 

 

Transition Networks Sales by Product Group

 

 

 

2019

 

 

2018

 

Media converters

 

$

20,005,000

 

 

$

20,226,000

 

Ethernet switches and adapters

 

 

18,845,000

 

 

 

9,694,000

 

Other products

 

 

6,010,000

 

 

 

6,550,000

 

 

 

$

44,860,000

 

 

$

36,470,000

 

 

Sales in North America increased 28% or $8,689,000 in 2019 compared to 2018 due to deliveries for a major metropolitan smart city IoT project and other security and surveillance projects, partially offset by reduced spend from the federal government and a major telecommunications provider. International sales decreased $299,000, or 6%, due to the slower adoption of new PoE products in our rest of world region, partially offset by a significant project with a customer in our EMEA region for media converter products in the first quarter of 2019. Sales of media converters decreased 1% or $221,000 due to lower spend by the federal government. Sales of Ethernet switches and adapters increased 94% or $9,151,000 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 other products decreased 8% or $540,000, due to competitive pricing pressures and reduced purchases from a major telecommunications provider.

 

Gross profit increased 23% to $20,602,000 in 2019 compared to $16,695,000 in 2018. Gross margin as a percentage of sales remained flat at 46% in both 2019 and 2018 due to reduced costs for larger volume product purchases and leveraging fixed supply chain costs on higher sales volume, offset by higher inventory adjustments for aged inventory and higher royalties.

 

Selling, general and administrative expenses increased 10% to $15,036,000, or 34% of sales, in 2019 from $13,716,000, or 38% of sales in 2018 due to higher employee related expenses, higher marketing spend and an increase in research and development spend. Operating income was $5,566,000 in 2019 compared to operating income of $2,979,000 in 2018.

 

22

 

JDL Technologies, Inc. Results

 

Sales by JDL Technologies decreased 8% to $4,741,000 in 2019 compared to $5,134,000 in 2018. The following table summarizes JDL’s revenues by customer group in 2019 and 2018:

 

 

 

JDL Revenue by Customer Group

 

 

 

2019

 

 

2018

 

Education

 

$

1,926,000

 

 

$

2,651,000

 

Healthcare and commercial clients

 

 

2,815,000

 

 

 

2,483,000

 

 

 

$

4,741,000

 

 

$

5,134,000

 

 

Revenues from the education sector decreased $725,000 or 27% in 2019 due to fewer projects being funded in the fourth quarter as compared to the prior year. Federal and local funding for public school district investments in IT infrastructure and services varies substantially from year to year, and JDL Technologies expects to continue to experience notable swings in quarterly and annual revenues as a result. 

 

Revenue from JDL Technologies’ sales to small and medium-sized commercial businesses, which are primarily healthcare and commercial clients, increased by 13% or $332,000 due to ongoing efforts to expand managed services and infrastructure sales to these markets.

 

JDL gross profit increased 14% to $1,482,000 in 2019 compared to $1,304,000 in 2018. Gross margin as a percentage of sales increased to 31% in 2019 from 25% in 2018 due to a combination of price increases applied to monthly recurring contracts and the benefit of cost reduction efforts made in the prior year.

 

Selling, general and administrative expenses decreased 7% in 2019 to $1,485,000, or 31% of sales, compared to $1,603,000 in 2018, or 31% of sales due to cost saving measures put in place and lower facility costs driven by an office move during the first quarter of 2019. JDL reported an operating loss of $3,000 in 2019 compared to an operating loss of $299,000 in 2018.

 

JDL Technologies continues to aggressively leverage opportunities to provide managed services, cloud migration and virtualization services, HIPAA-compliant technology services, and other network and infrastructure services to the commercial and healthcare markets. This strategic, multiyear plan to reduce the impact of volatile government funding is beginning to produce favorable results.

 

Net2Edge Results

 

Net2Edge’s sales increased 37% to $2,330,000 in 2019 compared to $1,700,000 in 2018 due to revenue from established CSI accounts with new higher featured carrier Ethernet products. Gross profit increased 98% to $959,000 in 2019 compared to $485,000 in 2018. Gross margin as a percentage of sales increased to 41% in 2019 from 29% in 2018 due favorable product mix at a key carrier customer and higher costs to expedite product in 2018. Selling, general and administrative expenses decreased 24% to $2,486,000 in 2019 compared to $3,279,000 in 2018 due to a reduction in selling expenses and an increase in research and development credits received in the U.K. Net2Edge reported an operating loss of $1,527,000 in 2019 compared to a loss of $2,794,000 in 2018.

 

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 Suttle that are not considered discontinued operations. Each year the Company estimates revenue and headcount for each of its three principal business units and allocates a portion of shared service corporate overhead costs based on these metrics. Projected Suttle revenue and headcount were lower in 2019 and therefore the Company allocated a lower percentage of allocable costs to Suttle. Because Suttle is now treated as discontinued operations, these costs are now included within Other.

 

The Company’s income from continuing operations before income taxes was $235,000 in 2019 compared to a loss before income taxes of $4,527,000 in 2018. The Company’s effective income tax rate was -6.5% in 2019 compared to   -8.9% in 2018. The 2019 effective rate differed from the standard rate of 21% primarily due to the valuation allowances related to deferred tax assets, along with the impact of state income taxes, foreign tax rate differences, foreign losses not deductible for U.S. income tax purposes, and provisions for interest charges for uncertain income tax positions. See Note 12 for a reconciliation of the standard tax rate to the Company’s effective tax rate for 2019 and 2018.

 

23

 

 

Acquisitions and Dispositions

 

The Company is a growth-focused supplier of IoT and edge management products and IT services, providing connectivity infrastructure and services for global deployments of broadband networks. The Company continually searches for acquisition candidates with products that would enable the Company to better serve its target markets.

 

Effects of Inflation

 

Inflation has not had a significant effect on operations in recent years. The Company does not have long-term production or procurement contracts and has historically been able to adjust pricing and purchasing decisions to respond to inflationary pressures.

 

Liquidity and Capital Resources

 

As of December 31, 2019, the Company had approximately $24,057,000 in cash, cash equivalents and investments, compared to $11,056,000 at December 31, 2018. Of this amount, $9,440,000 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 had working capital of $38,052,000, consisting of current assets of approximately $49,402,000 and current liabilities of $11,350,000 at December 31, 2019 compared to working capital of $30,695,000, consisting of current assets of $42,335,000 and current liabilities of $11,640,000 at the end of 2018.

 

Cash flow provided by operating activities was approximately $10,231,000 in 2019 compared to $4,723,000 used in 2018. Significant working capital changes from 2018 to 2019 included a decrease in inventories of $2.5 million and in other assets of $1.3 million and an increase in accrued compensation and benefits of $1.1 million.

 

Cash used in investing activities was $5,222,000 in 2019 compared to $4,812,000 provided in 2018, due to proceeds from discontinued operations, offset by additional investment purchases.

 

Net cash used by financing activities was $1,450,000 in 2019 compared to $1,417,000 in 2018. Cash dividends paid on common stock decreased to $743,000 in 2019 ($0.08 per common share) from $1,493,000 in 2018 ($0.16 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 $715,000 in 2019 and $104,000 in 2018. The Company acquired $2,000 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 $1,420,000 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 December 31, 2019, there remained $626,000 under the 2019 Stock Repurchase Program. 

 

The Company has a $15,000,000 credit facility from Wells Fargo Bank. The Company had no outstanding obligations under this credit facility at December 31, 2019 and 2018. The total amount available for borrowings under this credit facility at December 31, 2019 was $7,335,000, based on the borrowing base calculation. Interest on borrowings on the credit line is currently set at LIBOR plus 2.0% (3.8% at December 31, 2019). 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, the Company has sufficient funds to meet its current anticipated operating and capital expenditure needs.

 

24

 

Contractual Obligation Summary

 

The following table summarizes our contractual obligations at December 31, 2019 and the effect these obligations are expected to have on our liquidity and cash flow in future periods:

 

 

 

Less than

 

 

 

 

 

 

 

 

More Than

 

 

 

One Year

 

 

1 – 3 Years

 

 

3 – 5 Years

 

 

5 Years

 

Operating leases

 

$

130,000

 

 

$

220,000

 

 

$

52,000

 

 

$

 

Total

 

$

130,000

 

 

$

220,000

 

 

$

52,000

 

 

$

 

 

As of December 31, 2019, the Company had no other material commitments (either cancelable or non-cancelable) for capital expenditures, short or long term debt, capital leases or other purchase commitments related to ongoing operations.

 

New Accounting Pronouncements

 

See Note 1 of the “Notes to the Consolidated Financial Statements” under Item 8 herein for a discussion of new accounting standards.

 

Off Balance Sheet Arrangements

 

None.

 

ITEM 7A.        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. Although products sold by our Net2Edge subsidiary are generally denominated in British pounds, Net2Edge sales represented less than 5% of our consolidated net sales in 2019 and 2018. Therefore, fluctuations in foreign currency exchange rates have historically not been material to the Company.

 

At December 31, 2019, our bank line of credit carried a LIBOR rate plus 2.0%. The Company’s investments are money market, certificates of deposit, commercial paper, and corporate notes and bonds types of investments that earn interest at prevailing market rates and as such do not have material risk exposure.

 

Based on the Company’s operations, in the opinion of management, the Company is not exposed to material future losses due to market risk.

 

The Company believes its risk of material loss due to fluctuations in foreign currency markets to be small, primarily resulting from its Net2Edge operations and sales.

 

25

 

 

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

(a) FINANCIAL STATEMENTS

 

REPORT OF MANAGEMENT

 

The management of Communications Systems, Inc. and its subsidiary companies is responsible for the integrity and objectivity of the financial statements and other financial information contained in the annual report. The financial statements and related information were prepared in accordance with accounting principles generally accepted in the United States of America and include amounts that are based on management’s informed judgments and estimates.

 

In fulfilling its responsibilities for the integrity of financial information, management maintains accounting systems and related controls. These controls provide reasonable assurance, at appropriate costs, that assets are safeguarded against losses and that financial records are reliable for use in preparing financial statements. Management recognizes its responsibility for conducting the Company’s affairs according to the highest standards of personal and corporate conduct.

 

The Audit and Finance Committee of the Board of Directors, comprised solely of outside directors, meets with the independent auditors and management periodically to review accounting, auditing, financial reporting and internal control matters. The independent auditors have free access to this committee, without management present, to discuss the results of their audit work and their opinion on the adequacy of internal financial controls and the quality of financial reporting.

 

/s/ Roger H.D. Lacey

 

/s/ Mark D. Fandrich

 

Roger H.D. Lacey

 

Mark D. Fandrich

 

Chief Executive Officer

 

Chief Financial Officer

 

 

26

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the stockholders and the board of directors of Communications Systems, Inc.:

 

Opinion on the Consolidated Financial Statements

 

We have audited the accompanying consolidated balance sheets of Communications Systems, Inc. and subsidiaries (the “Company”) as of December 31, 2019 and 2018, the related consolidated statements of income (loss) and comprehensive income (loss), changes in stockholders’ equity, and cash flows, for each of the two years in the period ended December 31, 2019, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.

 

Basis for Opinion

 

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

/s/ Baker Tilly Virchow Krause, LLP  
We have served as the Company’s auditor since 2017.  
Minneapolis, Minnesota  
March 17, 2020  

 

27

 

COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

 

 

December 31

 

 

December 31

 

 

 

2019

 

 

2018

 

ASSETS                

CURRENT ASSETS:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

13,928,504

 

 

$

11,056,426

 

Restricted cash

 

 

679,006

 

 

 

 

Investments

 

 

9,449,650

 

 

 

 

Trade accounts receivable, less allowance for doubtful accounts of $154,000 and $93,000, respectively

 

 

10,242,405

 

 

 

9,593,328

 

Inventories

 

 

8,531,112

 

 

 

11,998,638

 

Prepaid income taxes

 

 

72,994

 

 

 

148,036

 

Other current assets

 

 

1,160,865

 

 

 

1,462,691

 

Current assets held for sale

 

 

5,337,274

 

 

 

8,075,973

 

TOTAL CURRENT ASSETS

 

 

49,401,810

 

 

 

42,335,092

 

 

 

 

 

 

 

 

 

 

PROPERTY, PLANT AND EQUIPMENT,  net

 

 

8,238,089

 

 

 

8,847,091

 

OTHER ASSETS:

 

 

 

 

 

 

 

 

Investments

 

 

250,000

 

 

 

 

Deferred income taxes

 

 

9,534

 

 

 

19,068

 

Right of use asset

 

 

367,909

 

 

 

 

Other assets

 

 

 

 

 

4,765

 

Noncurrent assets held for sale

 

 

883,370

 

 

 

2,115,148

 

TOTAL OTHER ASSETS

 

 

1,510,813

 

 

 

2,138,981

 

TOTAL ASSETS

 

$

59,150,712

 

 

$

53,321,164

 

                 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

 

 

Accounts payable

 

$

3,720,445

 

 

$

4,086,205

 

Accrued compensation and benefits

 

 

3,517,331

 

 

 

2,892,199

 

Lease liability

 

 

115,935

 

 

 

 

Other accrued liabilities

 

 

2,602,752

 

 

 

3,096,694

 

Dividends payable

 

 

200,363

 

 

 

184,541

 

Current liabilities held for sale

 

 

1,193,218

 

 

 

1,380,131

 

TOTAL CURRENT LIABILITIES

 

 

11,350,044

 

 

 

11,639,770

 

                 

LONG TERM LIABILITIES:

 

 

 

 

 

 

 

 

Long-term compensation plans

 

 

164,348

 

 

 

 

Uncertain tax positions

 

 

 

 

 

28,267

 

Lease liability

 

 

244,038

 

 

 

 

TOTAL LONG-TERM LIABILITIES

 

 

408,386

 

 

 

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; 9,252,749 and 9,158,438 shares issued and outstanding, respectively

 

 

462,637

 

 

 

457,922

 

Additional paid-in capital

 

 

42,977,914

 

 

 

42,680,499

 

Retained earnings (accumulated deficit)

 

 

4,649,395

 

 

 

(734,001

)

Accumulated other comprehensive loss

 

 

(697,664

)

 

 

(751,293

)

TOTAL STOCKHOLDERS’ EQUITY

 

 

47,392,282

 

 

 

41,653,127

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

 

$

59,150,712

 

 

$

53,321,164

 

 

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

 

28

 

COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS)

 

 

 

Year Ended December 31

 

 

 

2019

 

 

2018

 

 

 

 

 

 

 

 

 

 

Sales

 

$

50,906,179

 

 

$

42,369,232

 

Cost of sales

 

 

28,720,367

 

 

 

24,747,115

 

Gross profit

 

 

22,185,812

 

 

 

17,622,117

 

Operating expenses:

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

 

22,176,598

 

 

 

22,372,765

 

Total operating expenses

 

 

22,176,598

 

 

 

22,372,765

 

Operating income (loss) from continuing operations

 

 

9,214

 

 

 

(4,750,648

)

Other income (expenses):

 

 

 

 

 

 

 

 

Investment and other income

 

 

284,944

 

 

 

288,829

 

Loss on sale of assets

 

 

(20,368

)

 

 

(26,445

)

Interest and other expense

 

 

(38,440

)

 

 

(38,355

)

Other income,  net

 

 

226,136

 

 

 

224,029

 

Operating income (loss) from continuing operations before income taxes

 

 

235,350

 

 

 

(4,526,619

)

Income tax (benefit) expense

 

 

(15,269

)

 

 

404,386

 

Net income (loss) from continuing operations

 

 

250,619

 

 

 

(4,931,005

)

Net income (loss) from discontinued operations, net of tax

 

 

6,218,430

 

 

 

(1,860,730

)

Net income (loss)

 

 

6,469,049

 

 

 

(6,791,735

)

Other comprehensive (loss) income, net of tax:

 

 

 

 

 

 

 

 

Unrealized (losses)/gains on available-for-sale securities

 

 

(1,793

)

 

 

1,061

 

Foreign currency translation adjustment

 

 

55,422

 

 

 

(138,975

)

Total other comprehensive income (loss)

 

 

53,629

 

 

 

(137,914

)

Comprehensive income (loss)

 

$

6,522,678

 

 

$

(6,929,649

)

                 

Basic net income (loss) per share:

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.03

 

 

$

(0.54

)

Discontinued operations

 

 

0.67

 

 

 

(0.21

)

 

 

$

0.70

 

 

$

(0.75

)

Diluted net income (loss) per share:

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.03

 

 

$

(0.54

)

Discontinued operations

 

 

0.66

 

 

 

(0.21

)

 

 

$

0.69

 

 

$

(0.75

)

 

 

 

 

 

 

 

 

 

Weighted Average Basic Shares Outstanding

 

 

9,272,259

 

 

 

9,108,777

 

Weighted Average Dilutive Shares Outstanding

 

 

9,337,422

 

 

 

9,108,777

 

 

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

 

29

 

COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Retained

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

Earnings

 

 

Other

 

 

 

 

 

 

Common Stock

 

 

Paid-in

 

 

(Accumulated

 

 

Comprehensive

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit)

 

 

Income (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

 

 

 

 

 

 

 

 

 

 

 

(6,791,735

)

 

 

 

 

 

(6,791,735

)

Issuance of common stock under Employee Stock Purchase Plan

 

 

29,614

 

 

 

1,481

 

 

 

100,507

 

 

 

 

 

 

 

 

 

101,988

 

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

 

 

 

 

 

 

 

 

190,721

 

 

 

 

 

 

 

 

 

190,721

 

Other share retirements

 

 

(8,017

)

 

 

(401

)

 

 

(37,387

)

 

 

9,325

 

 

 

 

 

 

(28,463

)

Shareholder dividends ($0.14 per share)

 

 

 

 

 

 

 

 

 

 

 

(1,280,262

)

 

 

 

 

 

(1,280,262

)

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(137,914

)

 

 

(137,914

)

BALANCE AT DECEMBER 31, 2018

 

 

9,158,438

 

 

 

457,922

 

 

 

42,680,499

 

 

 

(734,001

)

 

 

(751,293

)

 

 

41,653,127

 

Net income

 

 

 

 

 

 

 

 

 

 

 

6,469,049

 

 

 

 

 

 

6,469,049

 

Issuance of common stock under Employee Stock Purchase Plan

 

 

34,469

 

 

 

1,723

 

 

 

93,437

 

 

 

 

 

 

 

 

 

95,160

 

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

 

 

156,525

 

 

 

7,826

 

 

 

612,424

 

 

 

 

 

 

 

 

 

620,250

 

Share based compensation

 

 

 

 

 

 

 

 

412,776

 

 

 

 

 

 

 

 

 

412,776

 

Other share retirements

 

 

(229,509

)

 

 

(11,475

)

 

 

(1,084,217

)

 

 

(326,556

)

 

 

 

 

 

(1,422,248

)

Shareholder dividends ($0.08 per share)

 

 

 

 

 

 

 

 

 

 

 

(759,097

)

 

 

 

 

 

(759,097

)

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

53,629

 

 

 

53,629

 

BALANCE AT DECEMBER 31, 2019

 

 

9,252,749

 

 

$

462,637

 

 

$

42,977,914

 

 

$

4,649,395

 

 

$

(697,664

)

 

$

47,392,282

 

 

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

 

30

 

 

COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

Year Ended December 31

 

 

 

2019

 

 

2018

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

6,469,049

 

 

$

(6,791,735

)

Net income (loss) from discontinued operations, net of tax

 

 

6,218,430

 

 

 

(1,860,730

)

Net income (loss) from continuing operations

 

 

250,619

 

 

 

(4,931,005

)

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

1,032,797

 

 

 

1,261,235

 

Share based compensation

 

 

412,776

 

 

 

190,721

 

Deferred taxes

 

 

9,534

 

 

 

19,068

 

Loss on sale of assets

 

 

20,368

 

 

 

26,445

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Trade accounts receivables

 

 

(618,663

)

 

 

(2,270,429

)

Inventories

 

 

2,469,800

 

 

 

(6,163,982

)

Prepaid income taxes

 

 

75,298

 

 

 

343,381

 

Other assets

 

 

1,348,481

 

 

 

(924,952

)

Accounts payable

 

 

(381,293

)

 

 

1,062,360

 

Accrued compensation and benefits

 

 

1,057,428

 

 

 

888,376

 

Other accrued liabilities

 

 

(515,279

)

 

 

1,690,598

 

Income taxes payable

 

 

(28,267

)

 

 

24,202

 

Net cash provided by (used in) operating activities - continuing operations

 

 

5,133,599

 

 

 

(8,783,982

)

Net cash provided by operating activities - discontinued operations

 

 

5,097,537

 

 

 

4,061,250

 

Net cash provided by (used in) operating activities

 

 

10,231,136

 

 

 

(4,722,732

)

                 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(424,988

)

 

 

(693,659

)

Purchases of investments

 

 

(18,673,530

)

 

 

(6,580,917

)

Proceeds from the sale of fixed assets

 

 

 

 

 

6,400

 

Proceeds from the sale of investments

 

 

8,972,087

 

 

 

12,122,722

 

Net cash (used in) provided by investing activities - continuing operations

 

 

(10,126,431

)

 

 

4,854,546

 

Net cash provided by (used in) investing activities - discontinued operations

 

 

4,904,456

 

 

 

(42,605

)

Net cash (used in) provided by investing activities

 

 

(5,221,975

)

 

 

4,811,941

 

                 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Cash dividends paid

 

 

(743,276

)

 

 

(1,492,871

)

Proceeds from issuance of common stock, net of shares withheld

 

 

715,410

 

 

 

75,700

 

Purchase of common stock

 

 

(1,422,248

)

 

 

 

Net cash used in financing activities

 

 

(1,450,114

)

 

 

(1,417,171

)

                 

EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH

 

 

(7,963

)

 

 

(69,275

)

                 

NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH

 

 

3,551,084

 

 

 

(1,397,237

)

                 

CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT BEGINNING OF YEAR

 

 

11,056,426

 

 

 

12,453,663

 

                 

CASH, CASH EQUIVALENTS AND RESTRICTED CASH AT END OF YEAR

 

$

14,607,510

 

 

$

11,056,426

 

                 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

 

 

 

 

 

 

 

 

Income taxes refunded

 

$

(73,151

)

 

$

(32,596

)

Interest paid

 

 

37,974

 

 

 

38,030

 

Dividends declared not paid

 

 

200,363

 

 

 

184,541

 

Capital expenditures in accounts payable

 

 

10,663

 

 

 

 

Operating right of use assets obtained in exchange for lease obligations

 

 

449,995

 

 

 

 

 

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

 

31

 

COMMUNICATIONS SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2019 and 2018

 

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Description of business: Communications Systems, Inc. (herein collectively called “CSI,” “our” or the “Company”) is a Minnesota corporation organized in 1969 that operates directly and through its subsidiaries located in the United States and the United Kingdom. CSI is principally engaged through its Transition Networks business unit in the manufacture and sale of Ethernet switches, core media conversion products, and other connectivity and data transmission products. Through its JDL Technologies business unit the Company provides technology solutions including virtualization, managed services, wired and wireless network design and implementation, HIPAA-compliant IT services, and converged infrastructure configuration and deployment. Through its Net2Edge business unit, the Company enables telecommunications carriers to connect legacy networks to high-speed networks and services.

 

The Company classifies its businesses into three segments that correspond to these three 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.

 

Principles of consolidation: The consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany transactions and accounts have been eliminated.

 

Use of estimates: The presentation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company uses estimates based on the best information available in recording transactions and balances resulting from operations. Actual results could differ from those estimates. The Company’s estimates consist principally of reserves for doubtful accounts, sales returns, warranty costs, asset impairment evaluations, accruals for compensation plans, self-insured medical and dental accruals, lower of cost or market inventory adjustments, provisions for income taxes and deferred taxes, and depreciable lives of fixed assets.

 

Cash equivalents: For purposes of the consolidated statements of cash flows, the Company considers all highly liquid investments with a maturity of three months or less at the time of purchase to be cash equivalents. As of December 31, 2019, the Company had $13,929,000 in cash and cash equivalents. Of this amount, $8,761,000 was invested in short-term money market funds that are not considered to be bank deposits and are not insured or guaranteed by the federal deposit insurance company (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 is operating cash and certificates of deposit which are fully insured through the FDIC.

 

Investments: Investments consist of certificates of deposit, corporate notes and bonds, and commercial paper that are traded on the open market and are classified as available-for-sale. Available-for-sale investments are reported at fair value with unrealized gains and losses excluded from operations and reported as a separate component of stockholders’ equity, net of tax (see Accumulated other comprehensive loss below).

 

Inventories: Inventories are stated at the lower of cost or net realizable value. Cost is determined by the first-in, first-out method. Provision to reduce inventories to the lower of cost or net realizable value is made based on a review of excess and obsolete inventories, estimates of future sales, examination of historical consumption rates and the related value of component parts.

 

32

 

 

Property, plant and equipment: Property, plant and equipment are recorded at cost. Depreciation is computed using the straight-line method. Depreciation included in cost of sales and selling, general and administrative expenses for continuing operations was $1,028,000 and $1,249,000 for 2019 and 2018, respectively. Maintenance and repairs are charged to operations and additions or improvements are capitalized. Items of property sold, retired or otherwise disposed of are removed from the asset and accumulated depreciation accounts and any gains or losses on disposal are reflected in operations.

 

Intangible Assets: Intangible assets with indefinite useful lives are not amortized, but are tested at least annually for impairment.

 

Recoverability of long-lived assets: The Company reviews its long-lived assets periodically when impairment indicators exist as required under generally accepted accounting principles. Potential impairment is determined by comparing the carrying value of the assets with expected net cash flows expected to be provided by operating activities of the business or related products. If the sum of the expected future net cash flows is less than the carrying value, an impairment loss would be measured by comparing the amount by which the carrying value exceeds the fair value of the asset.

 

Warranty:  The Company 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 following table presents the changes in the Company’s warranty liability, included in other accrued liabilities in the consolidated balance sheets, for the years ended December 31, 2019 and 2018, which relate to normal product warranties and a five-year obligation to provide for potential future liabilities for certain network equipment sales:

 

 

 

Year Ended December 31

 

 

 

2019

 

 

2018

 

Beginning balance

 

$

554,000

 

 

$

543,000

 

Amounts charged to expense

 

 

10,000

 

 

 

97,000

 

Actual warranty costs paid

 

 

(51,000

)

 

 

(86,000

)

Ending balance

 

$

513,000

 

 

$

554,000

 

 

Accumulated other comprehensive loss:  The components of accumulated other comprehensive loss are as follows:

 

 

Foreign Currency Translation

 

 

Unrealized (loss)/gain on securities

 

 

Accumulated Other Comprehensive Loss

 

December 31, 2017

 

$

(625,000

)

 

$

12,000

 

 

$

(613,000

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net current period change

 

 

(139,000

)

 

 

1,000

 

 

 

(138,000

)

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

$

(764,000

)

 

$

13,000

 

 

$

(751,000

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net current period change

 

 

55,000

 

 

 

(2,000

)

 

 

53,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2019

 

$

(709,000

)

 

$

11,000

 

 

$

(698,000

)

 

Revenue recognition: The Company’s manufacturing operations (Transition Networks and Net2Edge) recognize revenue 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. Sales are made directly to customers and through distributors. Payment terms for distributors are consistent with the terms of the Company’s direct customers. The Company records a provision for sales returns, sales incentives and warranty costs at the time of the sale based on historical experience and current trends.

 

33

 


The Company has determined that the following performance obligations identified in its JDL Technologies, Inc. business unit 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, a series of distinct services that are substantially the same and that have the same pattern of transfer to the customer and are 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 this 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.

 

The Company has also identified the following performance obligations within its JDL Technologies business unit 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 agreed upon 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 as the Company has transferred control upon the service first being made available to the customer by the third party vendor, which are required to be presented on a net basis. 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. See Note 2 for further discussion regarding revenue recognition.

 

Research and development: Research and development costs consist of outside testing services, equipment and supplies associated with enhancing existing products and developing new products. Research and development costs are expensed when incurred and totaled $3,600,000 in 2019 and $3,542,000 in 2018.

 

Employee Retirement Benefits: The Company has an Employee Savings Plan (401(k)) and matches a percentage of employee contributions up to six percent of compensation. Contributions to the plan in 2019 and 2018 were $401,000 and $450,000, respectively.

 

Net income per share: Basic net income per common share is based on the weighted average number of common shares outstanding during each year. Diluted net income per common share adjusts for 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 a dilutive effect of 65,163 shares for 2019 and no dilutive effect in 2018. The Company calculates the dilutive effect of outstanding options and unvested shares using the treasury stock method. Options totaling 860,539 were excluded from the calculation of diluted earnings per share for year ended December 31, 2019, because the exercise price was greater than the average market price of common stock during the year and deferred stock awards totaling 178,278 shares were not included because of unmet performance conditions. Due to the net loss in 2018, there was no dilutive impact from outstanding stock options or unvested shares. Options totaling 1,320,492 would have been excluded from the calculation of diluted earnings per share for year ended December 31, 2018, because the exercise price was greater than the average market price of common stock during the year and deferred stock awards totaling 265,491 shares would not have been included because of unmet performance conditions.

 

Share based compensation: The Company accounts for share based compensation awards on a fair value basis. The estimated grant date fair value of each stock-based award is recognized in income over the requisite service period (generally the vesting period). The estimated fair value of each option is calculated using the Black-Scholes option-pricing model.   

 

Accounting standards issued:

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 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.

34

 

 

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement.” This new standard requires changes to the disclosure requirements for fair value measurements for certain Level 3 items and specifies that some of the changes must be applied prospectively, while others should be applied retrospectively. This standard is effective for public business entities in fiscal years beginning after December 15, 2019, and for interim periods within those fiscal years, with early adoption permitted. We are currently evaluating the impact of the adoption of ASU 2018-13 on our consolidated financial statements.

 

Accounting standards adopted:

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. 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.

 

NOTE 2 – REVENUE RECOGNITION

 

In accordance with Accounting Standards Codification (“ASC”) 606, revenue is recognized when a customer obtains control of promised goods or services. The amount of revenue recognized reflects the consideration that the Company expects to receive in exchange for these goods or services.

 

Transition Networks

 

The Company’s Transition Networks business unit develops and manufactures Power over Ethernet (PoE) switches, media converters, network interface cards (NICs), Ethernet switches and other connectivity products that offer the ability to affordably integrate the benefits of fiber optics into any data network as well as provide connectivity and power to end devices in the IoT ecosystem. Transition sells its products through distributors, resellers, integrators, and OEMs.

 

The Company has determined that revenue recognition for its Transition Networks business unit 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’s JDL Technologies, Inc. business unit is a managed service provider and a value-added reseller supplying IT solutions focused on IT service and support management; network design, deployment and integration; cloud, hosted and virtualized services; and network operations center management. Major technology solutions include networking, virtualization, cloud and infrastructure services, most of which are available under JDL managed service contracts.

 

The Company has determined that the following performance obligations identified in its JDL Technologies, Inc. business unit 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, a series of distinct services that are substantially the same and that have the same pattern of transfer to the customer and are 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 this 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.

 

The Company has also identified the following performance obligations within its JDL Technologies business unit 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 agreed upon 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 as the Company has transferred control upon the service first being made available to the customer by the third party vendor, which are required to be presented on a net basis. 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.

35

 

 

Net2Edge Limited

 

The Company’s Net2Edge division manufactures and markets Ethernet based network access devices. The Company principally sells its products through approved partners and integrators outside the United States. The Company has determined that the performance obligation in the Net2Edge division is recognized at a point in time, upon the delivery of its connectivity infrastructure and data transmission products.

 

Significant Judgments

 

To determine the transaction price, the Company estimates the amount of variable consideration at the outset of the contract, depending on the facts and circumstances relative to the contract. The Company may provide credits or incentives to its customers, which are accounted for as either variable consideration or consideration payable to the customer. The Company estimates product returns based on historical return rates. The Company constrains (reduces) the estimates of variable consideration such that it is probable that a significant revenue reversal of previously recognized revenue will not occur throughout the life of the contract. When determining if variable consideration should be constrained, management considers whether there are factors outside the Company’s control that could result in a significant reversal of revenue. In making these assessments, the Company considers the likelihood and magnitude of a potential reversal of revenue. The Company will assess if any incentives it offers to its customer is a consideration payable. The Company accounts for consideration payable to a customer as a reduction of the transaction price, and therefore, of revenue.  For contracts with more than one performance obligation, the consideration is allocated between separate products and services based on their stand-alone selling prices. Judgment is required to determine standalone selling prices for each distinct performance obligation. The Company generally determines standalone selling prices based on the actual prices charged to customers and has an established range of amounts that fall within stand-alone selling price for its distinct performance obligations. The Company evaluates this range quarterly.

 

Costs to Obtain or Fulfill a Contract

 

The Company evaluates “Other Assets and Deferred Costs” (ASC 340-40), for the accounting for certain costs to obtain and fulfill contracts (or, in some cases, an anticipated contract) with a customer.  ASC 340-40 is applicable only to incremental contract costs, those that an entity would not have incurred if the contract had not been obtained, and requires the capitalization of these costs as well as provides guidance on the amortization and impairment considerations. The Company elects the practical expedient and expenses certain costs to obtain contracts when applicable. There were no material costs to obtain a contract in the years ended December 31, 2019 and 2018.

 

Transaction Price Allocated to Future Performance Obligations

 

To determine the allocation of the transaction price and amounts allocated to the performance obligations, the Company first determined the standalone selling price for each distinct performance obligation in the contract in order to determine the allocations of the transaction price in proportion to the standalone selling price for each performance obligation in the contract in accordance with ASC 606-10-32-31 and 32-33. Judgment is required to determine standalone selling price for each distinct performance obligation. The Company generally determines standalone selling prices based on the actual prices charged to customers and has an established range of amounts that fall within stand-alone selling price for its distinct performance obligations. The Company evaluates this range quarterly.

 

Practical Expedients and Exemptions

 

The Company adopted various practical expedients and policy elections related to the accounting for significant finance components, sales taxes, shipping and handling, costs to obtain a contract and immaterial promised goods or services. The practical expedient to disclose the unfulfilled performance obligations was not made as they are expected to be fulfilled within one year.

 

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.

36

 

 

For Transition Networks, we analyze revenue by region and product group, which is as follows for the years ended December 31, 2019 and 2018:

 

 

 

Transition Networks Revenue by Region

 

 

 

 

 

 

 

2019

 

 

2018

 

North America

 

$

39,748,000

 

 

$

31,059,000

 

Europe, Middle East, Africa (“EMEA”)

 

 

2,651,000

 

 

 

2,017,000

 

Rest of World

 

 

2,461,000

 

 

 

3,394,000

 

 

 

$

44,860,000

 

 

$

36,470,000

 

 

 

 

Transition Networks Revenue by Product Group

 

 

 

 

 

 

 

2019

 

 

2018

 

Media converters

 

$

20,005,000

 

 

$

20,226,000

 

Ethernet switches and adapters

 

 

18,845,000

 

 

 

9,694,000

 

Other products

 

 

6,010,000

 

 

 

6,550,000

 

 

 

$

44,860,000

 

 

$

36,470,000

 

 

For JDL, we analyze revenue by customer group, which is as follows for the years ended December 31, 2019 and 2018:

 

 

 

JDL Revenue by Customer Group

 

 

 

2019

 

 

2018

 

Education

 

$

1,926,000

 

 

$

2,651,000

 

Healthcare and commercial clients

 

 

2,815,000

 

 

 

2,483,000

 

 

 

$

4,741,000

 

 

$

5,134,000

 

 

The Company does not currently analyze revenue for Net2Edge on a disaggregated basis. Revenues from Net2Edge were $2,330,000 and $1,700,000 for the years ended December 31, 2019 and 2018, respectively.

 

Contract Balances

 

The Company does not have material costs to obtain a contract or material contract liabilities.

 

NOTE 3 – LEASES

 

In February 2016, 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.

 

The Company adopted this standard 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 consolidated balance sheets, consolidated statement of income (loss) and comprehensive income (loss) or consolidated statements of cash flows.

37

 

 

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 December 31, 2019, total ROU assets and operating lease liabilities were $368,000 and $360,000, respectively. All operating lease expense is recognized on a straight-line basis over the lease term. In the years ended December 31, 2019 and 2018, the Company recognized $124,000 and $223,000 in lease expense, respectively.

 

Information related to the Company’s ROU assets and related lease liabilities were as follows:

 

 

Year Ended
December 31, 2019

 

 

 

 

 

 

Cash paid for operating leases

 

$

112,000

 

Right-of-use assets obtained in exchange for new operating lease obligations (1)

 

 

450,000

 

 

 

As of
December 31, 2019

 

Weighted-average remaining lease term

 

 

3.3 years

 

Weighted-average discount rate

 

 

4.5

%

 

(1)

Includes $280,000 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 December 31, 2019 were as follows:

 

2020   $130,000 
2021    131,000 
2022    89,000 
2023    48,000 
2024    4,000 

Total lease payments

    402,000 

Less imputed interest

    (42,000)

Total operating lease liabilities

   $360,000 

 

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 

 

38

 

As of December 31, 2019, the Company does not have any additional future operating lease obligations that have not yet commenced.

 

NOTE 4 – DISCONTINUED OPERATIONS

 

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 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 related to the FutureLink™ Fiber business line until September 30, 2019, to ensure seamless supply to the customer base.

 

On March 11, 2020, the Company 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 and customer relationships to Oldcastle Infrastructure, Inc. (“Oldcastle”) for $8,000,000. Oldcastle, a wholly-owned subsidiary of Ireland based CRH PLC, will operate the majority of the acquired Suttle business through its wholly-owned subsidiary, Primex Technologies, Inc.  Concurrent with the closing of the transaction, the Company and Oldcastle entered into a Transition Services Agreement (“TSA”) under which Suttle will continue to manufacture products for Oldcastle for six months, to ensure seamless supply and quality assurance to the existing customer base. Concurrently with the closing of the transaction and the TSA, the Company and Oldcastle also entered into a lease agreement under which Oldcastle will lease 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 are classified as held for sale in the consolidated balance sheets.  The presentation of discontinued operations has been retrospectively applied to all prior periods presented.

 

The assets and liabilities of this discontinued operation that are classified as held for sale are as follows:

 

 

 

December 31, 2019

 

 

December 31, 2018

 

 

 

 

 

 

 

 

 

 

Trade accounts receivable

 

$

2,235,000

 

 

$

3,808,000

 

Inventories

 

 

3,009,000

 

 

 

4,177,000

 

Other current assets

 

 

93,000

 

 

 

91,000

 

Total current assets

 

$

5,337,000

 

 

$

8,076,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Property, plant, and equipment

 

$

883,000

 

 

$

2,115,000

 

Total noncurrent assets

 

$

883,000

 

 

$

2,115,000

 

 

 

 

 

 

 

 

 

 

Total assets held for sale

 

$

6,220,000

 

 

$

10,191,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

1,111,000

 

 

$

1,309,000

 

Other accrued liabilities

 

 

82,000

 

 

 

71,000

 

Total liabilities held for sale

 

$

1,193,000

 

 

$

1,380,000

 

 

The financial results of the discontinued operations are as follows:

39

 

 

 

 

Year Ended December 31

 

 

 

2019

 

 

2018

 

 

 

 

 

 

 

 

 

 

Sales

 

$

18,879,000

 

 

$

23,394,000

 

Cost of sales

 

 

12,965,000

 

 

 

19,709,000

 

Selling, general and administrative expenses

 

 

2,684,000

 

 

 

5,129,000

 

Restructuring expenses

 

 

 

 

 

364,000

 

(Gain) loss on sale of assets

 

 

(2,990,000

)

 

 

63,000

 

Other income

 

 

 

 

 

(11,000

)

Operating income before income taxes

 

 

6,220,000

 

 

 

(1,860,000

)

Income tax expense

 

 

2,000

 

 

 

1,000

 

Income (loss) from discontinued operations

 

$

6,218,000

 

 

$

(1,861,000

)

 

During the year ended December 31, 2018, the Company recorded $364,000 in restructuring expense. This consisted of severance and related benefits costs due to organizational restructuring within the Suttle business segment. The Company paid $364,000 in restructuring charges during 2019 and had no restructuring accruals recorded at December 31, 2019.

 

NOTE 5 –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 equivalents or short and long term investments as of December 31, 2019 and December 31, 2018:

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

$

 

 

$

 

 

40

 

 

The Company tests for other than temporary losses on a quarterly basis and has considered the unrealized losses indicated above to be temporary in nature. 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. All unrealized losses as of December 31, 2019 were in a continuous loss position for less than twelve months and are not deemed to be other than temporarily impaired as of December 31, 2019.

 

The Company did not recognize any gross realized gains or gross realized losses during the years ending December 31, 2019 and 2018, respectively. If the Company had realized gains or losses, they would be included within investment and other income in the accompanying consolidated statements of income (loss).

 

NOTE 6 - INVENTORIES

 

Inventories consist of:

 

 

 

 

 

 

 

 

 

December 31

 

 

 

2019

 

 

2018

 

Finished goods

 

$

6,728,000

 

 

$

7,140,000

 

Raw and processed materials

 

 

1,803,000

 

 

 

4,859,000

 

 

 

$

8,531,000

 

 

$

11,999,000

 

 

NOTE 7 - PROPERTY, PLANT AND EQUIPMENT

 

Property, plant and equipment and the estimated useful lives are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

Estimated

 

 

December 31

 

 

 

useful life

 

 

2019

 

 

2018

 

Land

 

 

 

 

 

$

2,965,000

 

 

$

2,965,000

 

Buildings and improvements

 

 

3-40 years

 

 

 

8,727,000

 

 

 

8,782,000

 

Machinery and equipment

 

 

3-15 years

 

 

 

9,347,000

 

 

 

11,406,000

 

Furniture and fixtures

 

 

3-10 years

 

 

 

3,628,000

 

 

 

3,750,000

 

Construction in progress

 

 

 

 

 

 

 

 

 

127,000

 

 

 

 

 

 

 

 

24,667,000

 

 

 

27,030,000

 

Less accumulated depreciation

 

 

 

 

 

 

(16,429,000

)

 

 

(18,183,000

)

 

 

 

 

 

 

$

8,238,000

 

 

$

8,847,000

 

 

NOTE 8 –INTANGIBLE ASSETS

 

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

 

 

 

December 31, 2019

 

 

 

Gross Carrying Amount

 

 

Accumulated Amortization

 

 

Impairment
Loss