10-K 1 pcti-10k_20161231.htm 10-K pcti-10k_20161231.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

Form 10-K

 

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

For the fiscal year ended December 31, 2016

OR

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

For the transition period from           to           

Commission File Number 000-27115

 

PCTEL, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

 

Delaware

 

77-0364943

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification Number)

 

 

 

471 Brighton Drive,

Bloomingdale IL

 

60108

(Address of Principal Executive Office)

 

(Zip Code)

 

(630) 372-6800

(Registrant's Telephone Number, Including Area Code)

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

 

Title of each class

 

Name of each exchange on which registered

Common Stock, $.001 Par Value Per Share

 

The NASDAQ Global Select Market

 

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

None

 

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

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

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

Indicate by checkmark whether the registrant has submitted electronically and posted on the Company’s website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T ((§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was acquired to submit and post such files)).    Yes     No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definition of “large accelerated filer”, "accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.:

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  (Do not check if a smaller reporting company)

  

Smaller reporting company

 

 

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

As of June 30, 2016, the last business day of the registrant's most recently completed second fiscal quarter, there were 17,324,506 shares of the registrant's common stock outstanding, and the aggregate market value of such shares held by non-affiliates of the registrant (based upon the closing sale price of such shares on the NASDAQ Global Select Market on June 30, 2016) was approximately $81,598,423. Shares of the registrant's common stock held by each executive officer and director and by each entity that owns 5% or more of the registrant's outstanding common stock have been excluded because such persons may be deemed to be affiliates.  This determination of affiliate status is not necessarily a conclusive determination for any other purposes.

17,332,602 shares of common stock were issued and outstanding as of March 10, 2017.

Documents Incorporated by Reference

Certain sections of the registrant's definitive proxy statement relating to its 2017 Annual Stockholders' Meeting to be held on June 21, 2017 are incorporated by reference into Part III of this Annual Report on Form 10-K.  The Company intends to file its proxy statement within 120 days after the end of its fiscal year end to which this report relates.

 

 

 

 


PCTEL, Inc.

Form 10-K

For the Fiscal Year Ended December 31, 2016

TABLE OF CONTENTS

 

PART I

 

 

 

Item 1

Business

 

3

Item 1A

Risk Factors

 

5

Item 1B

Unresolved Staff Comments

 

10

Item 2

Properties

 

11

Item 3

Legal Proceedings

 

11

Item 4

Mine Safety Disclosures

 

12

 

 

 

 

PART II

 

 

 

Item 5

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

 

13

Item 6

Selected Financial Data

 

14

Item 7

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

 

16

Item 7A

Quantitative and Qualitative Disclosures about Market Risk

 

27

Item 8

Financial Statements and Supplementary Data

 

29

Item 9

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

66

Item 9A

Controls and Procedures

 

66

Item 9B

Other Information

 

66

 

 

 

 

PART III

 

 

 

Item 10

Directors, Executive Officers and Corporate Governance

 

67

Item 11

Executive Compensation

 

67

Item 12

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

 

67

Item 13

Certain Relationships and Related Transactions, and Director Independence

 

67

Item 14

Principal Accountant Fees and Services

 

67

 

 

 

 

PART IV

 

 

 

Item 15

Exhibits and Financial Statement Schedules

 

68

Item 16

Form 10-K Summary

 

68

 

Schedule II - Valuation and Qualifying Accounts

 

68

 

Index to Exhibit

 

69

 

Signatures

 

72

 

 

 

 

 

 

 

 

 

2


PART I

Item 1:  Business

This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements include, among other things, statements concerning our future operations, financial condition and prospects, and business strategies. The words “believe”, “expect”, “anticipate” and other similar expressions generally identify forward-looking statements. Investors in our common stock are cautioned not to place undue reliance on these forward-looking statements. These forward-looking statements are subject to substantial risks and uncertainties that could cause our future business, financial condition, or results of operations to differ materially from the historical results or currently anticipated results. Investors should carefully review the information contained in Item 1A. Risk Factors and elsewhere in, or incorporated by reference into, this Annual Report on Form 10-K.  Other factors not currently anticipated may also materially and adversely affect our results of operations, cash flows and financial position. There can be no assurance that future results will meet expectations. While we believe that the forward-looking statements in this Annual Report on Form 10-K are reasonable, investors should not place undue reliance on any forward-looking statements. In addition, these statements speak only as of the date made. We do not undertake, and expressly disclaim any obligation to update or alter any statements whether as a result of new information, future events or otherwise, except as may be required by applicable law.

Overview

PCTEL, Inc. (“PCTEL”, the “Company”, “we”, “ours”, and “us”) delivers Performance Critical TELecom technology solutions to the wireless industry. We are a leading global supplier of wireless network antenna and testing solutions. PCTEL Connected Solutions designs and manufactures precision antennas. PCTEL antennas are deployed in small cells, enterprise Wi-Fi access points, fleet management and transit systems, and in network equipment and devices for the Industrial Internet of Things (“IIoT”). PCTEL RF Solutions provides test tools and engineering services that improve the performance of wireless networks globally. Mobile operators, neutral hosts, and equipment manufacturers rely on PCTEL to analyze, design, and optimize next generation wireless networks.

PCTEL was incorporated in California in 1994 and reincorporated in Delaware in 1998.  Our principal executive offices are located at 471 Brighton Drive, Bloomingdale, Illinois 60108.  Our telephone number at that address is (630) 372-6800 and our website is www.pctel.com.  The information within, or that can be accessed through, our website, is not part of this report.

Segment Reporting

PCTEL operates in two segments for reporting purposes, Connected Solutions and RF Solutions.  Our chief operating decision maker uses operating profits and identified assets for the Connected Solutions and RF Solutions segments to make operating decisions.  Each segment has its own segment manager as well as its own engineering, sales and marketing, and operational general and administrative functions.  All of our accounting and finance, human resources, IT and legal functions are provided on a centralized basis through the corporate function. We manage the balance sheet and cash flows centrally at the corporate level, with the exception of trade accounts receivable and inventory which is managed at the segment level. Each of the segment managers reports to and maintains regular contact with the chief operating decision maker to discuss operating activities, financial results, forecasts, or plans for the segment.

Connected Solutions Segment

PCTEL’s Connected Solutions segment designs and manufactures precision antennas. Our antennas are deployed primarily in small cells, enterprise Wi-Fi access points, fleet management and transit systems, and in equipment and devices for the Industrial Internet of Things (“IIoT”). Revenue growth in these markets is driven by the increased use of wireless communications and increased complexity trends occurring within them. Our antennas are primarily sold to original equipment manufacturer (“OEM”) providers where they are designed into the customer’s solution.

Competition in the antenna markets addressed by Connected Solutions is fragmented. Competitors include Amphenol, Comtelco, Laird, Mobile Mark, Pulse, and Radiall/Larsen. We seek out product applications that command a premium for product performance and customer service, and avoid commodity markets.

PCTEL maintains expertise in several technology areas in order to be competitive in the antenna market.  These include radio frequency engineering, mobile antenna design and manufacturing, mechanical engineering, product quality and testing, and wireless network engineering.

RF Solutions Segment

 

3


PCTEL’s RF Solutions segment provides test tools and engineering services that improve the performance of wireless networks globally. Mobile operators, neutral hosts, and equipment manufacturers rely on us to analyze, design, and optimize next generation wireless networks. Revenue growth is driven by the implementation and roll out of new wireless technology standards (i.e. 1G to 2G, 2G to 3G, 3G to 4G, 4G to 5G, etc…). Our test equipment is sold directly to wireless carriers or to OEM providers who integrate our products into their solution which is then sold to wireless carriers.

Competitors for our test tool products include OEMs such as Anritsu, Berkley Varitronics, Digital Receiver Technology, and Rohde and Schwarz.

PCTEL maintains expertise in several technology areas in order to be competitive in the test tool and related engineering services market. These include radio frequency engineering, digital signal process (“DSP”) engineering, manufacturing, mechanical engineering, product quality and testing, and wireless network engineering.

Major Customers

Huawei Technologies Co., Ltd (“Huawei”) accounted for approximately 11% of revenues during the year ended December 31, 2016 and accounted for approximately 17% of accounts receivable at December 31, 2016.  No other customer accounted for 10% or greater of revenues during the year ended December 31, 2016 and no other customer accounted from 10% or greater of accounts receivable at December 31, 2016.

There were no customers that accounted for 10% or greater of revenues or accounts receivable during the fiscal years ended December 31, 2015, or 2014, respectively.

International Activities

The following table shows the percentage of revenues by geographic location during the last three fiscal years:

 

 

 

Years Ended December 31,

 

Region

 

2016

 

 

2015

 

 

2014

 

Asia Pacific

 

 

21

%

 

 

9

%

 

 

11

%

Europe, Middle East, & Africa

 

 

8

%

 

 

10

%

 

 

11

%

Other Americas

 

 

6

%

 

 

6

%

 

 

5

%

Total Foreign sales

 

 

35

%

 

 

25

%

 

 

27

%

Total Domestic sales

 

 

65

%

 

 

75

%

 

 

73

%

 

 

 

100

%

 

 

100

%

 

 

100

%

 

See Note 11 of the consolidated financial statements for further geographical information.

Backlog

Sales of our products and services are generally made pursuant to standard purchase orders, which are officially acknowledged according to standard terms and conditions.  The backlog is useful for scheduling production, but is not necessarily a meaningful indicator of future product revenues as the order to ship cycle is extremely short.

Research and Development

We recognize that a strong technology base is essential to our long-term success and we have made a substantial investment in engineering, research and development.  We will continue to devote substantial resources to product development and patent submissions.  The patent submissions are primarily for defensive purposes, rather than for potential license revenue generation.  We monitor changing customer needs and work closely with our customers, consultants and market research organizations to track changes in the marketplace, including emerging industry standards.

4


Research and development expenses include costs for hardware and related software development, prototyping, certification and pre-production costs.  We spent approximately $10.2 million, $11.2 million, and $11.7 million in the fiscal years 2016, 2015, and 2014, respectively, in research and development.

Sales, Marketing and Support

We supply our products to public and private carriers, wireless infrastructure providers, wireless equipment distributors, value added resellers (“VARs”) and OEMs.  PCTEL’s direct sales force is technologically sophisticated and sales executives have strong industry domain knowledge.  Our direct sales force supports the sales efforts of our distributors and OEM resellers.

Our marketing strategy is focused on building market awareness and acceptance of our new products.  The marketing organization also provides a wide range of programs, materials and events to support the sales organization.  We spent approximately $13.8 million, $14.2 million, and $13.0 million in fiscal years 2016, 2015, and 2014, respectively, for sales and marketing support.

Manufacturing

We do final assembly of most of our antenna products and all of our OEM receiver and interference management product lines.  We also have arrangements with several contract manufacturers but are not dependent on any specific contract manufacturer.  If any of our contract manufacturers are unable to provide satisfactory services for us, other contract manufacturers are available, although engaging a new contract manufacturer could cause delays and additional costs.  We have no material guaranteed supply contracts or long-term agreements with any of our suppliers. We do have open purchase orders with our suppliers.  See the contractual obligations and commercial commitments section of Item 7 for information on purchase commitments.

Employees

As of December 31, 2016, we had 503 full-time equivalent employees, consisting of 363 in operations, 56 in sales and marketing, 49 in research and development, and 35 in general and administrative functions.  Total full-time equivalent employees were 491 and 465 at December 31, 2015 and 2014, respectively.  Headcount increased by 12 at December 31, 2016 from December 31, 2015 primarily due to the employees added at our Tianjin, China facility.  None of our employees are represented by a labor union.  We consider employee relations to be good.

Available Information

Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to such reports, are available free of charge through our website as soon as reasonably practicable after we electronically file such material with, or furnish it to, the United States Securities and Exchange Commission (the “SEC”).  Our website is located at the following address: www.pctel.com.  The information within, or that can be accessed through, our website, is not part of this Annual Report on Form 10-K.  Further, any materials we file with the SEC may be read and copied by the public at the SEC’s Public Reference Room, located at 100 F Street, N.E., Room 1580, Washington D.C. 20549.  Information regarding the operation of the Public Reference Room can be obtained by calling the SEC at 1(800) SEC-0330.  The SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding our filings at www.sec.gov.

Item 1A:  Risk Factors

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

Risks Related to Our Business

Competition within the wireless product and services industry is intense and is expected to increase significantly.  Failure to compete successfully could materially harm our prospects and financial results.

The market for our products and services is highly fragmented and is served by many local providers.  We may not be able to displace established competitors from their customer base with our products and services.

5


Many of our present and potential competitors have substantially greater financial, marketing, technical and other resources with which to pursue engineering, manufacturing, marketing, and distribution of their products and delivery of their services.  These competitors may succeed in establishing technology standards or strategic alliances in the connectivity products markets, obtain more rapid market acceptance for their products, or otherwise gain a competitive advantage.  We can offer no assurance that we will succeed in developing product technologies and services that are more effective than those developed by our competitors.  We can offer no assurance that we will be able to compete successfully against existing and new competitors as the connectivity wireless markets evolve and the level of competition increases.

Our wireless business is dependent upon the continued growth and evolution of the wireless industry.

Our future success is dependent upon the continued growth and evolution of the wireless industry.  The growth in demand for wireless products and services may not continue at its current rate or at all.  Any decrease in the growth of the wireless industry could have a material adverse effect on the results of our operations.

Our future success depends on our ability to develop and successfully introduce new and enhanced products for the wireless market that meet the needs of our customers.

Our revenue depends on our ability to anticipate our existing and prospective customers' needs and develop products and services that address those needs.  Our future success will depend on our ability to introduce new products and services for the wireless market, anticipate improvements and enhancements in wireless technology and wireless standards, and to develop products and services that are competitive in the rapidly changing wireless industry.  Introduction of new products, product enhancements, and services will require coordination of our efforts with those of our customers, suppliers, and manufacturers to rapidly achieve volume production.  If we fail to coordinate these efforts, develop product enhancements or introduce new products that meet the needs of our customers as scheduled, our operating results will be materially and adversely affected and our business and prospects will be harmed.  We cannot assure that product introductions will meet the anticipated release schedules or that our wireless products will be competitive in the market.  Furthermore, given the evolving nature of the wireless market, there can be no assurance our products and technology will not be rendered obsolete by alternative or competing technologies.

We may experience integration or other problems with potential acquisitions, which could have an adverse effect on our business or results of operations.  New acquisitions could dilute the interests of existing stockholders, and the announcement of new acquisitions could result in a decline in the price of our common stock.

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

 

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

 

disruption of our on-going business,

 

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

 

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

 

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

 

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

 

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

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

6


Our gross profit may vary based on the mix of sales of our products and services, and these variations may cause our net income to decline.

Depending on the mix of our products and services sold, our gross profit could vary significantly from quarter to quarter.  Generally, antenna products and engineering services have a lower profit margin than scanning receiver products creating the variance in gross profits related to profit mix.  A variance or decrease of our gross profit could have a negative impact on our financial results and cause our net income to decline.

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

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

 

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

 

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

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

We generally rely on independent companies to manufacture, assemble and test our products.  If these companies do not meet their commitments to us, or if our own assembly operations are impaired, our ability to sell products to our customers would be impaired.

We have limited manufacturing capability.  For some product lines we outsource the manufacturing, assembly, and testing of printed circuit board subsystems.  For other product lines, we purchase completed hardware platforms and add our proprietary software.  While there is no unique capability with these suppliers, any failure by these suppliers to meet delivery commitments would cause us to delay shipments and potentially be unable to accept new orders for product.

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

We assemble our antenna products in our facilities located in Illinois and China and scanning receivers at our facility in Maryland.  We may experience delays, disruptions, capacity constraints or quality control problems at our assembly facilities, which could result in lower yields or delays of product shipments to our customers.  In addition, we are having a number of our antenna products manufactured in China via contract manufacturers.  Any disruption of our own or contract manufacturers' operations could cause us to delay product shipments, which would negatively impact our sales, competitive reputation and position.  In addition, if we do not accurately forecast demand for our products, we will have excess or insufficient parts to build our products, either of which could materially affect our operating results.

In order for us to operate at a profitable level and continue to introduce and develop new products for emerging markets, we must attract and retain our executive officers and qualified engineering, technical, sales, support and other administrative personnel.

Our performance is substantially dependent on the performance of our current executive officers and certain key engineering, sales, marketing, financial, technical and customer support personnel.  If we lose the services of our executives or key employees, replacements could be difficult to recruit and, as a result, we may not be able to grow our business.

Competition for personnel, especially qualified engineering personnel, is intense.  We are particularly dependent on our ability to identify, attract, motivate and retain qualified engineers with the requisite education, background and industry experience.  As of December 31, 2016, we employed a total of 49 people in our research and development department.  If we lose the services of one or more of our key engineering personnel, our ability to continue to develop products and technologies responsive to our markets may be impaired.

7


We may be subject to litigation regarding intellectual property associated with our business and this could be costly to defend and could prevent us from using or selling the challenged technology.

In recent years, there has been significant litigation in the United States involving intellectual property rights.  We may be subject to claims in the future, including with respect to our wireless business.  Intellectual property claims against us, and any resulting lawsuits, may result in significant expenses and could subject us to significant liability for damages and invalidate what we currently believe are our proprietary rights.  These claims, regardless of their merits or outcome, would likely be time-consuming and expensive to resolve and could divert management's time and attention.  This could have a material and adverse effect on our results of operations.  Any intellectual property litigation disputes related to our  business could also force us to do one or more of the following:

 

cease selling, incorporating or using technology, products or services that incorporate the disputed intellectual property,

 

obtain from the holder of the disputed intellectual property a license to sell or use the relevant technology, which license may not be available on acceptable terms, if at all, or

 

redesign those products or services that incorporate the disputed intellectual property, which could result in substantial unanticipated development expenses.

If we are subject to a successful claim of infringement related to our wireless intellectual property and we fail to develop non-infringing intellectual property or license the infringed intellectual property on acceptable terms and on a timely basis, operating results could decline, and our ability to grow and sustain our wireless business could be materially and adversely affected.  As a result, our results of operations could be impaired.

We may in the future initiate claims or litigation against third parties for infringement of our intellectual property rights or to determine the scope and validity of our proprietary rights or the proprietary rights of our competitors.  These claims could also result in significant expense and the diversion of technical and management personnel's attention.

Undetected failures found in new products may result in a loss of customers or a delay in market acceptance of our products.

To date, we have not been made aware of any significant failures in our products.  However, despite testing by us and by current and potential customers, errors may be found in new products after commencement of commercial shipments, which could result in loss of revenue, loss of customers or delay in market acceptance, any of which could adversely affect our business, operating results, and financial condition.  We cannot assure that our efforts to monitor, develop, modify and implement appropriate test and manufacturing processes for our products will be sufficient to avoid failures in our products that result in delays in product shipment, replacement costs or potential damage to our reputation, any of which could harm our business, operating results and financial condition.

Conducting business in foreign countries involve additional risks.

A substantial portion of our manufacturing, research and development, and marketing activities is conducted outside the United States, including the United Kingdom, Hong Kong, and China.  There are a number of risks inherent in doing business in foreign countries, including: unfavorable political or economic factors; unexpected legal or regulatory changes; lack of sufficient protection for intellectual property rights; difficulties in recruiting and retaining personnel and managing international operations; repatriation of earnings; and less developed infrastructure.  If we are unable to manage successfully these and other risks pertaining to our international activities, our operating results, cash flows and financial position could be materially and adversely affected.

Our financial position and results of operations may be adversely affected if tax authorities challenge us and the tax challenges result in unfavorable outcomes.

We currently have international subsidiaries located in China, United Kingdom, and Israel as well as an international branch office located in Hong Kong.  The complexities resulting from operating in several different tax jurisdictions increase our exposure to worldwide tax challenges.  In the event a review of our tax filings results in unfavorable adjustments to our tax returns, our operating results, cash flows and financial position could be materially and adversely affected.

Conducting business in international markets involves foreign exchange rate exposure that may lead to reduced profitability.

We currently have operations in United Kingdom, Israel, Hong Kong, and China.  Fluctuations in the value of the U.S. dollar relative to other currencies may impact our revenues, cost of revenues and operating margins and may result in foreign currency translation gains and losses.

8


Risks Related to Our Industry

Challenging economic conditions worldwide have from time to time contributed, and may continue to contribute, to slowdowns in the wireless industry at large, resulting in:

 

reduced demand for our products as a result of continued constraints on corporate and government spending by our customers,

 

increased price competition for our products,

 

risk of excess and obsolete inventory,

 

risk of supply constraints,

 

risk of excess facilities and manufacturing capacity, and

 

higher costs as a percentage of revenue and higher interest expense.

Our industry is characterized by rapidly changing technologies and rapidly changing competitive environments.  If we are not successful in responding to these changes, our products may become obsolete and we may not be able to compete effectively.

We must continue to evaluate, develop and introduce technologically advanced products that will position us for possible growth in the wireless market.  If we are not successful in doing so, our products may not be accepted in the market or may become obsolete and we may not be able to compete effectively.

Consolidation and vertical integration in our industry, and particularly integration of our customers with our competitors, may significantly reduce our ability to successfully market our products to long-standing customers and may adversely affect our vertically integrated customers’ ability to choose our products even if our products are technologically superior.

Changes in laws or regulations, in particular future Federal Communications Commission (“FCC”) regulations or international regulations affecting the broadband market, internet service providers, or the communications industry, could negatively affect our ability to develop new technologies or sell new products and, therefore, reduce our profitability.

The jurisdiction of the FCC extends to the entire communications industry, including our customers and their products and services that incorporate our products.  Future FCC regulations affecting the broadband access services industry, our customers or our products may harm our business.  For example, future FCC regulatory policies that affect the availability of data and Internet services may impede our customers' penetration into their markets or affect the prices that they are able to charge.  In addition, FCC regulatory policies that affect the specifications of wireless data devices may impede certain of our customers' ability to manufacture their products profitably, which could, in turn, reduce demand for our products.  Furthermore, international regulatory bodies are beginning to adopt standards for the communications industry.  Although our business has not been hurt by any regulations to date, in the future, delays caused by our compliance with regulatory requirements may result in order cancellations or postponements of product purchases by our customers, which would reduce our profitability.

Risks Related to our Common Stock

The trading price of our stock price may be volatile based on a number of factors, many of which are not under our control.

Our stock can experience significant changes in price on a percentage basis.  The common stock price fluctuated between a high of $6.00 and a low of $4.36 in 2016.  Our stock price can be subject to wide fluctuation in response to a variety of factors, many of which are out of our control, including:

 

adverse change in domestic or global economic conditions,

 

new products or services offered by us or our competitors,

 

actual or anticipated variations in quarterly operating results,

 

changes in financial estimates by securities analysts,

 

announcements of technological innovations,

 

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

 

conditions or trends in our industry,

9


 

additions or departures of key personnel,

 

mergers and acquisitions, and

 

sales of common stock by our stockholders or us or repurchases by us.

In addition, the NASDAQ Global Select Market, where many publicly held telecommunications companies, including PCTEL, are traded, often experiences extreme price and volume fluctuations.  These fluctuations often have been unrelated or disproportionate to the operating performance of these companies.

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

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

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

If we are unable to successfully maintain processes and procedures required by the Sarbanes-Oxley Act of 2002 to achieve and maintain effective internal control over our financial reporting, our ability to provide reliable and timely financial reports could be harmed and our stock price could be adversely affected.

We must comply with the rules promulgated under Section 404 of the Sarbanes-Oxley Act of 2002.  Section 404 requires an annual management report assessing the effectiveness of our internal control over financial reporting and a report by our independent registered public accounting firm addressing this assessment.

While we are expending significant resources in maintaining the necessary documentation and testing procedures required by Section 404, we cannot be certain that the actions we are taking to achieve and maintain our internal control over financial reporting will be adequate.  If the processes and procedures that we implement for our internal control over financial reporting are inadequate, our ability to provide reliable and timely financial reports, and consequently our business and operating results, could be harmed.  This in turn could result in an adverse reaction in the financial markets due to a loss of confidence in the reliability of our financial reports, which could cause the market price of our common stock to decline.

Item 1B:  Unresolved Staff Comments

None.

10


Item 2:  Properties

The following table lists our main facilities:

 

 

 

 

 

 

 

 

 

Lease Term

 

 

Location

 

Square feet

 

 

Owned/Leased

 

Beginning

 

Ending

 

Segment

Bloomingdale, Illinois

 

 

75,517

 

 

Owned

 

N/A

 

N/A

 

Connected Solutions and Corporate

Tianjin, China

 

 

44,289

 

 

Leased

 

2012

 

2020

 

Connected Solutions

Germantown, Maryland

 

 

20,704

 

 

Leased

 

2012

 

2020

 

RF Solutions

Lexington, North Carolina

 

 

5,630

 

 

Leased

 

2013

 

2019

 

Connected Solutions

Beijing, China

 

 

5,393

 

 

Leased

 

2016

 

2020

 

Connected Solutions

Englewood, Colorado

 

 

4,759

 

 

Leased

 

2015

 

2020

 

RF Solutions

Melbourne, Florida

 

 

3,600

 

 

Leased

 

2013

 

2018

 

RF Solutions

 

Facility Changes

Pursuant to the Asset Purchase Agreement dated February 27, 2015 with Nexgen, we assumed the lease for office space in Schaumburg, Illinois consisting of 6,652 square feet.  The total lease obligation pursuant to this lease assumption was $0.3 million.  The lease contained a one-time option to elect an early termination of the lease by August 31, 2016.  In March 2016, we exercised the early termination option and paid a fee of $0.1 million.

In May 2015, we entered into a new five-year, five-month office lease in Englewood, Colorado consisting of 4,579 square feet of leased space for our engineering services business.  The total lease obligation pursuant to this lease was $0.6 million.  The lease expires in October 2020; however, during the first quarter 2016, the Company vacated this facility and is marketing this property for sublease. During 2016 we recorded restructuring expenses based on the remaining lease payments for the Englewood facility, net of estimated sublease payments.

Effective October 31, 2015, our lease for our mobile tower assembly facility in Pryor, Oklahoma expired in accordance with its terms.  This lease was not renewed because of the Company’s exit from the mobile tower product line.

Due to recent growth in our China business for Connected Solutions and with the transfer of certain manufacturing activities to our Tianjin, China facility, in October 2015 we entered into a new five-year lease for additional manufacturing space in Tianjin consisting of 22,163 square feet which expands our footprint in Tianjin to 44,289 square feet. This lease expires October 2020.  The total lease obligation pursuant to this lease is $0.2 million.  In January 2017, we signed a new lease for additional space of 5,877 square feet in our Beijing, China design center.  The additional space will accommodate additional engineering capacity in support of the growth of our China business for Connected Solutions.  

All properties are in good condition and are suitable for the purposes for which they are used.  We believe that we have adequate space for our current needs.

Item 3:  Legal Proceedings

Settlements with TelWorx Parties and Other Parties

On March 27, 2013, the Company and the TelWorx Parties (as defined below) entered into an Amendment (the “Amendment”) to the Asset Purchase Agreement dated July 9, 2012 (the “Original Agreement), among the Company, PCTelWorx, Ciao Enterprises, LLC f/k/a TelWorx Communications, LLC and certain of its affiliated entities (collectively, the “TelWorx Entities”) and Tim and Brenda Scronce (“Sellers” and collectively with the TelWorx Entities, the “TelWorx Parties”), as part of a settlement arrangement relative to PCTelWorx’s acquisition of substantially all of the assets and the assumption of certain specified liabilities of the TelWorx Entities on July 9, 2012 (the “Acquisition”).

After completion of the Acquisition, we became aware of certain accounting irregularities with respect to the TelWorx Entities and our Board of Directors directed management to conduct an internal investigation. Based on the results of our investigation, our Board of Directors directed management to seek restitution from the TelWorx Parties, and after protracted negotiations and concurrent litigation, the parties entered into the Amendment and related settlement agreements to resolve their dispute.  A legal settlement with an aggregate fair value of $5.4 million was reached with the TelWorx Parties in March 2013.

We also engaged in efforts to seek restitution from two other parties used by the TelWorx Parties for professional services in the sale of the business to PCTEL.  In 2014, we settled in cash with the two parties for $0.1 million and $0.8 million, respectively.

11


Item 4:  Mine Safety Disclosures

Not applicable.

12


PART II

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

Price Range of Common Stock and Dividends

PCTEL’s common stock has been traded on the NASDAQ Global Select Market under the symbol PCTI since our initial public offering on October 19, 1999.  The following table shows the high and low sale prices of our common stock as reported by the NASDAQ Global Select Market for the periods indicated.

 

 

 

2016

 

 

2015

 

 

 

Market Price

 

 

Dividends

 

 

Market Price

 

 

Dividends

 

 

 

High

 

 

Low

 

 

per Share

 

 

High

 

 

Low

 

 

per Share

 

Fourth Quarter

 

$

5.68

 

 

$

4.86

 

 

$

0.05

 

 

$

6.01

 

 

$

4.38

 

 

$

0.05

 

Third Quarter

 

$

5.62

 

 

$

4.62

 

 

$

0.05

 

 

$

7.24

 

 

$

5.27

 

 

$

0.05

 

Second Quarter

 

$

4.95

 

 

$

4.36

 

 

$

0.05

 

 

$

8.24

 

 

$

7.01

 

 

$

0.05

 

First Quarter

 

$

6.00

 

 

$

4.38

 

 

$

0.05

 

 

$

8.88

 

 

$

7.97

 

 

$

0.05

 

 

 

 

 

 

 

 

 

 

 

$

0.20

 

 

 

 

 

 

 

 

 

 

$

0.20

 

 

The closing sale price of our common stock as reported on the NASDAQ Global Select Market on March 10, 2017 was $5.81 per share.  As of that date there were 36 holders of record of the common stock.  A substantially greater number of holders of the common stock are in “street name” or beneficial holders, whose shares are held of record by banks, brokers, and other financial institutions.

13


Five-Year Cumulative Total Return Comparison

The following graph compares the annual percentage change in the cumulative return to our stockholders with the cumulative return of the NASDAQ Composite Index and the S&P Information Technology Index for the period beginning December 31, 2011 and ending December 31, 2016.  Returns for the indices are weighted based on market capitalization at the beginning of each measurement point.  Note that historic stock price performance is not necessarily indicative of future stock price performance.

Sales of Unregistered Equity Securities

None.

Issuer Purchases of Equity Securities

All share repurchase programs are authorized by our Board of Directors and are announced publicly.  On April 20, 2015, our Board of Directors authorized an additional 500,000 shares of stock under an existing share repurchase program.  Additionally, on August 10, 2015, our Board of Directors authorized an additional 1,300,000 shares under the existing share repurchase programs, for a total of 2,726,000 shares.  We repurchased 783,212 shares at an average price of $5.23 during the year ended December 31, 2016.  We repurchased 1,942,788 shares at an average price of $6.22 during the year ended December 31, 2015.  At December 31, 2016, the Company had no shares that could still be repurchased under previously approved programs.

Item 6:  Selected Consolidated Financial Data

The following selected consolidated financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," the Consolidated Financial Statements and related notes and other financial information appearing elsewhere in this Annual Report on Form 10-K.  The statement of operations data for the years ended December 31, 2016, 2015, and 2014 and the balance sheet data as of December 31, 2016 and 2015 are derived from audited financial statements included elsewhere in this Annual Report on Form 10-K.  The statement of operations data for the years ended December

14


31, 2013 and 2012 and the balance sheet data as of December 31, 2014, 2013, and 2012 are derived from audited financial statements not included in this Annual Report on Form 10-K.

 

 

 

2016

 

 

2015

 

 

2014

 

 

2013

 

 

2012

 

 

 

 

 

 

 

(in thousands, except per share data)

 

 

 

 

 

Consolidated Statement of Operations Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

96,713

 

 

$

106,615

 

 

$

107,164

 

 

$

104,253

 

 

$

88,849

 

Cost of revenues

 

 

61,507

 

 

 

69,354

 

 

 

63,577

 

 

 

62,493

 

 

 

53,029

 

Gross profit

 

 

35,206

 

 

 

37,261

 

 

 

43,587

 

 

 

41,760

 

 

 

35,820

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

10,158

 

 

 

11,205

 

 

 

11,736

 

 

 

11,064

 

 

 

9,290

 

Sales and marketing

 

 

13,810

 

 

 

14,196

 

 

 

12,961

 

 

 

12,121

 

 

 

11,343

 

General and administrative

 

 

12,051

 

 

 

12,399

 

 

 

12,819

 

 

 

15,623

 

 

 

10,982

 

Amortization of intangible assets

 

 

1,651

 

 

 

3,426

 

 

 

1,967

 

 

 

2,400

 

 

 

2,359

 

Impairment of goodwill and other intangible assets

 

 

5,785

 

 

 

161

 

 

 

0

 

 

 

0

 

 

 

12,550

 

Restructuring charges

 

 

664

 

 

 

1,630

 

 

 

0

 

 

 

256

 

 

 

157

 

Total operating expenses

 

 

44,119

 

 

 

43,017

 

 

 

39,483

 

 

 

41,464

 

 

 

46,681

 

Operating (loss) income from continuing operations

 

 

(8,913

)

 

 

(5,756

)

 

 

4,104

 

 

 

296

 

 

 

(10,861

)

Other income, net

 

 

112

 

 

 

3,287

 

 

 

1,666

 

 

 

5,378

 

 

 

100

 

(Loss) income before income taxes

 

 

(8,801

)

 

 

(2,469

)

 

 

5,770

 

 

 

5,674

 

 

 

(10,761

)

Expense (benefit) for income taxes

 

 

8,880

 

 

 

(901

)

 

 

1,158

 

 

 

2,332

 

 

 

(4,089

)

Net (loss) income from continuing operations

 

 

(17,681

)

 

 

(1,568

)

 

 

4,612

 

 

 

3,342

 

 

 

(6,672

)

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

   for income taxes

 

 

0

 

 

 

0

 

 

 

0

 

 

 

(91

)

 

 

(2,587

)

Net (loss) income

 

$

(17,681

)

 

$

(1,568

)

 

$

4,612

 

 

$

3,251

 

 

$

(9,259

)

(Loss) earnings per share from continuing operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(1.09

)

 

$

(0.09

)

 

$

0.25

 

 

$

0.19

 

 

$

(0.38

)

Diluted

 

$

(1.09

)

 

$

(0.09

)

 

$

0.25

 

 

$

0.18

 

 

$

(0.38

)

Loss per share from discontinued operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.00

 

 

$

0.00

 

 

$

0.00

 

 

$

(0.01

)

 

$

(0.15

)

Diluted

 

$

0.00

 

 

$

0.00

 

 

$

0.00

 

 

$

0.00

 

 

$

(0.15

)

(Loss) earnings per share :

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(1.09

)

 

$

(0.09

)

 

$

0.25

 

 

$

0.18

 

 

$

(0.53

)

Diluted

 

$

(1.09

)

 

$

(0.09

)

 

$

0.25

 

 

$

0.18

 

 

$

(0.53

)

Weighted average shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

16,151

 

 

 

17,737

 

 

 

18,159

 

 

 

17,797

 

 

 

17,402

 

Diluted

 

 

16,151

 

 

 

17,737

 

 

 

18,389

 

 

 

18,184

 

 

 

17,402

 

Dividends per common share

 

$

0.20

 

 

$

0.20

 

 

$

0.16

 

 

$

0.14

 

 

$

0.12

 

Consolidated Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash, cash equivalents and short-term investments

 

$

33,311

 

 

$

31,783

 

 

$

60,009

 

 

$

57,895

 

 

$

51,139

 

Working capital

 

$

55,152

 

 

$

59,041

 

 

$

88,573

 

 

$

83,585

 

 

$

74,486

 

Total assets

 

$

92,166

 

 

$

113,710

 

 

$

131,669

 

 

$

127,432

 

 

$

128,570

 

Total stockholders' equity

 

$

78,525

 

 

$

100,397

 

 

$

115,515

 

 

$

112,052

 

 

$

108,145

 

 

 

15


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

The following commentary presents a discussion and analysis of the Company’s financial condition and results of operations by its management. The review highlights the principal factors affecting earnings and the significant changes in balance sheet items for the years 2016 and 2015. Financial information for prior years is presented when appropriate. The objective of this financial review is to enhance investor understanding of the accompanying tables and charts, the consolidated financial statements, notes to financial statements, and financial statistics appearing elsewhere in this Annual Report on Form 10-K. Where applicable, this discussion also reflects management’s insights with respect to known events and trends that have or may reasonably be expected to have a material effect on the Company’s operations and financial condition.

Our 2016 revenues decreased by $9.9 million (9.3%), compared to 2015, due to lower revenues from services, site solutions, and scanning receivers. We recorded an operating loss of $8.9 million in 2016, compared to an operating loss of $5.8 million in 2015.  The loss was the result of the negative gross margin impact of lower revenues and impairment expenses.  Within operating expenses impairment charges of $5.8 million offset lower cash-based operating expenses in 2016 compared to 2015.  We impaired the customer relationships related to the services reporting unit.  The 2016 net loss included adjustments of $12.6 million related to the valuation allowance for deferred taxes.

Introduction

PCTEL operates in two segments for reporting purposes, Connected Solutions and RF Solutions.  Our chief operating decision maker uses operating profits and identified assets for the Connected Solutions and RF Solutions segments to make operating decisions.  Each segment has its own segment manager as well as its own engineering, sales and marketing, and operational general and administrative functions.  All of our accounting and finance, human resources, IT and legal functions are provided on a centralized basis through the corporate function. We manage its balance sheet and cash flows centrally at the corporate level, with the exception of trade accounts receivable and inventory which is managed at the segment level. Each of the segment managers reports to and maintains regular contact with the chief operating decision maker to discuss operating activities, financial results, forecasts, or plans for the segment.

Connected Solutions Segment

PCTEL’s Connected Solutions segment designs and manufactures precision antennas. PCTEL antennas are deployed primarily in small cells, enterprise Wi-Fi access points, fleet management and transit systems, and in equipment and devices for the Industrial Internet of Things (“IIoT”). Revenue growth in these markets is driven by the increased use of wireless communications and increased complexity trends occurring within them. PCTEL antennas are primarily sold to original equipment manufacturer (“OEM”) providers where they are designed into the customer’s solution.

Competition in the antenna markets addressed by Connected Solutions is fragmented. Competitors include Amphenol, Comtelco, Laird, Mobile Mark, Pulse, and Radiall/Larsen.  We seek out product applications that command a premium for product performance and customer service, and avoids commodity markets.

PCTEL maintains expertise in several technology areas in order to be competitive in the antenna market.  These include radio frequency engineering, mobile antenna design and manufacturing, mechanical engineering, product quality and testing, and wireless network engineering.

RF Solutions Segment

 

PCTEL’s RF Solutions segment provides test tools and engineering services that improve the performance of wireless networks globally. Mobile operators, neutral hosts, and equipment manufacturers rely on PCTEL to analyze, design, and optimize next generation wireless networks. Revenue growth is driven by the implementation and roll out of new wireless technology standards (i.e. 1G to 2G, 2G to 3G, 3G to 4G, 4G to 5G, etc…). PCTEL test equipment is sold directly to wireless carriers or to OEM providers who integrate our products into their solution which is then sold to wireless carriers.

Competitors for PCTEL’s test tool products include OEMs such as Anritsu, Berkley Varitronics, Digital Receiver Technology, and Rohde and Schwarz.

PCTEL maintains expertise in several technology areas in order to be competitive in the test tool and related engineering services market. These include radio frequency engineering, digital signal processing (“DSP”) engineering, manufacturing, mechanical engineering, product quality and testing, and wireless network engineering.

16


Results of Operations for Continuing Operations

Years ended December 31, 2016, 2015, and 2014

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

REVENUES BY SEGMENT

 

 

 

 

 

 

 

2016 compared to 2015

 

 

 

 

 

 

2015 compared to 2014

 

 

 

 

 

 

 

2016

 

 

$ Change

 

 

% Change

 

 

2015

 

 

$ Change

 

 

% Change

 

 

2014

 

Connected Solutions

 

$

65,763

 

 

$

(3,816

)

 

 

-5.5

%

 

$

69,579

 

 

$

(2,754

)

 

 

-3.8

%

 

$

72,333

 

RF Solutions

 

 

31,126

 

 

 

(6,129

)

 

 

-16.5

%

 

 

37,255

 

 

 

2,142

 

 

 

6.1

%

 

 

35,113

 

Corporate

 

 

(176

)

 

 

43

 

 

not meaningful

 

 

 

(219

)

 

 

63

 

 

not meaningful

 

 

 

(282

)

Total

 

$

96,713

 

 

$

(9,902

)

 

 

-9.3

%

 

$

106,615

 

 

$

(549

)

 

 

-0.5

%

 

$

107,164

 

 

Revenues were approximately $96.7 million for the year ended December 31, 2016, a decrease of 9.3% from the prior year.  Revenues declined by $6.1 million (16.5%) for the RF Solutions segment due to lower revenues for both products and services.  Approximately 71% of the decline in revenues in 2016 for the RF Solutions segment is due to the decline in service revenues.  The service revenue decline was due to a downturn in North American cellular carrier spending and slower Distributed Communication System (“DAS”) deployments.  Revenues for the Connected Solutions segment decreased $3.8 million (5.5%) primarily due to lower kitting revenues and due to the exit from mobile towers.  Approximately 42% of the revenue decline during 2016 was due to the exit from mobile towers.

 

Revenues were approximately $106.6 million for the year ended December 31, 2015, a decrease of 0.5% from the prior year.  Revenues for the RF Solutions segment increased by $2.1 million (6.1%) due to the additional revenue generated from the business acquired from Nexgen, offset by lower revenues for scanning receivers.  Revenues for the Connected Solutions segment decreased $2.8 million (3.8%).  Within Connected Solutions, revenues increased for antenna products, but decreased for cellular kitting products and mobile towers.  We exited the mobile tower product line as of September 30, 2015.  The decline in revenues from mobile towers contributed 2.6% of the 3.8% decrease in revenues for Connected Solutions for the year ended December 31, 2015 compared to the prior year.

GROSS PROFIT BY SEGMENT

 

 

 

2016

 

 

% of Revenues

 

 

2015

 

 

% of Revenues

 

 

2014

 

 

% of Revenues

 

Connected Solutions

 

$

20,706

 

 

 

31.5

%

 

$

20,426

 

 

 

29.4

%

 

$

22,818

 

 

 

31.5

%

RF Solutions

 

 

14,485

 

 

 

46.5

%

 

 

16,803

 

 

 

45.1

%

 

 

20,743

 

 

 

59.1

%

Corporate

 

 

15

 

 

not meaningful

 

 

 

32

 

 

not meaningful

 

 

 

26

 

 

not meaningful

 

Total

 

$

35,206

 

 

 

36.4

%

 

$

37,261

 

 

 

34.9

%

 

$

43,587

 

 

 

40.7

%

 

Gross profit was 36.4% for the year ended December 31, 2016, an increase of 1.5% compared to 2015.  The RF Solution’s segment gross profit increased 1.4% to 46.5% due to more favorable product mix with a higher proportion of scanning receivers versus services compared to 2015.  The Connected Solutions segment’s gross profit was 31.5%, an increase of 2.1% compared to 2015.  The margin improvement was primarily due to more favorable product mix with a higher proportion of antenna revenues, less kitting revenues and the exit from the mobile tower product line.

 

Gross profit was 34.9% for the year ended December 31, 2015, lower by 5.8% compared to 2014.  The RF Solutions segment’s gross profit was 45.1%, a decrease of (14.0%).  The decrease was due to less favorable product mix of lower revenues from scanning receivers and higher revenues from engineering services.  The Connected Solutions segment’s gross profit was 29.4%, lower by 2.1% compared to 2014.  The margin decline was primarily due to the fixed cost capacity variance created by the decline in mobile tower revenue and charges for excess inventories.

17


CONSOLIDATED OPERATING EXPENSES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

% of Revenues

 

 

 

2016

 

 

2016 Change

 

 

2015

 

 

2015 Change

 

 

2014

 

 

2016

 

 

2015

 

 

2014

 

Research and development

 

$

10,158

 

 

$

(1,047

)

 

$

11,205

 

 

$

(531

)

 

$

11,736

 

 

 

10.5

%

 

 

10.5

%

 

 

11.0

%

Sales and marketing

 

 

13,810

 

 

 

(386

)

 

 

14,196

 

 

 

1,235

 

 

 

12,961

 

 

 

14.3

%

 

 

13.3

%

 

 

12.1

%

General and administrative

 

 

12,051

 

 

 

(348

)

 

 

12,399

 

 

 

(420

)

 

 

12,819

 

 

 

12.5

%

 

 

11.6

%

 

 

12.0

%

Amortization of intangible assets

 

 

1,651

 

 

 

(1,775

)

 

 

3,426

 

 

 

1,459

 

 

 

1,967

 

 

 

1.7

%

 

 

3.2

%

 

 

1.8

%

Impairment of goodwill and

  other intangible assets

 

 

5,785

 

 

 

5,624

 

 

 

161

 

 

 

161

 

 

 

0

 

 

 

6.0

%

 

 

0.2

%

 

 

0.0

%

Restructuring charges

 

 

664

 

 

 

(966

)

 

 

1,630

 

 

 

1,630

 

 

 

0

 

 

 

0.7

%

 

 

1.5

%

 

 

0.0

%

 

 

$

44,119

 

 

$

1,102

 

 

$

43,017

 

 

$

3,534

 

 

$

39,483

 

 

 

45.6

%

 

 

40.3

%

 

 

36.8

%

 

RESEARCH AND DEVELOPMENT

Research and development expenses decreased $1.0 million from 2015 to 2016 due to reductions in expenses of $0.9 million for RF Solutions and $0.3 million for Connected Solutions, offset by an increase of $0.2 million for stock compensation.  The decrease in RF Solutions is due to headcount reductions in the third quarter 2015 for scanning receivers and in the first quarter 2016 for SeeHawk analytics.  

Research and development expenses decreased $0.5 million from 2014 to 2015.  Development expenses for scanning receivers declined $1.7 million and stock compensation expenses declined $0.2 million, offsetting $1.4 million of development expenses related to SeeHawk analytics.  Development expenses declined for scanning receivers because the IBflex® scanning receiver was launched in 2014.

We had 49, 61, and 57 full-time equivalent employees in research and development at December 31, 2016, 2015, and 2014, respectively.

SALES AND MARKETING

Sales and marketing expenses include costs associated with the sales and marketing employees, sales representatives, product line management, and trade show expenses.

Sales and marketing expenses decreased $0.4 million from 2015 to 2016 as expenses declined by $0.7 million within Connected Solutions and declined by $0.1 million within RF Solutions, offset by an increase of $0.4 million for stock compensation. The decrease from Connected Solutions is primarily due to headcount reductions in marketing and site solution sales.

Sales and marketing expenses increased $1.2 million from 2014 to 2015. The increase consisted of $1.0 million related to the business acquired from Nexgen and $0.6 million related to sales headcount and marketing expenses, offset by a $0.4 million reduction in stock compensation expenses.

We had 56, 61, and 65 full-time equivalent employees in sales and marketing at December 31, 2016, 2015, and 2014, respectively.

GENERAL AND ADMINISTRATIVE

General and administrative expenses include costs associated with the general management, finance, human resources, information technology, legal, public company costs, and other operating expenses to the extent not otherwise allocated to other functions.

General and administrative expenses decreased $0.3 million from 2015 to 2016 as decreases in Nexgen related expenses and other corporate expenses offset higher stock compensation expenses.  In 2015, we incurred $1.3 million in expenses related to the Nexgen acquisition and $0.1 million in legal expenses related to the TelWorx SEC investigation that did not reoccur in 2016.  Other corporate expenses were lower by $0.4 million in 2016 compared to 2015 primarily due to lower employee costs.  Stock compensation expense was $1.5 million higher in 2016 compared to 2015 because of higher expense for service-based restricted stock of $1.0 million, expense for stock bonuses of $0.4 million, and because 2015 included a credit of $0.1 million related to performance awards that did not vest.  

General and administrative expenses decreased $0.4 million from 2014 to 2015 due to declines of $1.2 million for legal and professional fees associated with the TelWorx SEC investigation, $0.7 million for stock compensation expenses, and $0.2 million related to expenses for the short-term incentive plan, offsetting $1.7 million of expenses related to the Nexgen acquisition.

18


We had 35, 40, and 43 full-time equivalent employees in general and administrative functions at December 31, 2016, 2015, and 2014, respectively.

AMORTIZATION OF INTANGIBLE ASSETS

Amortization expense within operating expenses was approximately $1.7 million in 2016 compared to $3.4 million in 2015.  The decrease of $1.7 million is attributable to certain assets being fully amortized in 2015 and the impact of the impairment of customer relationships at June 30, 2016.  Amortization declined by $0.7 million because of assets for Connected Solutions being fully amortized in 2015 and declined by $0.6 million because of assets for RF Solutions being fully amortized in 2015.  Amortization declined by $0.4 million as a result of the asset impairment at June 30, 2016.

Amortization expense was approximately $3.4 million in 2015 compared to $2.0 million in 2014.  The increase of $1.4 million is due to amortization expense related to intangible assets acquired from Nexgen.

IMPAIRMENT OF INTANGIBLE ASSETS

During 2016, we recorded total impairment expense of $5.8 million related to customer relationships for the services reporting unit within the RF Solutions segment, consisting of $4.7 million at June 30, 2016 and $1.1 million at December 31, 2016.  

For the three months ended June 30, 2016, the revenue and contribution margin of the services reporting unit were below the forecasts.  The results and revised forecast were reflective of a long-term slowdown in the DAS market which is the primary market addressed by our services offering.  We considered the changes to our forecast and the industry and market trends as a triggering event to assess the intangible assets of the services reporting units for impairment.  We reviewed our intangible assets for impairment by performing a test of recoverability.  The cash flow forecast prepared by us included assumptions for revenues, gross margins, and operating expenses.  The test of recoverability failed because the undiscounted cash flows were below the carrying value of the services reporting unit.  We calculated the fair value of the services reporting unit with the assistance of a third-party valuation firm.

For the three months ended December 31, 2016, the revenues and contribution margin for the services reporting unit declined sequentially.  Q4 2016 gross margins were negatively impacted by the lower volume and by lower average margin on individual projects.  We lowered our profit forecast for 2017 compared to the forecast prepared for the 2017 operating plan.  The new forecast was negatively impacted by a lower than normal sales backlog at December 31, 2016 as well as no known large projects in the sales funnel.  Further, based on management’s review of the market and industry as of year-end 2016, a long-term recovery is not expected.  We determined that the revision to the forecast for services was a triggering event for its review of intangible assets for impairment.  We reviewed our intangible assets for impairment by performing a test of recoverability.  The cash flow forecast that we prepared included assumptions for revenues, gross margins, and operating expenses.  The test of recoverability failed because the undiscounted cash flows were below the carrying value of the services reporting unit.  The impairment charge of $1.1 million represented the remaining value of the customer relationships as of December 31, 2016.

As part of the our annual impairment test for goodwill as of October 31, 2015, we recorded a goodwill impairment charge of $0.2 million related to our RF Services reporting unit because its fair value was below its carrying value.  We recorded no goodwill impairments in 2014.  See the discussion of this goodwill impairment within the critical accounting estimates section of this Item 7 and see Note 1 of the consolidated financial statements for information related to our evaluation of goodwill in the fourth quarter 2015.

RESTRUCTURING CHARGES

We incurred restructuring expense of $0.7 million and $1.6 million for the years ended December 31, 2016 and 2015, respectively.  No restructuring expenses were recorded for the year ended December 31, 2014.

During the first quarter 2016, we reduced headcount in our RF Solutions segment related to services and SeeHawk analytics, and exited from our Colorado office in order to consolidate facility space.  The restructuring expense incurred for lease terminations includes the remaining obligations under the lease, net of assumed proceeds for a sublease.  As of December 31, 2016, the Colorado office has not been subleased.  The restructuring expense in 2016 consisted of $0.3 million in employee severance and payroll related costs, $0.3 million for lease terminations, and $0.1 million related to fixed asset disposals.  The restructuring expense incurred for lease terminations includes the remaining obligations under the lease, net of assumed proceeds for a sublease.  As of December 31, 2016, the Colorado office has not been subleased.  

In June 2015, we committed to a restructuring program for reductions in U.S. headcount and the exit from the mobile towers product line.  To lower operating and production costs, we reduced headcount in engineering related to scanning receivers, in U.S. operations for Connected Solutions, and related to the mobile tower product line.  We terminated 51 employees between June and December 2015 and recorded severance and other employee benefits of $1.2 million.  Our mobile towers were primarily sold into the oil and gas

19


exploration market in North America. The mobile towers were used to primarily provide a communications link to an oil drilling site or lighting for a site under construction. The decline in oil prices caused a decline in related mobile tower sales. We made the decision to exit the mobile tower product line due to the anticipated long term effect on revenue from depressed oil prices, and one of our two tower suppliers filing for Chapter 7 bankruptcy in June 2015 as a result of the decline in sales. Mobile towers were not a key element of our kitting operation or antenna business within Connected Solutions.  Our exit from the mobile tower product line did not meet the accounting guidance for discontinued operations.  The exit from mobile towers did not constitute a strategic shift in our operations.  We recorded a charge of $0.4 million related to write-off of intangible assets related to the mobile towers product line.

OPERATING (LOSS) PROFIT BY SEGMENT

 

 

 

2016

 

 

% of Revenues

 

 

2015

 

 

% of Revenues

 

 

2014

 

 

% of Revenues

 

Connected Solutions

 

$

7,804

 

 

 

11.9

%

 

$

5,040

 

 

 

7.2

%

 

$

7,357

 

 

 

10.2

%

RF Solutions

 

 

(6,738

)

 

 

-21.6

%

 

 

(298

)

 

 

-0.8

%

 

 

7,333

 

 

 

20.9

%

Corporate

 

 

(9,979

)

 

not meaningful

 

 

 

(10,498

)

 

not meaningful

 

 

 

(10,586

)

 

not meaningful

 

Total

 

$

(8,913

)

 

 

-9.2

%

 

$

(5,756

)

 

 

-5.4

%

 

$

4,104

 

 

 

3.8

%

 

Total operating loss declined $3.2 million for the year ended December 31, 2016 compared to 2015. The decline is largely attributed to $2.1 million in lower gross profit and $5.8 million in impairment expenses related to intangible assets for our services reporting unit, offsetting lower restructuring charges and lower cash-based operating expenses.

 

Total operating profit declined $9.9 million for the year ended December 31, 2015 compared to 2014. The decline is largely attributed to $6.3 million lower gross profit previously discussed, $1.6 million of restructuring costs, and a $1.5 million increase in amortization of intangible assets from the Nexgen acquisition.

OTHER INCOME, NET

 

 

 

2016

 

 

2015

 

 

2014

 

Settlement income

 

$

0

 

 

$

3,160

 

 

$

1,005

 

Insurance proceeds

 

 

5

 

 

 

102

 

 

 

639

 

Interest income

 

 

100

 

 

 

55

 

 

 

85

 

Foreign exchange gains (losses)

 

 

13

 

 

 

(33

)

 

 

(49

)

Other, net

 

 

(6

)

 

 

3

 

 

 

(14

)

 

 

$

112

 

 

$

3,287

 

 

$

1,666

 

Percentage of revenues

 

 

0.1

%

 

 

3.1

%

 

 

1.6

%

 

Other income, net consists of interest income, foreign exchange gains and losses, insurance proceeds, and income from legal settlements.

For the year ended December 31, 2016, we recorded interest income of $100 and foreign exchange gains of $13.

For the year ended December 31, 2015, an Amendment to the Nexgen APA resulted in settlement income of $3.2 million consisting of $2.3 million from the release of the Nexgen escrow fund, $0.8 million from the collection of previously excluded accounts receivables, and $0.1 million related to the reversal of the contingent liability for the earnout.  We also received $0.1 million in insurance proceeds related to claims for legal and professional expenses for the SEC investigation of the TelWorx Parties.  The legal expenses and professional fees related to the insurance claim were recorded in general and administrative expenses.  We recorded interest income of $55 and foreign exchange losses of $33 during the year ended December 31, 2015.

For the year ended December 31, 2014, settlement income includes $0.9 million related to legal settlements with professional service firms that assisted the TelWorx parties with the sale of the business to PCTEL.  We received $0.6 million in insurance proceeds related to claims for legal and professional expenses for the SEC investigation of the TelWorx Parties.  The legal expenses and professional fees related to the insurance claim were recorded in general and administrative expenses.  We recorded interest income of $85 and foreign exchange losses of $49 during the year ended December 31, 2014.

20


EXPENSE (BENEFIT) FOR INCOME TAXES

 

 

 

2016

 

 

2015

 

 

2014

 

Expense (benefit) for income taxes

 

$

8,880

 

 

$

(901

)

 

$

1,158

 

Effective tax rate

 

 

-101.0

%

 

 

36.5

%

 

 

20.1

%

 

The effective tax rate differed from the statutory Federal rate of 34.0% by approximately 135% during 2016 primarily due to an adjustment to the valuation allowance for deferred taxes.  Based on lower future projected U.S. tax income, we recorded adjustments of $12.6 million to the valuation allowance.

 

The effective tax rate differed from the statutory Federal rate of 34.0% by approximately 2.5% during 2015 primarily due to research and development credits and incremental tax on repatriation of Israel funds.  The effective tax rate differed from the statutory Federal rate of 34.0% by approximately 14.0% during 2014 primarily due to reversals of reserves for uncertain tax positions related to research credits and foreign withholding taxes.  

At December 31, 2016, we had net deferred tax assets of $4.5 million, which includes a valuation allowance of $13.3 million.  We maintain a valuation allowance due to uncertainties regarding realizability.  On a regular basis, management evaluates the recoverability of deferred tax assets and the need for a valuation allowance.  The valuation allowance at December 31, 2016 is primarily because the Company does not believe it will generate sufficient US taxable income to realize a significant portion of its deferred tax assets. The valuation allowance at December 31, 2015 related to credits and state operating losses that we do not expect to realize because they correspond to tax jurisdictions where we no longer have significant operations.

 

 

Liquidity and Capital Resources

 

 

 

Years Ended December 31,

 

 

 

2016

 

 

2015

 

 

2014

 

Net (loss) income

 

$

(17,681

)

 

$

(1,568

)

 

$

4,612

 

Charges for depreciation, amortization, stock-based

 

 

 

 

 

 

 

 

 

 

 

 

compensation, and other non-cash items

 

 

22,997

 

 

 

8,085

 

 

 

8,720

 

Changes in operating assets and liabilities

 

 

5,090

 

 

 

2,557

 

 

 

(5,356

)

Net cash provided by operating activities

 

 

10,406

 

 

 

9,074

 

 

 

7,976

 

Net cash provided by (used in) investing activities

 

 

4,375