Organization and Summary of Significant Accounting Policies | 12 Months Ended |
Dec. 31, 2014 |
Accounting Policies [Abstract] | |
Organization and Summary of Significant Accounting Policies | 1. Organization and Summary of Significant Accounting Policies |
Nature of Operations |
PCTEL, Inc. (“PCTEL”, the “Company”, “we”, “ours”, and “us”) delivers Performance Critical Telecom solutions. RF Solutions develops and provides test equipment, software and engineering services for wireless networks. The industry relies upon PCTEL to benchmark network performance, analyze trends, and optimize wireless networks. Connected Solutions designs and delivers performance critical antennas and site solutions for wireless networks globally. Our antennas support evolving wireless standards for cellular, private, and broadband networks. PCTEL antennas and site solutions support networks worldwide, including SCADA for oil, gas and utilities, fleet management, industrial operations, health care, small cell and network timing deployment, defense, public safety, education, and broadband access. |
Segment Reporting |
Effective January 1, 2013, PCTEL operates in two segments for reporting purposes, RF Solutions and Connected Solutions. As of January 1, 2013, the Company’s chief operating decision maker uses the profit and loss results through operating profit 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 the Company’s accounting and finance, human resources, IT and legal functions are provided on a centralized basis through the corporate function. The Company manages 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. |
For the year ended December 31, 2012, the Company operated in two different segments, PCTEL Secure, LLC and the rest of the Company. The Company’s chief operating decision maker used the profit and loss results and the assets to make operating decisions. The 2012 segment information presented in the financial statements has been presented on a retrospective basis reflecting the Connected Solutions and RF Solution segments on a consistent basis with the current period. |
Connected Solutions Segment |
Connected Solutions designs and delivers performance critical antennas and site solutions for wireless networks globally. The Company’s antennas and site solutions support networks worldwide, including SCADA (“Supervisory Control and Data Acquisition”) for oil, gas and utilities, fleet management, industrial operations, health care, small cell and network timing deployment, defense, public safety, education, and broadband access. PCTEL’s performance critical MAXRAD® and Bluewave™ antenna solutions include high rejection and high performance GPS and GNSS products, the industry leading Yagi portfolio, mobile and indoor LTE, broadband, and LMR antennas and PIM-rated antennas for transit, in-building, and small cell applications. The Company provides performance critical mobile towers for demanding emergency and oil and gas network applications and leverage our design, logistics, and support capabilities to deliver performance critical site solutions into carrier, railroad, and utility applications. Revenue growth for antenna and site solutions is primarily driven by the increased use of wireless communications in these vertical markets. PCTEL’s antenna and site solution products are primarily sold through distributors, value-added resellers, and original equipment manufacturer (“OEM”) providers. The current antenna and site solutions product portfolio and expansion into these vertical markets resulted from organic growth and a series of six acquisitions, the most recent being the acquisition of certain assets of TelWorx Communications LLC, TelWorx U.K. Limited, TowerWorx LLC, and TowerWorx International, Inc. (collectively “TelWorx”), in July 2012. |
There are many competitors for antenna products, as the market is highly fragmented. Competitors include Laird (Cushcraft, Centurion, and Antennex brands), Mobile Mark, Radiall/Larsen, Comtelco, Wilson, Commscope (Andrew products), Kathrein, among others. The Company seeks 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 engineered site solutions market. These include radio frequency engineering, mobile antenna design and manufacturing, mechanical engineering, product quality and testing, and wireless network engineering. |
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RF Solutions Segment |
RF Solutions develops and provides performance critical test equipment, software, and engineering services for wireless networks. The industry relies upon PCTEL to benchmark network performance, analyze trends, and optimize wireless networks. SeeGull® scanning receivers are used around the world for indoor and drive test applications, including baseline testing, acceptance testing, competitive benchmarking, spectrum clearing, troubleshooting, and network optimization. SeeGull scanning receivers provide high quality real-world RF measurements needed to build, tune, troubleshoot, and expand commercial wireless networks. The Company’s highly-trained engineering services team uses state-of-the-art test, measurement, and design tools to provide engineering services for in-building and outdoor networks. Our engineering services team (“NES”), which commenced in 2011 with the acquisition of certain assets from Envision Wireless Inc. (“Envision”), provides wireless network testing, optimization, design, integration, and consulting services, with an emphasis on in-building distributed antenna systems (“DAS”). Revenue growth for the segment’s products and services is driven by the deployment of products based on new wireless technology and the need for wireless networks to be tuned and reconfigured on a regular basis. Scanning receiver products are sold primarily through test and measurement value -added resellers and to a lesser extent directly to network operators. Competitors for these products are OEMs such as JDS Uniphase, Rohde and Schwarz, Anritsu, Digital Receiver Technology, and Berkley Varitronics. |
On February 27, 2015, PCTEL, Inc., acquired substantially all of the assets of, and assumed certain specified liabilities of, Nexgen Wireless, Inc., an Illinois corporation (“Nexgen”), pursuant to an Asset Purchase Agreement dated as of February 27, 2015 (the “Acquisition Agreement”) among PCTEL, Nexgen, Bhumika Thakkar 2012 Irrevocable Trust Number One, Bhumika Thakkar 2012 Irrevocable Trust Number Two, and Jigar Thakkar and Bhumika Thakkar. |
The business of Nexgen is based in Schaumburg, Illinois. Nexgen provides Meridian™, a network analysis tool portfolio, and engineering services. Nexgen’s Meridian software product portfolio translates real-time network performance data into engineering actions to optimize operator performance. Meridian, with its modules of Network IQ™, Subscriber IQ™, and Map IQ™, supports crowd-based, cloud-based data analysis to enhance network performance. Nexgen provides performance engineering, specialized staffing, and trend analysis for carriers, infrastructure vendors, and neutral hosts for 2G, 3G, 4G, and LTE networks. Refer to footnote 17 related to subsequent events for more information on the Nexgen acquisition. |
PCTEL maintains expertise in several technology areas in order to be competitive in the scanning receiver and related engineering services market. These include radio frequency engineering, DSP engineering, manufacturing, mechanical engineering, product quality and testing, and wireless network engineering. |
Basis of Consolidation |
These consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany accounts and transactions have been eliminated. |
On April 30, 2013, the Company divested all material assets associated with its PCTEL Secure, LLC subsidiary’s ProsettaCore™ technology to Redwall Technologies, LLC (“Redwall”), a development organization that specializes in mobile security, military and defense projects and systems, and critical national infrastructure. Under the terms of the agreement, Redwall acquired the server and device software (the “Software”), the underlying intellectual property, and complete development responsibility for the security products. At the closing of the divestiture, the Company received no upfront cash payment, but has the right to receive a royalty of 7% of the net sale price of each future sale or license of the Software and each provision of services related to the Software, if any. Under the agreement, royalties will not exceed $10.0 million in the aggregate. In accordance with accounting for discontinued operations, the consolidated financial statements separately reflect the results of PCTEL Secure as discontinued operations for all periods presented. The prior period results have been restated to reflect this accounting treatment. |
Use of Estimates |
The preparation of financial statements in conformity with generally accepted accounting principles in the U.S. 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 periods reported. Actual results could differ from those estimates. |
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Foreign Operations |
The Company is exposed to foreign currency fluctuations due to its foreign operations and because products are sold internationally. The functional currency for the Company’s foreign operations is predominantly the applicable local currency. Accounts of foreign operations are translated into U.S. dollars using the year-end exchange rate for assets and liabilities and average monthly rates for revenue and expense accounts. Adjustments resulting from translation are included in accumulated other comprehensive income (loss), a separate component of stockholders’ equity. Gains and losses resulting from other transactions originally in foreign currencies and then translated into U.S. dollars are included in the consolidated statements of operations. Net foreign exchange losses resulting from foreign currency transactions included in other income, net were $49, $26, and $31 in the years ended December 31, 2014, 2013, and 2012, respectively. |
Fair Value of Financial Instruments |
The Company follows accounting pronouncements for Fair Value Measurements and Disclosures, which establishes a fair value hierarchy that requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, a three-tier fair value hierarchy has been established, which prioritizes the inputs used in measuring fair value as follows: |
Level 1: inputs are unadjusted quoted prices in active markets for identical assets or liabilities. |
Level 2: inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of assets or liabilities. |
Level 3: unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
Cash equivalents are measured at fair value and investments are recognized at amortized cost in the Company’s financial statements. Accounts receivable and other investments are financial assets with carrying values that approximate fair value due to the short-term nature of these assets. Accounts payable is a financial liability with a carrying value that approximates fair value due to the short-term nature of these liabilities. |
Cash and Cash Equivalents and Investments |
The Company’s cash and investments consist of the following: |
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| | December 31, | | | December 31, | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2014 | | 2013 | | | | | | | | | | | | | | | | | | | | | | | | |
Cash | | $ | 19,731 | | | $ | 19,734 | | | | | | | | | | | | | | | | | | | | | | | | | |
Cash equivalents | | | 701 | | | | 2,056 | | | | | | | | | | | | | | | | | | | | | | | | | |
Short-term investments | | | 39,577 | | | | 36,105 | | | | | | | | | | | | | | | | | | | | | | | | | |
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| | $ | 60,009 | | | $ | 57,895 | | | | | | | | | | | | | | | | | | | | | | | | | |
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Cash and Cash equivalents |
At December 31, 2014, cash and cash equivalents included bank balances and investments with original maturities less than 90 days. At December 31, 2014 and 2013, the Company’s cash equivalents were invested in highly liquid AAA rated money market funds that are required to comply with Rule 2a-7 under the Investment Company Act of 1940. Such funds utilize the amortized cost method of accounting, seek to maintain a constant $1.00 per share price, and are redeemable upon demand. The Company restricts its investments in AAA money market funds to those invested 100% in either short-term U.S. Government Agency securities or bank repurchase agreements collateralized by these same securities. The fair values of these money market funds are established through quoted prices in active markets for identical assets (Level 1 inputs). The cash in the Company’s U.S. banks is insured by the Federal Deposit Insurance Corporation up to the insurable amount of $250. |
At December 31, 2014, the Company had $19.7 million in cash and $0.7 million in cash equivalents and at December 31, 2013, the Company had $19.7 million in cash and $2.1 million in cash equivalents. The Company had $0.5 million and $1.0 million of cash and cash equivalents in foreign bank accounts at December 31, 2014 and at December 31, 2013. As of December 31, 2014, the Company has no intentions of repatriating the cash in its foreign bank accounts. If the Company decides to repatriate the cash in the foreign bank accounts, it may experience difficulty in doing so in a timely manner. The Company may also be exposed to foreign currency fluctuations and taxes if it repatriates these funds. The Company’s cash in its foreign bank accounts is not insured. |
Investments |
At December 31, 2014 and 2013, the Company’s short-term investments consisted of pre-refunded municipal bonds, U.S. government agency bonds, AA or higher rated corporate bonds and certificates of deposit, all classified as held-to-maturity. At December 31, 2014, the Company’s short-term investments also included mutual funds classified as available-for-sale and recorded at fair value. |
At December 31, 2014, the Company had invested $13.5 million in U.S. government agency bonds, $11.8 million in certificates of deposit, $7.2 million in AA rated or higher corporate bond funds, $5.2 million in pre-refunded municipal bonds and taxable bond funds, and $2.0 million in mutual funds. The income and principal from the pre-refunded municipal bonds is secured by an irrevocable trust of U.S. Treasury securities. The bonds have original maturities greater than 90 days and mature in 2015. The Company’s bonds are recorded at the purchase price and carried at amortized cost. The net unrealized gains (losses) were approximately $(5) and $15 at December 31, 2014 and December 31, 2013, respectively. Approximately 5% of the Company’s bonds were protected by bond default insurance at December 31, 2014 and 2013, respectively. |
At December 31, 2013, the Company had invested $17.2 million in pre-refunded municipal bonds and taxable bond funds, $7.3 million in AA rated or higher corporate bond funds, $6.3 million in U.S. government agency bonds, and $5.3 million in certificates of deposit. |
The Company categorizes its financial instruments within a fair value hierarchy according to accounting guidance for fair value. The fair value hierarchy is described under the Fair Value of Financial Instruments in Note 1. For the Level 2 investments, the Company uses quoted prices of similar assets in active markets. |
Cash equivalents and Level 1 and Level 2 investments measured at fair value were as follows: |
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| | December 31, 2014 | | | December 31, 2013 | |
| | Level 1 | | | Level 2 | | | Level 3 | | | Total | | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
Cash equivalents: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Money market funds and other cash equivalents | | $ | 701 | | | $ | 0 | | | $ | 0 | | | $ | 701 | | | $ | 2,056 | | | $ | 0 | | | $ | 0 | | | $ | 2,056 | |
Investments: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
US government agency bonds | | | 0 | | | | 13,502 | | | | 0 | | | | 13,502 | | | | 0 | | | | 6,291 | | | | 0 | | | | 6,291 | |
Certificates of deposit | | | 11,782 | | | | 0 | | | | 0 | | | | 11,782 | | | | 5,360 | | | | 0 | | | | 0 | | | | 5,360 | |
Corporate bonds | | | 0 | | | | 7,155 | | | | 0 | | | | 7,155 | | | | 0 | | | | 7,269 | | | | 0 | | | | 7,269 | |
Pre-refunded municipal bonds | | | 0 | | | | 5,162 | | | | 0 | | | | 5,162 | | | | 0 | | | | 17,200 | | | | 0 | | | | 17,200 | |
Mutual funds | | | 1,971 | | | | 0 | | | | 0 | | | | 1,971 | | | | 0 | | | | 0 | | | | 0 | | | | 0 | |
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Total | | $ | 14,454 | | | $ | 25,819 | | | $ | 0 | | | $ | 40,273 | | | $ | 7,416 | | | $ | 30,760 | | | $ | 0 | | | $ | 38,176 | |
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Accounts Receivable and Allowance for Doubtful Accounts |
Accounts receivable are recorded at invoiced amount with standard net terms for most customers that range between 30 and 60 days. The Company extends credit to its customers based on an evaluation of a company’s financial condition and collateral is generally not required. The Company maintains an allowance for doubtful accounts for estimated uncollectible accounts receivable. The allowance is based on the Company’s assessment of known delinquent accounts, historical experience, and other currently available evidence of the collectability and the aging of accounts receivable. The Company’s allowance for doubtful accounts was $0.1 million at December 31, 2014 and 2013. The provision for doubtful accounts is included in sales and marketing expense in the consolidated statements of operations. |
Inventories |
Inventories are stated at the lower of cost or market and include material, labor and overhead costs using the first-in, first-out (“FIFO”) method of costing. Inventories as of December 31, 2014 and 2013 were composed of raw materials, sub-assemblies, finished goods and work-in-process. The Company had consigned inventory of $0.8 million and $1.1 million at December 31, 2014 and 2013, respectively. The Company records allowances to reduce the value of inventory to the lower of cost or market, including allowances for excess and obsolete inventory. Reserves for excess inventory are calculated based on our estimate of inventory in excess of normal and planned usage. Obsolete reserves are based on our identification of inventory where carrying value is above net realizable value. The allowance for inventory losses was $1.8 million and $1.9 million as of December 31, 2014 and 2013, respectively. |
Inventories consisted of the following: |
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| | December 31, | | | December 31, | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2014 | | 2013 | | | | | | | | | | | | | | | | | | | | | | | | |
Raw materials | | $ | 10,160 | | | $ | 9,241 | | | | | | | | | | | | | | | | | | | | | | | | | |
Work in process | | | 915 | | | | 716 | | | | | | | | | | | | | | | | | | | | | | | | | |
Finished goods | | | 5,283 | | | | 4,578 | | | | | | | | | | | | | | | | | | | | | | | | | |
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Inventories, net | | $ | 16,358 | | | $ | 14,535 | | | | | | | | | | | | | | | | | | | | | | | | | |
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Prepaid and other current assets |
Prepaid assets are stated at cost and are amortized over the useful lives (up to one year) of the assets. |
Property and Equipment |
Property and equipment are stated at cost and are depreciated using the straight-line method over the estimated useful lives of the assets. The Company depreciates computers over three to five years, office equipment, manufacturing and test equipment and motor vehicles over five years, furniture and fixtures over seven years, and buildings over 30 years. Leasehold improvements are amortized over the shorter of the corresponding lease term or useful life. Depreciation expense and gains and losses on the disposal of property and equipment are included in cost of sales and operating expenses in the consolidated statements of operations. Maintenance and repairs are expensed as incurred. |
Property and equipment consisted of the following: |
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| | December 31, | | | December 31, | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2014 | | 2013 | | | | | | | | | | | | | | | | | | | | | | | | |
Building | | $ | 6,229 | | | $ | 6,207 | | | | | | | | | | | | | | | | | | | | | | | | | |
Computers and office equipment | | | 10,435 | | | | 9,818 | | | | | | | | | | | | | | | | | | | | | | | | | |
Manufacturing and test equipment | | | 11,880 | | | | 10,415 | | | | | | | | | | | | | | | | | | | | | | | | | |
Furniture and fixtures | | | 1,214 | | | | 1,204 | | | | | | | | | | | | | | | | | | | | | | | | | |
Leasehold improvements | | | 909 | | | | 837 | | | | | | | | | | | | | | | | | | | | | | | | | |
Motor vehicles | | | 117 | | | | 117 | | | | | | | | | | | | | | | | | | | | | | | | | |
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Total property and equipment | | | 30,784 | | | | 28,598 | | | | | | | | | | | | | | | | | | | | | | | | | |
Less: Accumulated depreciation and amortization | | | (17,712 | ) | | | (15,397 | ) | | | | | | | | | | | | | | | | | | | | | | | | |
Land | | | 1,770 | | | | 1,770 | | | | | | | | | | | | | | | | | | | | | | | | | |
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Property and equipment, net | | $ | 14,842 | | | $ | 14,971 | | | | | | | | | | | | | | | | | | | | | | | | | |
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Depreciation and amortization expense was approximately $2.8 million, $2.7 million, and $2.4 million for the years ended December 31, 2014, 2013, and 2012, respectively. Amortization for capital leases is included in depreciation and amortization expense. See Note 8 for information related to capital leases. |
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Liabilities |
Accrued liabilities consisted of the following: |
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| | December 31, | | | December 31, | | | | | | | | | | | | | | | | | | | | | | | | | |
2014 | 2013 | | | | | | | | | | | | | | | | | | | | | | | | |
Inventory receipts | | $ | 2,471 | | | $ | 1,489 | | | | | | | | | | | | | | | | | | | | | | | | | |
Executive deferred compensation | | | 2,043 | | | | 0 | | | | | | | | | | | | | | | | | | | | | | | | | |
Payroll, bonuses, and other employee benefits | | | 1,539 | | | | 3,267 | | | | | | | | | | | | | | | | | | | | | | | | | |
Deferred revenues | | | 1,262 | | | | 199 | | | | | | | | | | | | | | | | | | | | | | | | | |
Paid time off | | | 1,247 | | | | 1,154 | | | | | | | | | | | | | | | | | | | | | | | | | |
Employee stock purchase plan | | | 314 | | | | 292 | | | | | | | | | | | | | | | | | | | | | | | | | |
Warranties | | | 304 | | | | 305 | | | | | | | | | | | | | | | | | | | | | | | | | |
Income and sales taxes | | | 266 | | | | 159 | | | | | | | | | | | | | | | | | | | | | | | | | |
Professional fees and contractors | | | 223 | | | | 584 | | | | | | | | | | | | | | | | | | | | | | | | | |
Real estate taxes | | | 181 | | | | 160 | | | | | | | | | | | | | | | | | | | | | | | | | |
Other | | | 361 | | | | 194 | | | | | | | | | | | | | | | | | | | | | | | | | |
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Total | | $ | 10,211 | | | $ | 7,803 | | | | | | | | | | | | | | | | | | | | | | | | | |
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Long-term liabilities consisted of the following: |
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| | December 31, | | | December 31, | | | | | | | | | | | | | | | | | | | | | | | | | |
2014 | 2013 | | | | | | | | | | | | | | | | | | | | | | | | |
Deferred rent | | $ | 258 | | | $ | 278 | | | | | | | | | | | | | | | | | | | | | | | | | |
Long-term obligations under capital leases | | | 135 | | | | 0 | | | | | | | | | | | | | | | | | | | | | | | | | |
Deferred revenues | | | 55 | | | | 86 | | | | | | | | | | | | | | | | | | | | | | | | | |
Reserve for uncertain tax positions | | | 0 | | | | 865 | | | | | | | | | | | | | | | | | | | | | | | | | |
Executive deferred compensation | | | 0 | | | | 1,908 | | | | | | | | | | | | | | | | | | | | | | | | | |
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| | $ | 448 | | | $ | 3,137 | | | | | | | | | | | | | | | | | | | | | | | | | |
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Revenue Recognition |
The Company sells antennas, site solutions, and scanning receiver products, and provides network engineering services. The Company recognizes revenue when the following criteria are met: persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, price is fixed and determinable, and collectability is reasonably assured. |
The Company recognizes revenue for sales of its products when title transfers, which is predominantly upon shipment from its factory. For products shipped on consignment, the Company recognizes revenue upon delivery from the consignment location. The Company allows its major antenna product distributors to return product under specified terms and conditions and accrues for product returns. The Company recognizes revenue for its network engineering services under the completed performance method. Most services occur in one week or less, and revenue is generally recognized when the engineering reports are completed and issued to the customer. |
Research and Development Costs |
The Company expenses research and development costs as incurred. To date, the Company has expensed all software development costs related to research and development because the costs incurred subsequent to the products reaching technological feasibility were not significant. |
Advertising Costs |
Advertising costs are expensed in the period in which they are incurred. Advertising expense was $175, $166, and $150 in each of the fiscal years ended December 31, 2014, 2013, and 2012, respectively. |
Income Taxes |
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are provided against deferred tax assets, which are not likely to be realized. On a regular basis, management evaluates the recoverability of deferred tax assets and the need for a valuation allowance. |
Deferred tax assets arise when the Company recognizes charges or expenses in the financial statements that will not be allowed as income tax deductions until future periods. The deferred tax assets also include unused tax net operating losses and tax credits that the Company is allowed to carry forward to future years. Accounting rules permit the Company to carry the deferred tax assets on the balance sheet at full value as long as it is more likely than not the deductions, losses, or credits will be used in the future. A valuation allowance must be recorded against a deferred tax asset if this test cannot be met. |
The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. |
Sales and Value Added Taxes |
Taxes collected from customers and remitted to governmental authorities are presented on a net basis in cost of sales in the accompanying consolidated statements of operations. |
Shipping and handling costs |
Shipping and handling costs are included on a gross basis in cost of sales in the accompanying consolidated statements of operations. |
Goodwill |
The Company performs an annual impairment test of goodwill as of the end of the first month of the fiscal fourth quarter (October 31st), or at an interim date if an event occurs or if circumstances change that would indicate that an impairment loss may have been incurred. In performing the annual impairment test, the Company first performs a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value, including goodwill. If the qualitative assessment is indicative of possible impairment, then a two-step quantitative fair value assessment is performed at the reporting unit level. In the first step, the fair value of each reporting unit is compared with its carrying value. If the fair value exceeds the carrying value, then goodwill is not impaired and no further testing is performed. The second step is performed if the carrying value exceeds the fair value. The implied fair value of goodwill is then compared against the carrying value of goodwill to determine the amount of impairment. |
The process of evaluating the potential impairment of goodwill is subjective because it requires the use of estimates and assumptions in determining a reporting unit’s fair value. The Company calculates the fair value of each reporting unit by using a blended analysis of the present value of future discounted cash flows and the market approach of valuation. The discounted cash flow method requires the Company to use estimates and judgments about the future cash flows of the reporting units. Although the Company bases cash flow forecasts on assumptions that are consistent with plans and estimates the Company uses to manage the underlying reporting units, there is significant judgment in determining the cash flows attributable to these reporting units, including markets and market share, sales volumes and mix, research and development expenses, tax rates, capital spending, discount rate and working capital changes. Cash flow forecasts are based on reporting unit operating plans for the early years and business projections in later years. The market approach is based on a comparison of the Company to comparable publicly traded firms in similar lines of business. This method requires the Company to use estimates and judgments when determining comparable companies. The Company assesses such factors as size, growth, profitability, risk and return on investment. The Company believes the accounting estimate related to the valuation of goodwill is a critical accounting estimate because it requires us to make assumptions that are highly uncertain about the future cash flows of the reporting units. Changes in these estimates can have a material impact on the Company’s financial statements. |
While the use of historical results and future projections can result in different valuations for a business, it is a generally accepted valuation practice to apply more than one valuation technique to establish a range of values for a business. Since each technique relies on different inputs and assumptions, it is unlikely that each technique would yield the same results. However, it is expected that the different techniques would establish a reasonable range. In determining the fair value, the Company weighs the two methods equally because it believes both methods have an equal probability of providing an appropriate fair value. |
As of October 31, 2014 and 2013, respectively the Company performed a qualitative analysis of goodwill and concluded that there was no triggering event that would necessitate a two-step goodwill impairment test. |
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The Company recognized goodwill of $12.5 million with the acquisition of assets from TelWorx in July 2012. Goodwill recorded in connection with this acquisition was primarily attributable to the synergies expected to arise after the Company’s acquisition of the business and the assembled workforce of the acquired business. During the fourth quarter 2012, the Company recorded goodwill impairment of this $12.5 million based on the results from the annual test of goodwill impairment. Specifically, the projected 2013 base revenue declined 17% from the projections utilized in the purchase accounting fair value of the TelWorx assets at the acquisition date. The projected revenue, anticipated margins, and future cash flows of the business were significantly lower at the annual goodwill test date than at the acquisition date. The Company considered this revenue decline at the annual goodwill test date to be an indicator of goodwill impairment requiring the performance of the two-step quantitative fair value assessment, which resulted in a net present value of future cash flows that did not support a goodwill carrying value for this reporting unit. |
Long-lived and Definite-Lived Intangible assets |
The Company reviews definite-lived intangible assets, investments and other long-lived assets for impairment when events or changes in circumstances indicate that their carrying values may not be fully recoverable. This analysis differs from the Company’s goodwill analysis in that a definite-lived intangible asset impairment is only deemed to have occurred if the sum of the forecasted undiscounted future cash flows related to the assets being evaluated is less than the carrying value of the assets. The estimate of long-term undiscounted cash flows includes long-term forecasts of revenue growth, gross margins, and operating expenses. All of these items require significant judgment and assumptions. An impairment loss may exist when the estimated undiscounted cash flows attributable to the assets are less than the carrying amount. |
The Company had no assets for continuing operations measured at fair value on a non-recurring basis at December 31, 2014 and 2013. |
The following table presents assets for continuing operations measured at fair value on a non-recurring basis at December 31, 2012: |
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| | Level 1 | | | Level 2 | | | Level 3 | | | Loss | | | | | | | | | | | | | | | | | |
Intangible assets - RF Solutions | | $ | 0 | | | $ | 0 | | | $ | 161 | | | $ | 0 | | | | | | | | | | | | | | | | | |
Intangible assets - Connected Solutions | | $ | 0 | | | $ | 0 | | | $ | 0 | | | ($ | 12,550 | ) | | | | | | | | | | | | | | | | |
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Total | | $ | 0 | | | $ | 0 | | | $ | 161 | | | ($ | 12,550 | ) | | | | | | | | | | | | | | | | |
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Recent Accounting Pronouncements |
In August 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-15, which requires management to assess if there is substantial doubt about an entity’s ability to continue as a going concern for each annual and interim period. If conditions or events give rise to substantial doubt, disclosures are required. The new accounting standard is effective as of December 31, 2016, and the Company does not expect it to have an impact on its financial statement disclosures. |
In June 2014, the FASB issued ASU No. 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. ASU 2014-12 was issued to clarify that a performance target in a share-based payment that affects vesting and that could be achieved after the requisite service period should be accounted for as a performance condition under Accounting Standards Codification (ASC) 718, Compensation - Stock Compensation. As a result, the target is not reflected in the estimation of the award’s grant date fair value. Compensation cost would be recognized over the required service period, if it is probable that the performance condition will be achieved. The adoption of ASU No. 2014-12 is not expected to have a material impact on the Company’s consolidated financial statements. |
In May 2014, the FASB issued ASU 2014-09 which introduces a new five-step revenue recognition model in which an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU also requires disclosures sufficient to enable users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers, including qualitative and quantitative disclosures about contracts with customers, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. This standard is effective for fiscal years beginning after December 15, 2016, including interim periods within that reporting period. The Company is currently evaluating the new guidance to determine the impact it will have on its consolidated financial statements. |
In April 2014, the FASB issued ASU 2014-08, which includes amendments that change the requirements for reporting discontinued operations and require additional disclosures about discontinued operations. Under the new guidance, only disposals representing a strategic shift in operations - that is, a major effect on the organization’s operations and financial results should be presented as discontinued operations. Examples include a disposal of a major geographic area, a major line of business, or a major equity method investment. Additionally, the ASU requires expanded disclosures about discontinued operations that will provide financial statement users with more information about the assets, liabilities, income, and expenses of discontinued operations. This update is effective in the first quarter of 2015. The Company does not expect the new guidance to have a material impact on its consolidated financial statements. |