NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description
of Business
Communications
Systems, Inc. (herein collectively referred to as “CSI,” “our,” “we” or the “Company”)
is a Minnesota corporation organized in 1969 that operates directly and through its subsidiaries located in the United States
(U.S.) and the United Kingdom (U.K.). CSI is principally engaged in operations through its subsidiaries Transition Networks, Inc.
(“Transition Networks” or “Transition”), U.K.-based Net2Edge Limited (“Net2Edge”), JDL Technologies,
Inc. (“JDL Technologies” or “JDL”), and Ecessa Corporation (“Ecessa”). During the second quarter
of 2020, following the May 2020 acquisition of Ecessa and the consolidation of operations within the Transition Networks and Net2Edge
divisions, the Company realigned its business operations. Following this realignment, the Company now classifies its business
into two segments: (1) the Electronics & Software segment (consisting of Transition Networks and Net2Edge), which (i) manufactures
and sells solutions that provide actionable intelligence, power and connectivity at the edge of networks through Power over Ethernet
(“PoE”) products, software and services as well as traditional products such as media converters, network adapters
and other connectivity products and (ii) designs, develops, and sells edge network access products, TDM (time-division multiplexing)
over IP and other circuit emulation solutions, along with specialized cloud-based software solutions, primarily within the telecommunications
market; and (2) the Services and Support segment (consisting of JDL and Ecessa), which (i) provides technology solutions including
virtualization, managed services, wired and wireless network design and implementation, and hybrid cloud infrastructure and deployment
and (ii) designs, develops, and sells SD-WAN (software-designed wide-area network) solutions.
Non-allocated
general and administrative expenses are separately accounted for as “Other” in the Company’s segment reporting.
Intersegment revenues are eliminated upon consolidation.
Financial
Statement Presentation
The
condensed consolidated balance sheets and condensed consolidated statement of changes in stockholders’ equity as of June
30, 2020 and the related condensed consolidated statements of income (loss) and comprehensive income (loss), and the condensed
consolidated statements of cash flows for the periods ended June 30, 2020 and 2019 have been prepared by Company management. In
the opinion of management, all adjustments (which include only normal recurring adjustments, except where noted) necessary to
present fairly the financial position, results of operations, and cash flows at June 30, 2020 and 2019 and for the periods then
ended have been made.
Certain
information and footnote disclosures normally included in consolidated financial statements prepared in accordance with generally
accepted accounting principles in the United States of America have been condensed or omitted. We recommend these condensed consolidated
financial statements be read in conjunction with the financial statements and notes thereto included in the Company’s December
31, 2019 Annual Report to Shareholders on Form 10-K. The results of operations for the period ended June 30, 2020 are not necessarily
indicative of operating results for the entire year.
The
presentation of financial statements in conformity with generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities
at the balance sheet date, and the reported amounts of revenues and expenses during the reporting period. The estimates and assumptions
used in the accompanying condensed consolidated financial statements are based upon management’s evaluation of the relevant
facts and circumstances as of the time of the financial statements. Actual results could differ from those estimates.
Except
to the extent updated or described below, the significant accounting policies set forth in Note 1 to the consolidated financial
statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, appropriately represent, in all material
respects, the current status of accounting policies, and are incorporated herein by reference.
Accumulated
Other Comprehensive Loss
The
components of accumulated other comprehensive loss, net of tax, are as follows:
|
|
Foreign
Currency
Translation
|
|
|
Unrealized
gain
(loss) on
securities
|
|
|
Accumulated
Other
Comprehensive
Loss
|
|
December 31, 2019
|
|
$
|
(709,000
|
)
|
|
$
|
11,000
|
|
|
$
|
(698,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net current period change
|
|
|
(141,000
|
)
|
|
|
10,000
|
|
|
|
(131,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
$
|
(850,000
|
)
|
|
$
|
21,000
|
|
|
$
|
(829,000
|
)
|
NOTE
2 – REVENUE RECOGNITION
Electronics
& Software
The
Company has determined that the revenue recognition for its Electronics & Software segment occurs upon delivery of the Company’s
connectivity infrastructure and data transmission products. To determine when revenue should be recognized, it is important to
determine when the transfer of control has occurred. The Company has determined that control transfers for these products upon
shipment or delivery to the customer, in accordance with the agreed upon shipping terms. As such, the timing of revenue recognition
occurs at a specific point in time.
Services
& Support
The
Company has determined that the following performance obligations identified in its Services & Support segment are transferred
over time: managed services and professional services (time and materials (“T&M”) and fixed price) as well as
services under maintenance and service contracts. The managed services performance obligation is a bundled solution consisting
of a series of distinct services that are substantially the same and that have the same pattern of transfer to the customer and
are therefore recognized evenly over the term of the contract. T&M professional services arrangements are recognized over
time with an input method based on hours expended towards satisfying the performance obligation. Fixed price professional service
arrangements under a relatively longer-term service will also be recognized over time with an input method based on hours expended.
Maintenance and service contracts are recognized evenly over the life of the contract.
The
Company has also identified the following performance obligations within its Services & Support segment that are recognized
at a point in time which include resale of third-party hardware and software, installation, arranging for another party to transfer
services to the customer, and certain professional services. The resale of third-party hardware and software is recognized at
a point in time, when the goods are shipped or delivered to the customer’s location, in accordance with the shipping terms.
Installation services are recognized at a point in time when the services are completed. The service the Company provides to arrange
for another party to transfer services to the customer is satisfied at a point in time after the Company has transferred control
when the service is first available to the customer by the third-party vendor. The Company reports revenue from these third-party
services on a net basis in its financial statements. Depending on the nature of the service, certain professional services transfer
control at a point in time. The Company evaluates these circumstances on a case by case basis to determine if revenue should be
recognized over time or at a point in time.
Disaggregation
of revenue
Revenues
are recognized when control of the promised goods or services is transferred to our customers, in an amount that best reflects
the consideration we expect to receive in exchange for those goods or services. In accordance with ASC 606-10-50-5, the following
tables present how we disaggregate our revenues, which is different for each segment. During the second quarter of 2020, following
the May 2020 acquisition of Ecessa and the consolidation of operations within the Transition Networks and Net2Edge divisions,
the Company realigned its business operations. Following this realignment, the Company now classifies its businesses into two
segments, Electronics & Software and Services & Support. To conform to the presentation, the Company has reclassified
the 2019 information within its financial statements in this Form 10-Q.
For
the Electronics & Software segment, we analyze revenue by region and product group, which is as follows for the three and
six months ended June 30, 2020 and 2019:
|
|
Electronics
& Software Sales by Region
|
|
|
|
Three
Months Ended June 30
|
|
|
Six
Months Ended June 30
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
North America
|
|
$
|
6,898,000
|
|
|
$
|
8,055,000
|
|
|
$
|
14,346,000
|
|
|
$
|
14,969,000
|
|
International
|
|
|
1,389,000
|
|
|
|
1,881,000
|
|
|
|
2,477,000
|
|
|
|
4,258,000
|
|
|
|
$
|
8,287,000
|
|
|
$
|
9,936,000
|
|
|
$
|
16,823,000
|
|
|
$
|
19,227,000
|
|
|
|
Electronics
& Software Sales by Product Group
|
|
|
|
Three
Months Ended June 30
|
|
|
Six
Months Ended June 30
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Intelligent edge solutions
|
|
$
|
3,023,000
|
|
|
$
|
2,747,000
|
|
|
$
|
6,377,000
|
|
|
$
|
5,055,000
|
|
Traditional products
|
|
|
5,264,000
|
|
|
|
7,189,000
|
|
|
|
10,446,000
|
|
|
|
14,172,000
|
|
|
|
$
|
8,287,000
|
|
|
$
|
9,936,000
|
|
|
$
|
16,823,000
|
|
|
$
|
19,227,000
|
|
For
the Services & Support segment, we analyze revenue by customer group and type, which is as follows for the three and six months
ended June 30, 2020 and 2019:
|
|
Services
& Support Revenue by Customer Group
|
|
|
|
Three
Months Ended June 30
|
|
|
Six
Months Ended June 30
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Education
|
|
$
|
626,000
|
|
|
$
|
295,000
|
|
|
$
|
719,000
|
|
|
$
|
1,768,000
|
|
Healthcare
|
|
|
240,000
|
|
|
|
183,000
|
|
|
|
430,000
|
|
|
|
376,000
|
|
Financial and other commercial clients
|
|
|
474,000
|
|
|
|
291,000
|
|
|
|
817,000
|
|
|
|
550,000
|
|
CSI IT operations
|
|
|
185,000
|
|
|
|
182,000
|
|
|
|
386,000
|
|
|
|
466,000
|
|
|
|
$
|
1,525,000
|
|
|
$
|
951,000
|
|
|
$
|
2,352,000
|
|
|
$
|
3,160,000
|
|
|
|
Services
& Support Revenue by Type
|
|
|
|
Three
Months Ended June 30
|
|
|
Six
Months Ended June 30
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Project & product revenue
|
|
$
|
746,000
|
|
|
$
|
355,000
|
|
|
$
|
886,000
|
|
|
$
|
1,994,000
|
|
Services & support revenue
|
|
|
779,000
|
|
|
|
596,000
|
|
|
|
1,466,000
|
|
|
|
1,166,000
|
|
|
|
$
|
1,525,000
|
|
|
$
|
951,000
|
|
|
$
|
2,352,000
|
|
|
$
|
3,160,000
|
|
NOTE
3 – DISCONTINUED OPERATIONS
On
March 11, 2020, the Company sold the remainder of its Suttle business lines, including the SoHo, MediaMAX, and SpeedStar brands
and inventory as well as working capital, certain capital equipment, intellectual property, and customer relationships to Oldcastle
Infrastructure, Inc. (“Oldcastle”) for $8,000,000, with a working capital adjustment 90 days after close. Oldcastle
will operate the majority of the acquired Suttle business through its wholly-owned subsidiary, Primex Technologies, Inc. The Company
received proceeds of $8,190,000 and recorded a gain on the sale of $2,039,000 in the first six months of 2020.
Concurrent
with the closing of the transaction, the Company and Oldcastle entered into a Transition Services Agreement (“TSA”)
under which Suttle agreed to continue to manufacture products for Oldcastle for up to six months, to ensure seamless supply and
quality assurance to the existing customer base. Concurrently with the closing of the transaction and the TSA, the Company and
Oldcastle also entered into a lease agreement under which Oldcastle agreed to lease two buildings in Hector, Minnesota, where
Suttle had conducted operations. Base rents under the lease agreement range from $6,970 to $7,180 per month. The parties intend
to work with Suttle’s existing suppliers to ensure continued support and delivery of all Suttle products during the transition
period. The associated assets and liabilities related to this sale were classified as held for sale at December 31, 2019. The
presentation of discontinued operations has been retrospectively applied to all prior periods presented.
The
assets and liabilities of the discontinued operations that are classified as held for sale are as follows:
|
|
June
30, 2020
|
|
|
December
31, 2019
|
|
|
|
|
|
|
|
|
Trade accounts receivable
|
|
$
|
—
|
|
|
$
|
2,235,000
|
|
Inventories
|
|
|
—
|
|
|
|
3,009,000
|
|
Other current assets
|
|
|
—
|
|
|
|
93,000
|
|
Total current assets
|
|
$
|
—
|
|
|
$
|
5,337,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant, and equipment
|
|
$
|
—
|
|
|
$
|
883,000
|
|
Total noncurrent assets
|
|
$
|
—
|
|
|
$
|
883,000
|
|
|
|
|
|
|
|
|
|
|
Total assets held for sale
|
|
$
|
—
|
|
|
$
|
6,220,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
—
|
|
|
$
|
1,111,000
|
|
Other accrued liabilities
|
|
|
—
|
|
|
|
82,000
|
|
Total liabilities held for sale
|
|
$
|
—
|
|
|
$
|
1,193,000
|
|
The
financial results of the discontinued operations are as follows:
|
|
Three
Months Ended June 30
|
|
|
Six
Months Ended June 30
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
—
|
|
|
$
|
4,696,000
|
|
|
$
|
3,025,000
|
|
|
$
|
10,203,000
|
|
Cost of sales
|
|
|
—
|
|
|
|
3,228,000
|
|
|
|
2,050,000
|
|
|
|
6,935,000
|
|
Selling, general and administrative expenses
|
|
|
—
|
|
|
|
602,000
|
|
|
|
500,000
|
|
|
|
1,401,000
|
|
Restructuring expenses
|
|
|
445,000
|
|
|
|
—
|
|
|
|
764,000
|
|
|
|
—
|
|
Loss (gain) on sale of assets
|
|
|
122,000
|
|
|
|
(2,986,000
|
)
|
|
|
(2,039,000
|
)
|
|
|
(2,986,000
|
)
|
Other expense
|
|
|
—
|
|
|
|
10,000
|
|
|
|
—
|
|
|
|
—
|
|
Operating (loss) income before income taxes
|
|
|
(567,000
|
)
|
|
|
3,842,000
|
|
|
|
1,750,000
|
|
|
|
4,853,000
|
|
Income tax expense (benefit)
|
|
|
2,000
|
|
|
|
19,000
|
|
|
|
5,000
|
|
|
|
(3,000
|
)
|
(Loss) income from discontinued operations
|
|
$
|
(569,000
|
)
|
|
$
|
3,823,000
|
|
|
$
|
1,745,000
|
|
|
$
|
4,856,000
|
|
During
the six months ended June 30, 2020, the Company recorded $764,000 in restructuring expense. This consisted of severance and related
benefits costs due to the sale of the remainder of Suttle’s business lines and the closure of the plant once the TSA is
completed. We expect 2020 and 2021 restructuring costs to be $1,300,000 including remaining severance and other shut down costs.
Any remaining assets will be held for sale at the completion of the TSA. The Company paid $122,000 in restructuring charges during
the first six months of 2020 and had $642,000 in restructuring accruals recorded in accrued compensation and benefits at June
30, 2020 that are expected to be paid during 2020 and 2021.
NOTE
4 – CASH EQUIVALENTS AND INVESTMENTS
The
following tables show the Company’s cash equivalents and available –for-sale securities’ amortized cost, gross
unrealized gains, gross unrealized losses and fair value by significant investment category recorded as cash and cash equivalents
or short- and long-term investments as of June 30, 2020 and December 31, 2019:
June
30, 2020
|
|
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Cash
Equivalents
|
|
|
Short-Term
Investments
|
|
|
Long-Term
Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money Market funds
|
|
$
|
18,521,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
18,521,000
|
|
|
$
|
18,521,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Subtotal
|
|
|
18,521,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
18,521,000
|
|
|
|
18,521,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Paper
|
|
|
3,740,000
|
|
|
|
8,000
|
|
|
|
—
|
|
|
|
3,748,000
|
|
|
|
—
|
|
|
|
3,748,000
|
|
|
|
—
|
|
Convertible Debt
|
|
|
355,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
355,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
355,000
|
|
Subtotal
|
|
|
4,095,000
|
|
|
|
8,000
|
|
|
|
—
|
|
|
|
4,103,000
|
|
|
|
—
|
|
|
|
3,748,000
|
|
|
|
355,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
22,616,000
|
|
|
$
|
8,000
|
|
|
$
|
—
|
|
|
$
|
22,624,000
|
|
|
$
|
18,521,000
|
|
|
$
|
3,748,000
|
|
|
$
|
355,000
|
|
December
31, 2019
|
|
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Cash
Equivalents
|
|
|
Short-Term
Investments
|
|
|
Long-Term
Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money Market funds
|
|
$
|
8,761,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
8,761,000
|
|
|
$
|
8,761,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Subtotal
|
|
|
8,761,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
8,761,000
|
|
|
|
8,761,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Paper
|
|
|
8,695,000
|
|
|
|
—
|
|
|
|
(1,000
|
)
|
|
|
8,694,000
|
|
|
|
—
|
|
|
|
8,694,000
|
|
|
|
—
|
|
Corporate Notes/Bonds
|
|
|
756,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
756,000
|
|
|
|
—
|
|
|
|
756,000
|
|
|
|
—
|
|
Convertible Debt
|
|
|
250,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
250,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
250,000
|
|
Subtotal
|
|
|
9,701,000
|
|
|
|
—
|
|
|
|
(1,000
|
)
|
|
|
9,700,000
|
|
|
|
—
|
|
|
|
9,450,000
|
|
|
|
250,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
18,462,000
|
|
|
$
|
—
|
|
|
$
|
(1,000
|
)
|
|
$
|
18,461,000
|
|
|
$
|
8,761,000
|
|
|
$
|
9,450,000
|
|
|
$
|
250,000
|
|
The
following table summarizes the estimated fair value of our investments, designated as available-for-sale and classified by the
contractual maturity date of the securities as of June 30, 2020:
|
|
Amortized
Cost
|
|
|
Estimated
Market Value
|
|
|
|
|
|
|
|
|
Due within one year
|
|
$
|
3,740,000
|
|
|
$
|
3,748,000
|
|
Due after one year through five years
|
|
|
355,000
|
|
|
|
355,000
|
|
|
|
$
|
4,095,000
|
|
|
$
|
4,103,000
|
|
The
Company did not recognize any gross realized gains or losses during either of the three or six month periods ending June 30, 2020
and 2019, respectively. If the Company had realized gains or losses, they would be included within investment and other income
in the accompanying condensed consolidated statement of income and comprehensive income.
In April 2020, the Company made an $899,000
investment in the common stock of Quortus Ltd., a UK-based company that provides virtual core network software for Private LTE
solutions for critical and secure communications. The Company believes this investment is important for its Electronics &
Software segment because this business segment has begun exploring partnering with Quortus to integrate the Quortus Private LTE
core in existing and new products for that segment’s federal business, network extensions, and private networks for enterprises. The
Company’s investment represents less than 10% of the outstanding equity of Quortus Ltd. Investments in common stock or in-substance
common stock of entities in which the Company does not have the ability to exercise significant influence over the operating and
financial matters of the entity are accounted for using the cost method. Investments in companies that the Company does not control,
which are not in the form of common stock or in-substance common stock, are also accounted for using the cost method.
NOTE
5 - STOCK-BASED COMPENSATION
Employee
Stock Purchase Plan
Under
the Company’s Employee Stock Purchase Plan (“ESPP”), employees are able to acquire shares of common stock at
85% of the price at the end of each current quarterly plan term. The most recent term ended June 30, 2020. The ESPP is considered
compensatory under current Internal Revenue Service rules. At June 30, 2020, after giving effect to the shares issued as of that
date, 81,053 shares remain available for future issuance under the ESPP.
2011
Executive Incentive Compensation Plan
On
March 28, 2011 the Board adopted and on May 19, 2011 the Company’s shareholders approved the Company’s 2011 Executive
Incentive Compensation Plan (“2011 Incentive Plan”). The 2011 Incentive Plan authorizes incentive awards to officers,
key employees and non-employee directors in the form of options (incentive and non-qualified), stock appreciation rights, restricted
stock, restricted stock units, performance stock units (“deferred stock”), performance cash units, and other awards
in stock, cash, or a combination of stock and cash. The 2011 Incentive Plan, as amended, allows the issuance of up to 2,500,000
shares of common stock.
At
June 30, 2020, 413,664 shares have been issued under the 2011 Incentive Plan, 1,519,088 shares are subject to currently outstanding
options, deferred stock awards, and unvested restricted stock units, and 567,248 shares are eligible for grant under future awards.
Changes
in Stock Options Outstanding
The
following table summarizes changes in the number of outstanding stock options under the 2011 Incentive Plan over the period December
31, 2019 to June 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
|
Weighted
average
exercise price
per share
|
|
|
Weighted
average
remaining
contractual term
in years
|
|
Outstanding – December 31, 2019
|
|
|
|
1,130,472
|
|
|
$
|
7.28
|
|
|
|
3.48
|
|
Awarded
|
|
|
|
133,801
|
|
|
|
5.25
|
|
|
|
|
|
Exercised
|
|
|
|
(2,000
|
)
|
|
|
2.64
|
|
|
|
|
|
Forfeited
|
|
|
|
(46,369
|
)
|
|
|
11.11
|
|
|
|
|
|
Outstanding – June 30, 2020
|
|
|
|
1,215,904
|
|
|
|
6.92
|
|
|
|
3.52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2020
|
|
|
|
956,317
|
|
|
$
|
7.59
|
|
|
|
2.90
|
|
Expected to vest June 30, 2020
|
|
|
|
1,215,904
|
|
|
|
6.92
|
|
|
|
3.52
|
|
The
aggregate intrinsic value of all options (the amount by which the market price of the stock on the last day of the period exceeded
the market price of the stock on the date of grant) outstanding at June 30, 2020 was $674,000. The intrinsic value of all options
exercised during the three months ended June 30, 2020 was $5,000. Net cash proceeds from the exercise of all stock options were
$0 in each of the three-month periods ended June 30, 2020 and 2019.
Changes
in Deferred Stock Outstanding
The
following table summarizes the changes in the number of deferred stock shares under the 2011 Incentive Plan over the period December
31, 2019 to June 30, 2020:
|
|
|
|
|
|
Weighted
Average
|
|
|
|
|
|
|
|
Grant
Date
|
|
|
|
|
Shares
|
|
|
Fair
Value
|
|
Outstanding – December 31, 2019
|
|
|
|
321,227
|
|
|
$
|
3.37
|
|
Granted
|
|
|
|
89,131
|
|
|
|
5.39
|
|
Vested
|
|
|
|
(46,584
|
)
|
|
|
2.64
|
|
Forfeited
|
|
|
|
(60,590
|
)
|
|
|
4.40
|
|
Outstanding – June 30, 2020
|
|
|
|
303,184
|
|
|
|
3.87
|
|
Compensation
Expense
Share-based
compensation expense recognized for the six-months ended June 30, 2020 was $177,000 before income taxes and $140,000 after income
taxes. Share-based compensation expense recognized for the six-months ended June 30, 2019 was $189,000 before income taxes and
$149,000 after income taxes. Unrecognized compensation expense for the Company’s plans was $833,000 at June 30, 2020 and
is expected to be recognized over a weighted-average period of 2.6 years. Share-based compensation expense is recorded as a part
of selling, general and administrative expenses.
NOTE
6 - INVENTORIES
Inventories
summarized below are priced at the lower of first-in, first-out cost or net realizable value:
|
|
June
30
|
|
|
December
31
|
|
|
|
2020
|
|
|
2019
|
|
Finished goods
|
|
$
|
8,741,000
|
|
|
$
|
6,728,000
|
|
Raw and processed materials
|
|
|
1,201,000
|
|
|
|
1,803,000
|
|
|
|
$
|
9,942,000
|
|
|
$
|
8,531,000
|
|
NOTE
7 – ACQUISITION
On
May 14, 2020, in a reverse triangular merger, the Company completed the acquisition of 100% of Ecessa Corporation (“Ecessa”),
based in Plymouth, Minnesota. The purchase price was $4,650,000, with cash acquired totaling $666,000. The purchase price includes
initial consideration of $4,666,000 and $ (16,000) in working capital adjustments.
The
estimated assets and liabilities of Ecessa are recorded in the condensed consolidated balance sheet within the Services &
Support segment at June 30, 2020. The preliminary purchase price allocation was based on estimates of the fair value of assets
acquired and liabilities assumed, and included total assets of $5,249,000, including estimated goodwill of $411,000 and estimated
intangibles of $3,190,000, and total liabilities of $599,000. The fair value of acquired identifiable intangible assets of $3,190,000
is provisional depending on the final valuations for those assets. All balances recorded are estimated amounts and the Company
expects to finalize the purchase price allocation during the third quarter of 2020 as the valuation of identifiable assets and
liabilities is completed. The pro forma impact of Ecessa was not significant to the Company’s results for the three and
six months ended June 30, 2020.
NOTE
8 – CONTINGENCIES
In
the ordinary course of business, the Company is exposed to legal actions and claims and incurs costs to defend against these actions
and claims. Company management is not aware of any outstanding or pending legal actions or claims that could materially affect
the Company’s financial position or results of operations.
NOTE
9 – DEBT
Line
of Credit
The
Company has a $15,000,000 line of credit from Wells Fargo Bank, N.A. The Company had no outstanding borrowings against
the line of credit at June 30, 2020 or December 31, 2019. Due to the revolving nature of loans under our credit facility, additional
borrowings and periodic repayments and re-borrowings may be made until the maturity date. The total amount available for borrowings
under our credit facility at June 30, 2020 was $4,052,000, based on the borrowing base calculation. Interest on borrowings on
the credit line is at LIBOR plus 2.0% (2.2% at June 30, 2020). The credit agreement expires August 12, 2021 and is secured by
assets of the Company. Our credit agreement contains financial covenants including a minimum liquidity balance of $10,000,000. Liquidity
is calculated as the sum of unrestricted cash, marketable securities and the availability on the line of credit. The Company was
in compliance with its financial covenants at June 30, 2020.
NOTE
10 – INCOME TAXES
In
the preparation of the Company’s consolidated financial statements, management calculates income taxes based upon the estimated
effective rate applicable to operating results for the full fiscal year. This includes estimating the current tax liability as
well as assessing differences resulting from different treatment of items for tax and book accounting purposes. These differences
result in deferred tax assets and liabilities, which are recorded on the balance sheet. Management analyzes these assets and liabilities
regularly and assesses the likelihood that deferred tax assets will be recovered from future taxable income.
At
June 30, 2020 there was $111,000 of net uncertain tax benefit positions that would reduce the effective income tax rate if recognized.
The Company records interest and penalties related to income taxes as income tax expense in the condensed consolidated statements
of income (loss) and comprehensive income (loss).
The
Company is subject to U.S. federal income tax as well as income tax of multiple state and foreign jurisdictions. The tax years
2016-2019 remain open to examination by the Internal Revenue Service and the years 2015-2019 remain open to examination by various
state tax departments. The tax years from 2016-2018 remain open in Costa Rica.
The
Company’s effective income tax rate was 0.2% for the first six months of 2020. The effective tax rate differs from the federal
tax rate of 21% due to state income taxes, foreign tax rate differences, foreign losses not deductible for U.S. income tax purposes,
the effect of uncertain income tax positions, stock compensation windfalls and changes in valuation allowances related to deferred
tax assets. The foreign operating losses may ultimately be deductible in the countries
in which they occurred; however, the Company has not recorded a deferred tax asset for these losses due to uncertainty regarding
the eventual realization of the benefit. The effect of the foreign operations was an overall rate decrease of approximately (31.8%)
for the six months ended June 30, 2020. There were no additional uncertain tax positions
identified in the first half of 2020. The Company’s effective income tax rate for the six months
ended June 30, 2019 was 0.9%, and differed from the federal tax rate due to state income
taxes, foreign tax rate differences, foreign losses not deductible for U.S. income tax purposes, changes in the reserve for uncertain
income tax positions, provisions for interest charges for uncertain income tax positions, stock compensation shortfalls and changes
in valuation allowances related to deferred tax assets.
NOTE
11 – SEGMENT INFORMATION
Following
the acquisition of Ecessa during the quarter and the merging of certain operations, the Company classifies its remaining businesses
into two segments as follows:
|
●
|
Electronics
& Software: designs, develops and sells Intelligent Edge solutions that provide connectivity
and power through PoE products and actionable intelligence to end devices in an IoT ecosystem
through embedded and cloud-based management software. In addition, this segment continues to generate
revenue from its traditional products consisting of, media converters, NICs, and Ethernet switches
that offer the ability to affordably integrate the benefits of fiber optics into any data network;
and
|
|
●
|
Services
& Support: provides technology solutions that address prevalent IT challenges, including virtualization
and cloud solutions, managed services, wired and wireless network design and implementation, and
converged infrastructure configuration and deployment.
|
Management
has chosen to organize the Company and disclose reportable segments based on our products and services. Intersegment revenues
are eliminated upon consolidation. “Other” includes non-allocated corporate overhead costs. As a result of our treatment
of Suttle as discontinued operations, “Other” includes amounts previously allocated to Suttle that do not meet the
criteria to be included in income from discontinued operations. The Company has reclassified its 2019 financial statements to
conform to its new segment reporting.
Information
concerning the Company’s continuing operations in these two segments for the three and six-month periods ended June 30,
2020 and 2019 are as follows:
|
|
Electronics
&
|
|
|
Services &
|
|
|
|
|
|
Intersegment
|
|
|
|
|
|
|
Software
|
|
|
Support
|
|
|
Other
|
|
|
Eliminations
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
8,287,000
|
|
|
$
|
1,525,000
|
|
|
$
|
—
|
|
|
$
|
(184,000
|
)
|
|
$
|
9,628,000
|
|
Cost of sales
|
|
|
5,192,000
|
|
|
|
982,000
|
|
|
|
—
|
|
|
|
(26,000
|
)
|
|
|
6,148,000
|
|
Gross profit
|
|
|
3,095,000
|
|
|
|
543,000
|
|
|
|
—
|
|
|
|
(158,000
|
)
|
|
|
3,480,000
|
|
Selling, general and
administrative expenses
|
|
|
3,638,000
|
|
|
|
483,000
|
|
|
|
769,000
|
|
|
|
(158,000
|
)
|
|
|
4,732,000
|
|
Acquisition
costs
|
|
|
—
|
|
|
|
—
|
|
|
|
394,000
|
|
|
|
—
|
|
|
|
394,000
|
|
Operating (loss) income
|
|
|
(543,000
|
)
|
|
|
60,000
|
|
|
|
(1,163,000
|
)
|
|
|
—
|
|
|
|
(1,646,000
|
)
|
Other
income
|
|
|
3,000
|
|
|
|
—
|
|
|
|
276,000
|
|
|
|
—
|
|
|
|
279,000
|
|
Income
(loss) before income tax
|
|
$
|
(540,000
|
)
|
|
$
|
60,000
|
|
|
$
|
(887,000
|
)
|
|
$
|
—
|
|
|
$
|
(1,367,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
$
|
76,000
|
|
|
$
|
19,000
|
|
|
$
|
123,000
|
|
|
$
|
—
|
|
|
$
|
218,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
$
|
24,000
|
|
|
$
|
—
|
|
|
$
|
8,000
|
|
|
$
|
—
|
|
|
$
|
32,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
$
|
16,825,000
|
|
|
$
|
6,569,000
|
|
|
$
|
33,984,000
|
|
|
$
|
(27,000
|
)
|
|
$
|
57,351,000
|
|
|
|
|
Electronics
&
|
|
|
|
Services
&
|
|
|
|
|
|
|
|
Intersegment
|
|
|
|
|
|
|
|
|
Software
|
|
|
|
Support
|
|
|
|
Other
|
|
|
|
Eliminations
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
9,936,000
|
|
|
$
|
951,000
|
|
|
$
|
—
|
|
|
$
|
(182,000
|
)
|
|
$
|
10,705,000
|
|
Cost of sales
|
|
|
5,775,000
|
|
|
|
700,000
|
|
|
|
—
|
|
|
|
(11,000
|
)
|
|
|
6,464,000
|
|
Gross profit
|
|
|
4,161,000
|
|
|
|
251,000
|
|
|
|
—
|
|
|
|
(171,000
|
)
|
|
|
4,241,000
|
|
Selling,
general and administrative expenses
|
|
|
4,300,000
|
|
|
|
331,000
|
|
|
|
910,000
|
|
|
|
(171,000
|
)
|
|
|
5,370,000
|
|
Operating loss
|
|
|
(139,000
|
)
|
|
|
(80,000
|
)
|
|
|
(910,000
|
)
|
|
|
—
|
|
|
|
(1,129,000
|
)
|
Other
income
|
|
|
2,000
|
|
|
|
—
|
|
|
|
65,000
|
|
|
|
—
|
|
|
|
67,000
|
|
Loss
before income tax
|
|
$
|
(137,000
|
)
|
|
$
|
(80,000
|
)
|
|
$
|
(845,000
|
)
|
|
$
|
—
|
|
|
$
|
(1,062,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
$
|
89,000
|
|
|
$
|
26,000
|
|
|
$
|
147,000
|
|
|
$
|
—
|
|
|
$
|
262,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
$
|
5,000
|
|
|
$
|
—
|
|
|
$
|
28,000
|
|
|
$
|
—
|
|
|
$
|
33,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
$
|
19,421,000
|
|
|
$
|
1,658,000
|
|
|
$
|
33,024,000
|
|
|
$
|
(27,000
|
)
|
|
$
|
54,076,000
|
|
|
|
Electronics &
|
|
|
Services &
|
|
|
|
|
|
Intersegment
|
|
|
|
|
|
|
Software
|
|
|
Support
|
|
|
Other
|
|
|
Eliminations
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
16,823,000
|
|
|
$
|
2,352,000
|
|
|
$
|
—
|
|
|
$
|
(384,000
|
)
|
|
$
|
18,791,000
|
|
Cost of sales
|
|
|
9,999,000
|
|
|
|
1,602,000
|
|
|
|
—
|
|
|
|
(27,000
|
)
|
|
|
11,574,000
|
|
Gross profit
|
|
|
6,824,000
|
|
|
|
750,000
|
|
|
|
—
|
|
|
|
(357,000
|
)
|
|
|
7,217,000
|
|
Selling, general and
administrative expenses
|
|
|
7,535,000
|
|
|
|
811,000
|
|
|
|
1,683,000
|
|
|
|
(357,000
|
)
|
|
|
9,672,000
|
|
Acquisition
costs
|
|
|
—
|
|
|
|
—
|
|
|
|
415,000
|
|
|
|
—
|
|
|
|
415,000
|
|
Operating loss
|
|
|
(711,000
|
)
|
|
|
(61,000
|
)
|
|
|
(2,098,000
|
)
|
|
|
—
|
|
|
|
(2,870,000
|
)
|
Other
income
|
|
|
17,000
|
|
|
|
—
|
|
|
|
673,000
|
|
|
|
—
|
|
|
|
690,000
|
|
Loss
before income tax
|
|
$
|
(694,000
|
)
|
|
$
|
(61,000
|
)
|
|
$
|
(1,425,000
|
)
|
|
$
|
—
|
|
|
$
|
(2,180,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
$
|
147,000
|
|
|
$
|
32,000
|
|
|
$
|
251,000
|
|
|
$
|
—
|
|
|
$
|
430,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
$
|
68,000
|
|
|
$
|
1,000
|
|
|
$
|
20,000
|
|
|
$
|
—
|
|
|
$
|
89,000
|
|
|
|
Electronics
&
|
|
|
Services
&
|
|
|
|
|
|
Intersegment
|
|
|
|
|
|
|
Software
|
|
|
Support
|
|
|
Other
|
|
|
Eliminations
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
19,227,000
|
|
|
$
|
3,160,000
|
|
|
$
|
—
|
|
|
$
|
(466,000
|
)
|
|
$
|
21,921,000
|
|
Cost of sales
|
|
|
11,139,000
|
|
|
|
2,040,000
|
|
|
|
—
|
|
|
|
(125,000
|
)
|
|
|
13,054,000
|
|
Gross profit
|
|
|
8,088,000
|
|
|
|
1,120,000
|
|
|
|
—
|
|
|
|
(341,000
|
)
|
|
|
8,867,000
|
|
Selling,
general and administrative expenses
|
|
|
8,696,000
|
|
|
|
707,000
|
|
|
|
1,756,000
|
|
|
|
(341,000
|
)
|
|
|
10,818,000
|
|
Operating (loss) income
|
|
|
(608,000
|
)
|
|
|
413,000
|
|
|
|
(1,756,000
|
)
|
|
|
—
|
|
|
|
(1,951,000
|
)
|
Other
income (expense)
|
|
|
1,000
|
|
|
|
(10,000
|
)
|
|
|
102,000
|
|
|
|
—
|
|
|
|
93,000
|
|
(Loss)
income before income tax
|
|
$
|
(607,000
|
)
|
|
$
|
403,000
|
|
|
$
|
(1,654,000
|
)
|
|
$
|
—
|
|
|
$
|
(1,858,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
$
|
188,000
|
|
|
$
|
54,000
|
|
|
$
|
299,000
|
|
|
$
|
—
|
|
|
$
|
541,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
$
|
12,000
|
|
|
$
|
36,000
|
|
|
$
|
195,000
|
|
|
$
|
—
|
|
|
$
|
243,000
|
|
NOTE
12 – NET INCOME (LOSS) PER SHARE
Basic
net income (loss) per common share is based on the weighted average number of common shares outstanding during each period and
year. Diluted net income per common share takes into effect the dilutive effect of potential common shares outstanding. The Company’s
only potential common shares outstanding are stock options and shares associated with the long-term incentive compensation plans,
which resulted in no dilutive effect for the three and six months ended June 30, 2020. The dilutive
effect for the three and six-month periods ended June 30, 2019 was 2,530 and 0 shares, respectively. The Company calculates
the dilutive effect of outstanding options using the treasury stock method. Due to the net losses in the first three and six months
of 2020, there was no dilutive impact from stock options or unvested shares. Options totaling 614,114 and 634,114 were excluded
from the calculation of diluted earnings per share for the three and six months ended June 30, 2020, respectively because the
exercise price was greater than the average market price of common stock during the period and deferred stock awards totaling
117,688 shares would not have been included for the three and six months ended June 30, 2020, because of unmet performance conditions.
Options totaling 1,173,365 and 1,223,365 were excluded from the calculation of diluted earnings per share for the three and six
months ended June 30, 2019, respectively because the exercise price was greater than the average market price of common stock
during the period and deferred stock awards totaling 207,573 shares would not have been included for the three and six months
ended June 30, 2019, because of unmet performance conditions.
NOTE
13 – FAIR VALUE MEASUREMENTS
The
accounting guidance establishes a valuation hierarchy for disclosure of the inputs to valuation used to measure fair value. This
hierarchy prioritizes the inputs into three broad levels as follows:
Level
1 – Observable inputs that reflect unadjusted quoted prices for identical assets or liabilities in active markets that the
Company has the ability to access at the measurement date.
Level
2 – Observable inputs such as quoted prices for similar instruments and quoted prices in markets that are not active, and
inputs that are directly observable or can be corroborated by observable market data. The types of assets and liabilities included
in Level 2 are typically either comparable to actively traded securities or contracts, such as treasury securities with pricing
interpolated from recent trades of similar securities, or priced with models using highly observable inputs, such as commodity
options priced using observable forward prices and volatilities.
Level
3 – Significant inputs to pricing that have little or no observability as of the reporting date. The types of assets and
liabilities included in Level 3 are those with inputs requiring significant management judgment or estimation, such as the complex
and subjective models and forecasts used to determine the fair value of financial instruments.
Financial
assets and liabilities measured at fair value on a recurring basis as of June 30, 2020 and December 31, 2019, are summarized below:
|
|
June 30,
2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money Market Funds
|
|
$
|
18,521,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
18,521,000
|
|
Subtotal
|
|
|
18,521,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
18,521,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Paper
|
|
|
—
|
|
|
|
3,748,000
|
|
|
|
—
|
|
|
|
3,748,000
|
|
Subtotal
|
|
|
—
|
|
|
|
3,748,000
|
|
|
|
—
|
|
|
|
3,748,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible debt
|
|
|
—
|
|
|
|
—
|
|
|
|
355,000
|
|
|
|
355,000
|
|
Subtotal
|
|
|
—
|
|
|
|
—
|
|
|
|
355,000
|
|
|
|
355,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
18,521,000
|
|
|
$
|
3,748,000
|
|
|
$
|
355,000
|
|
|
$
|
22,624,000
|
|
|
|
December
31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money Market Funds
|
|
$
|
8,761,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
8,761,000
|
|
Subtotal
|
|
|
8,761,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
8,761,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Paper
|
|
|
—
|
|
|
|
8,694,000
|
|
|
|
—
|
|
|
|
8,694,000
|
|
Corporate Notes/Bonds
|
|
|
—
|
|
|
|
756,000
|
|
|
|
—
|
|
|
|
756,000
|
|
Subtotal
|
|
|
—
|
|
|
|
9,450,000
|
|
|
|
—
|
|
|
|
9,450,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible debt
|
|
|
—
|
|
|
|
—
|
|
|
|
250,000
|
|
|
|
250,000
|
|
Subtotal
|
|
|
—
|
|
|
|
—
|
|
|
|
250,000
|
|
|
|
250,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
8,761,000
|
|
|
$
|
9,450,000
|
|
|
$
|
250,000
|
|
|
$
|
18,461,000
|
|
We
record transfers between levels of the fair value hierarchy, if necessary, at the end of the reporting period. There were no transfers
between levels during the three and six months ended June 30, 2020.
NOTE
14 – GENERAL COMMITMENTS
On
August 2, 2018, the Company entered into a purchase agreement with Launch Properties, LLC for the sale of the Company’s
building located at 10900 Red Circle Drive, Minnetonka, MN for $10,000,000. The building currently includes the Company’s
corporate administrative offices, as well as some operations for Transition Networks and JDL Technologies. The closing of the
transaction was subject to several closing conditions, including the buyer’s ability to complete due diligence within 180
days and the buyer’s ability to obtain regulatory approval for its intended use of the property. The original due diligence
period lapsed on January 29, 2019, and through two amendments to the original agreement, the due diligence period was extended
to June 30, 2020, and the buyer met certain required obligations under these amendments. One of the conditions of the agreement
and amendments included non-refundable deposits into an escrow account. As of June 30, 2020, the balance in this escrow account
was $225,000 and is included within restricted cash within the condensed consolidated balance sheet. On July 28, 2020, the parties
executed an agreement terminating the original purchase agreement. The $225,000 in earnest money in the escrow account was transferred
to the Company.
NOTE 15 – RECENT ACCOUNTING PRONOUNCEMENTS
In
December 2019, the FASB issued ASU 2019-12, “Simplifying the Accounting for Income Taxes”, which, as part
of its Simplification Initiative to reduce the cost and complexity in accounting for income taxes, removes certain exceptions
related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period and
the recognition of deferred tax liabilities for outside basis differences. ASU 2019-12 also amends other aspects of
the guidance to help simplify and promote consistent application of GAAP. The guidance is effective for interim and annual periods
beginning after December 15, 2020, with early adoption permitted. The Company adopted this standard during the first quarter
of 2020 with an immaterial impact to our consolidated financial statements.
In
June 2016, FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial
Instruments.” The amendments in this update replace the incurred loss impairment methodology in current U.S. GAAP with a
methodology that reflects expected credit losses. This ASU is intended to provide financial statement users with more decision-useful
information about the expected credit losses and is effective for annual periods and interim periods for those annual periods
beginning after December 15, 2022, which for us is the first quarter ending March 31, 2023. Entities may early adopt beginning
after December 15, 2018. We are currently evaluating the impact of the adoption of ASU 2016-13 on our consolidated financial statements.
NOTE
16 – SUBSEQUENT EVENTS
The
Company has evaluated subsequent events through the date of this filing. Other than the termination of the purchase agreement
in Note 14, we do not believe there are any material subsequent events other than those disclosed in the footnotes to these financial
statements that require further disclosure.