Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations
The following information should be read in conjunction with the unaudited interim condensed consolidated financial statements of PCTEL, Inc. ("PCTEL," "the Company", “we,” “our,” and “us”) and the notes thereto included in Item 1 of this Quarterly Report on Form 10-Q and in conjunction with the consolidated financial statements for the year ended December 31, 2022 contained in 2022 Form 10-K. This Quarterly Report on Form 10-Q 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”). In some cases, you can identify these forward-looking statements by words such as “may,” “will,” “plans,” “seeks,” “expects,” “anticipates,” “intends,” “believes” and words of similar meaning. Investors in our common stock are cautioned not to place undue reliance on these forward-looking statements. Specifically, these statements include, but are not limited to, statements concerning: our growth strategy; our future financial performance; growth of our antenna solutions and Industrial Internet of Things business and our test & measurement business; our ability to continue to innovate new products; our ability to expand product lines in the European market and through distribution channels; the impact of our transition plan for manufacturing inside and outside China; the impact of the COVID-19 pandemic and the ensuing supply chain disruptions; the impact of geopolitical conditions, including the ongoing war in Ukraine and related sanctions and disruption in petroleum and other markets; the impact of economic conditions, including inflation, higher interest rates, economic weakness, and potential recession; the anticipated demand for certain products, including those related to public safety, Industrial IoT, 5G (e.g., the Gflex scanning receiver), agriculture and intelligent transportation; and the anticipated growth of public and private wireless systems. These statements are based on management’s current expectations and actual results may differ materially from those projected as a result of certain risks and uncertainties. Important factors that could cause such differences include, but are not limited to: the impact of adverse and uncertain economic and political conditions within and outside the U.S., including inflationary pressures, higher interest rates, economic downturn, the potential for a recession, and the ongoing war in Ukraine; inflation and increases in product and material costs; competition within the wireless product industry; disruptions to our workforce, operations, supply chain and customer demand caused by the COVID-19 pandemic and the impact of the pandemic and the ensuing supply chain disruption on our results of operations, financial condition, and stock price; our ability to accurately forecast demand for our products; our ability to continue to successfully integrate Smarteq and any future acquisitions into our existing operations; the impact of uncertainty as a result of doing business in China and Europe; the impact of tariffs on certain imports from China; delays in our sales cycles; the impact of data densification and IoT on capacity and coverage demand; the impact of 5G; customer demand and growth generally in our defined market segments; our ability to access the government market and create demand for our products; to expand our European presence and benefit from additional antenna and Industrial IoT product offerings from Smarteq; and our ability to grow our business and create, protect and implement new technologies and solutions. These and other risks and uncertainties are detailed in our filings with the Securities and Exchange Commission (“SEC”). These forward-looking statements are made only as of the date hereof. We do not undertake, and expressly disclaim, any obligation to update or revise any forward-looking statements whether because of new information, future events or otherwise, except as may be required by applicable law. Investors should carefully review the information contained in Item 1A Risk Factors.
Business Overview
PCTEL is a leading global provider of wireless technology, including purpose-built Industrial IoT devices, antennas, and test & measurement products. We strive to solve complex wireless challenges to help organizations stay connected, transform, and grow. We believe we have a strong brand presence and expertise in RF, digital and mechanical engineering. We have two product lines (antennas/Industrial IoT devices and test & measurement solutions). Our antenna products include antennas deployed in small cells, enterprise Wi-Fi access points, fleet management, IoT applications, and transit systems. Our Industrial IoT devices include ruggedized access points, IoT interface cards and IoT sensor platforms for applications such as logistics, remote monitoring and control. Our test & measurement products are designed to improve the performance of wireless networks globally. Mobile operators, private enterprises, and network equipment manufacturers rely on our products to analyze, design, and optimize next generation wireless networks. We seek out product applications that command a premium for product design and performance, and we avoid commodity markets. Our strength is solving complex wireless challenges for our customers through our products and solutions. To this end, we are constantly seeking to innovate and improve antenna, Industrial IoT, and wireless testing products and capabilities to capture the opportunities of the rapidly evolving wireless industry. We focus on engineering, research, and development to maintain and expand our competitiveness.
Antennas and Industrial IoT Devices
PCTEL designs and manufactures precision antennas and Industrial IoT devices, and we offer in-house wireless product development for our customers, including design, testing, radio integration, and manufacturing capabilities. Revenue growth in these markets is driven by the increased use and complexity of wireless communications.
Our antenna portfolio includes Wi-Fi, Bluetooth, Land Mobile Radio (“LMR”), Tetra, Global Navigation Satellite System (“GNSS”), Cellular, Industrial, Scientific, and Medical (“ISM”), Long Range (“LoRa”), and combination antenna solutions. The market applications for our antennas include public safety communications, military communications, utilities and energy, precision agriculture,
24
smart traffic management, Electric Vehicle (“EV”) charging stations, passenger and cargo vehicles, forestry machinery and off-road vehicles. For smart traffic management, we provide antenna systems for smart roadways and smart rail. Fleet antennas for public safety, including police vehicles, is a key market. We not only manufacture the antennas, but we also provide engineering design services to determine the layout of multi-antenna installations to minimize potential interference between each antenna element. Our customized solutions often result in general purpose products with advanced capabilities, such as multi-element antenna systems in a single radome. These systems can include several LTE bands, Wi-Fi bands, and GPS navigation elements, all in one housing. An antenna designed for one application can be modified to be used for other applications.
Our Industrial IoT device portfolio includes access points, radio modules, sensor communication modules, and wireless communication sensors. The market applications for our Industrial IoT devices include utilities and smart grid, oil and gas, manufacturing, logistics, industrial automation, smart metering, and asset tracking.
Our strategy is to provide a “toolbox” of hardware solutions to our existing OEMs and distributors for Industrial IoT systems. We provide all of the field hardware required for wireless Industrial IoT systems - antennas, ruggedized Wi-Fi access points, radio modules, and integrated cellular sensors for Industrial IoT. Our go-to-market strategy for this growing sector is to sell more RF hardware components to our customers that traditionally purchase antennas from PCTEL.
Consistent with our mission to solve complex network engineering problems and to compete effectively in the antenna market, PCTEL maintains expertise in the following areas: radio frequency engineering, wireless network engineering, mechanical engineering, mobile antenna design, manufacturing, and product quality and testing. Competition among providers of antennas and Industrial IoT devices is fragmented. Competitors include Airgain, Amphenol, Panorama, Taoglas, and TE Connectivity.
Test & Measurement Products
PCTEL provides RF test & measurement products that improve the performance of wireless networks globally, with a focus on LTE, public safety, and 5G technologies. Revenue growth in this market is driven by the implementation and roll out of new wireless technology standards (i.e., 3G to 4G, 4G to 5G) and new market applications for public safety and government. The market applications for our test & measurement equipment includes cellular testing, public safety and private radio network testing, federal government communications testing, and indoor building network testing. Our portfolio includes scanning receivers, scanning receiver software, public safety solutions, automated spectrum monitoring solutions, interference location systems, mmwave transmitters, and a cloud-based reporting platform.
Our scanning receivers are software defined radios used to (1) confirm adequate RF coverage during deployment, (2) identify interfering signals that decrease capacity, (3) troubleshoot system performance issues as networks expand, and (4) benchmark competing networks because our scanning receivers can scan all technologies across all frequencies during one test. They are necessary for initial network deployment and throughout the entire life cycle of the mobile network. Most of our 4G scanners can be upgraded to 5G via firmware. Our new Gflex scanning receiver includes advanced features to address 5G and broader critical communication and government applications such as signal intelligence.
We provide test & measurement equipment to test in-building communication capability, which is important for first responders, to certify that buildings meet certain in-building wireless communication standards and to test public safety networks, including P25, Tetra and digital mobile radio (“DMR”).
Our cloud-based reporting platform for public safety is a subscription-based service for test management, storage and analytics that allows stakeholders, including engineering service companies, building owners and government jurisdictions, to easily manage the data collection process and access final reports through an online map-based interface.
Consistent with our mission to solve complex network engineering problems and to compete effectively in the RF test & measurement market, PCTEL maintains expertise in the following areas: radio frequency engineering, digital signal processing (“DSP”) engineering, wireless network engineering, mechanical engineering, manufacturing, and product quality and testing. Competitors for PCTEL's test & measurement products include OEMs such as Anritsu, Berkley Varitronics, Digital Receiver Technology, Rohde and Schwarz, and Viavi.
Results of Operations
First Quarter Overview
Revenues for the three months ended March 31, 2023 were $23.0 million, an increase of 1.9% compared to $22.5 million for the same period in 2022. By product line, revenues increased by $1.8 million (33.0%) to $7.4 million for test & measurement products and
25
decreased by $1.5 million (8.7%) to $15.6 million for antennas and Industrial IoT devices during the three months ended March 31, 2023. The increase in revenues for test & measurement products was due to higher revenues from 5G scanning receiver sales in the U.S. and to global rental customers. The decrease in revenues for antennas and Industrial IoT devices was due to lower revenues related to enterprise and public safety applications. Gross profits of $11.5 million for the quarter increased by $2.2 million compared to the same period in 2022 due to a higher mix of test & measurement product revenue and higher gross margin percentage for antenna product revenue. Operating expenses of $10.2 million for the three months ended March 31, 2023 were $0.7 million lower than the same period in 2022. There were no restructuring expenses during the first quarter 2023 but the first quarter 2022 included $0.9 million of restructuring expenses related to the transition of our Tianjin manufacturing. The net impact of these changes resulted in income before tax of $1.5 million in the first quarter of 2023 compared to a loss before tax of $1.6 million for the first quarter 2022.
Our cash and investments increased by $0.3 million during the first quarter 2023 primarily because we generated cash from operations. As of March 31, 2023, we had cash and investments of $30.3 million.
Revenues by Product Line
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2023 |
|
|
2022 |
|
|
$ Change |
|
|
% Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Antennas & Industrial IoT Devices |
|
$ |
15,614 |
|
|
$ |
17,102 |
|
|
$ |
(1,488 |
) |
|
|
-8.7 |
% |
Test & Measurement Products |
|
|
7,427 |
|
|
$ |
5,583 |
|
|
|
1,844 |
|
|
|
33.0 |
% |
Corporate |
|
|
(68 |
) |
|
$ |
(143 |
) |
|
|
75 |
|
|
not meaningful |
|
Total |
|
$ |
22,973 |
|
|
$ |
22,542 |
|
|
$ |
431 |
|
|
|
1.9 |
% |
Revenues increased 1.9% for the three months ended March 31, 2023 compared to the same period in 2022 due to higher revenues for test & measurement products. Revenues for the test & measurement product line increased by 33.0% for the three months ended March 31, 2023 compared to the three months ended March 31, 2022 due to higher revenues from 5G scanning receiver sales in the U.S. and to global rental customers. For the three months ended March 31, 2023, revenues for the antennas and Industrial IoT devices product line decreased by 8.7% compared to the same period in 2022 due to lower antenna revenues for enterprise and public safety applications.
Gross Profit by Product Line
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2023 |
|
|
% of Revenues |
|
|
2022 |
|
|
% of Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Antennas & Industrial IoT Devices |
|
$ |
6,120 |
|
|
|
39.2 |
% |
|
$ |
5,247 |
|
|
|
30.7 |
% |
Test & Measurement Products |
|
|
5,383 |
|
|
|
72.5 |
% |
|
$ |
4,162 |
|
|
|
74.5 |
% |
Corporate |
|
|
29 |
|
|
not meaningful |
|
|
|
(76 |
) |
|
not meaningful |
|
Total |
|
$ |
11,532 |
|
|
|
50.2 |
% |
|
$ |
9,333 |
|
|
|
41.4 |
% |
The gross profit percentage increased by 8.8% for the three months ended March 31, 2023 compared to the same period in 2022 due to a higher mix of test & measurement products and a higher gross margin percentage for antennas and Industrial IoT devices. The gross profit percentage for the antennas and Industrial IoT devices increased by 8.5% for the three months ended March 31, 2023 compared to the same period in 2022 due to favorable product mix and lower logistics costs. The gross profit percentage for test & measurement products decreased by 2.0% for the three months ended March 31, 2023 compared to the same period in 2022 primarily due to higher component costs.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
|
|
Three Months Ended March 31, |
|
|
% of Revenues |
|
|
|
2023 |
|
|
Change |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
Research and development |
|
$ |
2,984 |
|
|
$ |
(266 |
) |
|
$ |
3,250 |
|
|
|
13.0 |
% |
|
|
14.4 |
% |
Sales and marketing |
|
|
3,562 |
|
|
|
160 |
|
|
|
3,402 |
|
|
|
15.5 |
% |
|
|
15.1 |
% |
General and administrative |
|
|
3,605 |
|
|
|
363 |
|
|
|
3,242 |
|
|
|
15.7 |
% |
|
|
14.4 |
% |
Amortization of intangible assets |
|
|
63 |
|
|
|
(8 |
) |
|
|
71 |
|
|
|
0.3 |
% |
|
|
0.3 |
% |
Restructuring expenses |
|
|
0 |
|
|
|
(935 |
) |
|
|
935 |
|
|
|
0.0 |
% |
|
|
4.1 |
% |
Total |
|
$ |
10,214 |
|
|
$ |
(686 |
) |
|
$ |
10,900 |
|
|
|
44.5 |
% |
|
|
48.3 |
% |
Research and development expenses were lower by $0.3 million for the three months ended March 31, 2023 compared to the same period in 2022 due to lower development expenses and lower stock compensation expenses.
26
Sales and marketing expenses include costs associated with the sales and marketing employees, product line management, and trade show expenses.
Sales and marketing expenses increased $0.2 million for the three months ended March 31, 2023 compared to the same period in 2022 as higher expenses for sales commissions, travel, and marketing offset lower stock compensation expenses.
General and administrative expenses include costs associated with general management, finance, human resources, IT, legal, public company costs, and other operating expenses to the extent not otherwise allocated to business segments.
General and administrative expenses increased by $0.4 million for the three months ended March 31, 2023 compared to the same period in 2022 primarily due to higher non-recurring legal expenses and professional fees related to exploring strategic alternatives.
Amortization of intangible assets within operating expenses were approximately the same for the three months ended March 31, 2023 compared to the same period in 2022.
Restructuring expenses in 2022 related to expenses for the transition of manufacturing operations from our Tianjin, China facility to contract manufacturers. Restructuring expenses of $0.9 million for the three months ended March 31, 2022 consisted primarily of employee severance and payroll related costs associated with the termination of 69 employees in Tianjin. We completed the manufacturing transition during the first quarter 2022.
Other Income, Net
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2023 |
|
|
2022 |
|
Interest income |
|
$ |
229 |
|
|
$ |
17 |
|
Foreign exchange losses |
|
|
(10 |
) |
|
|
(2 |
) |
Other, net |
|
|
1 |
|
|
|
(4 |
) |
Total |
|
$ |
220 |
|
|
$ |
11 |
|
Percentage of revenues |
|
|
1.0 |
% |
|
|
0.1 |
% |
Other income, net consists of interest income, foreign exchange losses, and interest expense. Interest income from investment securities increased by $212 during the three months ended March 31, 2023 compared to the prior year, due to higher average interest rates.
Expense for Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2023 |
|
|
2022 |
|
Expense for income taxes |
|
$ |
214 |
|
|
$ |
8 |
|
Effective tax rate |
|
|
13.9 |
% |
|
|
(0.5 |
)% |
We recorded income tax expense of $0.2 million and $8 for the three months ended March 31, 2023 and 2022, respectively. The expense recorded for the three months ended March 31, 2023 and March 31, 2022 because we have a full valuation allowance on our U.S. deferred tax assets.
The deferred tax assets consist of domestic deferred tax assets of $12.0 million and foreign deferred tax assets of $3.1 million. Our valuation allowances are due to uncertainty regarding the utilization of the deferred tax assets. On a regular basis, we evaluate the recoverability of deferred tax assets and the need for a valuation allowance. Such evaluations involve the application of significant judgment. We considered multiple factors in our evaluation of the need for a valuation allowance. At March 31, 2023 we had a full valuation allowance on our U.S. and China deferred tax assets and a partial valuation allowance related to our net deferred tax assets for Sweden.
We recorded pre-tax book income for the prior three years and we believe our financial outlook remains positive, but we did not meet revenue or earnings expectations for the U.S. jurisdiction. Additionally, the Company recognized revenue for one-time projects in fiscal year 2022 which may not be repeated in 2023 or future years. Because of difficulties with forecasting financial results historically, and due to the uncertainties associated with inflationary and recessionary issues, the Company maintained a full valuation allowance on its U.S. deferred tax assets at March 31, 2023.
The Company maintained a full valuation allowance on its China deferred tax assets. Since the Company completed the transition of manufacturing from its Tianjin facility to contract manufacturers in 2022, the Company does not expect sufficient profits to utilize its China deferred tax assets. The Company maintained a partial valuation allowance on its Sweden deferred tax assets at March 31, 2023.
27
Based on positive book and taxable income in 2021 and 2022 and because results exceeded projections, the Company reversed a portion of its valuation allowance related to Sweden deferred tax assets during 2022.
The analysis that we prepared to determine the valuation allowance required significant judgment and assumptions regarding future market conditions as well as forecasts for profits, taxable income, and taxable income by jurisdiction. Due to the sensitivity of the analysis, changes to the assumptions in subsequent periods could have a material effect on the valuation allowance. See Note 11 to the condensed consolidated financial statements for more information related to income taxes.
Net Income (Loss)
We recorded net income of $1.3 million for the three months ended March 31, 2023 compared to a net loss of $1.6 million for the same period in 2022 due to the favorable impact of higher gross margins and lower operating expenses. Gross margins were higher by $2.2 million for the three months ended March 31, 2023 compared to the same period in 2022 due to an increase in mix of test & measurement products and an increase in the antenna gross margin percentage. Operating expenses were lower by $0.7 million due to lower restructuring expenses being partially offset by higher sales and marketing expenses and general and administrative expenses.
Liquidity and Capital Resources
|
|
|
|
|
|
|
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|
|
|
Three Months Ended March 31, |
|
|
|
2023 |
|
|
2022 |
|
Net cash flow provided by (used in): |
|
|
|
|
|
|
Operating activities |
|
$ |
2,419 |
|
|
$ |
(1,330 |
) |
Investing activities |
|
$ |
295 |
|
|
$ |
(327 |
) |
Financing activities |
|
$ |
(1,754 |
) |
|
$ |
(1,412 |
) |
Net increase (decrease) in cash and cash equivalents |
|
$ |
960 |
|
|
$ |
(3,069 |
) |
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2023 |
|
|
2022 |
|
Cash and cash equivalents at the end of period |
|
$ |
8,717 |
|
|
$ |
7,736 |
|
Short-term investments at the end of period |
|
$ |
21,570 |
|
|
$ |
22,254 |
|
Working capital at the end of period |
|
$ |
52,516 |
|
|
$ |
52,369 |
|
Overview
Our primary source of liquidity is cash provided by operations, with short-term swings in liquidity supported by a significant balance of cash and short-term investments. The balance has fluctuated with cash from operations, acquisitions and divestitures, payment of dividends, and the repurchase of our common shares.
Within operating activities, we are historically a net generator of operating funds from our income statement activities and during periods of expansion, we expect to use cash from our balance sheet.
Within investing activities, capital spending historically ranges between 2.0% and 4.0% of our revenues and the primary use of capital is for manufacturing, engineering, and product development. We historically have made significant transfers between investments and cash as we rotate our large cash balances and short-term investment balances between money market funds, which are accounted for as cash equivalents, and other investment vehicles. We have a history of supplementing our organic revenue with acquisitions of product lines or companies, resulting in significant uses of our cash and short-term investment balances from time to time. We expect the historical trend for capital spending and the variability caused by moving money between cash and investments and periodic merger and acquisition activity to continue in the future.
Within financing activities, we have historically generated funds from the exercise of stock options and proceeds from the issuance of common stock through our Employee Stock Purchase Plan (“ESPP”). We have historically used funds to issue dividends and we periodically repurchase shares of our common stock through share repurchase programs.
At March 31, 2023, our cash, cash equivalents, and investments were approximately $30.3 million, and we had working capital of $52.5 million. Management believes our cash and investments provide adequate liquidity and working capital for the next twelve months from the date of this Quarterly Report on Form 10-Q to support our operations given our historic ability to generate free cash flow (cash flow from operations less capital spending).
28
Operating Activities:
Operating activities provided $2.4 million of cash during the three months ended March 31, 2023 primarily because we generated $2.3 million of cash from our statement of operations. The cash impact from changes in the balance sheet was approximately neutral during the three months ended March 31, 2023. Cash as payments for accrued liabilities and accounts payable offset the positive impact of net reductions in accounts receivable and inventories. Accounts receivable decreased by $3.3 million during the first quarter of 2023 due to lower sequential revenues and a decrease in days sales outstanding, and inventories were lower in the first quarter 2023 due to lower antenna-related inventories.
Operating activities used $1.3 million of cash during the three months ended March 31, 2022. We used $0.3 million of cash from our statement of operations and $1.0 million from the balance sheet. The balance sheet was a net use of cash as payments of accrued liabilities and accounts payable offset the positive impact of net reductions in accounts receivable and inventories. Accounts receivable decreased by $1.5 million during the first quarter 2022 due to lower sequential revenues, and inventories were lower in the first quarter 2022 due to the completion of our transition from Tianjin manufacturing to contract manufacturers.
Investing Activities:
Our investing activities provided $0.3 million of cash during the three months ended March 31, 2023. During the three months ended March 31, 2023, redemptions and maturities of our investments provided $7.3 million in funds and we rotated $6.7 million of cash into new investments. We used $0.4 million for capital expenditures during the three months ended March 31, 2023
Our investing activities used $0.3 million of cash during the three months ended March 31, 2022. During the three months ended March 31, 2022, redemptions and maturities of our investments provided $8.2 million in funds and we rotated $8.2 million of cash into new investments. We used $0.3 million for capital expenditures during the three months ended March 31, 2022.
Financing Activities:
We used $1.8 million in cash for financing activities during the three months ended March 31, 2023. We used $1.0 million for quarterly cash dividends and $0.7 million for payroll taxes related to stock-based compensation in this period. The tax payments primarily related to restricted stock awards.
We used $1.4 million in cash for financing activities during the three months ended March 31, 2022. We used $1.0 million for quarterly cash dividends and $0.4 million for payroll taxes related to stock-based compensation in this period. The tax payments related to restricted stock awards.
Material Cash Requirements
Our material cash requirements from known contractual and other obligations primarily relate to non-cancellable purchase obligations.
Expected timing of those payments are as follows:
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|
|
|
|
|
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|
|
|
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|
|
|
Payments Due by Period |
|
|
|
|
|
|
|
Less than |
|
|
|
|
|
|
|
|
After |
|
|
|
|
Total |
|
|
1 year |
|
|
1-3 years |
|
|
4-5 years |
|
|
5 years |
|
Purchase obligations |
|
|
$ |
18,864 |
|
|
$ |
16,930 |
|
|
$ |
1,933 |
|
|
$ |
1 |
|
|
$ |
0 |
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
Critical Accounting Policies and Estimates
We use certain critical accounting policies and estimates as described in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates” of the 2022 Form 10-K which is incorporated by reference in response to this item. There have been no material changes in any of our critical accounting policies and estimates since December 31, 2022. See Note 1 to the condensed consolidated financial statements for a discussion of recent accounting pronouncements.