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, 2021contained in our Annual Report on Form 10-K for the year ended December 31, 2021(the "2021 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 future financial performance; growth of our antenna solutions and Industrial IoT business and our test and measurement business; the impact of the acquisition of Smarteq on the Company's ability to offer additional products and, expand in the European market, and generate revenue; the impact of the war in Ukraine, disruption in petroleum and other markets, and cost inflation; the impact of our transition plan for manufacturing inside and outside China; the impact of the ongoing COVID-19 pandemic and the ensuing supply chain disruptions; the impact of geopolitical conditions, including the ongoing conflict in Ukraineand related sanctions; and the anticipated demand for certain products, including those related to public safety, Industrial IoT, 5G (e.g., the Gflex scanning receiver) and intelligent transportation. 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 competition within the wireless product industry; volatility and delays in customer demand caused by the COVID-19 pandemic and/or the war in Ukraine, the impact of uncertainty in our supply chain, as well as labor shortages and shipping delays and disruptions, our ability to accurately forecast demand for our products; our ability to successfully integrate Smarteq and any future acquisitions into our existing operations; the impact of uncertainty as a result of doing business in Chinaand Europe; the impact of adverse and uncertain economic and political conditions in the U.S.and international market, the impact of tariffs on certain imports from China; and delays in our sales cycles resulting in the cancellation of purchases of our products; macroeconomic conditions, including inflation and increases in product and material costs; 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. COVID-19 Update The COVID-19 pandemic and associated counter-acting measures implemented by governments and businesses around the world, as well as subsequent recoveries in global business activity, continue to contribute uncertainty in the global business environment and has led to supply chain disruptions and shortages in global markets for commodities, logistics and labor, and as well as increased inflationary pressures. Currently our expectation is that the impact of material cost inflation, labor constraints and logistics challenges and supplier component shortages will continue in 2022. Our foremost focus as we respond to the pandemic has been on the health and safety of our employees. We continue to maintain our enhanced health and safety protocols at our facilities and are encouraging our employees to obtain vaccinations. We also continue to closely monitor the risks posed by COVID-19 and the guidance from relevant authorities. We will adjust our practices accordingly, as we have throughout the pandemic. The public health situation, as well as global measures and corresponding impacts on various markets remain fluid and uncertain and may lead to sudden changes in trajectory and outlook. We will continue to proactively respond to the situation and may take further actions that alter our business activity as may be required by governmental authorities or that we determine are in the best interests of our employees and operations.
PCTELis a leading global provider of wireless technology, including purpose-built Industrial IoT devices, antenna systems, and test & measurement solutions. We solve complex wireless challenges to help organizations stay connected, transform, and grow. 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). 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 29 -------------------------------------------------------------------------------- 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 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.
Industrial IoT antennas and devices
PCTELdesigns 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 & energy, precision agriculture, smart traffic management, Electric Vehicle ("EV") charging stations, embedded vehicles, forestry machinery & 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 advance 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.
Test and measurement products
PCTELprovides 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, 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 which 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 and measurement equipment to test communication capabilities in buildings important to first responders and to certify that buildings meet certain standards for wireless communication in buildings. We provide test and measurement equipment 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,
PCTELmaintains expertise in the following areas: RF engineering, digital signal processing ("DSP") engineering, wireless network engineering, mechanical engineering, manufacturing, and product quality and testing. Competitors for PCTEL'stest & measurement products include OEMs such as Anritsu, Berkley Varitronics, Digital Receiver Technology, Rohde and Schwarz, and Viavi. 30 --------------------------------------------------------------------------------
First Quarter Overview
Revenues for the three months ended
March 31, 2022were $22.5 million, an increase of 27.3% compared to $17.7 millionfor the same period in 2021. By product line, revenues decreased by $0.6 million(10.0%) to $5.6 millionfor test & measurement products and increased by $5.4 million(45.9%) to $17.1 millionfor antennas and Industrial IoT devices during the three months ended March 31, 2022. The increase in revenues for antennas and Industrial IoT devices was due to both the acquisition of Smarteq and higher organic revenues. Gross profits of $9.3 millionfor the quarter increased by $1.0 millioncompared to the same period in 2021 due to the revenue increases for antennas and Industrial IoT devices. Operating expense of $10.9 millionwas $1.9 millionhigher than in the first quarter of 2021. The increase primarily resulted from the inclusion of Smarteq's operating expenses and higher expenses for sales and marketing related to travel and trade shows. The net impact of these changes resulted in a loss before tax of $1.6 millionin the first quarter of 2022 compared to a loss before tax of $0.7 millionfor the first quarter 2021. Our cash and investments decreased by $3.1 millionduring the first quarter of 2022 primarily because we used $1.3 millionfor operating activities and $1.4 millionfor financing activities. As of March 31, 2022, we had cash and investments of $27.7 millionand debt of $0.1 million.
April 30, 2021, we acquired all the outstanding stock of Smarteq, a Swedish company based in Kista, Sweden, that designs antennas for specialized Industrial IoT and vehicular applications ("Smarteq"), pursuant to a Share Sale and Purchase Agreement between PCTELand Allgon Aktiebolag, a Swedish company and holder of the outstanding stock of Smarteq (the "Agreement"). Smarteq owns all the outstanding stock of SAS Smarteq France, which engages in sales of Smarteq products. PCTELpaid cash consideration of SEK 56.8 million( $6.8 million) at the close of the transaction, all of which was provided from PCTEL'sexisting cash. The acquisition of Smarteq provides us with a strong European presence, technical and engineering expertise, and channel partners in Europe, as well as a complementary portfolio of products for our Industrial IoT and intelligent transportation customers worldwide. The revenues and gross margins for Smarteq are combined with the Company's antenna and Industrial IoT device product line. Revenues by Product Line Three Months Ended March 31, 2022 2021 $ Change % Change Antennas & Industrial IoT Devices $ 17,102 $ 11,723 $ 5,37945.9 % Test & Measurement Products 5,583 $ 6,205(622 ) -10.0 % Corporate (143 ) $ (221 )78 not meaningful Total $ 22,542 $ 17,707 $ 4,83527.3 % Revenues increased 27.3% for the three months ended March 31, 2022compared to the same period in 2021 due to higher revenues for antennas and Industrial IoT devices. Revenues for the test & measurement product line decreased by 10.0% for the three months ended March 31, 2022compared to the three months ended March 31, 2021due to lower revenues for products with 5G technologies. For the three months ended March 31, 2022, revenues for the antennas and Industrial IoT devices product line increased by 45.9% compared to the same period in 2021 as a result of revenues from the contribution of Smarteq and from higher organic revenues generated by antennas for public safety and fleet applications. Gross Profit by Product Line Three Months Ended March 31, 2022 % of Revenues 2021 % of Revenues Antennas & Industrial IoT Devices $ 5,24730.7 % $ 3,74732.0 % Test & Measurement Products 4,162 74.5 % $ 4,58873.9 % Corporate (76 ) not meaningful 3 not meaningful Total $ 9,33341.4 % $ 8,33847.1 % The gross profit percentage decreased by 5.7% for the three months ended March 31, 2022compared to the same period in 2021 due to a higher mix of antennas and Industrial IoT devices and a lower gross margin percentage for antennas and Industrial IoT devices. The gross profit percentage for the antennas and Industrial IoT devices decreased by 1.3% for the three months ended March 31, 202231 -------------------------------------------------------------------------------- compared to the same period in 2021 primarily due to higher freight costs and less favorable product mix. The gross profit percentage for test & measurement products increased by 0.6% for the three months ended March 31, 2022compared to the same period in 2021 due to favorable product and customer mix. Three Months Ended Three Months Ended March 31, March 31, % of Revenues 2022 Change 2021 2022 2021 Research and development $ 3,250 $ 56$ 3,194 14.4 % 18.0 % Sales and marketing 3,402 639 2,763 15.1 % 15.6 % General and administrative 3,242 166 3,076 14.4 % 17.4 % Amortization of intangible assets 71 71 0 0.3 % 0.0 % Restructuring benefits (expenses) 935 935 0 4.1 % 0.0 % Total $ 10,900 $ 1,867$ 9,033 48.3 % 51.0 % Research and development expenses were higher by $0.1 millionfor the three months ended March 31, 2022compared to the same period in 2021 as the inclusion of research and development expenses related to Smarteq offset the reduction in expense resulting from the termination of engineering employees in Beijing, Chinaduring the fourth quarter 2021.
Sales and marketing expenses include costs associated with sales and marketing employees, product line management and trade show expenses.
Sales and marketing expenses increased
$0.6 millionfor the three months ended March 31, 2022compared to the same period in 2021 due to inclusion of sales and marketing expenses for Smarteq of $0.2 million, other employee related expenses of $0.2 million, higher travel expenses of $0.1 million, and higher marketing expenses of $0.1 million.
General and administrative expenses include costs associated with general management, finance, human resources, IT, legal and public company fees and other operating expenses to the extent not otherwise allocated to business sectors.
General and administrative expenses increased by
$0.2 millionfor the three months ended March 31, 2022compared to the same period in 2021 primarily due to inclusion of general and administrative expenses for Smarteq and non-recurring professional fees associated with the business acquisitions. Amortization of intangible assets within operating expenses during the first quarter 2022 relates to amortization for the intangible assets for the Smarteq acquisition. Restructuring expenses in 2022 relate to expenses for the transition of manufacturing operations from our Tianjin, Chinafacility to contract manufacturers. Restructuring expenses of $0.9 millionfor the three months ended March 31, 2022consisted 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, 2022 2021 Interest income $ 17 $ 35 Foreign exchange (losses) gains (2 ) 8 Other, net (4 ) (4 ) Total $ 11 $ 39 Percentage of revenues 0.1 % 0.2 % Other income, net consists of interest income, foreign exchange gains and losses, and interest expense. Interest income from investment securities decreased by
$18during the three months ended March 31, 2022compared to the prior year, due to lower investment balances and lower average interest rates. Expense for Income Taxes Three Months Ended March 31, 2022 2021 Expense for income taxes $ 8 $ 6 Effective tax rate (0.5 )% (0.9 )% 32
-------------------------------------------------------------------------------- We recorded income tax expense of
$8and $6for the three months ended March 31, 2022and 2021, respectively. The expense recorded for the three months ended March 31, 2022and 2021 differed from the Federal statutory rate of 21% primarily because we have a full valuation allowance on our deferred tax assets. The full valuation allowance is due to the 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. The full valuation allowance against our deferred tax assets was $15.2 millionat March 31, 2022and at December 31, 2021. The deferred tax assets consist of domestic deferred tax assets of $11.9 millionand foreign deferred tax assets of $3.2 million. We recorded pretax book income during 2021 and believe our financial outlook remains positive. However, the COVID-19 pandemic and recent macroeconomic trends, including the current environment of inflationary pressures have created a high level of uncertainty. Due to this uncertainty, as well as difficulties with forecasting financial results historically, we maintained a full valuation allowance on our deferred tax assets at March 31, 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 13 to the condensed consolidated financial statements for more information related to income taxes. Net Loss We recorded a net loss of $1.6 millionfor the three months ended March 31, 2022compared to a net loss of $0.7 millionfor the same period in 2021, as higher operating expenses offset higher gross profits. Operating expenses were higher by $1.9 milliondue to restructuring expenses and higher expenses for sales and marketing related to travel and trade shows.
Cash and capital resources
Net cash flow provided by (used in): Operating activities
$ (1,330 ) $ 1,654Investing activities $ (327 ) $ 7,100Financing activities $ (1,412 ) $ (1,709 )Net increase (decrease) in cash and cash equivalents $ (3,069 ) $ 7,045March 31, December 31, 2022 2021 Cash and cash equivalents at the end of period $ 5,107 $ 8,192Short-term investments at the end of period $ 22,569 $ 22,562Working capital at the end of period $ 46,847 $ 48,620Overview 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. 33 -------------------------------------------------------------------------------- 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. We used $3.2 millionfor the repurchase of shares during 2021. Share repurchases were funded with cash on hand. At March 31, 2022, our cash, cash equivalents, and investments were approximately $27.7 million, and we had working capital of $46.8 million. Throughout the COVID-19 pandemic, we have proactively managed our costs and our working capital in order to protect our financial position and maintain our workforce. 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) and our low level of debt.
Operational activities :
Operating activities used
$1.3 millionof cash during the three months ended March 31, 2022. We used $0.3 millionof cash from our statement of operations and $1.0 millionfrom 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 millionduring the first quarter of 2022 due to lower sequential revenues, and inventories were lower in the first quarter of 2022 due to the completion of our transition from Tianjinmanufacturing to contract manufacturers. Operating activities generated $1.7 millionof cash during the three months ended March 31, 2021. We generated $0.7 millionof cash from our statement of operations activities and $1.0 millionfrom the balance sheet. The balance sheet was a net source of cash as reductions in accounts receivable were partially offset by the reduction in accounts payable. Accounts receivable decreased by $2.0 millionprimarily because revenues declined by $3.5 millionfor the three months ended March 31, 2021compared to the three months ended December 31, 2020. The reduction in accounts payable primarily relates to reduced purchases of inventory and the timing of supplier payments. Investing Activities: Our investing activities used $0.3 millionof 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 millionin funds and we rotated $8.2 millionof cash into new investments. We used $0.3 millionfor capital expenditures during the three months ended March 31, 2022. Our investing activities provided $7.1 millionof cash during the three months ended March 31, 2021. During the three months ended March 31, 2021, redemptions and maturities of our investments provided $13.4 millionin funds and we rotated $6.0 millionof cash into new investments. We used $0.4 millionfor capital expenditures during the three months ended March 31, 2021.
$1.4 millionin cash for financing activities during the three months ended March 31, 2022. We used $1.0 millionfor quarterly cash dividends and $0.4 millionfor payroll taxes related to stock-based compensation in this period. The tax payments related to restricted stock awards. We used $1.7 millionin cash for financing activities during the three months ended March 31, 2021. We used $1.0 millionfor quarterly cash dividends. We used $0.7 millionfor payroll taxes related to restricted stock awards and shares issued under the short-term incentive plan.
Material cash needs
Our significant cash requirements arising from known contractual and other obligations are primarily related to non-cancellable purchase obligations. The expected schedule for these payments is as follows:
Payments Due by Period Less than After Total 1 year 1-3 years 4-5 years 5 years Purchase obligations
$ 22,254 $ 22,157 $ 97$ 0 $ 0
Significant Accounting Policies and Estimates
We use certain critical accounting policies as described in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates” of 2021 Form 10-K. had no significant change in
none of our critical accounting policies since
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