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Organization and Summary of Significant Accounting Policies (Policies)

12 Months Ended

Dec. 31, 2021

Organization Consolidation And Presentation Of Financial Statements [Abstract]

PCTEL, Inc. (the “Company”) was incorporated in California in 1994 and reincorporated in Delaware in 1998. The Company is a leading global provider of wireless technology, including purpose-built Industrial IoT devices, antenna systems, and test and measurement solutions. We solve complex wireless challenges to help organizations stay connected, transform, and grow and we have expertise in RF, digital and mechanical engineering. We have two businesses (antennas & Industrial IoT devices and test & measurement products).

Our principal executive offices are located at 471 Brighton Drive, Bloomingdale, Illinois 60108. Our telephone number at that address is (630) 372-6800 and our website is www.pctel.com. Additional information about our Company can be obtained on our website; however, the information within, or that can be accessed through, our website, is not part of this report.

Basis of Consolidation

These consolidated financial statements include the accounts of the Company and its subsidiaries. The financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”). All intercompany accounts and transactions have been eliminated.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods reported. Actual results could differ from those estimates.

Foreign Operations

The Company is exposed to foreign currency fluctuations due to its foreign operations and because products are sold internationally. The functional currency for the Company’s foreign operations is predominantly the applicable local currency. Accounts of foreign operations are translated into U.S. dollars using the year-end exchange rate for assets and liabilities and average monthly rates for revenue and expense accounts. Adjustments resulting from translation are included in accumulated other comprehensive income (loss), a separate component of stockholders’ equity. Gains and losses resulting from other transactions originally in foreign currencies and then translated into U.S. dollars are included in the consolidated statements of income. For the year ended December 31, 2021, approximately 9% of revenue and 21% of expenses were transacted in foreign currencies as compared to 3% and 17% for the year ended December 31, 2020. For the year ended December 31, 2021, foreign currency transactions resulted in foreign exchange losses of $0.1 million and for the year ended December 31, 2020, foreign currency transactions resulted in foreign exchange losses of $0.3 million. Foreign exchange gains and losses are recorded in other income in the consolidated statement of income.

Fair Value of Financial Instruments

The Company follows accounting pronouncements for Fair Value Measurements and Disclosures, which establishes a fair value hierarchy that requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, a three-tier fair value hierarchy has been established, which prioritizes the inputs used in measuring fair value as follows:

Level 1: inputs are unadjusted quoted prices in active markets for identical assets or liabilities.

Level 2: inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of assets or liabilities.

Level 3: unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Cash equivalents are measured at fair value and investments are recognized at amortized cost in the Company’s financial statements. Accounts receivable and other investments are financial assets with carrying values that approximate fair value due to the short-term nature of these assets. Accounts payable is a financial liability with a carrying value that approximates fair value due to the short-term nature of these liabilities.

Cash and Cash Equivalents and Investments

The Company’s cash and cash equivalents and investments consist of the following:

	December 31,		December 31,
	2021		2020
Cash	$	6,789	$	4,740
Cash equivalents		1,403		1,021
Short-term investments		22,562		30,582
Long-term investments		0		4,640
	$	30,754	$	40,983

Cash and Cash Equivalents

On December 31, 2021 and 2020, cash and cash equivalents included bank balances and investments with original maturities less than 90 days. On December 31, 2021 and 2020, the Company’s cash equivalents were invested in highly liquid AAA rated money market funds that are required to comply with Rule 2a-7 under the Investment Company Act of 1940. Such funds utilize the amortized cost method of accounting, seek to maintain a constant $1.00 per share price, and are redeemable upon demand. The Company restricts its investments in AAA money market funds to those invested 100% in either short-term U.S. Government Agency securities or bank repurchase agreements collateralized by these same securities. The fair values of these money market funds are established through quoted prices in active markets for identical assets (Level 1 inputs). The cash in the Company’s U.S. banks is insured by the Federal Deposit Insurance Corporation up to the insurable limit of $250.

The Company had cash in foreign bank accounts of $3.9 million at December 31, 2021 and $2.9 million at December 31, 2020. The Company had $2.8 million and $2.9 million of cash and cash equivalents in bank accounts in China at December 31, 2021 and December 31, 2020, respectively. In addition, the Company had $1.0 million of cash in bank accounts in Sweden and $0.1 million of cash in bank accounts in France at December 31, 2021. The Company’s cash in these foreign bank accounts is not insured. As of December 31, 2021, the Company has no intentions of repatriating the cash in its foreign bank accounts. If the Company decides to repatriate the cash in the foreign bank accounts, it may have trouble doing so in a timely manner. The Company may also be exposed to foreign currency fluctuations and taxes if it repatriates these funds.

Investments

On December 31, 2021 and 2020, the Company’s short-term investments consisted of A- or higher rated corporate bonds and certificates of deposit. All the investments on December 31, 2021 and 2020 were classified as held-to-maturity. The bonds and certificates of deposit classified as short-term investments have original maturities greater than 90 days and mature within one year and the bonds and certificates of deposit classified as long-term investments have maturities greater than one year but less than two years. The Company’s bond investments are recorded at the purchase price and carried at amortized cost.

Cash equivalents and Level 1 and Level 2 investments measured at fair value were as follows:

	December 31, 2021								December 31, 2020
	Level 1		Level 2			Total			Level 1			Level 2			Total
Cash equivalents:
Certificates of deposit	$	0	$	0		$	0		$	300		$	0		$	300
Money market funds		1,403		0			1,403			721			0			721
Total Cash Equivalents	$	1,403	$	0		$	1,403		$	1,021		$	0		$	1,021
Short-Term Investments:
Corporate bonds	$	0	$	19,659		$	19,659		$	0		$	26,318		$	26,318
Certificates of deposit		2,903		0			2,903			4,264			0			4,264
Total Short-Term Investments	$	2,903	$	19,659		$	22,562		$	4,264		$	26,318		$	30,582
Long-Term Investments:
Corporate bonds	$	0	$	0		$	0		$	0		$	4,382		$	4,382
Certificates of deposit		0		0			0			258			0			258
Total Long-Term Investments	$	0	$	0		$	0		$	258		$	4,382		$	4,640
Cash equivalents and Investments - book value	$	4,306	$	19,659		$	23,965		$	5,543		$	30,700		$	36,243
Unrealized (losses) gains	$	1	$	(2	)	$	(1	)	$	(1	)	$	(7	)	$	(8	)
Cash equivalents and Investments - fair value	$	4,307	$	19,657		$	23,964		$	5,542		$	30,693		$	36,235

The Company categorizes its financial instruments within a fair value hierarchy according to accounting guidance for fair value. The fair value hierarchy is described under the Fair Value of Financial Instruments in Note 1. For the Level 2 investments, the Company uses quoted prices of similar assets in active markets. There were no Level 3 investments on December 31, 2021 or 2020. The fair values in the table above reflect net unrealized losses of $1 and $8 on December 31, 2021 and December 31, 2020, respectively.

Accounts Receivable and Allowance for Credit Losses

Accounts receivable are recorded at invoiced amount with standard net terms for most customers that range between 30 and 90 days. The Company extends credit to its customers based on an evaluation of the customer’s financial condition and collateral is generally not required. The Company records allowances for credit losses and credit allowances that reduce the value of accounts receivable to fair value.

The allowances for accounts receivable consisted of the following:

The Company is exposed to credit losses primarily through the sale of products. The Company’s expected loss methodology for accounts receivable is developed using historical collection experience, current and future economic market conditions, and a review of the current status of customers’ trade accounts receivable. Due to the short-term nature of accounts receivable, the estimate of amount of accounts receivable that may not be collected is based on aging of the account receivable balances and the financial condition of customers. Additionally, specific allowance amounts are established to record the appropriate provision for balances with customers that have a higher probability of default. The Company’s monitoring activities include timely account reconciliation, dispute resolution, payment confirmation, consideration of customers' financial condition and macroeconomic conditions. Balances are written off when determined to be uncollectible. The Company’s allowance for credit losses was $26 at December 31, 2021 and $66 at December 31, 2020.

The following table summarizes the allowance for credit losses for the years ended December 31, 2021 and December 31, 2020:

	December 31, 2021			December 31, 2020
Beginning Balance	$	66		$	56
Current period benefit for credit losses		(40	)		(167	)
Recovery of amounts previously written off		0			177
Ending Balance	$	26		$	66

Inventories

Inventories are stated at the lower of cost or net realizable value and include material, labor and overhead costs using the first-in, first-out method of costing. Inventories as of December 31, 2021 and 2020 were composed of raw materials, work-in-process, and finished goods. The Company had consigned inventory of $0.4 million and $0.3 million as of at December 31, 2021 and 2020, respectively. The Company records allowances to reduce the value of inventory to the lower of cost or market, including allowances for excess and obsolete inventory. Reserves for excess inventory are calculated based on the Company’s estimate of inventory more than normal and planned usage. Obsolete reserves are based on the Company’s identification of inventory where carrying value is above net realizable value. The allowance for inventory losses was $4.1 million and $3.7 million as of December 31, 2021 and 2020, respectively.

Inventories consisted of the following:

	December 31, 2021		December 31, 2020
Raw materials	$	6,171	$	5,315
Work in process		690		883
Finished goods		6,830		3,786
Inventories, net	$	13,691	$	9,984

Prepaid and Other Current Assets

Prepaid assets are stated at cost and are amortized over the useful lives (up to one year) of the assets.

Property and Equipment

Property and equipment are stated at cost and are depreciated using the straight-line method over the estimated useful lives of the assets. The Company depreciates computer equipment and software licenses over three to five years, office equipment, manufacturing and test equipment and motor vehicles over five years, furniture and fixtures over seven years, and buildings over 30 years. Leasehold improvements are amortized over the shorter of the corresponding lease term or useful life. Depreciation expense and gains and losses on the disposal of property and equipment are included in cost of sales and operating expenses in the consolidated statements of income. Maintenance and repairs are expensed as incurred.

Property and equipment consisted of the following:

	December 31, 2021			December 31, 2020
Building	$	6,892		$	6,868
Computers and office equipment		10,604			10,039
Manufacturing and test equipment		16,305			15,394
Furniture and fixtures		1,455			1,437
Leasehold improvements		3,021			2,973
Motor vehicles		20			20
Total property and equipment		38,297			36,731
Less: Accumulated depreciation and amortization		(28,118	)		(25,996	)
Land		1,770			1,770
Property and equipment, net	$	11,949		$	12,505

Depreciation and amortization expense were approximately $3.0 million for the years ended December 31, 2021 and 2020.

Liabilities

Accrued liabilities consisted of the following:

	December 31, 2021		December 31, 2020
Inventory receipts	$	4,302	$	3,049
Payroll and other employee benefits		2,266		1,083
Paid time off		1,284		1,028
Deferred revenues		538		242
Operating leases		475		269
Income and sales taxes		415		185
Restructuring		368		15
Warranties		257		285
Employee stock purchase plan		253		224
Customer refunds for estimated returns		248		146
Professional fees and contractors		233		316
Real estate taxes		156		155
Finance leases		62		68
Other		260		251
Total	$	11,117	$	7,316

Long-term liabilities consisted of the following:

	December 31, 2021		December 31, 2020
Operating leases	$	3,600	$	3,949
Deferred payroll taxes		0		243
Finance leases		92		96
Deferred revenue		181		76
Other		126		23
Total	$	3,999	$	4,387

Revenue Recognition

The Company sells antennas and Industrial IoT devices and test & measurement products. All the Company’s revenue relates to contracts with customers. The Company’s accounting contracts are from purchase orders or purchase orders combined with purchase agreements. The majority of the Company’s revenue is recognized on a “point-in-time” basis and a nominal amount of revenue is recognized “over time.” The Company satisfies its performance obligations related to the sale of its products generally at the time of shipment, or upon delivery based on the contractual terms with its customers. For products shipped on consignment, the Company recognizes revenue upon customer delivery from the consignment location. For its test & measurement software tools, the Company has a performance obligation to provide software maintenance and support for one year. The Company recognizes revenues for the maintenance and support over this period. The Company recognizes revenue for sales of its products when control transfers, which is predominantly upon shipment from its factory. For products shipped on consignment, the Company recognizes revenue upon delivery from the consignment location. The Company allows its major antenna product distributors to return product under specified terms and conditions and accrues for product returns. See Note 14 for additional information related to revenue policies.

Research and Development Costs

The Company expenses research and development costs as incurred. To date, the Company has expensed all software development costs related to research and development because the costs incurred subsequent to the products reaching technological feasibility were not significant.

Advertising Costs

Advertising costs are expensed in the period in which they are incurred. Advertising expense was $0.3 million during the year ended December 31, 2021 and $0.2 million during the year ended December 31, 2020.

Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and deferred tax assets are recognized for net operating losses and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are provided against deferred tax assets, which are not likely to be realized. On a regular basis, management evaluates the recoverability of deferred tax assets and the need for a valuation allowance.

The Company recognizes the effect of income tax positions only if those positions are more likely than not to being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.

Deferred tax assets arise when the Company recognizes charges or expenses in the financial statements that will not be allowed as income tax deductions until future periods. The deferred tax assets also include unused tax net operating losses and tax credits that the Company is allowed to carryforward to future years. Accounting rules permit the Company to carry the deferred tax assets on the balance sheet at full value as long as it is more likely than not the deductions, losses, or credits will be used in the future. A valuation allowance must be recorded against a deferred tax asset if this test cannot be met. The Company had a full valuation allowance of $15.3 million at December 31, 2021 and $12.9 million at December 31, 2020. See Note 6 for more information on the deferred tax valuation allowance.

On March 27, 2020, the “Coronavirus Aid, Relief and Economic Security Act” (CARES Act) was signed into law. The CARES Act includes provisions relating to refundable payroll tax credits, deferment of the employer portion of certain payroll taxes, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. Under the CARES Act, the Company is deferring the employer portion of social security taxes and will apply for a refund of its Alternative Minimum Tax credit. At December 31, 2021 and 2020, respectively, the Company had deferred payroll taxes of $0.2 and $0.5 million. The Company recorded a deferred tax asset for the payroll tax liability that was not deductible for income tax purposes. The remaining payroll taxes will be deferred until December 31, 2022.

Sales and Value Added Taxes

Taxes collected from customers and remitted to governmental authorities are presented on a net basis in cost of sales in the accompanying consolidated statements of income.

Shipping and Handling Costs

Shipping and handling costs are included on a gross basis in cost of sales in the accompanying consolidated statements of income.

Goodwill

The Company performs an annual impairment test of goodwill as of the end of the first month of the fourth fiscal quarter (October 31st), or at an interim date if an event occurs or if circumstances change that would indicate that an impairment loss may have been incurred. In performing the annual impairment tests, the Company may consider qualitative factors that would indicate possible impairment. A quantitative fair value assessment is also performed at the reporting unit level. If the fair value exceeds the carrying value, then goodwill is not impaired, and no further testing is performed. If the carrying value exceeds the fair value, the implied fair value of goodwill is then compared against the carrying value of goodwill to determine the amount of impairment.

The process of evaluating the potential impairment of goodwill is subjective because it requires the use of estimates and assumptions in determining a reporting unit’s fair value. The Company calculates the fair value of each reporting unit by using the income approach based on the present value of future discounted cash flows. The discounted cash flow method requires the Company to use estimates and judgments about the future cash flows of the reporting units. Although the Company bases cash flow forecasts on assumptions that are consistent with plans and estimates the Company uses to manage the underlying reporting units, there is significant judgment in determining the cash flows attributable to these reporting units, including markets and market share, sales volumes and mix, research and development expenses, tax rates, capital spending, discount rate and working capital changes. Cash flow forecasts are based on reporting unit operating plans for the early years and business projections in later years. The Company believes the accounting estimate related to the valuation of goodwill is a critical accounting estimate because it requires the Company to make assumptions that are

highly uncertain about the future cash flows of the reporting units. Changes in these estimates can have a material impact on the Company’s financial statements.

The Company performed its annual goodwill test at October 31, 2021 and at October 31, 2020 for the goodwill of $6.3 million and $3.3 million, respectively. The increase in goodwill in 2021 is from the acquisition of Smarteq in April 2021.The Company performed both a qualitative analysis of goodwill and a quantitative analysis. There were no triggering events during the year, and the fair value of the reporting unit was higher than its carrying value in the quantitative analysis. Based on the Company’s analysis, there was no impairment of goodwill as of the testing dates because the fair value of the reporting unit exceeded its carrying value by a significant margin.

Long-Lived and Definite-Lived Intangible assets

The Company reviews definite-lived intangible assets, investments, and other long-lived assets for impairment when events or changes in circumstances indicate that their carrying values may not be fully recoverable. This analysis differs from the Company’s goodwill analysis in that definite-lived intangible asset impairment is only deemed to have occurred if the sum of the forecasted undiscounted future cash flows related to the assets being evaluated is less than the carrying value of the assets. The estimate of long-term undiscounted cash flows includes long-term forecasts of revenue growth, gross margins, and operating expenses. All these items require significant judgment and assumptions. There were no impairments related to long-lived assets used for operations during the years ended December 31, 2021, and 2020.

Recent Accounting Pronouncements

In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (ASU 2017-14). This new guidance eliminates the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value. The changes are effective for smaller reporting companies for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, and early adoption is permitted. The Company is currently evaluating the impact that this guidance will have on its consolidated financial statements.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This update provides optional expedients and exceptions for applying generally accepted accounting principles to certain contract modifications and hedging relationships that reference London Inter-bank Offered Rate (LIBOR) or another reference rate expected to be discontinued. Topic 848 is effective upon issuance and generally can be applied through December 31, 2022. The Company is currently evaluating the impact of Topic 848 on the consolidated financial statements.

In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. This update requires that an acquirer recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606 as if the acquirer had originated the contracts. This ASU should be applied prospectively to business combinations occurring on or after the effective date of the update. This update is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period, but should be applied to all acquisitions occurring in the annual period of adoption. The Company is currently evaluating the impact of this ASU on our consolidated financial statements and related disclosures.

In November 2021, the FASB issued ASU 2021-10, Government Assistance (Topic 831): Disclosures by Business Entities about Government Assistance. This Update, which aims to increase transparency of government assistance, require annual disclosures about transactions with a government that are accounted for by applying a grant or contribution accounting model. Under this ASU, an entity is required to disclose (1) the types of assistance, (2) an entity’s accounting for assistance, and (3) the effect of the assistance on entity’s financial statements. This Update is effective for all entities within their scope for financial statements issued for annual periods beginning after December 15, 2021. Early adoption is permitted. The Company is evaluating the effect of adoption of the Update on our financial statements and related disclosures, but does not expect to have an impact on either the financial statements or the related disclosures.

December 31, 2021

December 31, 2020

Credit loss provision

Credit allowances

Total allowances