PC TEL INC

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 receivables, the estimate of amount of accounts receivable that may not be collected is based on aging of the accounts receivable balances and the financial condition of customers. Additionally, specific allowance amounts are established to record the appropriate provision for 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 considered the current and expected future economic and market conditions surrounding the COVID-19 pandemic and determined that the estimate of credit losses was not significantly impacted. However, the Company may experience delays with collections due to the COVID-19 pandemic. The Company’s allowance for credit losses was $0.1 million at March 31, 2020 and at December 31, 2019.  

The Company had deferred tax assets net of deferred tax liabilities of $13.5 million at March 31, 2020 and at December 31, 2019.  The deferred tax assets consisted of domestic deferred tax assets of $13.0 million and foreign deferred tax assets of $0.5 million. The Company’s gross deferred tax assets consist of federal and state net operating losses (“NOLs”), credits, and timing differences.  The Company’s federal NOLs generated in 2019 and 2018 have an infinite life, and the Company’s NOLs and credits generated as of December 31, 2017 have a finite life primarily based on the 20-year carry forward of federal net operating losses.  The timing differences have a ratable reversal pattern over 12 years.  On a regular basis, the Company evaluates the recoverability of deferred tax assets and the need for a valuation allowance. Such evaluations involve the application of significant judgment. The Company considers multiple factors in its evaluation of the need for a valuation allowance.  The Company’s full valuation allowance against its deferred tax assets was $13.5 million at March 31, 2020 and December 31, 2019.  The Company generated book and tax income during 2019 but incurred significant losses in 2018 resulting in a cumulative break-even position for the three years ended December 31, 2019.  The Company recorded a book pretax loss for the three months ended March 31, 2020.  While the COVID-19 situation adds additional difficulty with projecting future results, the Company believes its financial outlook remains positive; however, under the accounting standards objective verifiable evidence will have greater weight than subjective evidence, such as the Company’s projections for future growth.  The analysis that the Company 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. 

Since PCTEL serves critical infrastructure in markets such as 5G, enterprise wireless, public safety, utilities, fleet, and rail, we are permitted to remain open as an essential business. Nevertheless, our operations have been and continue to be adversely impacted by the COVID-19 pandemic.  Early in the first quarter 2020, our Tianjin, China facility ceased production for approximately one month and our Chinese contract manufacturers ceased production for several weeks due to the COVID-19 outbreak in China.  Production at our Tianjin facility is now operating at full capacity and the supply chain for that facility has generally recovered. Shortly after our Tianjin facility resumed production in March, the COVID-19 pandemic impacted production in our Bloomingdale, Illinois and Clarksburg, Maryland facilities.  The production facilities closed for two weeks in April; however, the production facilities have partially resumed operations with employees working on a voluntary basis to meet essential customer demand.  Although our U.S. production facilities have been operating at less than full capacity, employees whose duties permit working remotely have done so, including our executive, sales, engineering, marketing, and customer service teams. This level of production and ability to work remotely has allowed us to continue to service our essential customers and plan for our post-COVID-19 recovery.  

Our foremost focus has been on the health and safety of our employees. In response to the outbreak, we established a management response team and instituted safety measures in all our facilities. In addition to adopting remote work policies, we have modified practices at our production facilities and offices to adhere to guidance from the U.S. Centers for Disease Control and Prevention and local health and governmental authorities with respect to social distancing, physical separation, personal protective equipment and sanitization, and have restricted the number of employees permitted in common areas at any time. All employees are currently subject to travel restrictions and access to our premises is restricted.  

Due to the uncertainty regarding future customer demand, our ability to sustain our operations, and the reliability of our supply chain as the COVID-19 pandemic evolves, we are proactively managing our costs and our working capital in order to protect our financial position and maintain our workforce. Effective April 1, 2020, we reduced operating expenses through salary and director fee reductions.  We implemented a hiring freeze, eliminated non-essential travel, and reduced discretionary spending. As of March 31, 2020, we had cash and investments of $38.3 million and no debt. To preserve cash and liquidity, we are delaying non-essential capital expenditures and we suspended our stock repurchase program as of April 1, 2020.  We had an additional $5.0 million available under our stock repurchase program at the termination date. We also continue to monitor government economic stabilization efforts and expect to participate in certain legislative provisions, such as deferring payroll tax payments.

The COVID-19 pandemic has adversely impacted, and poses risks to, our business, the nature and extent of which are highly uncertain and unpredictable.

In January 2020, the World Health Organization (the “WHO”) declared a Public Health Emergency of International Concern, and on March 11, 2020, the WHO characterized COVID-19 as a pandemic. This pandemic has resulted in a global health crisis that is adversely affecting broader economies, financial markets and our business environment.  We are monitoring the global impact of the COVID-19 pandemic and taking steps to mitigate the accompanying by working with our employees, customers, suppliers, and other stakeholders. The pandemic is adversely affecting, and is expected to continue to adversely affect, certain elements of our business. Portions of our workforce are unable to work effectively due to illness and containment measures, including quarantines, facility closures, illness precautions, travel restrictions, and other restrictions. We experienced volatility in customer demand as their businesses were impacted by the pandemic. If the pandemic continues and conditions worsen, we may experience additional adverse impacts on our operational and commercial activities, including rising costs, volatility in customer orders and purchases and declines in our collections of accounts receivable, which may be material. Furthermore, the pandemic has impacted and may further impact the broader economies of affected countries, including negatively impacting economic growth, the proper functioning of financial and capital markets, foreign currency exchange rates and interest rates.  Due to the speed with which the situation is developing, the global breadth of its spread and the range of governmental and community reactions thereto, there is uncertainty around its duration, ultimate impact and the timing of recovery. Therefore, the pandemic could lead to an extended disruption of economic activity and the impact on our stock price, access to capital, consolidated results of operations, financial position and cash flows could be material.