Filing summary
Entity mismatch: The request identifies Sunation Energy, Inc., but the supplied filing is Communications Systems, Inc. (Nasdaq: JCS), Form 10-Q for the quarter ended March 31, 2019. The figures below describe the filing provided, not Sunation Energy.
Business context and reporting period
Communications Systems reported on four business units: Transition Networks, Suttle, JDL Technologies, and Net2Edge. This unaudited report covers the three months ended March 31, 2019, compared with the same period in 2018; balance-sheet comparisons are with December 31, 2018.
Key financial metrics
| Metric | Q1 2019 | Q1 2018 / prior date |
|---|---|---|
| Sales | $16.72 million | $16.77 million |
| Gross profit; gross margin | $6.43 million; 38.4% | $5.18 million; 30.9% |
| Operating income (loss); operating margin | $181,000; 1.1% | $(1.97) million; (11.8)% |
| Net income (loss) | $240,000 | $(1.86) million |
| Diluted earnings (loss) per share | $0.03 | $(0.21) |
| Cash from (used in) operations | $(1.19) million | $240,000 |
| Cash and cash equivalents | $9.49 million | $11.06 million at Dec. 31, 2018 |
| Working capital | $31.23 million | $30.70 million at Dec. 31, 2018 |
| Total assets; stockholders’ equity | $52.19 million; $42.10 million | $53.32 million; $41.65 million at Dec. 31, 2018 |
Investing cash use was $217,000 and financing cash use was $159,000. Capital expenditures were $226,000. The company had no borrowings under its $15 million Wells Fargo revolving facility; availability was $7.87 million under the borrowing-base calculation. The facility expires August 12, 2021, bears interest at LIBOR plus 2.0% when drawn, and is secured by company assets. The company reported compliance with its minimum-liquidity covenant. Operating lease liabilities totaled $437,000 at quarter-end.
Material changes versus the prior comparable period
- Sales were nearly flat, declining about 0.3%, while the company moved from a substantial operating and net loss to modest profitability. Lower cost of sales and lower consolidated SG&A contributed to the improvement.
- Transition Networks sales fell 3% to $8.89 million; operating income declined to $59,000 from $461,000. Management cited lower North American orders and product mix, partly offset by an EMEA project.
- Suttle sales declined 21% to $5.52 million, mainly on reduced Tier 1 telecom spending and legacy-product declines. Gross margin increased to 32.6% from 19.7%, and the unit reported $743,000 operating income versus a $600,000 loss, with management citing product mix, price increases, workforce reductions, and lower inventory adjustments.
- JDL sales rose to $2.21 million from $710,000, primarily as delayed education projects resumed; it reported $491,000 operating income versus a $442,000 loss.
- Net2Edge sales rose to $448,000 from $165,000 and its operating loss narrowed to $527,000 from $801,000; it remained loss-making.
- Cash declined $1.57 million during the quarter. Operating cash use included a $1.17 million decrease in accounts payable and other working-capital movements.
Outlook, risks, contingencies, and unusual items
- Management stated that available funds and its projected financial position were sufficient for anticipated operating and capital needs. The filing gives no quantified revenue or earnings guidance.
- On April 5, 2019, after quarter-end, the company sold Suttle’s FutureLink Fiber business line for $5 million cash, for general corporate purposes. Suttle agreed to continue manufacturing related products through September 30, 2019. The business had approximately $4.7 million of 2018 revenue.
- The company had classified related inventory and equipment as held for sale at March 31. It also reported a proposed $10 million sale of its Minnetonka headquarters, subject to closing conditions; it expected a possible closing in the second half of 2019 or early 2020.
- Key disclosed risks include Suttle’s concentration in major communications-service-provider customers and their spending, Transition Networks’ product and international-market execution, JDL’s education funding and customer expansion, Net2Edge’s ability to achieve profitability, and the execution of strategic options and the headquarters sale. The filing also cites cybersecurity and supplier risks.
- Management said it knew of no pending legal claims expected to materially affect financial position or results. The filing identifies $100,000 of net uncertain tax benefit positions; tax years remain open to examination in federal, state, and foreign jurisdictions.
- The company adopted lease accounting standard ASC 842 on January 1, 2019, recording right-of-use assets and lease liabilities; management said adoption did not materially affect the financial statements. It was evaluating the expected-credit-loss accounting standard scheduled to take effect for the company in 2020.
Most important facts for investors to verify
- Confirm the intended issuer: the supplied document is Communications Systems, Inc. (JCS), not Sunation Energy, Inc.
- Review the $5 million FutureLink Fiber sale’s final proceeds, transition-service obligations, and effect on Suttle’s future revenue and earnings.
- Track the headquarters sale conditions and timing, and the company’s post-sale operating and occupancy arrangements.
- Assess whether the operating turnaround is sustainable, particularly given Suttle’s lower sales, Net2Edge’s continuing operating losses, and negative operating cash flow in Q1.
- Monitor cash, borrowing-base availability, and compliance with the $10 million minimum-liquidity covenant.