Filing summary
Issuer identity discrepancy: The supplied filing is Communications Systems, Inc. and subsidiaries’ Form 10-Q, not a filing for Sunation Energy, Inc. Verify the issuer and filing before relying on these figures.
Business context and reporting period
The unaudited report covers the quarter and nine months ended September 30, 2018, compared with the corresponding 2017 periods. Communications Systems operates Suttle, Transition Networks, JDL Technologies, and Net2Edge, selling connectivity products and IT services.
Financial results and liquidity
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Sales | $15.29 million | $20.41 million | $47.10 million | $63.28 million |
| Gross profit (margin) | $5.24 million (34.3%) | $3.30 million (16.2%) | $14.40 million (30.6%) | $15.28 million (24.1%) |
| Operating loss | $1.60 million | $4.65 million | $6.30 million | $10.18 million |
| Net loss | $1.54 million | $4.52 million | $6.05 million | $10.13 million |
| Basic and diluted loss per share | $0.17 | $0.50 | $0.66 | $1.13 |
- Operating cash flow was negative $4.97 million for the first nine months of 2018, versus positive $2.73 million in 2017. Inventory rose $2.18 million during the period.
- Cash and cash equivalents were $8.63 million; investments were $2.62 million. Working capital was $30.98 million, down from $36.51 million at December 31, 2017. Current assets were $40.66 million and current liabilities $9.68 million.
- No borrowings were outstanding on the $15 million secured Wells Fargo credit facility. Borrowing availability was $8.13 million; the facility expires August 2021. The company reported compliance with its $10 million minimum-liquidity covenant.
- Dividends declared were $0.04 per share for Q3 and $0.12 per share for the first nine months. Total assets were $52.26 million and stockholders’ equity was $42.57 million at quarter-end.
Material changes and segment performance
- Consolidated sales fell 25% in Q3 and 26% year to date. Losses narrowed, with 2017 results burdened by restructuring charges and asset impairments; those items did not recur in 2018.
- Suttle sales declined 34% in Q3 and 28% year to date, reflecting lower Tier 1 telecom spending, legacy-product declines, and changed purchasing channels. Its operating loss improved to $1.14 million in Q3 and $3.71 million year to date.
- Transition Networks sales were nearly flat in Q3 (down 1%) and down 6% year to date. Q3 operating income was $603,000; year-to-date operating income was $835,000.
- JDL Technologies sales fell 76% both in Q3 and year to date, primarily because federal education funding approvals were delayed; two commercial customer contracts also expired. JDL reported a Q3 operating loss of $299,000 and a year-to-date operating loss of $1.21 million.
- Net2Edge sales rose 123% in Q3 and 74% year to date, but it continued to report operating losses: $769,000 for Q3 and $2.21 million year to date.
Outlook, risks, and unusual items
- Management said available funds were sufficient for anticipated operating and capital needs; the filing provides no specific earnings or revenue guidance.
- Management identified risks including concentrated Suttle customers and telecom spending, product and margin pressures, delayed education-sector funding at JDL, profitability and execution challenges across business units, and the contingent sale of the headquarters property.
- The company agreed to sell its Minnetonka headquarters for $10 million, subject to closing conditions, including buyer due diligence and regulatory approval. It expected closing in Q2 or Q3 2019 if the sale proceeded.
- ASC 606 was adopted January 1, 2018. The company said adoption had no significant opening balance-sheet adjustment and no impact on operating loss, although reported nine-month revenue was $472,000 lower than under prior guidance.
- Disclosure controls and procedures were deemed ineffective. The company reported an unresolved material weakness in review controls over long-lived asset impairment testing and said it was developing remediation controls.
- Management reported no known pending legal claims expected to materially affect the company. The filing notes warranty estimates, open tax years, foreign-currency translation exposure, and market-money-fund investment risk.
Important facts for investors to verify
- Confirm that Communications Systems, Inc.—not Sunation Energy, Inc.—is the intended issuer.
- Assess whether operating cash outflows and inventory growth are sustainable, and whether the stated liquidity covenant remains comfortably met.
- Track recovery in Suttle and JDL, Transition Networks’ sales and margins, and Net2Edge’s path toward profitability.
- Verify progress on the headquarters sale, including satisfaction of closing conditions and use of any proceeds.
- Review remediation of the disclosed material weakness and the implications of the ineffective disclosure controls.