Sunation Energy, Inc. quarterly report, Q1 FY2020

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Business context and reporting period

Important identity discrepancy: The supplied filing is Communications Systems, Inc. (Nasdaq: JCS), not Sunation Energy, Inc. It is a Form 10-Q for the quarter ended March 31, 2020; its financial statements are unaudited. The company’s continuing businesses were Transition Networks, JDL Technologies, and Net2Edge. Suttle is reported as discontinued operations following its sale.

Financial results and liquidity

  • Revenue: Continuing-operations sales were $9.16 million, down 18.3% from $11.22 million a year earlier. Gross profit was $3.74 million versus $4.63 million; gross margin was approximately 40.8% versus 41.2%.
  • Operating results and earnings: Operating loss from continuing operations was $1.22 million, compared with $821,000. Continuing-operations net loss was $809,000, or $0.09 per diluted share, versus a loss of $792,000, or $0.09 per diluted share. Consolidated net income was $1.50 million, including $2.31 million of income from discontinued operations.
  • Cash flow: Net cash provided by operating activities was $241,000, versus $1.19 million used in Q1 2019. Continuing operations provided $1.01 million, while discontinued operations used $765,000. Investing activities provided $6.50 million, principally reflecting the Suttle sale; financing activities used $274,000.
  • Liquidity: Management reported $32.34 million in cash, cash equivalents, restricted cash, and investments, and working capital of $40.59 million at March 31, 2020. Cash, cash equivalents, and restricted cash totaled $21.04 million. The filing notes that $16.91 million was in money-market funds, which are not FDIC-insured or guaranteed.
  • Debt: No borrowings were outstanding under the $15 million secured credit facility. Borrowing availability was $3.875 million under the borrowing-base calculation; the facility expires August 12, 2021. The company was in compliance with its $10 million minimum-liquidity covenant.
  • Other: Total assets were $56.84 million and stockholders’ equity was $48.96 million. The company declared dividends of $0.02 per share.

Material changes versus the prior comparable period

  • Transition Networks sales declined 8% to $8.16 million. Intelligent-edge sales rose 36% to $3.10 million, while traditional-product sales fell 23% to $5.06 million. International sales declined 64%; North American sales increased 8%. The segment recorded $216,000 of operating income, up from $59,000.
  • JDL sales fell 63% to $827,000, primarily as education revenue dropped 94% amid funding delays at its largest education customer. JDL shifted from $491,000 operating income to a $121,000 operating loss.
  • Net2Edge sales decreased 5% to $424,000; its operating loss narrowed to $383,000 from $527,000.
  • Consolidated net income benefited from the Suttle sale: on March 11, the company sold the remaining Suttle business lines for $8 million, subject to a working-capital adjustment, received $8.308 million in proceeds, and recorded a $2.161 million gain. Suttle’s results are presented as discontinued operations.

Outlook, risks and unusual items

  • No quantified consolidated revenue or earnings guidance is provided. Management expected $1.2 million of 2020 restructuring costs related to the Suttle sale and plant closure; $320,000 was accrued at quarter-end and expected to be paid during 2020.
  • Management said COVID-19 had caused supply-chain and demand disruptions, with no significant effect on Q1 results, but expected supply disruption and higher logistics and operating costs to continue through 2020. It reported increased demand for some Transition Networks fiber and high-speed products, alongside project and order delays. The ultimate financial impact was uncertain.
  • After quarter-end, the company invested $899,000 in UK-based Quortus Ltd. and completed its May 14 acquisition of Ecessa Corporation for $4 million, subject to working-capital adjustments. Management cited integration and execution as risks.
  • Other identified risks include continued declines in traditional products, reliance on key customers and contract manufacturers, JDL education-funding delays, Net2Edge’s path to profitability, and contingencies affecting a proposed sale of the Minnetonka headquarters.

Important facts for investors to verify

  1. Confirm the filing belongs to the intended issuer: this document identifies Communications Systems, Inc. (JCS), not Sunation Energy, Inc.
  2. Review the Suttle sale’s final working-capital adjustment, transition-services period, and actual restructuring costs.
  3. Monitor COVID-19-related supply, logistics, project delays, and demand, as the company provided no quantified forecast.
  4. Assess the sustainability of continuing-operations performance, particularly JDL’s education exposure and the decline in traditional Transition Networks products.
  5. Check post-quarter developments and funding needs related to the Ecessa acquisition, Quortus investment, and credit-facility availability.