SUNation Energy Inc. - 10-Q quarterly report FY2015 Q1

Washington, D.C.  20549

 

 

 

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  YES x  NO o

 

Indicate by a check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (as defined by Rule 12b-2 of the Exchange Act).

 

 

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

 

 

 

 

 

 

 

 

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

 

Communications Systems, Inc. (herein collectively called “CSI” or the “Company”) is a Minnesota corporation organized in 1969 that operates primarily as a holding company conducting its business through three business units having operations in the United States, Costa Rica, and the United Kingdom. Through its Suttle business unit, the Company is principally engaged in the manufacture and sale of copper and fiber connectivity systems, enclosure systems, and active technologies for voice, data and video communications. Through its Transition Networks business unit, the Company is engaged in the manufacture of media converters, network interface devices, network interface cards, Ethernet switches and other connectivity products that offer the ability to affordably integrate the benefits of fiber optics into any data network. Through its JDL Technologies business unit, the Company provides technology solutions including virtualization, managed services, wired and wireless network design and implementation, HIPAA-compliant IT services, and converged infrastructure configuration and deployment.

 

 

The condensed consolidated balance sheets and condensed consolidated statement of changes in stockholders’ equity as of March 31, 2015 and the related condensed consolidated statements of loss and comprehensive loss, and the condensed consolidated statements of cash flows for the periods ended March 31, 2015 and 2014 have been prepared by Company management.  In the opinion of management, all adjustments (which include only normal recurring adjustments, except where noted) necessary to present fairly the financial position, results of operations, and cash flows at March 31, 2015 and 2014 and for the periods then ended have been made.

 

Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with generally accepted accounting principles in the United States of America have been condensed or omitted.  We recommend these condensed consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the Company’s December 31, 2014 Annual Report to Shareholders on Form 10-K.  The results of operations for the period ended March 31, 2015 are not necessarily indicative of operating results for the entire year.

 

The presentation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, and disclosure of contingent assets and liabilities at the balance sheet date, and the reported amounts of revenues and expenses during the reporting period.  The estimates and assumptions used in the accompanying condensed consolidated financial statements are based upon management’s evaluation of the relevant facts and circumstances as of the time of the financial statements.  Actual results could differ from those estimates.

 

 

 

 

The components of accumulated other comprehensive loss, net of tax, are as follows:

NOTE 2 – CASH EQUIVALENTS AND INVESTMENTS

 

The following tables show the Company’s cash equivalents and available-for-sale securities’ amortized cost, gross unrealized gains, gross unrealized losses and fair value by significant investment category recorded as cash and cash equivalents or short and long term investments as of March 31, 2015 and December 31, 2014:

 

 

 

The Company tests for other than temporary losses on a quarterly basis and has considered the unrealized losses indicated above to be temporary in nature. The Company intends to hold the investments until it can recover the full principal amount and has the ability to do so based on other sources of liquidity. The Company expects these recoveries to occur prior to the contractual maturities.  All unrealized losses as of March 31, 2015 were in a continuous unrealized loss position for less than twelve months and are not deemed to be other than temporarily impaired as of March 31, 2015.

 

The following table summarizes the estimated fair value of our investments, designated as available-for-sale and classified by the contractual maturity date of the securities as of March 31, 2015:

 

The Company did not recognize any gross realized gains, and gross realized losses were immaterial, during the three-month periods ending March 31, 2015 and 2014, respectively. If the Company had realized gains or losses, they would be included within investment and other income in the accompanying consolidated results of operations.

 

NOTE 3 - STOCK-BASED COMPENSATION

 

 

Under the Company’s Employee Stock Purchase Plan (“ESPP”), employees are able to acquire shares of common stock at 85% of the price at the end of each current quarterly plan term.  The most recent term ended March 31, 2015.  The ESPP is considered compensatory under current Internal Revenue Service rules.  At March 31, 2015, after giving effect to the shares issued as of that date, 17,455 shares remain available for purchase under the ESPP. On April 3, 2015, the Company’s Board of Directors amended the ESPP to increase the authorized shares by 100,000 to 600,000, subject to approval at the Company’s Annual Meeting of Shareholders to be held on May 21, 2015.

 

 

On March 28, 2011 the Board adopted and on May 19, 2011 the Company’s shareholders approved the Company’s 2011 Executive Incentive Compensation Plan (“2011 Incentive Plan”).  The 2011 Incentive Plan authorizes incentive awards to officers, key employees and non-employee directors in the form of options (incentive and non-qualified), stock appreciation rights, restricted stock, restricted stock units, performance stock units (“deferred stock”), performance cash units, and other awards in stock, cash, or a combination of stock and cash.  Up to 1,000,000 shares of our common stock may be issued pursuant to awards under the 2011 Incentive Plan.

 

 

During 2015, stock options covering 105,279 shares were awarded to key executive employees and directors, which options expire seven years from the date of award and vest 25% each year beginning one year after the date of award.  The Company also granted deferred stock awards of 100,017 shares to key employees during the first quarter under the Company’s long-term incentive plan for performance over the 2015 to 2017 period. The actual number of shares of deferred stock, if any, that are earned by the respective employees will be determined based on achievement against performance goals for each of the three years ending December 31, 2017 and the shares earned will be issued in the first quarter of 2018 to those key employees still with the Company at that time.

 

At March 31, 2015, 65,651 shares have been issued under the 2011 Incentive Plan, 801,293 shares are subject to currently outstanding options, deferred stock awards, and unvested restricted stock units, and 133,056 shares are eligible for grant under future awards. On April 3, 2015, the Company’s Board of Directors amended the 2011 Stock Incentive plan to increase the authorized shares by 1,000,000 to 2,000,000, subject to approval at the Company’s Annual Meeting of Shareholders to be held on May 21, 2015.

 

 

Shares of common stock are reserved for issuance to non-employee directors under options granted by the Company prior to 2011 under its Stock Option Plan for Non-Employee Directors (the “Director Plan”).  Under the Director Plan nonqualified stock options to acquire shares of common stock were automatically granted to each non-employee director concurrent with annual meetings of shareholders in 2010 and earlier years, with the exercise price of options granted being the fair market value of the common stock on the date of the respective shareholder meetings.  Options granted under the Director Plan expire 10 years from date of grant.

 

No options were granted under the Director Plan in 2014 or 2015.  The Director Plan was amended as of May 19, 2011 to prohibit option grants in 2011 and future years.

 

 

Under the Company’s 1992 Stock Plan (“the Stock Plan”), shares of common stock may be issued pursuant to stock options, restricted stock or deferred stock grants to officers and key employees.  Exercise prices of stock options under the Stock Plan cannot be less than fair market value of the stock on the date of grant.  Rules and conditions governing awards of stock options, restricted stock and deferred stock are determined by the Compensation Committee of the Board of Directors, subject to certain limitations in the Stock Plan.  When seeking approval of the 2011 Incentive Plan at the 2011 Annual Meeting of Shareholders, the Company committed to amending the Stock Plan to prohibit the issuance of future equity awards if such approval was given. Effective August 11, 2011, the amendment to prohibit future stock options or other equity awards was approved by the Board.

 

At March 31, 2015, after reserving for stock options and deferred stock awards granted in prior years and adjusting for forfeitures and issuances during the year, there were 22,008 shares reserved for issuance under the Stock Plan. The Company has not awarded stock options or deferred stock under this plan in 2015.

 

 

The following table summarizes changes in the number of outstanding stock options under the 2011 Incentive Plan, the Director Plan and Stock Plan over the period December 31, 2014 to March 31, 2015:

 

The aggregate intrinsic value of all options (the amount by which the market price of the stock on the last day of the period exceeded the market price of the stock on the date of grant) outstanding at March 31, 2015 was $158,000.  The intrinsic value of all options exercised during the three months ended March 31, 2015 was $0. Net cash proceeds from the exercise of all stock options were $0 for the three months ended March 31, 2015 and 2014.

 

 

The following table summarizes the changes in the number of deferred stock shares under the Stock Plan and 2011 Incentive Plan over the period December 31, 2014 to March 31, 2015:

 

 

The following table summarizes the changes in the number of restricted stock units under the 2011 Incentive Plan over the period December 31, 2014 to March 31, 2015:

 

 

 

Share-based compensation expense recognized for the three-month period ended March 31, 2015 was $238,000 before income taxes and $155,000 after income taxes. Share-based compensation expense recognized for the three-month period ended March 31, 2014 was $48,000 before income taxes and $31,000 after income taxes.  Unrecognized compensation expense for the Company’s plans was $1,204,000 at March 31, 2015 and is expected to be recognized over a weighted-average period of 2.7 years.  Excess tax benefits from the exercise of stock options and issuance of stock included in financing cash flows for the three month periods ended March 31, 2015 and 2014 were $ (6,000) and $ (9,000), respectively. Share-based compensation expense is recorded as a part of selling, general and administrative expenses.

 

NOTE 4 - INVENTORIES

 

Inventories summarized below are priced at the lower of first-in, first-out cost or market:

 

NOTE 5 – INTANGIBLE ASSETS

 

The Company’s identifiable intangible assets with finite lives are being amortized over their estimated useful lives and were as follows:

 

 

 

NOTE 6 – WARRANTY

 

We provide reserves for the estimated cost of product warranties at the time revenue is recognized.  We estimate the costs of our warranty obligations based on our warranty policy or applicable contractual warranty, historical experience of known product failure rates, and use of materials and service delivery costs incurred in correcting product failures.  Management reviews the estimated warranty liability on a quarterly basis to determine its adequacy.  The actual warranty expense could differ from the estimates made by the Company based on product performance.

 

The following table presents the changes in the Company’s warranty liability for the three-month periods ended March 31, 2015 and 2014, respectively, the majority of which relates to a five-year obligation to provide for potential future liabilities for network equipment sales.

 

NOTE 7 – CONTINGENCIES

 

 

NOTE 8 – INCOME TAXES

 

In the preparation of the Company’s consolidated financial statements, management calculates income taxes based upon the estimated effective rate applicable to operating results for the full fiscal year. This includes estimating the current tax liability as well as assessing differences resulting from different treatment of items for tax and book accounting purposes. These differences result in deferred tax assets and liabilities, which are recorded on the balance sheet. These assets and liabilities are analyzed regularly and management assesses the likelihood that deferred tax assets will be recovered from future taxable income.

 

  

At March 31, 2015 there was $76,000 of net uncertain tax benefit positions that would reduce the effective income tax rate if recognized.  The Company records interest and penalties related to income taxes as income tax expense in the Condensed Consolidated Statements of Income.

 

The Company is subject to U.S. federal income tax as well as income tax of multiple state and foreign jurisdictions. The tax years 2011-2013 remain open to examination by the Internal Revenue Service and the years 2010-2013 remain open to examination by various state tax departments. The tax years from 2011-2013 remain open in Costa Rica.

 

 

NOTE 9 – SEGMENT INFORMATION

 

The Company classifies its businesses into three segments as follows:

 

 

Management has chosen to organize the enterprise and disclose reportable segments based on our products and services. There are no material inter-segment revenues.

 

Information concerning the Company’s continuing operations in the various segments for the three month periods ended March 31, 2015 and 2014 is as follows:

 

 

 

NOTE 10 – PENSIONS

 

The Company’s U.K. based subsidiary Austin Taylor maintains defined benefit pension plans.  The Company does not provide any other post-retirement benefits to its employees.  Components of net periodic benefit cost of the pension plans for the three-months ended March 31, 2015 and 2014 were:

 

 

NOTE 11 – NET INCOME (LOSS) PER SHARE

 

Basic net income per common share is based on the weighted average number of common shares outstanding during each year. Diluted net income per common share takes into effect the dilutive effect of potential common shares outstanding.  The Company’s only potential common shares outstanding are stock options and shares associated with the long-term incentive compensation plans, which resulted in no dilutive effect for the three months ended March 31, 2015 and 2014. The Company calculates the dilutive effect of outstanding options using the treasury stock method. Due to the net losses in the first three months of 2014 and 2015, there was no dilutive impact from stock options or unvested shares.  Options totaling 522,922 and 103,896 would have been excluded from the calculation of diluted earnings per share for the three-months ended March 31, 2015 and 2014, respectively, because the exercise price was greater than the average market price of common stock during the period and deferred stock awards totaling 205,010 and 172,750 shares would not have been included for the three-months ended March 31, 2015 and 2014 because of unmet performance conditions.

 

NOTE 12 – FAIR VALUE MEASUREMENTS

 

The accounting guidance establishes a valuation hierarchy for disclosure of the inputs to valuation used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows:

 

Level 1 – Observable inputs that reflect unadjusted quoted prices for identical assets or liabilities in active markets that the Company has the ability to access at the measurement date.

 

Level 2 – Observable inputs such as quoted prices for similar instruments and quoted prices in markets that are not active, and inputs that are directly observable or can be corroborated by observable market data. The types of assets and liabilities included in Level 2 are typically either comparable to actively traded securities or contracts, such as treasury securities with pricing interpolated from recent trades of similar securities, or priced with models using highly observable inputs, such as commodity options priced using observable forward prices and volatilities.

 

Level 3 – Significant inputs to pricing that have little or no observability as of the reporting date. The types of assets and liabilities included in Level 3 are those with inputs requiring significant management judgment or estimation, such as the complex and subjective models and forecasts used to determine the fair value of financial instruments.

 

Financial assets and liabilities measured at fair value as of March 31, 2015 and December 31, 2014, are summarized below:

 

 

 

We record transfers between levels of the fair value hierarchy, if necessary, at the end of the reporting period. There were no transfers between levels during the three months ended March 31, 2015.

 

NOTE 13 – RESTRUCTURING CHARGES

 

During the three-months ended March 31, 2014, the Company recorded $238,000 in restructuring expense. This consisted of severance and related benefits costs due to the restructuring within the Transition Networks business segment, including ongoing costs related to the closure of the China facility. The facility was completely closed in the second quarter of 2014. The Company had no restructuring expenses for the three-month period ended March 31, 2015.

 

NOTE 14 – SUBSEQUENT EVENTS

 

The Company has evaluated subsequent events through the date of this filing. We do not believe there are any material subsequent events that would require further disclosure.

 

 

 

 

Communications Systems, Inc. provides physical connectivity infrastructure and services for global deployments of broadband networks through the following business units:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

In this report and, from time to time, in reports filed with the Securities and Exchange Commission, in press releases, and in other communications to shareholders or the investing public, the Company may make “forward looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 concerning possible or anticipated future financial performance, business activities, plans, pending claims, investigations or litigation which are typically preceded by the words “believes,” “expects,” “anticipates,” “intends” or similar expressions. For these forward-looking statements, the Company claims the protection of the safe harbor for forward-looking statements contained in federal securities laws. Shareholders and the investing public should understand that these forward-looking statements are subject to risks and uncertainties that could cause actual performance, activities, anticipated results, outcomes or plans to differ significantly from those indicated in the forward-looking statements. These risks and uncertainties include, but are not limited to:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2015 Compared to

 

Consolidated sales decreased 22% in 2015 to $19,545,000 compared to $25,198,000 in 2014.  Consolidated operating loss in 2015 increased to $5,691,000 compared to an operating loss of $252,000 in the first quarter of 2014.  Net loss in 2015 increased to $4,163,000 or $ (0.48) per share compared to a net loss of $141,000 or $ (0.02) per share in the first quarter of 2014.

 

 

Suttle sales decreased 18% in the first quarter of 2015 to $10,590,000 compared to $12,882,000 in the same period of 2014 as Suttle experienced increased pricing pressure and volume declines in its legacy product lines.  Sales by customer groups in the first quarter of 2015 and 2014 were:

 

Suttle’s sales by product groups in first quarter of 2015 and 2014 were:

 

Sales to the major communication service providers decreased 19% in 2015 due to a disrupted order cycle at a major customer that significantly curtailed its first quarter purchasing, and overall decline in legacy product lines.  Sales to major communication service providers accounted for 82% of Suttle’s sales in the first quarter of 2015 compared to 84% of sales in 2014.  Sales to distributors decreased 46% in 2015 due to a continuing decline in legacy product lines.  This customer segment accounted for 7% and 11% of sales in the first quarters of 2015 and 2014, respectively. International sales increased 47% and accounted for 9% of Suttle’s first quarter 2015 sales, due to the ordering cycle of DSL products for a major customer.

 

Sales of structured cabling products decreased 26% due to reduced demand in major customers. Sales of DSL products decreased 20% and modular connecting products sales decreased 23% due to shifts in technology. Sales of FTTx products increased 32% due to success in securing new business in multiple new FTTx networks deployments.

 

 

Suttle’s gross margin decreased 59% in the first quarter of 2015 to $1,441,000 compared to $3,490,000 in the same period of 2014.  Gross margin as a percentage of sales decreased to 13.6% from 27.1% in the same period of 2014 due to increased pricing pressure at a major customer and high production variances due to decreased demand, as well as continued investment into production capabilities to support new FTTx product platforms. Selling, general and administrative expenses increased 33% to $4,306,000, or 40.7% of sales, in the first quarter of 2015 compared to $3,137,000, or 24.4% of sales, in the same period in 2014 due in part to investment into fiber and active capabilities to support new product platforms.  Suttle incurred $1,396,000 and $748,000 in research and development expenses in the respective 2015 and 2014 first quarters,  as it continues to invest in enhancing existing products and developing new products. Suttle’s operating income was a loss of $2,865,000 in the first quarter of 2015 compared to income of $353,000 in 2014.

 

 

Transition Networks sales decreased 17% to $8,090,000 in the first quarter of 2015 compared to $9,749,000 in 2014 due to decreased activity in the North American and EMEA markets. Transition Networks organizes its sales force by channel to market and segments its customers geographically.  First quarter sales by region are presented in the following table:

 

The following table summarizes Transition Networks’ 2015 and 2014 first quarter sales by its major product groups:

 

Sales in North America decreased 22% or $1,491,000 due mainly to a slowdown in federal government and enterprise business segments.  International sales decreased $168,000, or 6%, mainly due to lower circuit emulation and service contract sales out of the United Kingdom site.  Sales of media converters decreased 8% or $532,000 due to a decline in domestic sales resulting from competitive pricing pressures and project timing. Sales of Ethernet adapters decreased 86% or 720,000 due to the slowing of government business and project timing.

 

Gross margin on first quarter Transition Networks’ sales decreased 28% to $3,405,000 in 2015 from $4,706,000 in 2014.  Gross margin as a percentage of sales decreased to 42.1% in 2015 from 48.3% in 2014 due to unfavorable product mix and pricing pressure.  Selling, general and administrative expenses increased 5% to $5,462,000, or 67.5% of sales, in 2015 compared to $5,180,000, or 53.1% of sales, in 2014 due to increased global selling expenses to support our product development initiatives. Operating loss was $2,057,000 in 2015 compared to a loss of $712,000 in 2014.

 

 

 

JDL Technologies sales decreased 66% to $865,000 in the first quarter of 2015 compared to $2,567,000 in 2014.

 

JDL’s revenues by customer group were as follows:

 

Revenues earned from Broward County Public Schools decreased $1,602,000 or 83% in the first quarter of 2015 as compared to the 2014 first quarter due to E-Rate funding not yet being available in the 2015 period.  The Schools and Library Department is expected to provide confirmation of E-Rate awards by the third quarter of 2015.  As E-Rate represents significant savings for the district, all E-Rate eligible purchases are on hold until funding commitments are released. In the first quarter of 2015, the Broward County School District awarded JDL Technologies new contracts for information technology services and infrastructure, with revenues expected to be realized beginning in the second quarter of 2015. The contracts are valued at approximately $83 million over the five-year contract period.

 

Absence of further revenues from Miami-Dade County Public Schools reflects completion of that district’s wireless classroom initiative, which had been funded under the E-Rate program.  Revenue from JDL Technologies’ sales to small and medium-sized commercial businesses (SMBs) remained flat at $537,000.

 

Gross margin decreased 95% to $41,000 in the first quarter of 2015 compared to $791,000 in the same period in 2014. Gross margin as a percentage of sales decreased to 4.8% in 2015 from 30.8% in 2014 due to changes in revenue mix from 2014 to 2015.  Selling, general and administrative expenses increased 18% in 2015 to $810,000, or 93.6% of sales, compared to $685,000, or 26.7% of sales, in 2014. Selling, general and administrative expenses as a percentage of sales were much higher in the 2015 period as JDL’s non-variable general and administrative expenses constituted a much higher percentage of the lower 2015 sales. Reflecting the first quarter 2015 revenue decline, JDL Technologies reported an operating loss of $769,000 in the first quarter of 2015 compared to operating income of $107,000 in the same period of 2014.

 

 

The Company’s loss before income taxes increased to $5,637,000 in 2015 compared to a loss of $265,000 in 2014. The Company’s effective income tax rate was 26.1% in 2015 and 46.9% in 2014.  This effective tax rate for 2015 differs from the federal tax rate of 35% due to state income taxes, foreign tax rate differences, foreign losses not deductible for U.S. income tax purposes and provisions for interest charges for uncertain income tax positions.

 

 

 

As of March 31, 2015, the Company had approximately $24,613,000 in cash, cash equivalents and investments. Of this amount, $442,000 was invested in short-term money market funds that are not considered to be bank deposits and are not insured or guaranteed by the FDIC or other government agency. These money market funds seek to preserve the value of the investment at $1.00 per share; however, it is possible to lose money investing in these funds. The remainder in cash and cash equivalents is operating cash and certificates of deposit that are fully insured through the FDIC. The Company also had $15,463,000 in investments consisting of certificates of deposit and corporate notes and bonds that are traded on the open market and are classified as available-for-sale at March 31, 2015.

 

The Company had working capital of $52,014,000, consisting of current assets of approximately $65,767,000 and current liabilities of $13,753,000 at March 31, 2015 compared to working capital of $56,911,000, consisting of current assets of $69,906,000 and current liabilities of $12,995,000 at December 31, 2014.

 

Cash flow used by operating activities was approximately $2,311,000 in 2015 compared to $5,823,000 provided in the same period of 2014.  Significant working capital changes from December 31, 2014 to March 31, 2015 included a decrease in receivables of $2,957,000 due to lower revenues in the first quarter of 2015 as compared to the last quarter of 2014, and an increase in JDL-related inventory and related accounts payable due to a large order at JDL.

 

Net cash used in investing activities was $96,000 in 2015 compared to $5,978,000 used in the same period of 2014, primarily because of large net investments in the 2014 period. The Company continued to make capital investments in 2015, specifically within Suttle’s manufacturing operations.

 

Net cash used by financing activities was $1,536,000 in 2015 compared to $2,027,000 in the same period of 2014. Cash dividends paid on common stock increased to $1,395,000 in 2015 ($0.16 per common share) from $1,369,000 in 2014.  Proceeds from common stock issuances, principally shares sold to the Company’s Employee Stock Ownership Plan and issued under the Company’s Employee Stock Purchase Plan, totaled approximately $43,000 in 2015 and $36,000 in 2014. The Company did not repurchase any shares in 2015 or 2014 under the Board authorized program.  At March 31, 2015, Board of Director authority to purchase approximately 411,910 additional shares remained in effect.  The Company acquired $51,000 and $0 in 2015 and 2014, respectively, of Company stock from employees in order to satisfy withholding tax obligations related to share-based compensation, pursuant to terms of Board and shareholder-approved compensation plans.

 

The Company has a $10,000,000 line of credit from Wells Fargo Bank.  Interest on borrowings on the credit line is at LIBOR plus 1.1% (1.4% at March 31, 2015). There were no borrowings on the line of credit at March 31, 2015 or 2014. The credit agreement expires October 31, 2016 and is secured by assets of the Company.

 

 

 

 

Our critical accounting policies, including the assumptions and judgments underlying them, are discussed in our 2014 Form 10-K in Note 1 Summary of Significant Accounting Policies included in our Consolidated Financial Statements.  There were no significant changes to our critical accounting policies during the three months ended March 31, 2015.

 

The Company’s accounting policies have been consistently applied in all material respects and disclose such matters as allowance for doubtful accounts, sales returns, inventory valuation, warranty expense, income taxes, revenue recognition, asset impairment recognition and foreign currency translation. On an ongoing basis, we evaluate our estimates based on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the result of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.  Results may differ from these estimates due to actual outcomes being different from those on which we based our assumptions.  Management reviews these estimates and judgments on an ongoing basis.

 

 

 

 

The Company has no freestanding or embedded derivatives.  The Company’s policy is to not use freestanding derivatives and to not enter into contracts with terms that cannot be designated as normal purchases or sales.

 

The vast majority of our transactions are denominated in U.S. dollars; as such, fluctuations in foreign currency exchange rates have historically not been material to the Company.  At March 31, 2015 our bank line of credit carried a variable interest rate based on LIBOR plus 1.1%.

 

Based on the Company’s operations, in the opinion of management, no material future losses or exposure exist relative to market risk.

 

 

 

disclosure controls and procedures are effective.

 

 

Except as set forth below, there was no change in the Company’s internal control over financial reporting that occurred during the Company’s most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

During the quarter ended March 31, 2015, we implemented a new ERP system within our Suttle business unit. The ERP system is designed to strengthen our long-term performance by standardizing all CSI business units on a common platform. The system changes were not being made in response to any material weakness in our internal controls. This implementation has resulted in some changes to business processes and internal control over financial reporting. We have taken steps to monitor and maintain appropriate internal control over financial reporting and will continue to evaluate the operating effectiveness of related controls during future periods.

 

Not Applicable.

 

Not Applicable.

 

 

 

 

Not Applicable.

 

Not Applicable.

 

On May 7, 2015, Communications Systems, Inc., JDL Technologies, Inc., Transition Networks, Inc. and Suttle, Inc. entered in the Fourth Amendment to Credit Agreement and Waiver of Default with Wells Fargo Bank, National Association.

 

 

 

The following exhibits are included herein:

 

 

 

 

 

 

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereto duly authorized.