PC TEL INC - Annual Report: 2016 (Form 10-K)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-K

For the fiscal year ended December 31, 2016

OR

For the transition period from           to           

Commission File Number 000-27115

PCTEL, Inc.

(Exact Name of Registrant as Specified in Its Charter)

(630) 372-6800

(Registrant's Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes ☐    No ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.     Yes ☐    No ☒

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes ☒    No ☐

Indicate by checkmark whether the registrant has submitted electronically and posted on the Company’s website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T ((§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was acquired to submit and post such files)).    Yes ☒    No ☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definition of “large accelerated filer”, "accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.:

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes ☐    No ☒

As of June 30, 2016, the last business day of the registrant's most recently completed second fiscal quarter, there were 17,324,506 shares of the registrant's common stock outstanding, and the aggregate market value of such shares held by non-affiliates of the registrant (based upon the closing sale price of such shares on the NASDAQ Global Select Market on June 30, 2016) was approximately $81,598,423. Shares of the registrant's common stock held by each executive officer and director and by each entity that owns 5% or more of the registrant's outstanding common stock have been excluded because such persons may be deemed to be affiliates.  This determination of affiliate status is not necessarily a conclusive determination for any other purposes.

17,332,602 shares of common stock were issued and outstanding as of March 10, 2017.

Documents Incorporated by Reference

Certain sections of the registrant's definitive proxy statement relating to its 2017 Annual Stockholders' Meeting to be held on June 21, 2017 are incorporated by reference into Part III of this Annual Report on Form 10-K.  The Company intends to file its proxy statement within 120 days after the end of its fiscal year end to which this report relates.

PCTEL, Inc.

Form 10-K

For the Fiscal Year Ended December 31, 2016

TABLE OF CONTENTS

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PART I

Item 1:  Business

This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements include, among other things, statements concerning our future operations, financial condition and prospects, and business strategies. The words “believe”, “expect”, “anticipate” and other similar expressions generally identify forward-looking statements. Investors in our common stock are cautioned not to place undue reliance on these forward-looking statements. These forward-looking statements are subject to substantial risks and uncertainties that could cause our future business, financial condition, or results of operations to differ materially from the historical results or currently anticipated results. Investors should carefully review the information contained in Item 1A. Risk Factors and elsewhere in, or incorporated by reference into, this Annual Report on Form 10-K.  Other factors not currently anticipated may also materially and adversely affect our results of operations, cash flows and financial position. There can be no assurance that future results will meet expectations. While we believe that the forward-looking statements in this Annual Report on Form 10-K are reasonable, investors should not place undue reliance on any forward-looking statements. In addition, these statements speak only as of the date made. We do not undertake, and expressly disclaim any obligation to update or alter any statements whether as a result of new information, future events or otherwise, except as may be required by applicable law.

Overview

PCTEL, Inc. (“PCTEL”, the “Company”, “we”, “ours”, and “us”) delivers Performance Critical TELecom technology solutions to the wireless industry. We are a leading global supplier of wireless network antenna and testing solutions. PCTEL Connected Solutions designs and manufactures precision antennas. PCTEL antennas are deployed in small cells, enterprise Wi-Fi access points, fleet management and transit systems, and in network equipment and devices for the Industrial Internet of Things (“IIoT”). PCTEL RF Solutions provides test tools and engineering services that improve the performance of wireless networks globally. Mobile operators, neutral hosts, and equipment manufacturers rely on PCTEL to analyze, design, and optimize next generation wireless networks.

PCTEL was incorporated in California in 1994 and reincorporated in Delaware in 1998.  Our principal executive offices are located at 471 Brighton Drive, Bloomingdale, Illinois 60108.  Our telephone number at that address is (630) 372-6800 and our website is www.pctel.com.  The information within, or that can be accessed through, our website, is not part of this report.

Segment Reporting

PCTEL operates in two segments for reporting purposes, Connected Solutions and RF Solutions.  Our chief operating decision maker uses operating profits and identified assets for the Connected Solutions and RF Solutions segments to make operating decisions.  Each segment has its own segment manager as well as its own engineering, sales and marketing, and operational general and administrative functions.  All of our accounting and finance, human resources, IT and legal functions are provided on a centralized basis through the corporate function. We manage the balance sheet and cash flows centrally at the corporate level, with the exception of trade accounts receivable and inventory which is managed at the segment level. Each of the segment managers reports to and maintains regular contact with the chief operating decision maker to discuss operating activities, financial results, forecasts, or plans for the segment.

Connected Solutions Segment

PCTEL’s Connected Solutions segment designs and manufactures precision antennas. Our antennas are deployed primarily in small cells, enterprise Wi-Fi access points, fleet management and transit systems, and in equipment and devices for the Industrial Internet of Things (“IIoT”). Revenue growth in these markets is driven by the increased use of wireless communications and increased complexity trends occurring within them. Our antennas are primarily sold to original equipment manufacturer (“OEM”) providers where they are designed into the customer’s solution.

Competition in the antenna markets addressed by Connected Solutions is fragmented. Competitors include Amphenol, Comtelco, Laird, Mobile Mark, Pulse, and Radiall/Larsen. We seek out product applications that command a premium for product performance and customer service, and avoid commodity markets.

PCTEL maintains expertise in several technology areas in order to be competitive in the antenna market.  These include radio frequency engineering, mobile antenna design and manufacturing, mechanical engineering, product quality and testing, and wireless network engineering.

RF Solutions Segment

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PCTEL’s RF Solutions segment provides test tools and engineering services that improve the performance of wireless networks globally. Mobile operators, neutral hosts, and equipment manufacturers rely on us to analyze, design, and optimize next generation wireless networks. Revenue growth is driven by the implementation and roll out of new wireless technology standards (i.e. 1G to 2G, 2G to 3G, 3G to 4G, 4G to 5G, etc…). Our test equipment is sold directly to wireless carriers or to OEM providers who integrate our products into their solution which is then sold to wireless carriers.

Competitors for our test tool products include OEMs such as Anritsu, Berkley Varitronics, Digital Receiver Technology, and Rohde and Schwarz.

PCTEL maintains expertise in several technology areas in order to be competitive in the test tool and related engineering services market. These include radio frequency engineering, digital signal process (“DSP”) engineering, manufacturing, mechanical engineering, product quality and testing, and wireless network engineering.

Major Customers

Huawei Technologies Co., Ltd (“Huawei”) accounted for approximately 11% of revenues during the year ended December 31, 2016 and accounted for approximately 17% of accounts receivable at December 31, 2016.  No other customer accounted for 10% or greater of revenues during the year ended December 31, 2016 and no other customer accounted from 10% or greater of accounts receivable at December 31, 2016.

There were no customers that accounted for 10% or greater of revenues or accounts receivable during the fiscal years ended December 31, 2015, or 2014, respectively.

International Activities

The following table shows the percentage of revenues by geographic location during the last three fiscal years:

See Note 11 of the consolidated financial statements for further geographical information.

Backlog

Sales of our products and services are generally made pursuant to standard purchase orders, which are officially acknowledged according to standard terms and conditions.  The backlog is useful for scheduling production, but is not necessarily a meaningful indicator of future product revenues as the order to ship cycle is extremely short.

Research and Development

We recognize that a strong technology base is essential to our long-term success and we have made a substantial investment in engineering, research and development.  We will continue to devote substantial resources to product development and patent submissions.  The patent submissions are primarily for defensive purposes, rather than for potential license revenue generation.  We monitor changing customer needs and work closely with our customers, consultants and market research organizations to track changes in the marketplace, including emerging industry standards.

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Research and development expenses include costs for hardware and related software development, prototyping, certification and pre-production costs.  We spent approximately $10.2 million, $11.2 million, and $11.7 million in the fiscal years 2016, 2015, and 2014, respectively, in research and development.

Sales, Marketing and Support

We supply our products to public and private carriers, wireless infrastructure providers, wireless equipment distributors, value added resellers (“VARs”) and OEMs.  PCTEL’s direct sales force is technologically sophisticated and sales executives have strong industry domain knowledge.  Our direct sales force supports the sales efforts of our distributors and OEM resellers.

Our marketing strategy is focused on building market awareness and acceptance of our new products.  The marketing organization also provides a wide range of programs, materials and events to support the sales organization.  We spent approximately $13.8 million, $14.2 million, and $13.0 million in fiscal years 2016, 2015, and 2014, respectively, for sales and marketing support.

Manufacturing

We do final assembly of most of our antenna products and all of our OEM receiver and interference management product lines.  We also have arrangements with several contract manufacturers but are not dependent on any specific contract manufacturer.  If any of our contract manufacturers are unable to provide satisfactory services for us, other contract manufacturers are available, although engaging a new contract manufacturer could cause delays and additional costs.  We have no material guaranteed supply contracts or long-term agreements with any of our suppliers. We do have open purchase orders with our suppliers.  See the contractual obligations and commercial commitments section of Item 7 for information on purchase commitments.

Employees

As of December 31, 2016, we had 503 full-time equivalent employees, consisting of 363 in operations, 56 in sales and marketing, 49 in research and development, and 35 in general and administrative functions.  Total full-time equivalent employees were 491 and 465 at December 31, 2015 and 2014, respectively.  Headcount increased by 12 at December 31, 2016 from December 31, 2015 primarily due to the employees added at our Tianjin, China facility.  None of our employees are represented by a labor union.  We consider employee relations to be good.

Available Information

Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to such reports, are available free of charge through our website as soon as reasonably practicable after we electronically file such material with, or furnish it to, the United States Securities and Exchange Commission (the “SEC”).  Our website is located at the following address: www.pctel.com.  The information within, or that can be accessed through, our website, is not part of this Annual Report on Form 10-K.  Further, any materials we file with the SEC may be read and copied by the public at the SEC’s Public Reference Room, located at 100 F Street, N.E., Room 1580, Washington D.C. 20549.  Information regarding the operation of the Public Reference Room can be obtained by calling the SEC at 1(800) SEC-0330.  The SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding our filings at www.sec.gov.

Item 1A:  Risk Factors

Factors That May Affect Our Business, Financial Condition and Future Operations

Risks Related to Our Business

Competition within the wireless product and services industry is intense and is expected to increase significantly.  Failure to compete successfully could materially harm our prospects and financial results.

The market for our products and services is highly fragmented and is served by many local providers.  We may not be able to displace established competitors from their customer base with our products and services.

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Many of our present and potential competitors have substantially greater financial, marketing, technical and other resources with which to pursue engineering, manufacturing, marketing, and distribution of their products and delivery of their services.  These competitors may succeed in establishing technology standards or strategic alliances in the connectivity products markets, obtain more rapid market acceptance for their products, or otherwise gain a competitive advantage.  We can offer no assurance that we will succeed in developing product technologies and services that are more effective than those developed by our competitors.  We can offer no assurance that we will be able to compete successfully against existing and new competitors as the connectivity wireless markets evolve and the level of competition increases.

Our wireless business is dependent upon the continued growth and evolution of the wireless industry.

Our future success is dependent upon the continued growth and evolution of the wireless industry.  The growth in demand for wireless products and services may not continue at its current rate or at all.  Any decrease in the growth of the wireless industry could have a material adverse effect on the results of our operations.

Our future success depends on our ability to develop and successfully introduce new and enhanced products for the wireless market that meet the needs of our customers.

Our revenue depends on our ability to anticipate our existing and prospective customers' needs and develop products and services that address those needs.  Our future success will depend on our ability to introduce new products and services for the wireless market, anticipate improvements and enhancements in wireless technology and wireless standards, and to develop products and services that are competitive in the rapidly changing wireless industry.  Introduction of new products, product enhancements, and services will require coordination of our efforts with those of our customers, suppliers, and manufacturers to rapidly achieve volume production.  If we fail to coordinate these efforts, develop product enhancements or introduce new products that meet the needs of our customers as scheduled, our operating results will be materially and adversely affected and our business and prospects will be harmed.  We cannot assure that product introductions will meet the anticipated release schedules or that our wireless products will be competitive in the market.  Furthermore, given the evolving nature of the wireless market, there can be no assurance our products and technology will not be rendered obsolete by alternative or competing technologies.

We may experience integration or other problems with potential acquisitions, which could have an adverse effect on our business or results of operations.  New acquisitions could dilute the interests of existing stockholders, and the announcement of new acquisitions could result in a decline in the price of our common stock.

We may in the future make acquisitions of, or large investments in, businesses that offer products, services, and technologies that we believe would complement our products or services, including wireless products and technology.  We may also make acquisitions of or investments in, businesses that we believe could expand our distribution channels.  Even if we were to announce an acquisition, we may not be able to complete it.  Additionally, any future acquisition or substantial investment would present numerous risks, including:

We expect that future acquisitions could provide for consideration to be paid in cash, shares of our common stock, or a combination of cash and our common stock.  If consideration for a transaction is paid in common stock, this would further dilute our existing stockholders. We may also incur debt to pay for an acquisition.

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Our gross profit may vary based on the mix of sales of our products and services, and these variations may cause our net income to decline.

Depending on the mix of our products and services sold, our gross profit could vary significantly from quarter to quarter.  Generally, antenna products and engineering services have a lower profit margin than scanning receiver products creating the variance in gross profits related to profit mix.  A variance or decrease of our gross profit could have a negative impact on our financial results and cause our net income to decline.

Any delays in our sales cycles could result in customers canceling purchases of our products.

Sales cycles for our products with major customers can be lengthy, often lasting nine months or longer.  In addition, it can take an additional nine months or more before a customer commences volume production of equipment that incorporates our products.  Sales cycles with our major customers are lengthy for a number of reasons, including:

A significant portion of our operating expenses is relatively fixed and is largely based on our forecasts of volume and timing of orders.  The lengthy sales cycles make forecasting the volume and timing of product orders difficult.  In addition, the delays inherent in lengthy sales cycles raise additional risks of customer decisions to cancel or change product phases.  If customer cancellations or product changes were to occur, this could result in the loss of anticipated sales without sufficient time for us to reduce our operating expenses.

We generally rely on independent companies to manufacture, assemble and test our products.  If these companies do not meet their commitments to us, or if our own assembly operations are impaired, our ability to sell products to our customers would be impaired.

We have limited manufacturing capability.  For some product lines we outsource the manufacturing, assembly, and testing of printed circuit board subsystems.  For other product lines, we purchase completed hardware platforms and add our proprietary software.  While there is no unique capability with these suppliers, any failure by these suppliers to meet delivery commitments would cause us to delay shipments and potentially be unable to accept new orders for product.

In addition, in the event that these suppliers discontinued the manufacture of materials used in our products, we would be forced to incur the time and expense of finding a new supplier or to modify our products in such a way that such materials were not necessary.  Either of these alternatives could result in increased manufacturing costs and increased prices of our products.

We assemble our antenna products in our facilities located in Illinois and China and scanning receivers at our facility in Maryland.  We may experience delays, disruptions, capacity constraints or quality control problems at our assembly facilities, which could result in lower yields or delays of product shipments to our customers.  In addition, we are having a number of our antenna products manufactured in China via contract manufacturers.  Any disruption of our own or contract manufacturers' operations could cause us to delay product shipments, which would negatively impact our sales, competitive reputation and position.  In addition, if we do not accurately forecast demand for our products, we will have excess or insufficient parts to build our products, either of which could materially affect our operating results.

In order for us to operate at a profitable level and continue to introduce and develop new products for emerging markets, we must attract and retain our executive officers and qualified engineering, technical, sales, support and other administrative personnel.

Our performance is substantially dependent on the performance of our current executive officers and certain key engineering, sales, marketing, financial, technical and customer support personnel.  If we lose the services of our executives or key employees, replacements could be difficult to recruit and, as a result, we may not be able to grow our business.

Competition for personnel, especially qualified engineering personnel, is intense.  We are particularly dependent on our ability to identify, attract, motivate and retain qualified engineers with the requisite education, background and industry experience.  As of December 31, 2016, we employed a total of 49 people in our research and development department.  If we lose the services of one or more of our key engineering personnel, our ability to continue to develop products and technologies responsive to our markets may be impaired.

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We may be subject to litigation regarding intellectual property associated with our business and this could be costly to defend and could prevent us from using or selling the challenged technology.

In recent years, there has been significant litigation in the United States involving intellectual property rights.  We may be subject to claims in the future, including with respect to our wireless business.  Intellectual property claims against us, and any resulting lawsuits, may result in significant expenses and could subject us to significant liability for damages and invalidate what we currently believe are our proprietary rights.  These claims, regardless of their merits or outcome, would likely be time-consuming and expensive to resolve and could divert management's time and attention.  This could have a material and adverse effect on our results of operations.  Any intellectual property litigation disputes related to our  business could also force us to do one or more of the following:

If we are subject to a successful claim of infringement related to our wireless intellectual property and we fail to develop non-infringing intellectual property or license the infringed intellectual property on acceptable terms and on a timely basis, operating results could decline, and our ability to grow and sustain our wireless business could be materially and adversely affected.  As a result, our results of operations could be impaired.

We may in the future initiate claims or litigation against third parties for infringement of our intellectual property rights or to determine the scope and validity of our proprietary rights or the proprietary rights of our competitors.  These claims could also result in significant expense and the diversion of technical and management personnel's attention.

Undetected failures found in new products may result in a loss of customers or a delay in market acceptance of our products.

To date, we have not been made aware of any significant failures in our products.  However, despite testing by us and by current and potential customers, errors may be found in new products after commencement of commercial shipments, which could result in loss of revenue, loss of customers or delay in market acceptance, any of which could adversely affect our business, operating results, and financial condition.  We cannot assure that our efforts to monitor, develop, modify and implement appropriate test and manufacturing processes for our products will be sufficient to avoid failures in our products that result in delays in product shipment, replacement costs or potential damage to our reputation, any of which could harm our business, operating results and financial condition.

Conducting business in foreign countries involve additional risks.

A substantial portion of our manufacturing, research and development, and marketing activities is conducted outside the United States, including the United Kingdom, Hong Kong, and China.  There are a number of risks inherent in doing business in foreign countries, including: unfavorable political or economic factors; unexpected legal or regulatory changes; lack of sufficient protection for intellectual property rights; difficulties in recruiting and retaining personnel and managing international operations; repatriation of earnings; and less developed infrastructure.  If we are unable to manage successfully these and other risks pertaining to our international activities, our operating results, cash flows and financial position could be materially and adversely affected.

Our financial position and results of operations may be adversely affected if tax authorities challenge us and the tax challenges result in unfavorable outcomes.

We currently have international subsidiaries located in China, United Kingdom, and Israel as well as an international branch office located in Hong Kong.  The complexities resulting from operating in several different tax jurisdictions increase our exposure to worldwide tax challenges.  In the event a review of our tax filings results in unfavorable adjustments to our tax returns, our operating results, cash flows and financial position could be materially and adversely affected.

Conducting business in international markets involves foreign exchange rate exposure that may lead to reduced profitability.

We currently have operations in United Kingdom, Israel, Hong Kong, and China.  Fluctuations in the value of the U.S. dollar relative to other currencies may impact our revenues, cost of revenues and operating margins and may result in foreign currency translation gains and losses.

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Risks Related to Our Industry

Challenging economic conditions worldwide have from time to time contributed, and may continue to contribute, to slowdowns in the wireless industry at large, resulting in:

Our industry is characterized by rapidly changing technologies and rapidly changing competitive environments.  If we are not successful in responding to these changes, our products may become obsolete and we may not be able to compete effectively.

We must continue to evaluate, develop and introduce technologically advanced products that will position us for possible growth in the wireless market.  If we are not successful in doing so, our products may not be accepted in the market or may become obsolete and we may not be able to compete effectively.

Consolidation and vertical integration in our industry, and particularly integration of our customers with our competitors, may significantly reduce our ability to successfully market our products to long-standing customers and may adversely affect our vertically integrated customers’ ability to choose our products even if our products are technologically superior.

Changes in laws or regulations, in particular future Federal Communications Commission (“FCC”) regulations or international regulations affecting the broadband market, internet service providers, or the communications industry, could negatively affect our ability to develop new technologies or sell new products and, therefore, reduce our profitability.

The jurisdiction of the FCC extends to the entire communications industry, including our customers and their products and services that incorporate our products.  Future FCC regulations affecting the broadband access services industry, our customers or our products may harm our business.  For example, future FCC regulatory policies that affect the availability of data and Internet services may impede our customers' penetration into their markets or affect the prices that they are able to charge.  In addition, FCC regulatory policies that affect the specifications of wireless data devices may impede certain of our customers' ability to manufacture their products profitably, which could, in turn, reduce demand for our products.  Furthermore, international regulatory bodies are beginning to adopt standards for the communications industry.  Although our business has not been hurt by any regulations to date, in the future, delays caused by our compliance with regulatory requirements may result in order cancellations or postponements of product purchases by our customers, which would reduce our profitability.

Risks Related to our Common Stock

The trading price of our stock price may be volatile based on a number of factors, many of which are not under our control.

Our stock can experience significant changes in price on a percentage basis.  The common stock price fluctuated between a high of $6.00 and a low of $4.36 in 2016.  Our stock price can be subject to wide fluctuation in response to a variety of factors, many of which are out of our control, including:

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In addition, the NASDAQ Global Select Market, where many publicly held telecommunications companies, including PCTEL, are traded, often experiences extreme price and volume fluctuations.  These fluctuations often have been unrelated or disproportionate to the operating performance of these companies.

Provisions in our charter documents may inhibit a change of control or a change of management, which may cause the market price for our common stock to decline and may inhibit a takeover or change in our control that a stockholder may consider favorable.

Provisions in our charter documents could discourage potential acquisition proposals and could delay or prevent a change in control transaction that our stockholders may favor.  Specifically, our charter documents do not permit stockholders to act by written consent, do not permit stockholders to call a stockholders meeting, and provide for a classified board of directors, which means stockholders can only elect, or remove, a limited number of our directors in any given year.  These provisions could have the effect of discouraging others from making tender offers for our shares, and as a result, these provisions may prevent the market price of our common stock from reflecting the effects of actual or rumored takeover attempts and may prevent stockholders from reselling their shares at or above the price at which they purchased their shares.  These provisions may also prevent changes in our management that our stockholders may favor.

Our board of directors has the authority to issue up to 5,000,000 shares of preferred stock in one or more series.  The board of directors can fix the price, rights, preferences, privileges and restrictions of this preferred stock without any further vote or action by our stockholders.  The rights of the holders of our common stock will be affected by, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future.  Further, the issuance of shares of preferred stock may delay or prevent a change in control transaction without further action by our stockholders.  As a result, the market price of our common stock may decline.

If we are unable to successfully maintain processes and procedures required by the Sarbanes-Oxley Act of 2002 to achieve and maintain effective internal control over our financial reporting, our ability to provide reliable and timely financial reports could be harmed and our stock price could be adversely affected.

We must comply with the rules promulgated under Section 404 of the Sarbanes-Oxley Act of 2002.  Section 404 requires an annual management report assessing the effectiveness of our internal control over financial reporting and a report by our independent registered public accounting firm addressing this assessment.

While we are expending significant resources in maintaining the necessary documentation and testing procedures required by Section 404, we cannot be certain that the actions we are taking to achieve and maintain our internal control over financial reporting will be adequate.  If the processes and procedures that we implement for our internal control over financial reporting are inadequate, our ability to provide reliable and timely financial reports, and consequently our business and operating results, could be harmed.  This in turn could result in an adverse reaction in the financial markets due to a loss of confidence in the reliability of our financial reports, which could cause the market price of our common stock to decline.

Item 1B:  Unresolved Staff Comments

None.

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Item 2:  Properties

The following table lists our main facilities:

Facility Changes

Pursuant to the Asset Purchase Agreement dated February 27, 2015 with Nexgen, we assumed the lease for office space in Schaumburg, Illinois consisting of 6,652 square feet.  The total lease obligation pursuant to this lease assumption was $0.3 million.  The lease contained a one-time option to elect an early termination of the lease by August 31, 2016.  In March 2016, we exercised the early termination option and paid a fee of $0.1 million.

In May 2015, we entered into a new five-year, five-month office lease in Englewood, Colorado consisting of 4,579 square feet of leased space for our engineering services business.  The total lease obligation pursuant to this lease was $0.6 million.  The lease expires in October 2020; however, during the first quarter 2016, the Company vacated this facility and is marketing this property for sublease. During 2016 we recorded restructuring expenses based on the remaining lease payments for the Englewood facility, net of estimated sublease payments.

Effective October 31, 2015, our lease for our mobile tower assembly facility in Pryor, Oklahoma expired in accordance with its terms.  This lease was not renewed because of the Company’s exit from the mobile tower product line.

Due to recent growth in our China business for Connected Solutions and with the transfer of certain manufacturing activities to our Tianjin, China facility, in October 2015 we entered into a new five-year lease for additional manufacturing space in Tianjin consisting of 22,163 square feet which expands our footprint in Tianjin to 44,289 square feet. This lease expires October 2020.  The total lease obligation pursuant to this lease is $0.2 million.  In January 2017, we signed a new lease for additional space of 5,877 square feet in our Beijing, China design center.  The additional space will accommodate additional engineering capacity in support of the growth of our China business for Connected Solutions.  

All properties are in good condition and are suitable for the purposes for which they are used.  We believe that we have adequate space for our current needs.

Item 3:  Legal Proceedings

Settlements with TelWorx Parties and Other Parties

On March 27, 2013, the Company and the TelWorx Parties (as defined below) entered into an Amendment (the “Amendment”) to the Asset Purchase Agreement dated July 9, 2012 (the “Original Agreement), among the Company, PCTelWorx, Ciao Enterprises, LLC f/k/a TelWorx Communications, LLC and certain of its affiliated entities (collectively, the “TelWorx Entities”) and Tim and Brenda Scronce (“Sellers” and collectively with the TelWorx Entities, the “TelWorx Parties”), as part of a settlement arrangement relative to PCTelWorx’s acquisition of substantially all of the assets and the assumption of certain specified liabilities of the TelWorx Entities on July 9, 2012 (the “Acquisition”).

After completion of the Acquisition, we became aware of certain accounting irregularities with respect to the TelWorx Entities and our Board of Directors directed management to conduct an internal investigation. Based on the results of our investigation, our Board of Directors directed management to seek restitution from the TelWorx Parties, and after protracted negotiations and concurrent litigation, the parties entered into the Amendment and related settlement agreements to resolve their dispute.  A legal settlement with an aggregate fair value of $5.4 million was reached with the TelWorx Parties in March 2013.

We also engaged in efforts to seek restitution from two other parties used by the TelWorx Parties for professional services in the sale of the business to PCTEL.  In 2014, we settled in cash with the two parties for $0.1 million and $0.8 million, respectively.

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Item 4:  Mine Safety Disclosures

Not applicable.

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PART II

Item 5:  Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Price Range of Common Stock and Dividends

PCTEL’s common stock has been traded on the NASDAQ Global Select Market under the symbol PCTI since our initial public offering on October 19, 1999.  The following table shows the high and low sale prices of our common stock as reported by the NASDAQ Global Select Market for the periods indicated.

The closing sale price of our common stock as reported on the NASDAQ Global Select Market on March 10, 2017 was $5.81 per share.  As of that date there were 36 holders of record of the common stock.  A substantially greater number of holders of the common stock are in “street name” or beneficial holders, whose shares are held of record by banks, brokers, and other financial institutions.

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Five-Year Cumulative Total Return Comparison

The following graph compares the annual percentage change in the cumulative return to our stockholders with the cumulative return of the NASDAQ Composite Index and the S&P Information Technology Index for the period beginning December 31, 2011 and ending December 31, 2016.  Returns for the indices are weighted based on market capitalization at the beginning of each measurement point.  Note that historic stock price performance is not necessarily indicative of future stock price performance.

Sales of Unregistered Equity Securities

None.

Issuer Purchases of Equity Securities

All share repurchase programs are authorized by our Board of Directors and are announced publicly.  On April 20, 2015, our Board of Directors authorized an additional 500,000 shares of stock under an existing share repurchase program.  Additionally, on August 10, 2015, our Board of Directors authorized an additional 1,300,000 shares under the existing share repurchase programs, for a total of 2,726,000 shares.  We repurchased 783,212 shares at an average price of $5.23 during the year ended December 31, 2016.  We repurchased 1,942,788 shares at an average price of $6.22 during the year ended December 31, 2015.  At December 31, 2016, the Company had no shares that could still be repurchased under previously approved programs.

Item 6:  Selected Consolidated Financial Data

The following selected consolidated financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," the Consolidated Financial Statements and related notes and other financial information appearing elsewhere in this Annual Report on Form 10-K.  The statement of operations data for the years ended December 31, 2016, 2015, and 2014 and the balance sheet data as of December 31, 2016 and 2015 are derived from audited financial statements included elsewhere in this Annual Report on Form 10-K.  The statement of operations data for the years ended December

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31, 2013 and 2012 and the balance sheet data as of December 31, 2014, 2013, and 2012 are derived from audited financial statements not included in this Annual Report on Form 10-K.

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Item 7:  Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following commentary presents a discussion and analysis of the Company’s financial condition and results of operations by its management. The review highlights the principal factors affecting earnings and the significant changes in balance sheet items for the years 2016 and 2015. Financial information for prior years is presented when appropriate. The objective of this financial review is to enhance investor understanding of the accompanying tables and charts, the consolidated financial statements, notes to financial statements, and financial statistics appearing elsewhere in this Annual Report on Form 10-K. Where applicable, this discussion also reflects management’s insights with respect to known events and trends that have or may reasonably be expected to have a material effect on the Company’s operations and financial condition.

Our 2016 revenues decreased by $9.9 million (9.3%), compared to 2015, due to lower revenues from services, site solutions, and scanning receivers. We recorded an operating loss of $8.9 million in 2016, compared to an operating loss of $5.8 million in 2015.  The loss was the result of the negative gross margin impact of lower revenues and impairment expenses.  Within operating expenses impairment charges of $5.8 million offset lower cash-based operating expenses in 2016 compared to 2015.  We impaired the customer relationships related to the services reporting unit.  The 2016 net loss included adjustments of $12.6 million related to the valuation allowance for deferred taxes.

Introduction

PCTEL operates in two segments for reporting purposes, Connected Solutions and RF Solutions.  Our chief operating decision maker uses operating profits and identified assets for the Connected Solutions and RF Solutions segments to make operating decisions.  Each segment has its own segment manager as well as its own engineering, sales and marketing, and operational general and administrative functions.  All of our accounting and finance, human resources, IT and legal functions are provided on a centralized basis through the corporate function. We manage its balance sheet and cash flows centrally at the corporate level, with the exception of trade accounts receivable and inventory which is managed at the segment level. Each of the segment managers reports to and maintains regular contact with the chief operating decision maker to discuss operating activities, financial results, forecasts, or plans for the segment.

Connected Solutions Segment

PCTEL’s Connected Solutions segment designs and manufactures precision antennas. PCTEL antennas are deployed primarily in small cells, enterprise Wi-Fi access points, fleet management and transit systems, and in equipment and devices for the Industrial Internet of Things (“IIoT”). Revenue growth in these markets is driven by the increased use of wireless communications and increased complexity trends occurring within them. PCTEL antennas are primarily sold to original equipment manufacturer (“OEM”) providers where they are designed into the customer’s solution.

Competition in the antenna markets addressed by Connected Solutions is fragmented. Competitors include Amphenol, Comtelco, Laird, Mobile Mark, Pulse, and Radiall/Larsen.  We seek out product applications that command a premium for product performance and customer service, and avoids commodity markets.

PCTEL maintains expertise in several technology areas in order to be competitive in the antenna market.  These include radio frequency engineering, mobile antenna design and manufacturing, mechanical engineering, product quality and testing, and wireless network engineering.

RF Solutions Segment

PCTEL’s RF Solutions segment provides test tools and engineering services that improve the performance of wireless networks globally. Mobile operators, neutral hosts, and equipment manufacturers rely on PCTEL to analyze, design, and optimize next generation wireless networks. Revenue growth is driven by the implementation and roll out of new wireless technology standards (i.e. 1G to 2G, 2G to 3G, 3G to 4G, 4G to 5G, etc…). PCTEL test equipment is sold directly to wireless carriers or to OEM providers who integrate our products into their solution which is then sold to wireless carriers.

Competitors for PCTEL’s test tool products include OEMs such as Anritsu, Berkley Varitronics, Digital Receiver Technology, and Rohde and Schwarz.

PCTEL maintains expertise in several technology areas in order to be competitive in the test tool and related engineering services market. These include radio frequency engineering, digital signal processing (“DSP”) engineering, manufacturing, mechanical engineering, product quality and testing, and wireless network engineering.

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Results of Operations for Continuing Operations

Years ended December 31, 2016, 2015, and 2014

(All amounts in tables, other than percentages, are in thousands)

REVENUES BY SEGMENT

Revenues were approximately $96.7 million for the year ended December 31, 2016, a decrease of 9.3% from the prior year.  Revenues declined by $6.1 million (16.5%) for the RF Solutions segment due to lower revenues for both products and services.  Approximately 71% of the decline in revenues in 2016 for the RF Solutions segment is due to the decline in service revenues.  The service revenue decline was due to a downturn in North American cellular carrier spending and slower Distributed Communication System (“DAS”) deployments.  Revenues for the Connected Solutions segment decreased $3.8 million (5.5%) primarily due to lower kitting revenues and due to the exit from mobile towers.  Approximately 42% of the revenue decline during 2016 was due to the exit from mobile towers.

Revenues were approximately $106.6 million for the year ended December 31, 2015, a decrease of 0.5% from the prior year.  Revenues for the RF Solutions segment increased by $2.1 million (6.1%) due to the additional revenue generated from the business acquired from Nexgen, offset by lower revenues for scanning receivers.  Revenues for the Connected Solutions segment decreased $2.8 million (3.8%).  Within Connected Solutions, revenues increased for antenna products, but decreased for cellular kitting products and mobile towers.  We exited the mobile tower product line as of September 30, 2015.  The decline in revenues from mobile towers contributed 2.6% of the 3.8% decrease in revenues for Connected Solutions for the year ended December 31, 2015 compared to the prior year.

GROSS PROFIT BY SEGMENT

Gross profit was 36.4% for the year ended December 31, 2016, an increase of 1.5% compared to 2015.  The RF Solution’s segment gross profit increased 1.4% to 46.5% due to more favorable product mix with a higher proportion of scanning receivers versus services compared to 2015.  The Connected Solutions segment’s gross profit was 31.5%, an increase of 2.1% compared to 2015.  The margin improvement was primarily due to more favorable product mix with a higher proportion of antenna revenues, less kitting revenues and the exit from the mobile tower product line.

Gross profit was 34.9% for the year ended December 31, 2015, lower by 5.8% compared to 2014.  The RF Solutions segment’s gross profit was 45.1%, a decrease of (14.0%).  The decrease was due to less favorable product mix of lower revenues from scanning receivers and higher revenues from engineering services.  The Connected Solutions segment’s gross profit was 29.4%, lower by 2.1% compared to 2014.  The margin decline was primarily due to the fixed cost capacity variance created by the decline in mobile tower revenue and charges for excess inventories.

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CONSOLIDATED OPERATING EXPENSES

RESEARCH AND DEVELOPMENT

Research and development expenses decreased $1.0 million from 2015 to 2016 due to reductions in expenses of $0.9 million for RF Solutions and $0.3 million for Connected Solutions, offset by an increase of $0.2 million for stock compensation.  The decrease in RF Solutions is due to headcount reductions in the third quarter 2015 for scanning receivers and in the first quarter 2016 for SeeHawk analytics.  

Research and development expenses decreased $0.5 million from 2014 to 2015.  Development expenses for scanning receivers declined $1.7 million and stock compensation expenses declined $0.2 million, offsetting $1.4 million of development expenses related to SeeHawk analytics.  Development expenses declined for scanning receivers because the IBflex^® scanning receiver was launched in 2014.

We had 49, 61, and 57 full-time equivalent employees in research and development at December 31, 2016, 2015, and 2014, respectively.

SALES AND MARKETING

Sales and marketing expenses include costs associated with the sales and marketing employees, sales representatives, product line management, and trade show expenses.

Sales and marketing expenses decreased $0.4 million from 2015 to 2016 as expenses declined by $0.7 million within Connected Solutions and declined by $0.1 million within RF Solutions, offset by an increase of $0.4 million for stock compensation. The decrease from Connected Solutions is primarily due to headcount reductions in marketing and site solution sales.

Sales and marketing expenses increased $1.2 million from 2014 to 2015. The increase consisted of $1.0 million related to the business acquired from Nexgen and $0.6 million related to sales headcount and marketing expenses, offset by a $0.4 million reduction in stock compensation expenses.

We had 56, 61, and 65 full-time equivalent employees in sales and marketing at December 31, 2016, 2015, and 2014, respectively.

GENERAL AND ADMINISTRATIVE

General and administrative expenses include costs associated with the general management, finance, human resources, information technology, legal, public company costs, and other operating expenses to the extent not otherwise allocated to other functions.

General and administrative expenses decreased $0.3 million from 2015 to 2016 as decreases in Nexgen related expenses and other corporate expenses offset higher stock compensation expenses.  In 2015, we incurred $1.3 million in expenses related to the Nexgen acquisition and $0.1 million in legal expenses related to the TelWorx SEC investigation that did not reoccur in 2016.  Other corporate expenses were lower by $0.4 million in 2016 compared to 2015 primarily due to lower employee costs.  Stock compensation expense was $1.5 million higher in 2016 compared to 2015 because of higher expense for service-based restricted stock of $1.0 million, expense for stock bonuses of $0.4 million, and because 2015 included a credit of $0.1 million related to performance awards that did not vest.  

General and administrative expenses decreased $0.4 million from 2014 to 2015 due to declines of $1.2 million for legal and professional fees associated with the TelWorx SEC investigation, $0.7 million for stock compensation expenses, and $0.2 million related to expenses for the short-term incentive plan, offsetting $1.7 million of expenses related to the Nexgen acquisition.

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We had 35, 40, and 43 full-time equivalent employees in general and administrative functions at December 31, 2016, 2015, and 2014, respectively.

AMORTIZATION OF INTANGIBLE ASSETS

Amortization expense within operating expenses was approximately $1.7 million in 2016 compared to $3.4 million in 2015.  The decrease of $1.7 million is attributable to certain assets being fully amortized in 2015 and the impact of the impairment of customer relationships at June 30, 2016.  Amortization declined by $0.7 million because of assets for Connected Solutions being fully amortized in 2015 and declined by $0.6 million because of assets for RF Solutions being fully amortized in 2015.  Amortization declined by $0.4 million as a result of the asset impairment at June 30, 2016.

Amortization expense was approximately $3.4 million in 2015 compared to $2.0 million in 2014.  The increase of $1.4 million is due to amortization expense related to intangible assets acquired from Nexgen.

IMPAIRMENT OF INTANGIBLE ASSETS

During 2016, we recorded total impairment expense of $5.8 million related to customer relationships for the services reporting unit within the RF Solutions segment, consisting of $4.7 million at June 30, 2016 and $1.1 million at December 31, 2016.  

For the three months ended June 30, 2016, the revenue and contribution margin of the services reporting unit were below the forecasts.  The results and revised forecast were reflective of a long-term slowdown in the DAS market which is the primary market addressed by our services offering.  We considered the changes to our forecast and the industry and market trends as a triggering event to assess the intangible assets of the services reporting units for impairment.  We reviewed our intangible assets for impairment by performing a test of recoverability.  The cash flow forecast prepared by us included assumptions for revenues, gross margins, and operating expenses.  The test of recoverability failed because the undiscounted cash flows were below the carrying value of the services reporting unit.  We calculated the fair value of the services reporting unit with the assistance of a third-party valuation firm.

For the three months ended December 31, 2016, the revenues and contribution margin for the services reporting unit declined sequentially.  Q4 2016 gross margins were negatively impacted by the lower volume and by lower average margin on individual projects.  We lowered our profit forecast for 2017 compared to the forecast prepared for the 2017 operating plan.  The new forecast was negatively impacted by a lower than normal sales backlog at December 31, 2016 as well as no known large projects in the sales funnel.  Further, based on management’s review of the market and industry as of year-end 2016, a long-term recovery is not expected.  We determined that the revision to the forecast for services was a triggering event for its review of intangible assets for impairment.  We reviewed our intangible assets for impairment by performing a test of recoverability.  The cash flow forecast that we prepared included assumptions for revenues, gross margins, and operating expenses.  The test of recoverability failed because the undiscounted cash flows were below the carrying value of the services reporting unit.  The impairment charge of $1.1 million represented the remaining value of the customer relationships as of December 31, 2016.

As part of the our annual impairment test for goodwill as of October 31, 2015, we recorded a goodwill impairment charge of $0.2 million related to our RF Services reporting unit because its fair value was below its carrying value.  We recorded no goodwill impairments in 2014.  See the discussion of this goodwill impairment within the critical accounting estimates section of this Item 7 and see Note 1 of the consolidated financial statements for information related to our evaluation of goodwill in the fourth quarter 2015.

RESTRUCTURING CHARGES

We incurred restructuring expense of $0.7 million and $1.6 million for the years ended December 31, 2016 and 2015, respectively.  No restructuring expenses were recorded for the year ended December 31, 2014.

During the first quarter 2016, we reduced headcount in our RF Solutions segment related to services and SeeHawk analytics, and exited from our Colorado office in order to consolidate facility space.  The restructuring expense incurred for lease terminations includes the remaining obligations under the lease, net of assumed proceeds for a sublease.  As of December 31, 2016, the Colorado office has not been subleased.  The restructuring expense in 2016 consisted of $0.3 million in employee severance and payroll related costs, $0.3 million for lease terminations, and $0.1 million related to fixed asset disposals.  The restructuring expense incurred for lease terminations includes the remaining obligations under the lease, net of assumed proceeds for a sublease.  As of December 31, 2016, the Colorado office has not been subleased.  

In June 2015, we committed to a restructuring program for reductions in U.S. headcount and the exit from the mobile towers product line.  To lower operating and production costs, we reduced headcount in engineering related to scanning receivers, in U.S. operations for Connected Solutions, and related to the mobile tower product line.  We terminated 51 employees between June and December 2015 and recorded severance and other employee benefits of $1.2 million.  Our mobile towers were primarily sold into the oil and gas

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exploration market in North America. The mobile towers were used to primarily provide a communications link to an oil drilling site or lighting for a site under construction. The decline in oil prices caused a decline in related mobile tower sales. We made the decision to exit the mobile tower product line due to the anticipated long term effect on revenue from depressed oil prices, and one of our two tower suppliers filing for Chapter 7 bankruptcy in June 2015 as a result of the decline in sales. Mobile towers were not a key element of our kitting operation or antenna business within Connected Solutions.  Our exit from the mobile tower product line did not meet the accounting guidance for discontinued operations.  The exit from mobile towers did not constitute a strategic shift in our operations.  We recorded a charge of $0.4 million related to write-off of intangible assets related to the mobile towers product line.

OPERATING (LOSS) PROFIT BY SEGMENT

Total operating loss declined $3.2 million for the year ended December 31, 2016 compared to 2015. The decline is largely attributed to $2.1 million in lower gross profit and $5.8 million in impairment expenses related to intangible assets for our services reporting unit, offsetting lower restructuring charges and lower cash-based operating expenses.

Total operating profit declined $9.9 million for the year ended December 31, 2015 compared to 2014. The decline is largely attributed to $6.3 million lower gross profit previously discussed, $1.6 million of restructuring costs, and a $1.5 million increase in amortization of intangible assets from the Nexgen acquisition.

OTHER INCOME, NET

Other income, net consists of interest income, foreign exchange gains and losses, insurance proceeds, and income from legal settlements.

For the year ended December 31, 2016, we recorded interest income of $100 and foreign exchange gains of $13.

For the year ended December 31, 2015, an Amendment to the Nexgen APA resulted in settlement income of $3.2 million consisting of $2.3 million from the release of the Nexgen escrow fund, $0.8 million from the collection of previously excluded accounts receivables, and $0.1 million related to the reversal of the contingent liability for the earnout.  We also received $0.1 million in insurance proceeds related to claims for legal and professional expenses for the SEC investigation of the TelWorx Parties.  The legal expenses and professional fees related to the insurance claim were recorded in general and administrative expenses.  We recorded interest income of $55 and foreign exchange losses of $33 during the year ended December 31, 2015.

For the year ended December 31, 2014, settlement income includes $0.9 million related to legal settlements with professional service firms that assisted the TelWorx parties with the sale of the business to PCTEL.  We received $0.6 million in insurance proceeds related to claims for legal and professional expenses for the SEC investigation of the TelWorx Parties.  The legal expenses and professional fees related to the insurance claim were recorded in general and administrative expenses.  We recorded interest income of $85 and foreign exchange losses of $49 during the year ended December 31, 2014.

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EXPENSE (BENEFIT) FOR INCOME TAXES

The effective tax rate differed from the statutory Federal rate of 34.0% by approximately 135% during 2016 primarily due to an adjustment to the valuation allowance for deferred taxes.  Based on lower future projected U.S. tax income, we recorded adjustments of $12.6 million to the valuation allowance.

The effective tax rate differed from the statutory Federal rate of 34.0% by approximately 2.5% during 2015 primarily due to research and development credits and incremental tax on repatriation of Israel funds.  The effective tax rate differed from the statutory Federal rate of 34.0% by approximately 14.0% during 2014 primarily due to reversals of reserves for uncertain tax positions related to research credits and foreign withholding taxes.  

At December 31, 2016, we had net deferred tax assets of $4.5 million, which includes a valuation allowance of $13.3 million.  We maintain a valuation allowance due to uncertainties regarding realizability.  On a regular basis, management evaluates the recoverability of deferred tax assets and the need for a valuation allowance.  The valuation allowance at December 31, 2016 is primarily because the Company does not believe it will generate sufficient US taxable income to realize a significant portion of its deferred tax assets. The valuation allowance at December 31, 2015 related to credits and state operating losses that we do not expect to realize because they correspond to tax jurisdictions where we no longer have significant operations.

Liquidity and Capital Resources

Liquidity and Capital Resources Overview

At December 31, 2016, our cash, cash equivalents, and investments were approximately $33.3 million and we had working capital of approximately $55.2 million.  Our primary source of liquidity is cash provided by operations, with short term swings in liquidity supported by a significant balance of cash and short-term investments.  The balance has fluctuated with cash from operations, acquisitions and divestitures, payment of dividends and the repurchase of our common shares.

Within operating activities, we are historically a net generator of operating funds from our income statement activities and a net user of operating funds for balance sheet expansion.  We expect this historical trend to continue in the future.

Within investing activities, capital spending historically ranges between 2.0% and 5.0% of our revenues and the primary use of capital is for manufacturing and engineering development requirements.  Our capital expenditures during the year ended December 31, 2016 was approximately 2.0% of revenues. We historically have significant transfers between investments and cash as we rotate our large cash balances and short-term investment balances between money market funds, which are accounted for as cash equivalents, and other investment vehicles.  We have a history of supplementing our organic revenue growth with acquisitions of product lines or companies, resulting in significant uses of our cash and short-term investment balances from time to time.  We expect the historical trend for capital spending and the variability caused by moving money between cash and investments and periodic merger and acquisition activity to continue in the future.

Within financing activities, we have historically generated funds from the exercise of stock options and proceeds from the issuance of common stock through the Employee Stock Purchase Plan (“ESPP”) and have historically used funds to repurchase shares of our

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common stock through our share repurchase programs and through quarterly dividends.  Whether this activity results in our being a net user of funds versus a net generator of funds is largely dependent on our stock price during any given year.

Operating Activities:

We generated $10.4 million of funds from operating activities during the year ended December 31, 2016.  Adjustments related to non-cash items within net income were $23.0 million for the year ended December 31, 2016 as the deferred tax provision was $8.2 million,  impairment expense was $5.8 million, amortization and depreciation was $5.5 million, and stock-based compensation was $4.0 million.  Within the balance sheet, we generated cash of $2.9 million from the reduction of inventories and $1.7 million from the reduction of accounts receivable.  Inventories decreased $2.9 million due to lower inventories for Connected Solutions as a result of improved processes for forecasting and reductions in minimum order quantities for purchases.  Accounts receivable generated cash primarily due to more favorable timing of revenues with the fourth quarter 2016 compared to the fourth quarter 2015.  We used $0.4 million for payroll taxes related to stock-based compensation. The tax payments related to our stock issued for restricted stock awards.

We generated $9.1 million of funds from operating activities during the year ended December 31, 2015.  Adjustments related to non-cash items within net income were $8.1 million for the year ended December 31, 2015 as amortization and depreciation was $7.1 million and stock-based compensation was $1.9 million.  Within the balance sheet, we generated cash of $8.3 million from accounts receivable, of which $5.4 million related to the collection of opening balance sheet accounts receivable for Nexgen.  We also generated cash from accounts receivable because revenues for the quarter ended December 31, 2015 were $3.3 million lower than the quarter ended December 31, 2014.  We used $1.9 million for the payout of the executive deferred compensation plan, and we used $1.5 million to pay annual 2014 accruals, including short-term incentive plan bonuses and sales commissions.  Inventories increased $1.4 million due to higher inventories for Connected Solutions. Inventories increased because of the transition of additional production to China from the U.S. and because of increased safety stock.  We used $0.4 million for payroll taxes related to stock-based compensation. The tax payments related to our stock issued for restricted stock awards.

We generated $8.0 million of funds from operating activities during the year ended December 31, 2014.  Cash from operations consisted of approximately $13.3 million of cash generated from our income statement, offset by approximately $5.3 million of cash used within our balance sheet.  Within our income statement activities, we used $1.0 million for payroll taxes related to stock-based compensation.  The tax payments related to our stock issued for restricted stock awards.  On the balance sheet, we used cash of $5.3 million due to higher accounts receivable.  Accounts receivable increased due to higher revenues during the quarter ended compared to quarter ended December 31, 2013 and due to the timing of revenues with the quarters.  Revenues were $3.4 million higher for the three months ended December 31, 2014 versus the comparable period in 2013.  We used cash of $1.9 million from the increase of inventories.  Our inventories were higher for RF Solutions due to the introduction of new products, and our inventories were higher for Connected Solutions to meet the demand for shipments in the first quarter 2015. We generated cash of $1.1 million within the balance sheet due to higher accounts payable.  Accounts payable increased due to increases in inventories and due to the timing of vendor purchases during the year ended December 31, 2014 compared to the year ended December 31, 2013.

Investing Activities:

Our investing activities provided $4.3 million of cash during the year ended December 31, 2016.  Redemptions and maturities of our short-term investments during the year provided $80.5 million in cash and we rotated $74.3 million of cash into new short-term investments. We used $1.9 million for capital expenditures during the year ended December 31, 2016.

Our investing activities used $7.7 million of cash during the year ended December 31, 2015.  We used $20.5 million for the purchase of the Nexgen business in February 2015. We funded the acquisition from our cash and from investments that matured during January and February 2015.  During the year ended December 31, 2015, redemptions and maturities of our short-term investments provided $45.0 million in cash and we rotated $30.1 million of cash into new short-term investments. We used $2.1 million for capital expenditures during the year ended December 31, 2015.

Our investing activities used $6.0 million of cash during the year ended December 31, 2014 as we used $3.5 million of cash for investments and used $2.5 million for capital expenditures.  Redemptions and maturities of our investments in short-term bonds during the year ended December 31, 2014 provided $55.1 million in funds.  We rotated $58.6 million of cash into new short-term bonds during the year ended December 31, 2014.

Financing Activities:

We used $6.9 million in cash for financing activities during the year ended December 31, 2016. We used $4.1 million to repurchase shares in the stock repurchase program and $3.5 million for cash dividends paid quarterly during 2016.  We received $0.6 million in proceeds from the purchase of shares through our ESPP.

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We used $14.7 million in cash for financing activities during the year ended December 31, 2015. We used $12.1 million to repurchase shares in the stock repurchase program and $3.6 million for cash dividends paid quarterly during 2015.  We received $1.0 million in proceeds from the purchase of shares through our ESPP and the exercise of stock options.

We used $3.3 million in cash for financing activities during the year ended December 31, 2014.  We paid $3.0 million for quarterly cash dividends and used $1.6 million to repurchase shares in the stock repurchase program.  We received $1.3 million in proceeds from the purchase of shares through our ESPP and the exercise of stock options.

Contractual Obligations and Commercial Commitments

The following summarizes our contractual obligations at December 31, 2016 for office and product assembly facility leases, office equipment leases and purchase obligations, and the effect such obligations are expected to have on the liquidity and cash flows in future periods (in thousands):

As of December 31, 2016, we had obligations through 2021 for capital leases of $241 related to office and manufacturing equipment.  See Note 7 of the consolidated financial statements for more information on capital leases.

We have a liability related to uncertain positions for income taxes of $0.9 million at December 31, 2016.  We do not know when this obligation will be paid.

Off-Balance Sheet Arrangements

None.

Critical Accounting Policies and Estimates

The preparation of our consolidated financial statements in accordance with generally accepted accounting principles requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the period reported.  By their nature, these estimates and judgments are subject to an inherent degree of uncertainty.  Management bases its estimates and judgments on historical experience, market trends, and other factors that are believed to be reasonable under the circumstances.  Actual results may differ from these estimates under different assumptions or conditions.

Revenue Recognition - We recognize revenue when the following criteria are met: persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, price is fixed and determinable, and collectability is reasonably assured.  We recognize revenue for sales of products when title transfers, which is predominantly upon shipment from the factory.  For products shipped on consignment, we recognize revenue upon delivery from the consignment location.  Revenue recognition is also based on estimates of product returns, allowances, discounts, and other factors.  These estimates are based on historical data.  We believe that the estimates used are appropriate, but differences in actual experience or changes in estimates may affect future results.  We recognize revenue for our network engineering services under the completed performance method.  Most services occur in one week or less, and revenue is generally recognized when the engineering reports are completed and issued to the customer.

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Accounts Receivable and Allowance for Doubtful Accounts - Accounts receivable are recorded at invoiced amount.  We extend credit to our customers based on an evaluation of a customer’s financial condition and collateral is generally not required.  We maintain an allowance for doubtful accounts for estimated uncollectible accounts receivable.  The allowance is based on our assessment of known delinquent accounts, historical experience, and other currently available evidence of the collectability and the aging of accounts receivable.  Although management believes the current allowance is sufficient to cover existing exposures, there can be no assurance against the deterioration of a major customer’s creditworthiness, or against defaults that are higher than what has been experienced historically.

Excess and Obsolete Inventory - We maintain reserves to reduce the value of inventory to the lower of cost or market and reserves for excess and obsolete inventory.  Reserves for excess inventory are calculated based on our estimate of inventory in excess of normal and planned usage. Obsolete reserves are based on our identification of inventory where carrying value is above net realizable value.  We believe the accounting estimate related to excess and obsolete inventory is a critical accounting estimate because it requires us to make assumptions about future sales volumes and product mix, both of which are highly uncertain.  Changes in these estimates can have a material impact on our financial statements.

Warranty Costs - We offer repair and replacement warranties of primarily five years for antenna products and scanning receiver products.  Our warranty reserve is based on historical sales and costs of repair and replacement trends.  We believe that the accounting estimate related to warranty costs is a critical accounting estimate because it requires us to make assumptions about matters that are highly uncertain, including future rates of product failure and repair costs.  Changes in warranty reserves could be material to our financial statements.

Stock-based Compensation - We recognize stock-based compensation expense for all equity awards in accordance with fair value recognition provisions.  Under the fair value provisions, we recognize stock-based compensation expense net of an estimated forfeiture rate, recognizing compensation cost only for those awards expected to vest over requisite service periods of the awards.  Stock-based compensation expense and disclosures are dependent on assumptions used in calculating such amounts.  These assumptions include risk-free interest rates, expected term of the stock-based compensation instrument granted, volatility of stock and option prices, expected time between grant date and date of exercise, attrition, performance, and other factors.  These factors require us to use judgment.  Our estimates of these assumptions typically are based on historical experience and currently available market place data.  While management believes that the estimates used are appropriate, differences in actual experience or changes in assumptions may affect our future stock-based compensation expense and disclosures.

Income Taxes - Income taxes are accounted for under the asset and liability method.  Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

Our operations have international subsidiaries located in China, United Kingdom and Israel, as well as an international branch office located in Hong Kong.  The complexities that arise from operating in several different tax jurisdictions inevitably lead to an increased exposure to worldwide taxes.  Should review of the tax filings result in unfavorable adjustments to our tax returns, the operating results, cash flows, and financial position could be materially and adversely affected.

We are subject to the continuous examination of our income tax returns by the Internal Revenue Service and other tax authorities.  A change in the assessment of the outcomes of such matters could materially impact our consolidated financial statements.  The calculation of tax liabilities involves dealing with uncertainties in the application of complex tax regulations.  We recognize liabilities for anticipated tax audit issues based on our estimate of whether, and the extent to which, additional taxes may be required.  If we ultimately determine that payment of these amounts is unnecessary, then we reverse the liability and recognize a tax benefit during the period in which we determine that the liability is no longer necessary.  We also recognize tax benefits to the extent that it is more likely than not that our positions will be sustained if challenged by the taxing authorities.  To the extent we prevail in matters for which liabilities have been established, or are required to pay amounts in excess of our liabilities, our effective tax rate in a given period may be materially affected.  An unfavorable tax settlement would require cash payments and may result in an increase in our effective tax rate in the year of resolution.  A favorable tax settlement would be recognized as a reduction in our effective tax rate in the year of resolution.

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Valuation Allowances for Deferred Tax Assets - We establish an income tax valuation allowance when available evidence indicates that it is more likely than not that all or a portion of a deferred tax asset will not be realized.  In assessing the need for a valuation allowance, we consider the amounts and timing of expected future deductions or carryforwards and sources of taxable income that may enable utilization.  We maintain an existing valuation allowance until sufficient positive evidence exists to support its reversal.  Changes in the amount or timing of expected future deductions or taxable income may have a material impact on the level of income tax valuation allowances.  Our assessment of the realizability of the deferred tax assets requires judgment about our future results.  Inherent in this estimation is the requirement for us to estimate future book and taxable income and possible tax planning strategies.  These estimates require us to exercise judgment about our future results, the prudence and feasibility of possible tax planning strategies, and the economic environment in which we do business.  It is possible that the actual results will differ from the assumptions and require adjustments to the allowance.  Adjustments to the allowance would affect future net income.

Impairment Reviews of Goodwill – We perform an annual impairment test of goodwill as of the end of the first month of the fiscal fourth quarter (October 31st), or at an interim date if an event occurs or if circumstances change that would indicate that an impairment loss may have been incurred. In performing our annual impairment test, we first perform a qualitative assessment to determine whether it is more likely that not that the fair value of a reporting unit is less than its carrying value, including goodwill.  If our qualitative assessment is indicative of possible impairment, then a two-step quantitative fair value assessment is performed at the reporting unit level. In the first step, the fair value of each reporting unit is compared with its carrying value.  If the fair value exceeds the carrying value, then goodwill is not impaired and no further testing is performed.  The second step is performed if the carrying value exceeds the fair value.  The implied fair value of goodwill is then compared against the carrying value of goodwill to determine the amount of impairment.

The process of evaluating the potential impairment of goodwill is subjective because it requires the use of estimates and assumptions in determining a reporting unit’s fair value. We calculate the fair value of each reporting unit by using the income approach based on the present value of future discounted cash flows. The discounted cash flow method requires us to use estimates and judgments about the future cash flows of the reporting units. Although we base cash flow forecasts on assumptions that are consistent with plans and estimates we use to manage the underlying reporting units, there is significant judgment in determining the cash flows attributable to these reporting units, including markets and market share, sales volumes and mix, research and development expenses, tax rates, capital spending, discount rate and working capital changes. Cash flow forecasts are based on reporting unit operating plans for the early years and business projections in later years. We believe the accounting estimate related to the valuation of goodwill is a critical accounting estimate because it requires us to make assumptions that are highly uncertain about the future cash flows of our reporting units.

While the use of historical results and future projections can result in different valuations for a business, it is a generally accepted valuation practice to apply more than one valuation technique to establish a range of values for a business. Since each technique relies on different inputs and assumptions, it is unlikely that each technique would yield the same results. However, it is expected that the different techniques would establish a reasonable range. In determining the fair value, we weigh the two methods equally because we believe both methods have an equal probability of providing an appropriate fair value.

Impairment Reviews of Finite-Lived Intangible Assets - We evaluate the carrying value of finite-lived intangible assets and other long-lived assets for impairment whenever indicators of impairment exist. We test finite-lived intangible assets for recoverability using undiscounted cash flows. Although we base cash flow forecasts on assumptions that are consistent with plans and estimates we use to manage the underlying reporting units, there is significant judgment in determining the cash flows attributable to these reporting units, including markets and market share, sales volumes and mix, research and development expenses, capital spending and working capital changes. Cash flow forecasts are based on operating plans and business projections. We compare the tax-affected undiscounted cash flows to the carrying value of the asset group. If the carrying value exceeds the sum of the undiscounted cash flows of the asset group, we would assess the fair value of the intangible assets in the group to determine if an impairment charge should be recognized in the financial statements.

We believe the accounting estimate related to the valuation of intangible assets is a critical accounting estimate because it requires us to make assumptions about future sales prices and volumes for products that involve new technologies and applications where customer acceptance of new products or timely introduction of new technologies into their networks are uncertain. The recognition of impairment could be material to our financial statements.

Recent Accounting Pronouncements

In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU 2017-04”).  ASU 2017-04 eliminates Step 2 as part of the goodwill impairment test.  The amount of the impairment charge to be recognized would now be the amount by which the carrying value exceeds the reporting unit’s fair value.  The loss to be recognized cannot exceed the amount of

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goodwill allocated to that reporting unit.  The amendments in ASU 2017-04 are effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019.  Early adoption is permitted for interim and annual goodwill impairment tests performed on testing dates after January 1, 2017.  We are evaluating the provisions of ASU 2017-04 and its impact on our consolidated financial statements and related disclosures.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. This ASU addresses the following eight specific cash flow issues: Debt prepayment or debt extinguishment costs; settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies (including bank-owned life insurance policies); distributions received from equity method investees; beneficial interests in securitization transactions; and separately identifiable cash flows and application of the predominance principle. This guidance will be effective for us on January 1, 2018. We do not expect the adoption of this ASU to have a material impact on our consolidated financial statements.

In June 2016, the FASB issued Accounting Standards Update No. 2016-13 ("ASU 2016-13") regarding ASC Topic 326, "Financial Instruments - Credit Losses," which modifies the measurement of expected credit losses of certain financial instruments. The amendments will be effective for us on January 1, 2020.  We are currently evaluating this guidance and the impact it will have on our consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. ASU No. 2016-09 affects all entities that issue share-based payment awards to their employees. ASU No. 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows, including recognizing all excess tax benefits and tax deficiencies as income tax expense or benefit in the income statement rather than in additional paid-in capital. ASU No. 2016-09 is effective for financial statements issued for annual reporting periods beginning after December 15, 2016 and interim periods within those years.  Upon adoption, we anticipate recognizing deferred tax assets for all excess tax benefits that had not been previously recognized. This will be accomplished through a cumulative-effect adjustment to retained earnings of approximately $0.6 million.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which amends existing guidance to require lessees to recognize assets and liabilities on the balance sheet for the rights and obligations created by long-term leases and to disclose additional quantitative and qualitative information about leasing arrangements. This ASU also provides clarifications surrounding the presentation of the effects of leases in the income statement and statement of cash flows. This guidance will be effective for us on January 1, 2019. We are currently evaluating this guidance and the impact it will have on our consolidated financial statements and related disclosures.

In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes, to simplify the presentation of deferred income taxes. The amendments in this update require that deferred tax assets and liabilities be entirely classified as noncurrent within the statement of financial position. Effective December 31, 2015, we early adopted the balance sheet classification of deferred taxes on a prospective basis. The guidance requires deferred tax assets and liabilities to be classified as noncurrent rather than split between current and noncurrent. Approximately $1.8 million in current deferred tax assets was reclassified to long-term deferred tax assets at December 31, 2015.

In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory. ASU 2015-11 simplifies the subsequent measurement of inventory by requiring inventory to be measured at the lower of cost and net realizable value.  ASU 2015-11 applies only to inventories for which cost is determined by methods other than last-in first-out and the retail inventory method.  ASU 2015-11 is effective for public companies for annual reporting periods beginning after December 15, 2016, and interim periods within those fiscal years.  We are currently evaluating the impact of ASU 2015-11 and have preliminarily concluded that it will not have a significant impact on our consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers” which introduces a new revenue recognition model in which an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP. This ASU also requires disclosures sufficient to enable users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers, including qualitative and quantitative disclosures about contracts with customers, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. This guidance will be effective for us on January 1, 2018. The FASB has also issued the following standards which clarify ASU 2014-09 and have the same effective date as the original standard: ASU 2016-20,

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Technical Corrections and Improvements to Topic 606, ASU No. 2016-12, Narrow-Scope Improvements and Practical Expedients, ASU 2016-10, Identifying Performance Obligations and Licensing and ASU 2016-08, Principal versus Agent Considerations.

We will commence our assessment of ASU 2014-09 during the first quarter of 2017 and develop a project plan to guide the implementation. This project plan includes analyzing the standard’s impact on our contract portfolio, comparing our historical accounting policies and practices to the requirements of the new standard and identifying potential differences from applying the requirements of the new standard to its contracts. We will draft an updated accounting policy, evaluate new disclosure requirements and identify and implement appropriate changes to our business processes, systems and controls to support recognition and disclosure under the new standard.  We expect to adopt this new standard using the modified retrospective method that will result in a cumulative effect adjustment as of the date of adoption. We are currently evaluating this guidance and the impact it will have on the consolidated financial statements.

Item 7A:  Quantitative and Qualitative Disclosures about Market Risk

We are exposed to market risk from changes in interest rates, foreign exchange rates, credit risk, and investment risk as follows:

Interest Rate Risk

We manage the sensitivity of our results of operations to interest rate risk on cash equivalents by maintaining a conservative investment portfolio.  The primary objective of our investment activities is to preserve principal without significantly increasing risk.  To achieve this objective, we maintain our portfolio of cash equivalents, short-term investments, and long-term investments, in pre-refunded municipal bonds, U.S. government agency bonds or money market funds invested exclusively in government agency bonds and AA or higher rated corporate bonds.

Due to changes in interest rates, our future investment income may fall short of expectations.  A hypothetical increase or decrease of 10% in market interest rates would not result in a material decrease in interest income earned through maturity on investments held at December 31, 2016.  We do not hold or issue derivatives, derivative commodity instruments or other financial instruments for trading purposes.

Foreign Currency Risk

We are exposed to currency fluctuations due to our foreign operations and because we sell our products internationally.  We manage the sensitivity of our international sales by denominating the majority of transactions in U.S. dollars.  However, the value of our billings in Chinese yuan is increasing due to the growth of the Connected Solutions business in China.  We manage these operating activities at the local level and revenues, costs, assets and liabilities are generally denominated in local currencies, thereby mitigating the risk associated with changes in foreign exchange. However, our results of operations and assets and liabilities are reported in U.S. dollars and thus will fluctuate with changes in exchange rates between such local currencies and the U.S. dollar. As exchange rates vary, these results, when translated, may vary from expectations and adversely impact overall expected profitability.

We had $1.3 million of cash in foreign bank accounts at December 31, 2016.  We ceased ongoing operations of our Israel subsidiary during the third quarter 2016.  We expect to liquidate the subsidiary and repatriate its remaining cash during 2017.  We do not expect the foreign currency exchange related to the repatriation of these funds to have a material impact on the financial statements.  As of December 31, 2016, we had no intention of repatriating the cash in our foreign bank accounts in China or the U.K.  If we decide to repatriate the cash in these foreign bank accounts, we may experience difficulty in repatriating the cash in a timely manner.  We may also be exposed to foreign currency fluctuations and taxes if we repatriate these funds.

Credit Risk

The financial instruments that potentially subject us to credit risk consist primarily of trade receivables.  For trade receivables, credit risk is the potential for a loss due to a customer not meeting its payment obligations.  Our customers are concentrated in the wireless communications industry.  Estimates are used in determining an allowance for amounts which we may not be able to collect, based on current trends, the length of time receivables are past due and historical collection experience.  Provisions for and recovery of bad debts are recorded as sales and marketing expense in the consolidated statements of operations.  We perform ongoing evaluations of customers' credit limits and financial condition.  Generally, we do not require collateral from customers.  Huawei accounted for approximately 17% of accounts receivable at December 31, 2016.  No other customer accounts receivable balance represented 10% or greater of gross accounts receivable at December 31, 2016 and no customer’s accounts receivable balance represented 10% or greater of gross accounts receivable at December 31, 2015.  Our allowances for potential credit losses have historically been adequate compared to actual losses.  

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One customer represented 10% or greater of our revenues for the years ended December 31, 2016, and no customers represented 10% or greater of our revenues for the years ended December 31, 2015 or 2014.

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Item 8:  Financial Statements and Supplementary Data

PCTEL, INC.

INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders

PCTEL, Inc.

We have audited the accompanying consolidated balance sheets of PCTEL, Inc. (a Delaware corporation) and subsidiaries (the Company) as of December 31, 2016 and 2015, and the related consolidated statements of operations, comprehensive (loss) income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2016. Our audits of the basic consolidated financial statements included the financial statement schedule listed in the index appearing under Item 15(a)(2). These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of PCTEL, Inc. and subsidiaries as of December 31, 2016 and 2015, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2016, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.

As discussed in note 1 to the consolidated financial statements, the Company adopted new accounting guidance in 2015 related to the presentation of deferred income taxes.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2016, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 15, 2017 expressed an unqualified opinion thereon.

/s/ Grant Thornton LLP

Chicago, Illinois

March 15, 2017

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders

PCTEL, Inc.

We have audited the internal control over financial reporting of PCTEL, Inc. (a Delaware corporation) and subsidiaries (the Company) as of December 31, 2016, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying “Management’s Report on Internal Control Over Financial Reporting.”  Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on criteria established in the 2013 Internal Control—Integrated Framework issued by COSO.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements of the Company as of and for the year ended December 31, 2016, and our report dated March 15, 2017 expressed an unqualified opinion on those financial statements.

/s/ Grant Thornton LLP

Chicago, Illinois

March 15, 2017

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PCTEL, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

The accompanying notes are an integral part of these consolidated financial statements.

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PCTEL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

The accompanying notes are an integral part of these consolidated financial statements.

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PCTEL, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(in thousands, except per share data)