PC TEL INC - Quarter Report: 2019 March (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2019

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from            to           

Commission File Number 000-27115

PCTEL, Inc.

(Exact Name of Registrant as Specified in Its Charter)

Registrant's Telephone Number, Including Area Code: (630) 372-6800

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 check mark whether the registrant has submitted electronically every Interactive Date File required to be submitted 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 required to submit such files).  Yes   ☒  No   ☐

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) 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 May 10, 2019, the registrant had 18,417,701 shares of common stock, $0.001 par value per share, outstanding.

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

PCTEL, INC.

Form 10-Q

For the Quarterly Period Ended March 31, 2019

TABLE OF CONTENTS

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PART I – FINANCIAL INFORMATION

Item 1: Financial Statements (unaudited)

PCTEL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

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

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PCTEL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

(in thousands, except per share data)

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

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PCTEL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (unaudited)

(in thousands)

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

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PCTEL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(unaudited, in thousands)

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

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PCTEL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, in thousands)

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

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PCTEL, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands except per share data and as otherwise noted)

1. Basis of Presentation

The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all the information and footnotes required by U.S. GAAP for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.  For further information, refer to the audited consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 (the “2018 Form 10-K”).

Nature of Operations

PCTEL, Inc. (“PCTEL”, the “Company”, “we”, “ours”, and “us”) delivers Performance Critical TELecom technology solutions to the wireless industry. PCTEL is a leading global supplier of wireless network antenna and testing solutions. PCTEL designs and manufactures precision antennas and provides test and measurement products that improve the performance of wireless networks globally. PCTEL products address three market segments: Enterprise Wireless, Intelligent Transportation, and Industrial Internet of Things (“IoT”).  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 IoT. PCTEL test tools 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.

Product Lines

Antenna Products

PCTEL designs and manufactures precision antennas and offers in-house wireless product development for our customers, including design, testing, radio integration, and manufacturing capabilities. PCTEL antennas are deployed in small cells, enterprise Wi-Fi access points, fleet management and transit systems, and in equipment and devices for the Industrial IoT. Revenue growth in these markets is driven by the increased use and complexity of wireless communications. Consistent with the Company’s mission to solve complex network engineering problems and in order to compete effectively in the antenna market, PCTEL maintains expertise in the following areas: radio frequency engineering, wireless network engineering, mechanical engineering, mobile antenna design, manufacturing, and product quality and testing. The Company seeks out product applications that command a premium for product design and performance and customer service, and it avoids commodity markets. The Company’s antennas are primarily sold to original equipment manufacturer (“OEM”) providers where they are designed into the customer’s solution. Competition in the antenna markets is fragmented. Competitors include Airgain, Amphenol, Laird, Panorama and Taoglas.

Test and Measurement Products

PCTEL provides RF test and measurement tools that improve the performance of wireless networks globally, with a focus on LTE, public safety, and emerging 5G technologies. Mobile operators, neutral hosts, and equipment manufacturers rely on PCTEL to analyze, design, and optimize next generation wireless networks. Revenue growth in this market is driven by the implementation and roll out of new wireless technology standards (i.e. 3G to 4G, 4G to 5G). Consistent with our mission to solve complex network engineering problems and in order to compete effectively in the RF test and measurement market, PCTEL maintains expertise in the following areas: radio frequency engineering, digital signal process (“DSP”) engineering, wireless network engineering, mechanical engineering, manufacturing, and product quality and testing. The Company’s test equipment is sold directly to wireless carriers or to OEMs who integrate its products into their solutions which are then sold to wireless carriers. Competitors for the Company’s test tool products include OEMs such as Anritsu, Berkley Varitronics, Digital Receiver Technology, and Rohde and Schwarz.

Reorganization and Segment Reporting

Effective August 2018, the Company consolidated its organizational structure to drive growth and address the convergence in the Industrial IoT, public safety, and 4G infrastructure markets and the emergence of new technologies such as 5G (the “Reorganization”). The Company’s operations, engineering, business development, sales and marketing, and operational general and administrative functions were consolidated into a single enterprise-wide organization. As a result of the Reorganization that occurred in the third quarter 2018, the Company’s Chief Executive Officer, as the chief operating decision maker (“CODM”) began assessing operating profits and identified assets at the enterprise level for resource allocations. In connection with the Reorganization, the Board of Directors appointed a Chief Operating Officer who maintains regular contact with the CODM to discuss operating activities, financial

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results, forecasts, and plans for the Company’s businesses. All operating profit and cash flows are measured and managed at the enterprise level.

Until the Reorganization, PCTEL operated in two segments for reporting purposes, Connected Solutions and RF Solutions. The CODM assessed operating profits and identified assets for the Connected Solutions and RF Solutions segments for resource allocations. Each segment had its own general manager as well as its own engineering, business development, sales and marketing, and operational general and administrative functions.

The Company included revenues and gross profit for the two major product lines (antenna products and test and measurement products) because each product line has a significantly different gross profit profile. In order to understand the Company’s financial results, it is necessary to understand the impact on gross profit of the revenue mix between them.

Basis of Consolidation

The unaudited interim condensed consolidated financial statements of the Company include the condensed consolidated balance sheet and the condensed consolidated statement of stockholders’ equity for the period ended March 31, 2019 and December 31, 2018, and the condensed consolidated statements of operations, statements of comprehensive loss, and cash flows for the three months ended March 31, 2019 and 2018, respectively. The interim condensed consolidated financial statements are unaudited and reflect all adjustments of a normal recurring nature that are, in the opinion of management, necessary for a fair presentation of the interim period financial statements.  The condensed consolidated balance sheet as of December 31, 2018 is derived from the audited financial statements as of December 31, 2018.  

The unaudited interim condensed consolidated financial statements of the Company have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).  Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted.  The significant accounting policies followed by the Company are set forth within the 2018 Form 10-K.  There were no significant changes in the Company’s significant accounting policies during the three months ended March 31, 2019.  See Note 10 related to Leases for additional disclosures related to the implementation of ASU 2016-02 (“Topic 842”).  In addition, the Company reaffirms the use of estimates in the preparation of the financial statements as set forth in the 2018 Form 10-K.  These unaudited interim condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the 2018 Form 10-K.  The results of operations for the period ended March 31, 2019 may not be indicative of the results for the period ending December 31, 2019.

Foreign Operations

The Company is exposed to foreign currency fluctuations due to its foreign operations and because products are sold internationally.  The functional currency for the Company’s foreign operations is predominantly the applicable local currency.  Accounts of foreign operations are translated into U.S. dollars using the exchange rate in effect at the applicable balance sheet date for assets and liabilities and average monthly rates prevailing during the period for revenue and expense accounts.  Adjustments resulting from translation are included in accumulated other comprehensive loss, a separate component of stockholders’ equity.  Gains and losses resulting from other transactions originally in foreign currencies and then translated into U.S. dollars are included in the condensed consolidated statement of operations.  Net foreign exchange losses resulting from foreign currency transactions included in other income, net was $57 and $69 for the three months ended March 31, 2019 and 2018, respectively.   

Recent Accounting Pronouncements

In February 2016, the FASB issued Accounting Standards Update (“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. The Company adopted this guidance on January 1, 2019.  The Company commenced its assessment of Topic 842 in the second half of 2018 and developed a project plan to guide the implementation. The Company completed this project plan, in which it analyzed the ASU's impact on its leases, surveyed the Company's key employees, assessed the portfolio of leases, and established a future lease process to keep the lease accounting portfolio up to date. The Company also evaluated the key policy elections and considerations under the standard and completed the internal policy documentation to address the new standard requirements.  The Company adopted this new guidance using the updated modified transition method allowed per ASU 2018-11 of Topic 842.  Upon adoption on January 1, 2019, total assets and liabilities increased due to the recording of right-of-use assets of $1.5 million and lease liabilities of $1.6 million.  Additional information and disclosures required by this new standard are contained in Note 10, 'Leases'.

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In October 2016, the FASB issued ASU 2016-16, Income Taxes (“Topic 740”): Intra-Entity Transfer of Assets Other than Inventory. Topic 740 requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The Company adopted Topic 740 on January 1, 2018 using the modified retrospective approach, and as a result recorded a deferred tax asset with a corresponding adjustment to retained earnings of $0.1 million associated with an intra-entity transfer of goodwill in 2009. The goodwill was transferred to the U.S. entity from a Canadian entity that was dissolved in 2009.

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 the Company on January 1, 2020. The Company is currently evaluating this guidance and the impact it will have on its consolidated financial statements.  

2. Fair Value of Financial Instruments

The Company follows accounting guidance for fair value measurements and disclosures, which establishes a fair value hierarchy that requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.  Fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, a three-tier fair value hierarchy has been established, which prioritizes the inputs used in measuring fair value as follows:

Level 1: inputs are unadjusted quoted prices in active markets for identical assets or liabilities.

Level 2: inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of assets or liabilities.

Level 3: unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Cash equivalents are measured at fair value and investments are recognized at amortized cost in the Company’s financial statements.  Accounts receivable and other investments are financial assets with carrying values that approximate fair value due to the short-term nature of these assets.  Accounts payable is a financial liability with a carrying value that approximates fair value due to the short-term nature of these liabilities.

3. Earnings per Share

The following table is the computation of basic and diluted earnings per share:

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4. Cash, Cash Equivalents and Investments

The Company’s cash and investments consisted of the following:

Cash and Cash Equivalents

At March 31, 2019 and December 31, 2018, cash and cash equivalents included bank balances and investments with original maturities less than 90 days.  At March 31, 2019 and December 31, 2018, the Company’s cash equivalents were invested in highly liquid AAA rated money market funds that are required to comply with Rule 2a-7 of the Investment Company Act of 1940.  Such funds utilize the amortized cost method of accounting, seek to maintain a constant $1.00 per share price, and are redeemable upon demand.  The Company restricts its investments in AAA money market funds to those invested 100% in either short-term U.S. government agency securities or bank repurchase agreements collateralized by these same securities.  The fair values of these money market funds are established through quoted prices in active markets for identical assets (Level 1 inputs).  The Company’s cash in U.S. banks is insured by the Federal Deposit Insurance Corporation up to the insurable limit of $250.

The Company had $1.1 million and $0.8 million of cash and cash equivalents in foreign bank accounts at March 31, 2019 and December 31, 2018, respectively.  The Company’s cash in its foreign bank accounts is not insured.  Within the cash in foreign bank accounts, the Company had cash of $0.9 million and $0.6 million in China bank accounts at March 31, 2019 and December 31, 2018, respectively.  As of March 31, 2019, the Company has no intentions of repatriating the cash in its foreign bank accounts in China.  If the Company decides to repatriate the cash in the foreign bank accounts, it may have trouble in doing so in a timely manner.  The Company may also be exposed to foreign currency fluctuations and taxes if it repatriates these funds.  The Company completed the closure of its Israeli subsidiary during the fourth quarter of 2018.  The Company expects to repatriate the subsidiary’s remaining cash of $0.2 million in 2019.  The Company does not expect the foreign currency exchange rate related to the repatriation of these funds to have a material impact on the financial statements.

Investments

At March 31, 2019 and December 31, 2018, the Company’s short-term investments consisted of U.S. government agency bonds, A or higher rated corporate bonds, and certificates of deposit. All the investments at March 31, 2019 and December 31, 2018 were classified as held-to-maturity.  The bonds have original maturities greater than 90 days and mature in less than one year.  The Company’s bond investments are recorded at the purchase price and carried at amortized cost. 

Cash equivalents and investments were as follows at March 31, 2019 and December 31, 2018:

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The Company categorizes its financial instruments within a fair value hierarchy according to accounting guidance for fair value.  The fair value hierarchy is described under the Fair Value of Financial Instruments in Note 2.  For the Level 2 investments, the Company uses quoted prices of similar assets in active markets.  The fair values in the table above reflect net unrealized losses of $49 and $21 at March 31, 2019 and December 31, 2018, respectively.  

5. Goodwill and Intangible Assets

Goodwill

There were no changes to the goodwill valued at $3.3 million during the three months ended March 31, 2019.   There were no triggering events during the quarter ended March 31, 2019.  The Company will continue to monitor goodwill for impairment going forward.  

The goodwill is related to the test and measurement product line, not to the whole Company.  Due to the reorganization in the third quarter 2018, the Company’s operations, engineering, business development, sales and marketing, and operational general and administrative functions were consolidated into a single enterprise-wide organization. As such, there are  no longer reportable segments. The Company does have discrete financial information necessary to perform goodwill impairment testing for the reporting unit under the accounting guidance. The Company evaluates the goodwill based on the cash flows for the test and measurement product line. The cash flows for the test and measurement product line are only prepared for testing goodwill and were not reviewed by the Company’s CODM for business planning purposes.  

Intangible Assets

The Company amortizes intangible assets with finite lives on a straight-line basis over the estimated useful lives, which range from one to six years.  The summary of amortization expense in the consolidated statement of operations is as follows:   

The summary of other intangible assets, net is as follows:

The $0.2 million decrease in the net book value of intangible assets at March 31, 2019 compared to December 31, 2018 relates to amortization expense for the three months ended March 31, 2019.  

The assigned lives and weighted average amortization periods by intangible asset category are summarized below:

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The Company’s intangible amortization is scheduled through February 2020.  The amortization expense for 2019 and the next year is as follows:

6. Balance Sheet Information

Accounts Receivable

Accounts receivable are recorded at invoiced amounts with standard net terms that range between 30 and 90 days.  The Company extends credit to its customers based on an evaluation of a customer’s financial condition and collateral is generally not required.  The Company maintains an allowance for estimated uncollectible accounts receivable.  The allowance is based on the Company’s assessment of known delinquent accounts, historical experience, and other currently available evidence of the collectability and the aging of accounts receivable.  The Company’s allowance for doubtful accounts was $0.1 million at March 31, 2019 and at December 31, 2018.  

Inventories

Inventories are stated at the lower of cost or market and include material, labor and overhead costs using the first-in, first-out method of costing.  Inventories as of March 31, 2019 and December 31, 2018 were composed of raw materials, sub-assemblies, finished goods and work-in-process.  The Company had consigned inventory with customers of $0.4 million and $0.9 million at March 31, 2019 and December 31, 2018, respectively.  The Company records allowances to reduce the value of inventory to the lower of cost or market, including allowances 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 the carrying value is above net realizable value.  The allowance for inventory losses was $3.3 million at March 31, 2019 and at December 31, 2018.

Inventories consisted of the following:

Prepaid and Other Current Assets

Prepaid assets are stated at cost and are amortized over the useful lives (up to one year) of the assets.

Property and Equipment

Property and equipment are stated at cost and are depreciated using the straight-line method over the estimated useful lives of the assets.  The Company depreciates computer equipment over three to five years, office equipment, manufacturing and test equipment, and motor vehicles over five years, furniture and fixtures over seven years, and buildings over 30 years.  Leasehold improvements are amortized over the shorter of the corresponding lease term or useful life.  Depreciation expense and gains and losses on the disposal of property and equipment are included in cost of sales and operating expenses in the condensed consolidated statements of operations.  Maintenance and repairs are expensed as incurred.

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Property and equipment consisted of the following:

Depreciation and amortization expense was approximately $0.7 million for the three months ended March 31, 2019 and 2018, respectively.    Amortization for finance leases is included in depreciation and amortization expense.  See Note 10 for information related to finance leases.

Liabilities

Accrued liabilities consisted of the following:

Long-term liabilities consisted of the following:

7. Stock-Based Compensation

The condensed consolidated statements of operations include $0.9 million and $0.7 million of stock compensation expense for the three months ended March 31, 2019 and 2018, respectively.  The Company accounts for forfeitures as they occur.

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The stock-based compensation expense by type is as follows:

Total stock-based compensation is reflected in the condensed consolidated statements of operations as follows:

Restricted Stock – Service Based

The Company grants restricted shares as employee and director incentives.  When service-based restricted stock is granted, the Company records deferred stock compensation within additional paid in capital, representing the fair value of the common stock on the date the restricted shares are granted.  The Company records stock compensation expense on a straight-line basis over the vesting period of the applicable service-based restricted shares.  These grants vest over various periods.  During the first quarter 2019, the Company issued 190,159 service-based restricted stock awards to employees that vest in equal annual increments over three years.    

The following table summarizes service-based restricted stock activity for the three months ended March 31, 2019: 

The intrinsic value of service-based restricted shares that vested during the three months ended March 31, 2019 and 2018 was $2.1 million and $0.8 million, respectively.    

At March 31, 2019, total unrecognized compensation expense related to restricted stock was approximately $3.0 million to be recognized through 2022 over a weighted average period of 1.5 years.

Restricted Stock Units – Service Based

The Company grants restricted stock units as employee incentives.  Restricted stock units are primarily granted to foreign employees for long-term incentive purposes.  Employee restricted stock units are service-based awards and are amortized over the vesting period.  At the vesting date, these units are converted to shares of common stock.  The Company records expense on a straight-line basis for restricted stock units.

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The following table summarizes the restricted stock unit activity during the three months ended March 31, 2019:

The intrinsic value of service-based restricted stock units that vested and were issued as shares during the three months ended March 31, 2019 and 2018 was $30 and $29, respectively.   

As of March 31, 2019, the unrecognized compensation expense related to the unvested portion of the Company’s restricted stock units was approximately $0.1 million, to be recognized through 2022 over a weighted average period of 1.2 years.

Stock Options

The Company grants stock options to purchase common stock primarily to certain new employees.  The exercise price of the stock options is no less than the fair value of the Company’s stock on the grant date.  The stock options have a seven-year life and generally vest over a period of four years, 25% after one year, and ratably on a monthly basis thereafter.  Stock options may be exercised at any time prior to their expiration date or within ninety days of termination of employment, or such shorter time as may be provided in the related stock option agreement.  

A summary of the Company’s stock option activity for the three months ended March 31, 2019 is as follows:

The range of exercise prices for options outstanding and exercisable at March 31, 2019, was $5.00 to $8.32.  The following table summarizes information about stock options outstanding under all stock option plans:

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The weighted average contractual life and intrinsic value of options outstanding and options exercisable at March 31, 2019, was the following:

The intrinsic value is based on the share price of $5.01 at March 31, 2019.

There were no stock options granted during the three months ended March 31, 2019.  For outstanding stock options, the Company calculated the fair value of each option grant on the date of grant using the Black-Scholes option-pricing model. Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, the existing models may not necessarily provide a reliable single measure of the fair value of the employee stock options. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility and expected option life.  

The dividend yield rate is calculated by dividing the Company’s annual dividend by the closing price on the grant date. The risk-free interest rate is based on the U.S. Treasury yields with a remaining term that approximates the expected life of the options granted.  The expected volatility is based on a five-year historical period of the Company’s stock price.  The expected life for options granted is based on historical data of employee exercise performance.  The Company records expense based on the graded vesting method.

As of March 31, 2019, the unrecognized compensation expense related to the unvested portion of the Company’s stock options was approximately $2, to be recognized through 2021 over a weighted average period of 1.5 years.

Performance-Based Equity Awards

In February 2019, the Company’s Board of Directors approved the 2019 Long-Term Incentive Plan (“2019 LTIP”).  Under the 2019 LTIP, shares of the Company’s stock can be earned by certain executive employees based on achievement of a three-year revenue growth target with a penalty if a certain adjusted EBITDA level is not maintained.  At target, the aggregate number of shares that can be earned is 174,117.  If the Company achieves less than the target growth over the performance period, the participant will receive fewer shares than the target award, determined on a straight-line basis.  If the Company, achieves greater than the target growth, the participant will receive more shares than the target award on an accelerated basis.  The maximum number of aggregate shares that may be issues under the 2019 LTIP is 304,705 as of March 31, 2019.

The performance period for the 2019 LTIP is from January 1, 2019 through December 31, 2021 and the participants are required to be in service at the determination date of the award following the end of the performance period in order to receive the award.  Shares earned under the 2019 LTIP will be fully vested shares.  Stock compensation expense is amortized over the performance period for these awards based on estimated achievement of the goal.  At target, the total fair market of the award was $0.9 million based on the share price on $5.27 on the grant date.

Short-Term Incentive Plan

In February 2019, the Board of Directors approved the 2019 short-term incentive plan (“2019 STIP”) based on two components of the Company’s performance: (1) revenues weighted 20% and (2) Adjusted EBITDA weighted 80%.  “Adjusted EBITDA” is defined as GAAP operating profit excluding stock compensation expenses, amortization of intangible assets, depreciation, restructuring charges, impairment charges, gain/loss on sale of product lines, and expenses included in GAAP operating profit to the extent recovery of such expenses is recorded in other income.  The goals are consistent for all employees who participate in the 2019 STIP.  Incentive awards earned by certain executives and key managers under the Company’s 2019 STIP will be settled 50% in cash and 50% in shares of the Company’s stock.  The incentive awards for all other participants under the 2019 STIP will be 100% in cash.  The Company records stock compensation expense based on the estimated payouts under the STIP.  No incentive awards were settled for the 2018 short-term incentive plan because the Company did not meet the performance objectives.  

Employee Stock Purchase Plan (“ESPP”)

The ESPP enables eligible employees to purchase common stock at the lower of 85% of the fair market value of the common stock on the first or last day of each offering period.  Each offering period is approximately six months.  The Company received proceeds of $0.3 million from the issuance of 95,376 shares under the ESPP in February 2019 and received proceeds of $0.4 million from the

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issuance of 68,212 shares under the ESPP in February 2018. The Company received proceeds of $0.3 million from the issuance of 88,583 shares under the ESPP in August 2018.

Based on the 15% discount and the fair value of the option feature of the ESPP, it is considered compensatory.  Compensation expense is calculated using the fair value of the employees’ purchase rights under the Black-Scholes model.

The Company calculated the fair value of each employee stock purchase grant on the date of grant using the Black-Scholes option-pricing model using the following assumptions:

The dividend yield rate was calculated by dividing the Company’s annual dividend by the closing price on the grant date.  The risk-free interest rate was based on the U.S. Treasury yields with a remaining term that approximates the expected life of the options granted.  The volatility was based on a five-year historical period of the Company’s stock price.  The expected life was based on the offering period.

Employee Withholding Taxes on Stock Awards

For ease in administering the issuance of stock awards, the Company holds back shares of vested restricted stock awards and short-term incentive plan stock awards for the value of the statutory withholding taxes.  For each individual receiving a share award, the Company redeems the shares it computes as the value for the withholding tax and remits this amount to the appropriate tax authority.  For withholding taxes related to stock awards, the Company paid $0.7 million and $0.3 million during the three months ended March 31, 2019 and 2018, respectively.

8. Benefit Plans

Employee Benefit Plans

The Company’s 401(k) plan covers all of the U.S. employees beginning the first day of the month following the first month of their employment.  Under this plan, employees may elect to contribute up to 15% of their current compensation to the 401(k) plan up to the statutorily prescribed annual limit.  The Company matches employee contributions up to 4%, and may also make discretionary contributions to the 401(k) plan.  The Company also contributes to various retirement plans for foreign employees.

The Company’s contributions to retirement plans were as follows:

9. Commitments and Contingencies

Restructuring

During the first quarter 2016, the Company exited from its Colorado office in order to consolidate facility space and recorded restructuring expense for the remaining obligations under the lease, net of proceeds for a sublease.  The Company signed a sublease for the office space in the second quarter 2017.  The obligation for the Colorado lease was retained by the Company.  

The following table summarizes the restructuring activity during the three months ended March 31, 2019 and the status of the reserves at March 31, 2019:

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The restructuring liability is recorded on the balance sheet at March 31, 2019 and December 31, 2018 as follows: