UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2017 |
For the quarterly period ended September 30, 2016
OR
o | 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
1-11916
WIRELESS TELECOM GROUP, INC.
(Exact name of registrant as specified in its charter)
New Jersey | 22-2582295 | |
(State or Other Jurisdiction | (I.R.S. Employer | |
of Incorporation or Organization) | Identification No.) | |
25 Eastmans Road | ||
Parsippany, New Jersey | 07054 | |
(Address of Principal Executive Offices) | (Zip Code) |
(973) 386-9696
(Registrant’s Telephone Number, Including Area Code)
Not Applicable
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
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. Yesxo Noox
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yesx Noo
IndicateIndicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, (seeor an emerging growth company. See the definitions of “large accelerated filer, accelerated” “accelerated filer,” “smaller reporting company,” and smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act). (Check one):Act.
Large accelerated filero | Accelerated filero | Non-accelerated filero | Smaller reporting companyx | Emerging growth companyo |
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.o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YesoNox
Number of shares of Common Stock outstanding as of October 28, 2016: 18,721,346May 10, 2017: 22,289,475
WIRELESS TELECOM GROUP, INC.
Table of Contents
Page
2 |
PART 1 – FINANCIAL INFORMATION
WIRELESS TELECOM GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
WIRELESS TELECOM GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, | December 31, | |||||||
2016 | 2015 | |||||||
(unaudited) | ||||||||
- ASSETS - | ||||||||
CURRENT ASSETS: | ||||||||
Cash and cash equivalents | $ | 8,101,707 | $ | 9,726,007 | ||||
Accounts receivable - net of allowance for doubtful accounts of $96,780 and $105,568 for 2016 and 2015, respectively | 5,635,968 | 5,451,161 | ||||||
Inventories - net of reserves of $1,331,657 and $1,110,288, respectively | 9,450,740 | 8,068,728 | ||||||
Prepaid expenses and other current assets | 672,038 | 586,889 | ||||||
TOTAL CURRENT ASSETS | 23,860,453 | 23,832,785 | ||||||
PROPERTY, PLANT AND EQUIPMENT - NET | 2,136,286 | 1,742,888 | ||||||
OTHER ASSETS: | ||||||||
Goodwill | 1,351,392 | 1,351,392 | ||||||
Deferred income taxes | 7,448,262 | 7,013,929 | ||||||
Other assets | 694,343 | 765,330 | ||||||
TOTAL OTHER ASSETS | 9,493,997 | 9,130,651 | ||||||
TOTAL ASSETS | $ | 35,490,736 | $ | 34,706,324 | ||||
- LIABILITIES AND SHAREHOLDERS’ EQUITY - | ||||||||
CURRENT LIABILITIES: | ||||||||
Accounts payable | $ | 2,137,722 | $ | 1,046,651 | ||||
Accrued expenses and other current liabilities | 678,828 | 648,010 | ||||||
Equipment leases payable | 14,368 | 73,760 | ||||||
TOTAL CURRENT LIABILITIES | 2,830,918 | 1,768,421 | ||||||
LONG TERM LIABILITIES: | ||||||||
Deferred rent | 60,906 | 33,452 | ||||||
COMMITMENTS AND CONTINGENCIES | ||||||||
SHAREHOLDERS’ EQUITY: | ||||||||
Preferred stock, $.01 par value, 2,000,000 shares authorized, none issued | — | — | ||||||
Common stock, $.01 par value, 75,000,000 shares authorized, 29,756,224 and 29,627,891 shares issued, 18,721,346 and 18,636,008 shares outstanding, respectively | 297,562 | 296,279 | ||||||
Additional paid-in-capital | 40,296,660 | 39,865,331 | ||||||
Retained earnings | 12,828,170 | 13,500,853 | ||||||
Treasury stock at cost, 11,034,878 and 10,991,883 shares, respectively | (20,823,480 | ) | (20,758,012 | ) | ||||
TOTAL SHAREHOLDERS’ EQUITY | 32,598,912 | 32,904,451 | ||||||
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | 35,490,736 | $ | 34,706,324 |
March 31, | December 31, | |||||
2017 | 2016 | |||||
(unaudited) | ||||||
Assets | ||||||
CURRENT ASSETS | ||||||
Cash & cash equivalents | $2,175,481 | $9,350,803 | ||||
Accounts receivable - net of allowance for doubtful accounts of $11,929 and $10,740, respectively | 7,672,167 | 5,183,869 | ||||
Inventories - net of reserves of $1,648,618 and $1,549,089, respectively | 9,890,709 | 8,452,751 | ||||
Prepaid expenses and other current assets | 870,217 | 866,035 | ||||
TOTAL CURRENT ASSETS | 20,608,574 | 23,853,458 | ||||
PROPERTY PLANT AND EQUIPMENT - NET | 2,482,089 | 2,166,566 | ||||
OTHER ASSETS | ||||||
Goodwill | 11,412,264 | 1,351,392 | ||||
Acquired Intangible Assets, net | 9,422,210 | - | ||||
Deferred income taxes | 7,899,240 | 7,403,600 | ||||
Other long term assets | 832,493 | 660,119 | ||||
TOTAL OTHER ASSETS | 29,566,207 | 9,415,111 | ||||
TOTAL ASSETS | $52,656,870 | $35,435,135 | ||||
Liabilities and Shareholders’ Equity | ||||||
CURRENT LIABILITIES | ||||||
Short term debt | $2,056,037 | - | ||||
Accounts payable | 4,501,861 | 2,986,797 | ||||
Accrued expenses and other current liabilities | 2,924,479 | 673,067 | ||||
Deferred Revenue | 614,466 | - | ||||
TOTAL CURRENT LIABILITIES | 10,096,843 | 3,659,864 | ||||
LONG TERM LIABILITIES | ||||||
Long term debt | 608,000 | - | ||||
Other long term liabilities | 3,546,406 | 69,058 | ||||
Deferred Tax Liability | 1,652,321 | - | ||||
TOTAL LONG TERM LIABILITIES | 5,806,727 | 69,058 | ||||
COMMITMENTS AND CONTINGENCIES | ||||||
SHAREHOLDERS’ EQUITY | ||||||
Preferred stock, $.01 par value, 2,000,000 shares authorized, none issued | - | - | ||||
Common stock, $.01 par value, 75,000,000 shares authorized, 33,323,752and 29,786,224 shares issued, 22,288,874 and 18,751,346 shares outstanding, respectively | 333,237 | 297,862 | ||||
Additional paid in capital | 46,865,064 | 40,563,002 | ||||
Retained earnings | 10,437,386 | 11,668,829 | ||||
Treasury stock at cost, - 11,034,878 and 11,034,878 shares, respectively | (20,823,480 | ) | (20,823,480 | ) | ||
Accumulated Other Comprehensive (Loss) | (58,907 | ) | ||||
TOTAL SHAREHOLDERS’ EQUITY | 36,753,300 | 31,706,213 | ||||
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $52,656,870 | $35,435,135 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
3 |
WIRELESS TELECOM GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS)
(unaudited)
For the Three Months | For the Nine Months | |||||||||||||||
Ended September 30, | Ended September 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
NET REVENUES | $ | 8,344,301 | $ | 8,339,155 | $ | 22,322,820 | $ | 25,180,143 | ||||||||
COST OF REVENUES | 4,521,302 | 4,715,944 | 12,440,817 | 14,126,798 | ||||||||||||
GROSS PROFIT | 3,822,999 | 3,623,211 | 9,882,003 | 11,053,345 | ||||||||||||
OPERATING EXPENSES | ||||||||||||||||
Research and development | 948,654 | 1,026,580 | 3,042,916 | 2,899,481 | ||||||||||||
Sales and marketing | 1,216,265 | 1,224,559 | 3,703,522 | 3,911,997 | ||||||||||||
General and administrative | 1,389,996 | 1,209,672 | 4,141,520 | 3,592,847 | ||||||||||||
TOTAL OPERATING EXPENSES | 3,554,915 | 3,460,811 | 10,887,958 | 10,404,325 | ||||||||||||
OPERATING INCOME (LOSS) | 268,084 | 162,400 | (1,005,955 | ) | 649,020 | |||||||||||
OTHER EXPENSE - NET | 27,267 | 5,880 | 79,137 | 2,913 | ||||||||||||
NET INCOME (LOSS) BEFORE INCOME TAXES | 240,817 | 156,520 | (1,085,092 | ) | 646,107 | |||||||||||
PROVISION (BENEFIT) FOR INCOME TAXES | 118,980 | 81,381 | (412,409 | ) | 293,109 | |||||||||||
NET INCOME (LOSS) | $ | 121,837 | $ | 75,139 | $ | (672,683 | ) | $ | 352,998 | |||||||
INCOME (LOSS) PER COMMON SHARE: | ||||||||||||||||
BASIC | $ | 0.01 | $ | 0.00 | $ | (0.04 | ) | $ | 0.02 | |||||||
DILUTED | $ | 0.01 | $ | 0.00 | $ | (0.04 | ) | $ | 0.02 |
Three Months Ended | ||||||||
March 31 | ||||||||
2017 | 2016 | |||||||
NET REVENUES | $ | 9,548,758 | $ | 6,368,415 | ||||
COST OF REVENUES | 5,216,248 | 3,648,301 | ||||||
GROSS PROFIT | 4,332,510 | 2,720,114 | ||||||
Operating Expenses | ||||||||
Research and development | 1,086,914 | 1,064,321 | ||||||
Sales and marketing | 1,552,086 | 1,251,176 | ||||||
General and administrative | 3,412,491 | 1,325,268 | ||||||
Total Operating Expenses | 6,051,491 | 3,640,765 | ||||||
Other income/(expense) | (1,545 | ) | (41,604 | ) | ||||
Interest Expense | (49,218 | ) | 0 | |||||
Income/(Loss) Before Taxes | (1,769,744 | ) | (962,255 | ) | ||||
Tax Provision/(Benefit) | (538,301 | ) | (385,928 | ) | ||||
Net (Loss)/Income | $ | (1,231,443 | ) | $ | (576,327 | ) | ||
Other Comprehensive (Loss): | ||||||||
Foreign currency translation adjustments | (58,907 | ) | - | |||||
Comprehensive (Loss) | $ | (1,290,350 | ) | $ | (576,327 | ) | ||
Net (Loss)/Income Per Common Share: | ||||||||
Basic | $ | (0.06 | ) | $ | (0.03 | ) | ||
Diluted | $ | (0.06 | ) | $ | (0.03 | ) | ||
Weighted Average Shares Outstanding: | ||||||||
Basic | 20,386,678 | 18,606,582 | ||||||
Diluted | 21,166,681 | 19,013,726 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
4 |
WIRELESS TELECOM GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
For the Nine Months | ||||||||
Ended September 30, | ||||||||
2016 | 2015 | |||||||
CASH FLOWS (USED) PROVIDED BY OPERATING ACTIVITIES | ||||||||
Net income (loss) | $ | (672,683 | ) | $ | 352,998 | |||
Adjustments to reconcile net income (loss) to net cash (used) provided by operating activities: | ||||||||
Depreciation and amortization | 363,634 | 338,826 | ||||||
Share-based compensation expense | 432,612 | 223,273 | ||||||
Deferred rent | 27,454 | 22,301 | ||||||
Deferred income taxes | (434,333 | ) | 216,922 | |||||
Provision for doubtful accounts | (8,788 | ) | 4,912 | |||||
Inventory reserves | 221,369 | 35,599 | ||||||
Changes in assets and liabilities: | ||||||||
Accounts receivable | (176,019 | ) | (436,464 | ) | ||||
Inventories | (1,603,381 | ) | (210,909 | ) | ||||
Prepaid expenses and other assets | (14,162 | ) | 568,319 | |||||
Accounts payable | 1,091,071 | 170,509 | ||||||
Accrued expenses and other current liabilities | 30,818 | (767,557 | ) | |||||
Net cash (used) provided by operating activities | (742,408 | ) | 518,729 | |||||
CASH FLOWS (USED) BY INVESTING ACTIVITIES | ||||||||
Capital expenditures | (715,128 | ) | (371,718 | ) | ||||
CASH FLOWS (USED) BY FINANCING ACTIVITIES | ||||||||
Proceeds from exercise of stock options | — | 23,400 | ||||||
Repayments of equipment leases payable | (101,296 | ) | (115,827 | ) | ||||
Repurchase of common stock - 42,995 shares | (65,468 | ) | — | |||||
Net cash (used) by financing activities | (166,764 | ) | (92,427 | ) | ||||
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS | (1,624,300 | ) | 54,584 | |||||
Cash and cash equivalents, at beginning of period | 9,726,007 | 10,723,513 | ||||||
CASH AND CASH EQUIVALENTS, AT END OF PERIOD | $ | 8,101,707 | $ | 10,778,097 | ||||
SUPPLEMENTAL INFORMATION: | ||||||||
Cash paid during the period for income taxes | $ | 67,438 | $ | 63,762 | ||||
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: | ||||||||
Capital expenditures | $ | (41,904 | ) | $ | — | |||
Equipment leases payable | $ | 41,904 | $ | — |
For the Three Months Ended March | ||||||
2017 | 2016 | |||||
CASH FLOWS PROVIDED/(USED) BY OPERATING ACTIVITIES | ||||||
Net loss | ($1,231,443) | ($576,327) | ||||
Adjustments to reconcile net loss to cash provided/(used) from operating activities | ||||||
Depreciation and amortization | 414,120 | 115,858 | ||||
Shared based compensation | 301,389 | 98,619 | ||||
Amortization of debt issuance fees | 9,228 | - | ||||
Deferred rent | 8,151 | 11,150 | ||||
Deferred income taxes | (495,640) | (385,928) | ||||
Provision for doubtful accounts | 1,189 | (35,416) | ||||
Provision inventory reserves | 99,528 | 64,433 | ||||
Changes in assets and liabilities, net of acquisition | ||||||
Accounts receivables | (230,712) | 991,152 | ||||
Inventories | (412,189) | (795,581) | ||||
Prepaid expenses and other assets | 124,575 | 110,862 | ||||
Accounts payable | 352,132 | 637,921 | ||||
Accrued expenses and other current liabilities | 159,840 | (9,129) | ||||
NET CASH PROVIDED/(USED) BY OPERATING ACTIVITIES | ($899,832) | $227,614 | ||||
CASH FLOWS (USED FOR) INVESTING ACTIVITIES | ||||||
Capital expenditures | ($192,075) | (74,474) | ||||
Acquisition of business net of cash acquired | (8,596,183) | - | ||||
NET CASH (USED) BY INVESTING ACTIVITIES | ($8,788,258) | (74,474) | ||||
CASH FLOWS PROVIDED/(USED) FOR FINANCING ACTIVITIES | ||||||
Revolver Borrowings | 3,398,500 | - | ||||
Revolver Repayments | (1,494,463) | - | ||||
Term Loan Borrowings | 760,000 | - | ||||
Debt Issuance Fees | (215,358) | - | ||||
Proceeds from exercise of stock options | 37,500 | - | ||||
Repayments of equipment lease payable | - | (42,089) | ||||
Repurchase of common stock - 42,995 shares | - | (65,468) | ||||
NET CASH PROVIDED/(USED) BY FINANCING ACTIVITIES | 2,486,179 | (107,557) | ||||
Effect of exchange rate changes on cash | 26,589 | - | ||||
NET (DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS | ($7,175,322) | $45,583 | ||||
Cash and equivalents, at beginning of year | $9,350,803 | $9,726,007 | ||||
CASH AND CASH EQUIVALENTS, AT END OF PERIOD | $2,175,481 | $9,771,590 | ||||
SUPPLEMENTAL INFORMATION | ||||||
Cash paid during the period for interest | $4,807 | - | ||||
Cash paid during the period for income taxes | - | $3,723 | ||||
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND | ||||||
FINANCING ACTIVITIES: | ||||||
Issuance of Common Shares as Consideration | $5,998,548 | - | ||||
Capital Expenditures | - | ($41,904) | ||||
Equipment Lease Payable | - | $41,904 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
5 |
WIRELESS TELECOM GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTSTATEMENTS OF SHAREHOLDERS’ EQUITY
(unaudited)
Common Stock Issued | Common Stock Amount | Additional Paid In Capital | Retained Earnings | Treasury Stock | Total Shareholders’ Equity | |||||||||||||||||||
Balances at December 31, 2015 | 29,627,891 | $ | 296,279 | $ | 39,865,331 | $ | 13,500,853 | $ | (20,758,012 | ) | $ | 32,904,451 | ||||||||||||
Net (loss) | — | — | — | (672,683 | ) | — | (672,683 | ) | ||||||||||||||||
Stock issued under equity compensation plan | 128,333 | 1,283 | (1,283 | ) | — | — | — | |||||||||||||||||
Share-based compensation expense | — | — | 432,612 | — | — | 432,612 | ||||||||||||||||||
Repurchase of treasury stock | — | — | — | — | (65,468 | ) | (65,468 | ) | ||||||||||||||||
Balances at September 30, 2016 | 29,756,224 | $ | 297,562 | $ | 40,296,660 | $ | 12,828,170 | $ | (20,823,480 | ) | $ | 32,598,912 |
Accumulated | |||||||||||||||||||||
Common | Other | Total | |||||||||||||||||||
Common | Stock | Additional Paid | Retained | Comprehensive | Shareholders’ | ||||||||||||||||
Stock Issued | Amount | In Capital | Earnings | Loss | Treasury Stock | Equity | |||||||||||||||
Balances at December 31, 2016 | 29,786,224 | $297,862 | $40,563,002 | $11,668,829 | - | ($20,823,480 | ) | $31,706,213 | |||||||||||||
Net Income (loss) | (1,231,443 | ) | (1,231,443 | ) | |||||||||||||||||
Issuance of shares in connection with stock options exercised | 50,000 | 500 | 37,000 | 37,500 | |||||||||||||||||
Share-based compensation expense | 301,389 | 301,389 | |||||||||||||||||||
Issuance of shares in connection with CommAgility acquisition | 3,487,528 | 34,875 | 5,963,673 | 5,998,548 | |||||||||||||||||
Cumulative translation adjustment | (58,907 | ) | (58,907 | ) | |||||||||||||||||
Repurchase of treasury stock | - | ||||||||||||||||||||
Balances at March 31, 2017 | 33,323,752 | $333,237 | $46,865,064 | $10,437,386 | ($58,907 | ) | ($20,823,480 | ) | $36,753,300 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
6 |
WIRELESS TELECOM GROUP, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES AND POLICIES
Basis of Presentation
The condensed consolidated balance sheet as of September 30, 2016,March 31, 2017, the condensed consolidated statements of operations for the three and nine-month periods ended September 30, 2016 and 2015, the condensed consolidated statements of cash flows for the nine-monththree-month periods ended September 30,March 31, 2017 and 2016, and 2015, and the condensed consolidated statement of shareholders’ equity for the nine-monththree-month period ended September 30, 2016March 31, 2017 have been prepared by the Company (as defined below) without audit. The condensed consolidated financial statements include the accounts of Wireless Telecom Group, Inc., which operates one of its product linesdoing business as and operating under the trade name, Noisecom, Inc. (“Noisecom”)NoiseCom , and its wholly-ownedwholly owned subsidiaries including Boonton Electronics Corporation (“Boonton”), Microlab/FXR, (“Microlab”), WTG Foreign Sales CorporationWireless Telecommunications Ltd and NC Mahwah, Inc.,CommAgility Limited (“CommAgility”) which are collectively referred to herein as, the “Company”. All intercompany transactions and balances have been eliminated in consolidation.
Interim Financial Statements
In the opinion of management, the accompanying condensed consolidated financial statements referred to above contain all necessary adjustments, consisting of normal accruals and recurring entries, which are necessary to fairly present the Company’s results for the interim periods being presented.
The accounting policies followed by the Company are set forth in Note 1 to the Company’s financial statements included in its annual report on Form 10-K for the year ended December 31, 2015.2016. Specific reference is made to that report since certain information and footnote disclosures normally included in financial statements in accordance with accounting principles generally accepted in the United States of America (US GAAP) have been condensed or omitted from this report.
The results of operations for the three-month period ended March 31, 2017 are not necessarily indicative of the results to be expected for the full year ending December 31, 2017.
Use of Estimates
The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities (including inventory valuation, accounts receivable valuation, valuation of deferred tax assets, intangible assets, estimated fair values of stock options and vesting periods of performance-based stock options and restricted stock) and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of net sales and expenses during the reporting period. Actual results could differ from those estimates.
The results of operations for the three and nine-month periods ended September 30, 2016 are not necessarily indicative of the results to be expected for the full year ending December 31, 2016.Concentration Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents and accounts receivable.
The Company maintains significant cash investments primarily with two financial institutions, which at times may exceed federally insured limits. The Company performs periodic evaluations of the relative credit rating of these institutions as part of its investment strategy.
The Company has limited concentration of credit risk in accounts receivable due to the large number of entities comprising our customer base and their dispersion across many different industries and geographies. Credit evaluations are performed on customers requiring credit over a certain amount. Credit risk is mitigated to a lesser extent through collateral such as letters of credit, bank guarantees or payment terms like cash in advance. Credit evaluation is performed independent of the Company’s sales team to ensure segregation of duties.
For the three and nine-monthsthree-months ended September 30, 2016,March 31, 2017, one customer accounted for approximately 11% and 10%, respectively, of the Company’s consolidated revenues.sales. For the three and nine-monthsthree-months ended September 30, 2015,March 31, 2016, no customer accounted for 10% or more of the Company’s consolidated revenues.sales. At September 30,March 31, 2017 two customers represented approximately 19% and 13% of the Company’s consolidated gross accounts receivable, respectively. At December 31, 2016, one customer represented approximately 15%16% of the Company’s gross accounts receivable. At December 31, 2015, no customer represented 10% or more of the Company’s gross accounts receivable.
The carrying amounts of cash and cash equivalents, trade receivables, other current assets and liabilities approximate fair value due to the short-term nature of these instruments.receivable balance.
7 |
WIRELESS TELECOM GROUP, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTEFair Value of Financial Instruments
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the reporting date. The accounting guidance establishes a three-tiered hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:
Level 1—Quoted prices in active markets for identical assets or liabilities.
Level 2—Inputs other than Level 1 - SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES AND POLICIES (Continued)that are observable, either directly or indirectly, such as quoted prices 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 the 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.
The categorization of a financial instrument within the valuation hierarchy is based on the lowest level of input that is significant to the fair value measurement.
The carrying amounts of the Company’s financial instruments, including cash, accounts receivable, accounts payable and accrued liabilities, approximate fair value due to their relatively short maturities. The Company’s term loan and revolving credit facility bear interest at a variable interest rate plus an applicable margin and, therefore, carrying amount approximates fair value.
Contingent Consideration
Under the terms of the CommAgility Share Purchase Agreement (defined below) the Company considersmay be required to pay additional amounts if certain financial targets are achieved for the years ended December 31, 2017 and December 31, 2018 (“CommAgility Earn-Out”). As of the acquisition date, the Company estimated the fair value of the contingent consideration to be $2,700,353 (see Note 3) and the Company is required to reassess the fair value of the contingent consideration at each reporting period.
The significant inputs used in this fair value estimate include gross sales and Adjusted EBITDA, as defined, scenarios for the Earn-out Periods for which probabilities are assigned to each scenario to arrive at a single estimated outcome (Level 3). The estimated outcome is then discounted based on the individual risk analysis of the liability. Although the Company believes its estimates and assumptions are reasonable, different assumptions, including those regarding the operating results of CommAgility, or changes in the future may result in different estimated amounts.
The contingent consideration is included in other long term liabilities in the accompanying condensed consolidated balance sheets. The Company will satisfy this obligation with a cash payment to the sellers of CommAgility upon the achievement of the respective milestone discussed above.
Revenue Recognition
Revenue from product shipments, including shipping and handling fees, is recognized once delivery has occurred, provided that persuasive evidence of an arrangement exists, the price is fixed or determinable, and collectability is reasonably assured. Delivery is considered to have occurred when title and risk of loss have transferred to the customer. Revenues from international distributors are recognized in the same manner. If title does not pass until the product reaches the customer’s delivery site, then revenue recognition is deferred until that time. There are no formal sales incentives offered to any of the Company’s customers. Volume discounts may be offered from time to time to customers purchasing large quantities on a per transaction basis.
8 |
WIRELESS TELECOM GROUP, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Standalone sales of software or software-related items are recognized in accordance with the software revenue recognition guidance. For multiple deliverable arrangements that only include software items, the Company generally uses the residual method to allocate the arrangement consideration. Under the residual method, the amount of consideration allocated to the delivered items equals the total arrangement consideration, less the fair value of the undelivered items. Where vendor-specific objective evidence of fair value for the undelivered items cannot be determined, the Company generally defers revenue until all highly liquid investments with maturitiesitems are delivered and services have been performed, or until such evidence of three monthsfair value can be determined for the undelivered items.
Software arrangements that require significant customization or lessmodification of software are accounted for under percentage of completion accounting. The Company uses the input method to measure progress for arrangements accounted for under percentage of completion accounting.
Foreign Currency Translation
Assets and liabilities of non-U.S. subsidiaries that operate in a local currency environment, where the local currency is the functional currency, are translated from foreign currencies into U.S. dollars at period-end exchange rates while income and expenses are translated at the timeaverage spot rate. Translation gains or losses related to net assets located outside the U.S. are shown as a component of purchaseaccumulated other comprehensive loss in the Condensed Consolidated Statements of Changes in Shareholders’ Equity. Gains and losses resulting from foreign currency transactions, which are denominated in currencies other than the Company’s functional currency, are included in the Condensed Consolidated Statements of Operations.
Other Comprehensive Income (Loss)
Other comprehensive income (loss) is recorded directly to a separate section of shareholders’ equity in accumulated other comprehensive loss and primarily includes unrealized gains and losses excluded from the Consolidated Statements of Operations. These unrealized gains and losses consist of changes in foreign currency translation, interest rate swaps, and changes in unamortized pension, postretirement and postemployment actuarial gains and losses. At March 31, 2017 all of the Company’s other comprehensive income/(loss) consists of foreign currency translation.
Intangible and Long-lived Assets
Intangible assets include patents and customer relationships and are amortized using the straight-line method over the estimated economic lives of the assets, which range from five to seven years. Long-lived assets, including intangible assets with finite lives, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. Measurement of an impairment loss for long-lived assets that management expects to hold and use is based on the estimated fair value of the asset. Long-lived assets to be cash equivalents. Cashdisposed of are reported at the lower of carrying amount or estimated fair value less costs to sell. The estimated useful lives of intangible and cash equivalents consistlong-lived assets are based on many factors including assumptions regarding the effects of bankobsolescence, demand, competition and moneyother economic factors, expectations regarding the future use of the asset, and our historical experience with similar assets. The assumptions used to determine the estimated useful lives could change due to numerous factors including product demand, market accounts.conditions, technological developments, economic conditions and competition.
Goodwill
Goodwill represents the excess of the aggregate purchase price over the fair value of the net assets acquired in a purchase business combination. Goodwill is not amortized but rather is reviewed for impairment at least annually or more frequently if a triggering event occurs. Management first makes a qualitative assessment of whether it is more-likely-than-not that a reporting unit’s fair value is less than its carrying amount. If, based on the qualitative assessment, the estimated fair value is well in excess of its carrying amount, no impairment is recorded. If, however, the reporting unit’s carrying value exceeds its fair value an impairment is recorded by the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill.
9 |
WIRELESS TELECOM GROUP, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Subsequent Events
Management has evaluated subsequent events and determined that there were no subsequent events or transactions requiring recognition or disclosure in the condensed consolidated financial statements through the date the financial statements were issued.
NOTE 2 – RECENT ACCOUNTING PRONOUNCEMENTS
In August 2016,January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment (“ASU 2017-04”). ASU 2017-04 removes the requirement to perform a hypothetical purchase price allocation to measure goodwill impairment. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. ASU 2017-04 is effective for annual periods and interim periods within those annual periods beginning after December 15, 2019, and early adoption is permitted. The Company early adopted this standard as of January 1, 2017.
In January 2017, the FASB issued ASU No. 2017-01, Business Combinations: Clarifying the Definition of a Business (“ASU 2017-01”). ASU 2017-01 clarifies the definition of a business for determining whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. ASU 2017-01 is effective for annual periods and interim periods within those annual periods beginning after December 15, 2017, and early adoption is permitted. The adoption of this ASU is not expected to have a material impact on our consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, “Classification of Certain Cash Receipts and Cash Payments”, to address some questions about the presentation and classification of certain cash receipts and payments in the statement of cash flows. The update addresses eight specific issues, including contingent consideration payments made after a business combination, distribution received from equity method investees and the classification of cash receipts and payments that have aspects of more than one class of cash flows. This standard will be effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. The Company is in the process of evaluating the impact of the adoption of ASU 2016-15 on its consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, “Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting,” which relates to the accounting for employee share-based payments. This standard addresses several aspects of the accounting for share-based payment award transactions, including: (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows. This standard will be effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The Company is in the process of evaluating the impact of the adoption of ASU 2016-09 on its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02,“Leases”Leases, which creates new accounting and reporting guidelines for leasing arrangements. The new standard will requireguidance requires organizations that lease assets to recognize assets and liabilities on the balance sheet related to the rights and obligations created by those leases, regardless of whether they are classified as finance or operating leases. Consistent with current guidance, the recognition, measurement, and presentation of expenses and cash flows arising from a lease primarily will depend on its classification as a finance or operating lease. The standard willguidance also requirerequires new disclosuredisclosures to help financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. The new standard will beis effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period, with early application permitted. The new standard is to be applied using a modified retrospective approach. The Company is in the process of evaluating the impact of ASU 2016-02 on its consolidated financial statements.
In July 2015, the FASB issued ASU 2015-11,“Simplifying the Measurement of Inventory.” ASU 2015-11 applies to inventory that is measured using first-in, first-out (FIFO) or average cost. An entity should measure inventory within the scope of ASU 2015-11 at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. The amendments in ASU 2015-11 more closely align the measurement of inventory in US GAAP with the measurement of inventory in International Financial Reporting Standards (IFRS). ASU 2015-11 is effective for fiscal years beginning after December 15, 2016. The Company is in the process of evaluating the impact of this ASU on its consolidated financial statements.
WIRELESS TELECOM GROUP, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 2 – RECENT ACCOUNTING PRONOUNCEMENTS (Continued)
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers” (Topic 606). ASU 2014-09 is a comprehensive new revenue recognition model requiring a company to recognize revenue to depict the transfer of goods or services to a customer at an amount reflecting the consideration it expects to receive in exchange for those goods or services. In August 2015, the FASB issued ASU 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date,” which defers the effective date by one year, with early adoption on the original effective date permitted. As a result, ASU 2014-09 will be effective for annual and interim periods beginning after December 15, 2017. The Company does not expectis in the adoptionprocess of evaluating the impact of this ASU to have a material impact on the Company’sits consolidated financial statements.
10 |
WIRELESS TELECOM GROUP, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
ManagementThe Company does not believe thatthere are any other recently issued, but not yet effective accounting pronouncements, if adopted, that would have a material impacteffect on the accompanying condensed consolidated financial statements.
NOTE 3 – ACQUISITION
On February 17, 2017, Wireless Telecommunications, Ltd. (the “Acquisition Subsidiary”), a company incorporated in England and Wales which is a wholly owned subsidiary of Wireless Telecom Group, Inc., completed the acquisition of all of the issued shares in CommAgility, Limited, (“CommAgility”) a company incorporated in England and Wales (the “Acquisition”) from CommAgility’s founders. The Acquisition was completed pursuant to the terms of a Share Purchase Agreement, dated February 17, 2017, and entered into by and among the Company, the Acquisition Subsidiary and the founders (the “Share Purchase Agreement”). The Company paid $11,317,500 in cash on acquisition date and issued 3,487,528 shares of newly issued common stock (“Consideration Shares”) with an acquisition date fair value of $5,998,548.The Company financed the cash portion of the transaction with proceeds from a term loan totaling $760,000, proceedsfrom an asset based revolver totaling $1,098,000 and cash on hand of $9,459,500. Refer to Note 8 for additional details regarding the financing arrangement entered into in connection with this transaction. In addition to the acquisition date cash purchase price the sellers are to be paid an additional £2,000,000 (approximately $2,515,000 at acquisition date) in the form of deferred purchase price payable beginning in March 2017 through January 2019 and are due an additional purchase price adjustment based on working capital and cash levels delivered to the buyer as of February 17, 2017 (“Completion Cash Adjustment”). Lastly, the sellers may earn up to an additional £10,000,000 (approximately $12,500,000 at the acquisition date) payment if certain financial targets are achieved by CommAgility during calendar years 2017 and 2018.
Pursuant to the Share Purchase Agreement, 2,092,516 of the Consideration Shares are subject to forfeiture and return to the Company if (a) 2017 Adjusted EBITDA, as defined, generated by CommAgility is less than £2,400,000; or (b) 2018 Adjusted EBITDA, as defined, generated by CommAgility is less than £2,400,000 (in each case as determined by an audit of CommAgility conducted by the accountants of the Acquisition Subsidiary in accordance with the terms of the Share Purchase Agreement).
The acquisition has been accounted for under the acquisition method of accounting in accordance with ASC 805 Business Combinations, whereby the purchase consideration was allocated to tangible and intangible net assets acquired and liabilities assumed at their estimated fair values on the date of acquisition. The excess purchase consideration over fair value of net assets acquired and liabilities assumed was recorded as goodwill.The Company incurred $1,272,083of acquisition-related costs during the three months ended March 31, 2017, which is included as part of general and administrative expense in the accompanying condensed consolidated statements of operations and comprehensive (loss).Since the acquisition date of February 17, 2017, CommAgility contributed $996,776 of net sales to the Company for the three months ended March 31, 2017.
Various valuation techniques were used to estimate the fair value of assets acquired and the liabilities assumed which use significant unobservable inputs, or Level 3 inputs as defined by the fair value hierarchy. Using these valuation approaches requires the Company to make significant estimates and assumptions. The estimated fair values are expected to change as the Company completes is valuation analyses and purchase price allocation. Management is responsible for these internal and third-party valuations and appraisals and is continuing to review the amounts and allocations. Thefollowing table summarizes the preliminary allocation of the purchase consideration to the estimated fair value of assets acquired and liabilities assumed at the date of acquisition:
11 |
WIRELESS TELECOM GROUP, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Cash at close | $ | 11,317,500 | ||
Equity issued at close | 5,998,548 | |||
Completion Cash Adjustment | 1,382,288 | |||
Deferred Purchase Price | 2,515,000 | |||
Contingent Consideration | 2,700,353 | |||
Total Purchase Price | $ | 23,913,689 | ||
Cash | $ | 4,566,510 | ||
Accounts Receivable | 2,267,124 | |||
Inventory | 1,125,532 | |||
Intangible Assets | 9,657,600 | |||
Other Assets | 167,650 | |||
Fixed Assets | 303,904 | |||
Accounts Payable | (1,171,846) | |||
Accrued Expenses | (417,213) | |||
Deferred Revenue | (638,671) | |||
Deferred Tax Liability | (1,701,586) | |||
Other LongTerm Liabilities | (339,096) | |||
Net Assets Acquired | 13,819,908 | |||
Goodwill | $ | 10,093,781 |
Goodwill is calculated as the excess of consideration paid over the net assets acquired and represents synergies, organic growth and other benefits that are expected to arise from integrating CommAgility into our operations. None of the goodwill recorded in this transaction is expected to be tax deductible.
The following table summarizes the activity related to Contingent Consideration and Deferred Purchase Price for the three months ended March 31, 2017:
12 |
WIRELESS TELECOM GROUP, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Contingent Consideration | Deferred Purchase Price | |||||||
Balance at Beginning of Period | $ | - | $ | - | ||||
Fair Value At Acquisition Date | 2,700,353 | $ | 2,515,000 | |||||
Accretion of Interest | 21,916 | |||||||
Payment | (419,166) | |||||||
Foreign Currency Translation | (8,521) | (6,834) | ||||||
Balance as of March 31, 2017 | $ | 2,713,748 | $ | 2,089,000 |
As of March 31, 2017 Contingent Consideration in included in Other long term liabilities on the Condensed Consolidated Balance Sheet. As of March 31, 2017 $1,671,200 of Deferred Purchase Price is included in Accrued expenses and other current liabilities and $417,800 is included in Other long term liabilities on the Condensed Consolidated Balance Sheet. The Completion Cash Adjustment was paid prior to March 31, 2017.
Pro Forma Information(Unaudited)
The following unaudited pro forma information present the Company’s operations as if the CommAgility acquisition and related financing activities had occurred on January 1, 2016. The pro forma information includes the following adjustments (i) amortization of acquired definite-lived intangible assets; (ii) interest expense incurred in connection with the New Credit Facility (described in further detail in Note 7) used to finance the acquisition of CommAgility; and (iii) inclusion of acquisition-related expenses in the earliest period presented.The pro forma combined statements of operations are not necessarily indicative of the results of operations as they would have been had the transaction been effected on the assumed date and are not intended to be a projection of future results:
Three Months Ended March 31, | ||||||||
(Unaudited) | 2017 | 2016 | ||||||
Net Revenues | $ | 10,922,602 | $ | 9,175,189 | ||||
Net (loss) | $ | (351,433) | $ | (1,613,947) | ||||
Basic net (loss) per share | $ | (0.02) | $ | (0.07) | ||||
Diluted net (loss) per share | $ | (0.02) | $ | (0.07) |
NOTE 4 – INCOME TAXES
The Company records deferred taxes in accordance with Accounting Standards Codification (“ASC”) 740, “Accounting for Income Taxes.” ASC 740 requires recognition of deferred tax assets and liabilities for temporary differences between tax basis of assets and liabilities and the amounts at which they are carried in the financial statements, based upon the enacted rates in effect for the year in which the differences are expected to reverse. The Company establishes a valuation allowance when necessary to reduce deferred tax assets to the amount expected to be realized. The Company periodically assesses the value of its deferred tax assets and determines the necessity for a valuation allowance.
The Company hadhas a domestic federal and state net operating loss carryforward at September 30, 2016March 31, 2017 of approximately $17,800,000$18,900,000 and $44,400,000, respectively, which expires in 2029. The Company also had a German
13 |
WIRELESS TELECOM GROUP, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
has foreign net operating loss carryforwardcarryforwards at September 30, 2016March 31, 2017 of approximately 12,900,000 Euro’sEuro 12,800,000 relating to an inactive German subsidiary and approximately 12,400,000 Euro’s for German Corporate tax and German Trade tax purposes, respectively.£848,000 related to CommAgility.
Realization of the Company’s deferred tax assets is dependent upon the Company generating sufficient taxable income in the appropriate tax jurisdictions in future years to obtain benefit from the reversal of net deductible temporary differences and from utilization of net operating losses. The Company’s valuation allowancesallowance of $4,331,265 and $4,188,688 at September 30, 2016 and December 31, 2015, respectively, are$5,568,950 is primarily associated with the Company’s German net operating loss carryforward from an inactive German entity.entity which is unlikely to be realized in future periods. The amount of deferred tax assets considered realizable is subject to adjustment in future periods if estimates of future taxable income are changed. As of September 30, 2016,March 31, 2017, management believed that it wasis more likely than not that the Company will fully realize the benefits of its deferred tax asset associated with its domestic federal net operating loss carryforward.
The deferred income tax assets (liabilities) are summarized as follows:
September 30, | December 31, | March 31, | December 31, | |||||||||||||
Net deferred tax asset: | 2016 | 2015 | 2017 | 2016 | ||||||||||||
Uniform capitalization of inventory costs for tax purposes | $ | 185,742 | $ | 158,599 | $ | 170,555 | $ | 166,017 | ||||||||
Reserves on inventories | 532,663 | 444,115 | 659,236 | 619,636 | ||||||||||||
Reserves on product returns | 48,564 | 48,564 | ||||||||||||||
Tax effect of goodwill | (532,299 | ) | (507,524 | ) | (540,557) | (540,557) | ||||||||||
Depreciation | (52,088 | ) | (43,514 | ) | ||||||||||||
Accruals and other timing differences | 180,675 | 115,725 | ||||||||||||||
Book depreciation over tax | (200,266) | (121,890) | ||||||||||||||
Other timing differences | 150,777 | 135,156 | ||||||||||||||
Net operating loss carryforward | 11,464,834 | 11,035,216 | 13,179,881 | 12,559,023 | ||||||||||||
11,779,527 | 11,202,617 | 13,468,190 | 12,865,949 | |||||||||||||
Valuation allowance for deferred tax assets | (4,331,265 | ) | (4,188,688 | ) | (5,568,950) | (5,462,349) | ||||||||||
$ | 7,448,262 | $ | 7,013,929 | $ | 7,899,240 | $ | 7,403,600 |
Under ASC 740, the Company must recognize the tax benefit from an uncertain position only if it is more-likely-than-not the tax position will be sustained on examination by the taxing authority, based on the technical merits of the position. The tax benefits recognized in the financial statements attributable to such position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon the ultimate resolution of the position.
The components of income tax expense (benefit) related to income from operations are as follows:
Three Months Ended March 31, | ||||||||
2017 | 2016 | |||||||
Current: | ||||||||
Federal | $ | - | $ | - | ||||
State | 18,839 | - | ||||||
Foreign | - | - | ||||||
Deferred: | ||||||||
Federal | (495,640) | (336,915) | ||||||
State | - | (49,013) | ||||||
Foreign | (61,500) | - | ||||||
$ | (538,301) | $ | (385,928) |
WIRELESS TELECOM GROUP, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 3 – INCOME TAXES (Continued)The Company and its subsidiaries file income tax returns in the U.S. (federal and state of New Jersey) and the United Kingdom. With few exceptions, the Company is no longer subject to U.S. federal and state tax examinations in its major tax jurisdictions for periods before 2013.
The components of the provision for income taxes (benefit) are as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
Current: | ||||||||||||||||
Federal | $ | — | $ | — | $ | — | $ | 17,457 | ||||||||
State | 21,924 | 14,154 | 21,924 | 58,730 | ||||||||||||
Deferred: | ||||||||||||||||
Federal | 84,730 | 58,689 | (379,173 | ) | 193,406 | |||||||||||
State | 12,326 | 8,538 | (55,160 | ) | 23,516 | |||||||||||
$ | 118,980 | $ | 81,381 | $ | (412,409 | ) | $ | 293,109 |
The Company has analyzed its filing positions in all of the Federal and state jurisdictions where it is required to file income tax returns. As of September 30, 2016 and December 31, 2015, the Company identified its Federal tax return and its state tax return in New Jersey as “major” tax jurisdictions, as defined, in which it is required to file income tax returns. Based on the evaluations noted above, the Company concluded that there were nodoes not have any significant uncertainunrecognized tax positions requiring recognitionand does not anticipate significant increases or disclosuredecreases in its condensed consolidated financial statements.unrecognized tax positions within the next twelve months.
NOTE 45 - INCOME (LOSS) PER COMMON SHARE
Basic earnings (loss) per share is calculated by dividing income (loss) available to common shareholders by the weighted average number of shares of common stock outstanding during the period. Diluted incomeearnings (loss) per share isare calculated by using the weighted average number of shares of common stock outstanding and, when dilutive, potential shares from stock options and warrants to purchase common stock, using the treasury stock method.
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||
2016 | 2015 | 2016 | 2015 | Three Months Ended March 31, | ||||||||||||||||||||
2017 | 2016 | |||||||||||||||||||||||
Weighted average common shares outstanding | 18,721,346 | 19,626,455 | 18,650,274 | 19,549,532 | 20,386,678 | 18,606,582 | ||||||||||||||||||
Potentially dilutive stock options | 637,622 | 523,507 | 494,073 | 915,384 | 780,003 | 407,144 | ||||||||||||||||||
Weighted average common shares outstanding, assuming dilution | 19,358,968 | 20,149,962 | 19,144,347 | 20,464,916 | 21,166,681 | 19,013,726 |
Common stock options are included in the diluted incomeearnings (loss) per share calculation when the various option exercise prices are less than their relative average market price during the periods presented in this quarterly report. The weighted average number of shares of common stock underlying options not included in diluted incomeearnings (loss) per share, because the effects are anti-dilutive, was 2,781,8441,412,500 and 2,061,830 for2,080,857for the three-months ended September 30,March 31, 2017 and 2016, respectively.
NOTE 6 – INVENTORIES
Inventory carrying value is net of inventory reserves of $1,648,618 and 2015,$1,549,089 at March 31, 2017 and December 31, 2016, respectively. For
Inventories consist of: | March 31, 2017 | December 31, 2016 | ||||||
Raw materials | $ | 4,102,194 | $ | 3,558,430 | ||||
Work-in-process | 725,356 | 531,210 | ||||||
Finished goods | 5,063,159 | 4,363,111 | ||||||
$ | 9,890,709 | $ | 8,452,751 |
NOTE 7 – GOODWILL AND INTANGIBLE ASSETS
The Company’s goodwill balance of $11,412,264 at March 31, 2017 relates to two of the nine-months ended September 30,Company’s reporting units, Microlab ($1,351,392) and Embedded Solutions ($10,060,872). Management’s qualitative assessment performed in the fourth quarter of 2016 and 2015, the weighted average numberdid not indicate any impairment of shares of common stock underlying options not included in diluted income (loss) per share was 2,992,083 and 1,691,515, respectively.
WIRELESS TELECOM GROUP, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 5 – INVENTORIES
Inventory carrying value is net of inventory reserves of $1,331,657 and $1,110,288 at September 30, 2016 and December 31, 2015, respectively.
Inventories consist of: | September 30, | December 31, | ||||||
2016 | 2015 | |||||||
Raw materials | $ | 4,379,817 | $ | 3,993,052 | ||||
Work-in-process | 1,025,674 | 628,140 | ||||||
Finished goods | 4,045,249 | 3,447,536 | ||||||
$ | 9,450,740 | $ | 8,068,728 |
NOTE 6 - GOODWILL
Goodwill represents the excess of the aggregate purchase price over the fair value of the net assets acquired in a purchase business combination. Goodwill is not amortized but rather is reviewed for impairment at least annually or more frequently if a triggering event occurs. Management first makes a qualitative assessment of whether it is more-likely-than-not that a reporting unit’s fair value is less than its carrying amount before applying the two-step goodwill impairment test described below. If, based on the qualitative assessment, the estimated fair value is well in excess of its carrying amount, management will not perform a quantitative assessment. If, however, the conclusion is that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, management then performs a two-step goodwill impairment test. Under the first step, the fair value of the reporting unit is compared with its carrying value, and, if an indication of goodwill impairment exists for the reporting unit, the Company must perform step two of the impairment test (measurement).
Under step two, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill as determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation. The residual fair value after this allocation is the implied fair value of the reporting unit’s goodwill.
The Company’s goodwill balance of $1,351,392 at September 30, 2016 and December 31, 2015 related to one of the Company’s reporting units, Microlab. Management’s qualitative assessment performed in the fourth quarter of 2015 did not indicate any impairment of Microlab’s goodwill as its fair value was estimated to be in excess of its carrying value. Furthermore, no events have occurred since then that would change this assessment. The Embedded Solutions reporting unit was acquired on February 17, 2017 (see Note 3). No events have occurred since the acquisition date that would indicate any impairment of Embedded Solutions goodwill.
Goodwill consists of the following:
March 31, 2017 | ||||
Beginning Balance | $ | 1,351,392 | ||
CommAgility Acquisition | 10,093,781 | |||
Foreign Currency Translation | (32,909) | |||
Ending Balance | $ | 11,412,264 |
Intangible assets consist of the following:
Gross Carrying Amount | Accumulated Amortization | Foreign Exchange Translation | Net Carrying Amount | |||||||||||||
Customer Relationships | $ | 7,419,250 | ($130,525 | ) | (26,541 | ) | $ | 7,262,184 | ||||||||
Patents | 1,320,375 | (32,482 | ) | (4,725 | ) | 1,283,168 | ||||||||||
Non Compete Agreements | 917,975 | (37,638 | ) | (3,479 | ) | 876,858 | ||||||||||
Total | $ | 9,657,600 | ($200,645 | ) | (34,745 | ) | $ | 9,422,210 |
Amortization of acquired intangible assets was $200,645 for the three months ended March 31, 2017. Amortization of acquired intangible assets is included as part of general and administrative expenses in the accompanying condensed consolidated statements of operations and comprehensive (loss).
The estimated future amortization expense related to intangible assets is as follows as of March 31, 2017:
Remainder of 2017 | $ | 1,218,484 | ||
2018 | 1,624,645 | |||
2019 | 1,624,645 | |||
2020 | 1,357,775 | |||
2021 | 1,319,651 | |||
Thereafter | 2,277,010 | |||
Total | $ | 9,422,210 |
16 |
WIRELESS TELECOM GROUP, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 8 – DEBT
Debt consists of the following:
March 31 2017 | ||||
Revolver at LIBOR Plus Margin | $ | 1,904,037 | ||
Term Loan at LIBOR Plus Margin | 760,000 | |||
Total Debt | 2,664,037 | |||
Debt Maturing within one year | (2,056,037 | ) | ||
Non-current portion of long term debt | $ | 608,000 |
In connection with the acquisition of CommAgility, the Company entered into a Credit Agreement with Bank of America, N.A. (the “Lender”) on February 16, 2017 (the “New Credit Facility”), which provided for a term loan in the aggregate principal amount of $760,000 (the “Term Loan”) and an asset based revolving loan (the “Revolver”), which is subject to a Borrowing Base Calculation (as defined in the New Credit Facility) of up to a maximum availability of $9,000,000 (“Revolver Commitment Amount”). The borrowing base is calculated as 85% of Eligible accounts receivable and inventory, as defined, subject to certain caps and limits. The borrowing base is calculated on a monthly basis. The proceeds of the term loan and revolver were used to finance the acquisition of CommAgility.
In connection with the issuance of the New Credit Facility, the Companypaid lender and legal fees of$212,258 which were primarily related to the Revolver and are capitalized and presented as other current and non-current assets in the condensed consolidated balance sheets. These costs are recognized as additional interest expense over the term of the related debt instrument using the straight line method.
The Company must repay the Term Loan in installments of $ 38,000 per quarter due on the first day of each fiscal quarterbeginning April 1, 2017 and continuing until the term loan maturity date, on which the remaining balance is due at maturity in a final installment.The future principal payments under the term loan are $114,000 for the remainder of 2017, $152,000 in 2018 and $494,000 in 2019.The Term Loan and Revolver are both scheduled to mature onNovember 16, 2019.
The Term and Revolving Loans bear interest at the LIBOR rate plus a margin. The margin on the outstanding balance of the Company’s Term Loans and Revolving Loans is3.50% and 3.00%per annum, respectively, at March 31, 2017 and will continue at these rates until September 30, 2017. Thereafter, the margins shall be subject to increase or decrease by Lender on the first day of each of the Borrowers’ fiscal quarters based upon the Fixed Charge Coverage Ratio as of the most recently ended fiscal quarter falling into three levels. If the Company’s Fixed Coverage Leverage Ratio (as defined in the New Credit Facility) is greater than or equal to ratio 1.25 to 1.00, a margin of 3.25% and 2.75%, respectively, is added to LIBOR rate with a step up to 3.50% and 3.00%, respectively, if the ratio is greater than or equal 1.00 to 1.00 but less than 1.25 to 1.00 and another step up to 3.75% and 3.25%, respectively, if the ratio is less than 1.00 to 1.00.The Company is also required to pay a commitment fee on the unused commitments under the Revolver at a rate equal to 0.50% per annum and early termination fee of (a) 2% of the Revolver Commitment Amount and Term Loan if termination occurs before the first anniversary of the New Credit Facility or (b) 1% of the Revolver Commitment Amount and Term Loan if termination occurs after the first anniversary of the New Credit Facility but before the second anniversary of the New Credit Facility.
The New Credit Facility is secured by liens on substantially all of the Company’s and its domestic subsidiaries’ assets including a pledge of 66 2/3% of the equity interests in the Company’s Foreign Subsidiaries (as defined in the New Credit Facility). The New Credit Facility contains customary affirmative and negative covenants for a transaction of this type, including, among others, the provision of annual, quarterly and monthly financial statements and compliance certificates, maintenance of property, insurance, compliance with laws and environmental matters, restrictions on incurrence of indebtedness, granting of liens, making investments and acquisitions, paying dividends, entering into affiliate transactions and asset sales. The New Credit Facility also provides for a number of customary
17 |
WIRELESS TELECOM GROUP, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
events of default, including, among others, payment, bankruptcy, representation and warranty, covenant, change in control, judgment and events or conditions that have a Material Adverse Effect (as defined in the New Credit Facility).
NOTE 79 - ACCOUNTING FOR SHARE BASED COMPENSATION
The Company follows the provisions of ASC 718, “Share-Based Payment.” The Company’s results for the three and nine-monththree-month periods ended September 30,March 31, 2017 and 2016 include share-based compensation expense totaling $235,374$301,389 and $432,612, respectively. Results for the three and nine-month periods ended September 30, 2015 included share-based compensation expense totaling $51,347 and $223,273,$98,619, respectively. Such amounts have been included in the Condensed Consolidated Statements of Operations within operating expenses.
Incentive Compensation Plan:
In 2012, the Company’s Board of Directors and shareholders approved the 2012 Incentive Compensation Plan (the “Initial 2012 Plan”), which provides for the grant of restricted stock awards, non-qualified stock options and incentive stock options in compliance with the Internal Revenue Code of 1986, as amended, to employees, officers, directors, consultants and advisors of the Company who are expected to contribute to the Company’s future growth and success. When originally approved, the Initial 2012 Plan provided for the grant of awards relating to 2,000,000 shares of common stock, plus those shares still available under the Company’s prior incentive compensation plan.
WIRELESS TELECOM GROUP, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 7 - ACCOUNTING FOR SHARE BASED COMPENSATION (Continued)
In June 2014, the Company’s shareholders approved the Amended and Restated 2012 Incentive Compensation Plan (the “2012 Plan”) allowing for an additional 1,658,045 shares of the Company’s common stock to be available for future grants under the 2012 Plan. As of September 30, 2016,March 31, 2017, there were 1,261,001 shares876,000shares available for issuance under the 2012 Plan, including those shares available under the Company’s prior incentive compensation plan as of such date.
All service-based options granted have ten-year terms from the date of grant and typically vest annually and become fully exercisable after a maximum of five years. However, vesting conditions are determined on a grant by grant basis. Performance-based options granted have ten-year terms and vest and become fully exercisable when determinable performance targets are achieved. Performance targets are agreed to, and approved by, the Company’s Board of Directors or the Compensation Committeecompensation committee of the Boardboard of Directors.directors.
Provisions ofUnder the 2012 Plan, require that all awards that areoptions may be granted to purchase shares of the Company’s common stock options be madeexercisable at exercise prices equal to or greater thanabove the fair market value on the date of the grant.
The following summarizes the components of share-based compensation expense by equity type for the three and nine-monthsthree-months ended September 30, 2016 and 2015:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
Service-based Restricted Common Stock | $ | 40,598 | $ | 55,500 | $ | 151,598 | $ | 155,100 | ||||||||
Performance-based Stock Options | 28,650 | (3,517 | ) | 85,950 | 56,553 | |||||||||||
Service-based Stock Options | 160,773 | — | 179,005 | — | ||||||||||||
Performance-based Restricted Common Stock | 5,353 | (636 | ) | 16,059 | 11,620 | |||||||||||
Total Share-Based Compensation Expense | $ | 235,374 | $ | 51,347 | $ | 432,612 | $ | 223,273 |
Stock-based compensation for the three and nine-months ended September 30, 2016 and 2015 is included in general and administrative expenses in the accompanying condensed consolidated statement of operations.March 31:
Three Months Ended | ||||||||
March 31, | ||||||||
2017 | 2016 | |||||||
Service - based Restricted Common Stock | $ | 56,748 | $ | 55,500 | ||||
Performance-based Stock Options | 58,641 | 28,650 | ||||||
Service -based Stock Options | 180,647 | 9,116 | ||||||
Performance-based Restricted Common Stock | 5,353 | 5,353 | ||||||
$ | 301,389 | $ | 98,619 |
Restricted Common Stock Awards:
On June 8, 2016, the Company granted 150,000 shares of restricted common stock to certain non-employee directors of the Company under the 2012 Plan. The shares were granted at a price of $1.33 per share. On June 30, 2016, Timothy Whelan, the Company’s newly appointed Chief Executive Officer, forfeited the 30,000 shares of restricted common stock that were granted to him on June 8, 2016 as a non-employee director in connection with his appointment as Chief Executive Officer of the Company. The remaining 120,000 shares of restricted common stock granted on June 8, 2016 will fully vest on the date of the Company’s next annual shareholders’ meeting to be held in June 2017, or a vesting period of approximately one year, provided that the director’s service continues through the vesting date. The total compensation expense to be recognized over the one-year vesting period with respect to the remaining 120,000 shares of restricted common stock is $159,600.
On June 30, 2016, the Company granted 8,333 shares of restricted common stock to its newly appointed Chief Executive Officer under the 2012 Plan. The shares were granted at a price of $1.34 per share and will vest in sixteen equal quarterly installments over a period of four years, provided that the executive officer’s service with the Company continues through each quarterly vesting date, so that the shares will fully vest on June 30, 2020. The total compensation expense to be recognized over the four-year vesting period is $11,166.
WIRELESS TELECOM GROUP, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 7 - ACCOUNTING FOR SHARE BASED COMPENSATION (Continued)
A summary of the status of the Company’s non-vested restricted common stock, as granted under the Company’s approved equity compensation plans, as of September 30, 2016,March 31, 2017, and changes during the nine-monthsthree-months ended September 30, 2016,March 31, 2017, are presented below:
18 |
WIRELESS TELECOM GROUP, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Weighted Average | ||||||||
Non-vested Restricted Shares | Number of Shares | Grant Date Fair Value | ||||||
Non-vested at January 1, 2016 | 187,000 | $ | 2.01 | |||||
Granted | 158,333 | $ | 1.33 | |||||
Forfeited | (30,000 | ) | $ | 1.33 | ||||
Vested | (100,521 | ) | $ | 2.22 | ||||
Non-vested at September 30, 2016 | 214,812 | $ | 1.51 |
Under the terms of the performance-based restricted common stock award agreements pertaining to the 87,000 shares of restricted stock granted to employees in 2013, the awards will fully vest and become exercisable on the date on which the Company’s Board of Directors shall have determined that specific financial milestones have been met, provided the employee remains in the employ of the Company at such time; provided, however, upon a Change in Control (as defined in the award agreements and the 2012 Plan), the restricted stock shall automatically vest as permitted by the 2012 Plan. For the performance-based restricted stock awarded in 2013, the Company’s Board of Directors adopted specific revenue and earnings performance targets as vesting conditions. During the first quarter of 2015, management determined the performance conditions related to these restricted stock awards are probable to be achieved by the year ending 2020. As a result, the Company adjusted the amortization of the fair market value of these awards over the revised implicit service period from December 2017 to December 2020. If management determines in future periods the achievement of performance conditions are probable to occur sooner than expected, the Company will accelerate the expensing of the unamortized balance as of that determination date.
Non-vested Restricted Shares | Number of Shares | Weighted Average Grant Date Fair Value | |||||||
Non-vested at January 1, 2017 | 244,291 | $ | 1.52 | ||||||
Granted | - | - | |||||||
Forfeited | - | - | |||||||
Vested | (521 | ) | 1.34 | ||||||
Non-vested at March 31, 2017 | 243,770 | $ | 1.52 |
As of September 30, 2016,March 31, 2017, the unearned compensation related to Company granted restricted common stock was $221,173 of$145,420of which $119,700$39,900 (pertaining to 120,000 service-based restricted common stock awards) will be amortized on a straight-line basis through the date of the Company’s next annual shareholders meeting scheduled to be held in JuneinJune 2017,the vesting date, and $10,468$16,150 (pertaining to 30,000 service-based restricted common stock awards) will be amortized on a straight-line basis through the date of the Company’s next annual shareholders meeting scheduled to be held inJune 2017,the vesting date.The remaining balance of $80,298 (pertaining to 87,000 performance-based shares of restricted common stock awarded in 2013) and $9,073 (pertaining 8,333 service-based restricted common stock awards) will be amortized on a straight-line basis through December 31, 2020 and June 30, 2020, the date which they will have fully vested. The remaining balance of $91,005 (pertaining to 87,000 performance-based shares of restricted common stock awarded in 2013) will be amortized on a straight-line basis through December 31, 2020,respectively, the implicit service period.
Performance-Based Stock Option Awards:
A summary of performance-based stock option activity, and related information for the nine-monthsthree-months ended September 30, 2016March 31, 2017 follows:
Weighted Average | Options | Weighted Average Exercise Price | |||||||||||||||
Options | Exercise Price | ||||||||||||||||
Outstanding, January 1, 2016 | 1,965,000 | $ | 1.32 | ||||||||||||||
Outstanding, January 1, 2017 | 2,165,000 | $ | 1.32 | ||||||||||||||
Granted | 200,000 | $ | 1.36 | - | - | ||||||||||||
Exercised | — | — | (50,000 | ) | $ | 0.75 | |||||||||||
Forfeited | — | — | - | - | |||||||||||||
Expired | — | — | - | - | |||||||||||||
Outstanding, September 30, 2016 | 2,165,000 | $ | 1.32 | ||||||||||||||
Outstanding, March 31, 2017 | 2,115,000 | $ | 1.34 | ||||||||||||||
Options exercisable: | |||||||||||||||||
September 30, 2016 | 1,090,000 | $ | 0.96 | ||||||||||||||
March 31, 2017 | 1,040,000 | $ | 0.96 |
The aggregate intrinsic value of performance-based stock options outstanding (regardless of whether or not such options are exercisable) as of March 31, 2017 and December 31, 2016 was $352,000 and $1,282,950, respectively. The aggregate intrinsic value of performance-based stock options exercisable as of September 30, 2016March 31, 2017 and December 31, 20152016 was $824,550 and $846,350,$548,250and $1,053,450, respectively.
WIRELESS TELECOM GROUP, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 7 - ACCOUNTING FOR SHARE BASED COMPENSATION (Continued)
On September 8, 2015, The intrinsic value of options exercised during the Company granted a performance-based stock option to a non-executive officer employee to acquire 50,000 shares of common stock at an exercise price of $1.83 per share, which represented the closing price of the Company’s common stock as reported on the NYSE MKT on the date of grant. The per share fair-value of this performance-based optionthree months ended March 31, 2017 was $1.03. The per share fair-value was estimated on the date of grant using the Black-Scholes option pricing method and included the following range of assumptions: dividend yield 0%, risk-free interest rate of 1.53% and expected option life of 4 years. Volatility assumption was 75.46% and the forfeiture rate was assumed to be 0%.$36,550.
Under the terms of the performance-based stock option agreements, granted prior to 2016, the awards will fully vest and become exercisable on the date on which the Company’s Board of Directors shall have determined that specific financial performance milestones have been met, provided the employee remains in the employ of the Company at such time; provided, however, upon a Change in Control (as defined in the stock option agreements and the 2012 Plan), the stock options shall automatically vest as permitted by the 2012 Plan. DuringAs of March 31, 2017, the first quarter of 2015, managementCompany has determined that the performance conditions related to the stock option awards granted in 2013 and grants made subsequent thereto (but on or prior to the date of determination) are probable to beof being achieved by the year ending 2020. As a result,of March 31, 2017, the Company adjustedunearned compensation related to the amortization of the fair market value of these awards over the revised875,000 performance-based stock options with an implicit service period fromthrough December 31, 2020 is $429,729. As of March 31, 2017, the unearned compensation related to 200,000 performance-based stock options with an implicit service period through December 2020. If management determines in future periods31, 2021 is $125,866.
The Company’s performance-based stock options granted prior to 2013 (consisting of 1,090,000 options) are fully amortized.
19 |
WIRELESS TELECOM GROUP, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Service-Based Stock Option Awards:
A summary of service-based stock option activity, and related information for the achievementthree-months ended March 31, 2017 follows:
Options | Weighted Average Exercise Price | ||||||||
Outstanding, January 1, 2017 | 1,198,000 | $ | 1.51 | ||||||
Granted | 220,000 | 1.82 | |||||||
Exercised | - | - | |||||||
Forfeited | - | - | |||||||
Expired | - | - | |||||||
Outstanding, March 31, 2017 | 1,418,000 | $ | 1.59 | ||||||
Options exercisable: | |||||||||
March 31, 2017 | 218,417 | $ | 1.96 |
The aggregate intrinsic value of performance conditionsservice-based stock options (regardless of whether or not such options are probable to occur sooner than expected, the Company will accelerate the expensing of the unamortized balanceexercisable) as of that determination date.March 31, 2017 and December 31, 2016 was $12,050 and $567,300, respectively. As of March 31, 2017, the unearned compensation related to service-based stock options is $564,562.
On May 16, 2016,January 2, 2017, the Company granted to its newly appointed Chief Financial Officer a performance-basedservice-based stock option to a non-executive officer employee to acquire 200,000100,000 shares of common stock at an exercise price of $1.36$1.91 per share, which represented the closing price of the Company’s common stock as reported on the NYSE MKT on the date of grant. The per share fair-value of this performance-basedservice-based option was $0.78.$1.11. The per share fair-value was estimated on the date of grant using the Black-Scholes option pricing method and included the following range of assumptions: dividend yield 0%, risk-free interest rate of 1.26%1.94% and expected option life of four years. The volatility assumption was 77.54%77.78% and the forfeiture rate was assumed to be 0%.
Under the terms of the performance-basedservice-based stock option agreement granted on May 16, 2016,relating to theJanuary 2, 2017 stock option grant, the award will incrementally vestvestsin four annual installmentsover a period of four years and become exercisable upon achievement of specific annualized revenue targets in the Company’s network solutions segment. As of September 30, 2016, the Company had not incurred expense relating to this performance-based stock option as management determined it was more likely than not that the revenue targets would notshall be achieved.
As of September 30, 2016, the unearned compensation related to the performance-based stock options to acquire 825,000 shares of common stock granted in August 2013 (with a weighted average per share exercise price of $1.77) and the performance-based stock option to acquire 50,000 shares of common stock granted in September 2015 (with a weighted average per share exercise price of $1.83) is $445,337 and $41,713, respectively, which have been, and are expected to be, amortized on a straight-line basis through December 31, 2020, the implicit service period. Unearned compensation in the amount of $155,810 related to the performance-based stock option granted in May 2016 (with a weighted average per share exercise price of $1.36) will begin to be amortized when achievement of specific annualized revenue targets in the Company’s network solutions segment are determined to be probable.
The Company’s performance-based stock options granted prior to 2013 (consisting of options to acquire 1,090,000 shares) are fully amortized.
WIRELESS TELECOM GROUP, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 7 - ACCOUNTING FOR SHARE BASED COMPENSATION (Continued)
Service-Based Stock Option Awards:
A summary of service-based stock option activity, and related information for the nine-months ended September 30, 2016 follows:
Weighted Average | ||||||||
Options | Exercise Price | |||||||
Outstanding, January 1, 2016 | 523,000 | $ | 2.23 | |||||
Granted | 950,000 | $ | 1.39 | |||||
Exercised | — | — | ||||||
Forfeited | (70,000 | ) | $ | 1.33 | ||||
Expired | (295,000 | ) | $ | 2.46 | ||||
Outstanding, September 30, 2016 | 1,108,000 | $ | 1.52 | |||||
Options exercisable: | ||||||||
September 30, 2016 | 144,250 | $ | 2.05 |
The aggregate intrinsic value of service-based stock options outstanding (regardless of whether or not such options are exercisable) as of September 30, 2016 and December 31, 2015 was $325,600 and $0, respectively.
The aggregate intrinsic value of service-based stock options exercisable as of September 30, 2016 and December 31, 2015 was $23,500 and $0, respectively.vested onJanuary 2, 2021.
On November 19, 2015,January 12, 2017, the Company granted to the members of the Company’s Strategic Planning and Operating Committeecertain employees service-based stock options to acquire 145,000 shares20,000shares of common stock at an exercise price of $1.30$1.92 per share, which represented the closing price of the Company’s common stock as reported on the NYSE MKT on November 19, 2015, the date of grant. The per share fair-value of thesethis service-based optionsoption was $0.75.$1.11. The per share fair-value was estimated on the date of grant using the Black-Scholes option pricing method and included the following range of assumptions: dividend yield 0%, risk-free interest rate of 1.68%1.87% and expected option life of 4four years. The volatility assumption was 78.22%77.88% and the forfeiture rate was assumed to be 0%.
Under the terms of the service-based stock option agreementsagreement relating to the November 19, 2015theJanuary 12, 2017 stock option grants,grant, the awards vestaward vests in twelve equal quarterly installments overfour annual installmentsover a period of threefour years and shall be fully vested on November 19, 2018.onJanuary 12, 2021.
On June 8, 2016,February 17, 2017, the Company granted to certain non-employee directors of the Companyemployees service-based stock options to acquire collectively 350,000 shares100,000shares of common stock at an exercise price of $1.33$1.72 per share, which represented the closing price of the Company’s common stock as reported on the NYSE MKT on June 8, 2016, the date of grant. The per share fair-value of thesethis service-based optionsoption was $0.76.$0.94. The per share fair-value was estimated on the date of grant using the Black-Scholes option pricing method and included the following range of assumptions: dividend yield 0%, risk-free interest rate of 1.23%1.92% and expected option life of four years. The volatility assumption was 76.72% and the forfeiture rate was assumed to be 0%. These stock options were granted in connection with the annual compensation for services as a Company director. Such equity awards are intended to replace the cash component of the director compensation.
On June 30, 2016, the service-based stock option to acquire 70,000 shares of common stock that was granted to Timothy Whelan on June 8, 2016, was terminated, unvested, in connection with his appointment as Chief Executive Officer of the Company.
Under the terms of the remaining service-based stock option agreements relating to the June 8, 2016 stock option grants to the non-employee directors of the Company, the awards will fully vest on the date of the Company’s next annual shareholder’s meeting to be held in June 2017, or a vesting period of approximately one year, provided that the director’s service continues through the vesting date.
WIRELESS TELECOM GROUP, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 7 - ACCOUNTING FOR SHARE BASED COMPENSATION (Continued)
On June 30, 2016, the Company granted to Timothy Whelan, its newly appointed Chief Executive Officer, a service-based stock option to acquire 400,000 shares of common stock at an exercise price of $1.34 per share, which represented the closing price of the Company’s common stock as reported on the NYSE MKT on the date of grant. The per share fair-value of this service-based option was $0.76. The per share fair-value was estimated on the date of grant using the Black-Scholes option pricing method and included the following range of assumptions: dividend yield 0%, risk-free interest rate of 1.01% and expected option life of four years. The volatility assumption was 76.68%72.01% and the forfeiture rate was assumed to be 0%.
Under the terms of the service-based stock option agreements relating to the June 30, 2016theFebruary 17, 2017 stock option grants,grant, the awards vest in sixteen equal quarterly installments overaward vestsin four annual installmentsover a period of four years and shall be fully vested on June 30, 2020.onFebruary 17, 2021.
20 |
WIRELESS TELECOM GROUP, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Under the terms of Mr. Whelan’s employment agreement, dated June 30, 2016, if Mr. Whelan’s employment is terminated by the Company without Cause, upon a Change of Control or by Mr. Whelan for Good Reason (as such terms are defined in his employment agreement), in each case, subject to his compliance with certain conditions, Mr. Whelan is entitled to (among other benefits) extension of the post-termination exercise period for all outstanding stock options of the Company’s common stock held by Mr. Whelan as of the date of his termination to the earlier of (a) the first anniversary of the date of termination, and (b) the date of expiration of the respective option, during which post-termination period such options shall continue to vest in accordance with their respective terms (to the extent not already fully vested).
On September 16, 2016, the Company granted to certain employees of the Company service-based stock options to acquire collectively 200,000 shares of common stock at an exercise price of $1.60 per share, which represented the closing price of the Company’s common stock as reported on the NYSE MKT on September 16, 2016, the date of grant. The per share fair-value of these service-based options was $0.95. The per share fair-value was estimated on the date of grant using the Black-Scholes option pricing method and included the following range of assumptions: dividend yield 0%, risk-free interest rate of 1.21% and expected option life of four years. The volatility assumption was 81.21% and the forfeiture rate was assumed to be 0%.
Under the terms of the service-based stock option agreements relating to the September 16, 2016 stock option grants, the awards vest in four equal annual installments over a period of four years and shall be fully vested on September 16, 2020.
As of September 30, 2016, the unearned compensation related to the service-based stock options granted in 2015 and 2016 was $634,890, which will be amortized over each of the grant’s respective service periods.
At September 30, 2016, the Company’s service-based stock options granted prior to November 2015 were fully amortized.
NOTE 810 – SEGMENT INFORMATION
The operating businesses of the Company are segregated into twothree reportable segments: (i) network solutions; andsolutions, (ii) test and measurement.measurement and (iii) embedded solutions. The network solutions segment is comprised primarily of the operations of Wireless Telecom Group Inc.’s subsidiary, Microlab. The test and measurement segment is comprised primarily of the Company’s operations of the Noisecom product line and the operations of its subsidiary, Boonton. The embedded solutions segment is comprised of the operations of CommAgility Limited which was acquired on February 17, 2017.
The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies. The Company allocates resources and evaluates the performance of segments based on income or loss from operations, excluding interest, corporate expenses and other income (expenses).
Financial information by reportable segment for the three-months ended March 31, 2017 and 2016 is set forth below:
WIRELESS TELECOM GROUP, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 8 – SEGMENT INFORMATION (Continued)
Financial information by reportable segment for the three and nine-months ended September 30, 2016 and 2015 is set forth below:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
Net revenues by segment: | ||||||||||||||||
Network solutions | $ | 5,507,065 | $ | 5,481,651 | $ | 15,196,799 | $ | 16,708,137 | ||||||||
Test and measurement | 2,837,236 | 2,857,504 | 7,126,021 | 8,472,006 | ||||||||||||
Total consolidated net revenues of reportable segments | $ | 8,344,301 | $ | 8,339,155 | $ | 22,322,820 | $ | 25,180,143 | ||||||||
Segment income (loss): | ||||||||||||||||
Network solutions | $ | 1,081,854 | $ | 901,277 | $ | 2,466,115 | $ | 2,596,224 | ||||||||
Test and measurement | 179,879 | 34,818 | (499,220 | ) | 389,030 | |||||||||||
Income from reportable segments | 1,261,733 | 936,095 | 1,966,895 | 2,985,254 | ||||||||||||
Other unallocated amounts: | ||||||||||||||||
Corporate expenses | (993,649 | ) | (773,695 | ) | (2,972,850 | ) | (2,336,234 | ) | ||||||||
Other (expense) - net | (27,267 | ) | (5,880 | ) | (79,137 | ) | (2,913 | ) | ||||||||
Consolidated income (loss) before income tax provision (benefit) | $ | 240,817 | $ | 156,520 | $ | (1,085,092 | ) | $ | 646,107 | |||||||
Depreciation and amortization by segment: | ||||||||||||||||
Network solutions | $ | 68,002 | $ | 58,317 | $ | 181,706 | $ | 164,447 | ||||||||
Test and measurement | 62,936 | 56,754 | 181,928 | 174,379 | ||||||||||||
Total depreciation and amortization for reportable segments | $ | 130,938 | $ | 115,071 | $ | 363,634 | $ | 338,826 | ||||||||
Capital expenditures by segment (a): | ||||||||||||||||
Network solutions | $ | 132,022 | $ | 91,000 | $ | 415,401 | $ | 266,599 | ||||||||
Test and measurement | 81,083 | — | 299,727 | 105,119 | ||||||||||||
Total consolidated capital expenditures by reportable segment | $ | 213,105 | $ | 91,000 | $ | 715,128 | $ | 371,718 |
Financial information by reportable segment as of September 30, 2016 and December 31, 2015:
2016 | 2015 | |||||||
Total assets by segment: | ||||||||
Network solutions | $ | 11,996,766 | $ | 10,638,961 | ||||
Test and measurement | 7,724,371 | 7,153,310 | ||||||
Total assets for reportable segments | 19,721,137 | 17,792,271 | ||||||
Corporate assets, principally cash and cash equivalents and deferred and current taxes | 15,769,599 | 16,914,053 | ||||||
Total consolidated assets | $ | 35,490,736 | $ | 34,706,324 |
Three Months Ended March 31, | ||||||||
2017 | 2016 | |||||||
Net sales by segment: | ||||||||
Network solutions | $ | 5,515,301 | $ | 4,213,314 | ||||
Test and measurement | 3,036,681 | 2,155,101 | ||||||
Embedded solutions | 996,776 | - | ||||||
Total consolidated net sales of reportable segments | $ | 9,548,758 | $ | 6,368,415 | ||||
Segment income (loss): | ||||||||
Network solutions | $ | 908,221 | $ | 339,926 | ||||
Test and measurement | 25,206 | (312,447 | ) | |||||
Embedded solutions | (229,471 | ) | - | |||||
Income (loss) from reportable segments | $ | 703,956 | $ | 27,479 | ||||
Other unallocated amounts: | ||||||||
Corporate expenses | $ | (2,422,936 | ) | $ | (948,130 | ) | ||
Other (expenses) income - net | (50,764 | ) | (41,604 | ) | ||||
Consolidated income (loss) before Income tax provision (benefit) | $ | (1,769,744 | ) | $ | (962,255 | ) | ||
Depreciation and amortization by segment: | ||||||||
Network solutions | $ | 101,364 | $ | 55,747 | ||||
Test and measurement | 93,386 | 60,111 | ||||||
Embedded solutions | 219,370 | - | ||||||
Total depreciation and amortization for reportable segments | $ | 414,120 | $ | 115,858 | ||||
Capital expenditures by segment: | ||||||||
Network solutions | $ | 83,959 | $ | 55,230 | ||||
Test and measurement | 66,139 | 19,244 | ||||||
Embedded solutions | 41,977 | - | ||||||
Total consolidated capital expenditures by reportable segment | $ | 192,075 | $ | 74,474 | ||||
2017 | 2016 | |||||||
Total assets by segment: | ||||||||
Network solutions | $ | 11,345,314 | $ | 10,594,770 | ||||
Test and measurement | 7,449,613 | 7,851,479 | ||||||
Embedded solutions | 23,592,296 | - | ||||||
Total assets for reportable segments | 42,387,223 | 18,446,249 | ||||||
Corporate assets, principally cash and cash equivalents and deferred income taxes | 10,269,647 | 16,988,886 | ||||||
Total consolidated assets | $ | 52,656,870 | $ | 35,435,135 |
WIRELESS TELECOM GROUP, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 8 – SEGMENT INFORMATION (Continued)
Consolidated net revenuessales by region were as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
Revenues by region | 2016 | 2015 | 2016 | 2015 | ||||||||||||
Americas | $ | 6,394,496 | $ | 6,539,352 | $ | 17,262,164 | $ | 19,161,206 | ||||||||
Europe, Middle East, Africa (EMEA) | 1,600,694 | 1,284,596 | 4,042,081 | 4,579,863 | ||||||||||||
Asia Pacific (APAC) | 349,111 | 515,207 | 1,018,575 | 1,439,074 | ||||||||||||
Total Sales | $ | 8,344,301 | $ | 8,339,155 | $ | 22,322,820 | $ | 25,180,143 |
Three Months Ended March 31, | ||||||||
Sales by region | 2017 | 2016 | ||||||
Americas | $ | 6,959,419 | $ | 5,065,636 | ||||
Europe, Middle East, Africa (EMEA) | 1,971,924 | 948,357 | ||||||
Asia Pacific (APAC) | 617,415 | 354,422 | ||||||
Total Sales | $ | 9,548,758 | $ | 6,368,415 |
Net revenuessales are attributable to a geographic area based on the destination of the product shipment, which may not be the final geographic destination of our international distributors’ end customer.shipment. The majority of shipments in the Americas are to customers located within the United States. For the three-months ended September 30,March 31, 2017 and 2016, and 2015, revenuessales in the United States for all reportable segments amounted to $6,210,423$6,461,065 and $6,087,609,$4,772,171 respectively. For the nine-monthsthree months ended September 30, 2016 and 2015, revenues in the United States for all reportable segments amounted to $16,593,877 and $17,494,870, respectively. ShipmentsMarch 31, 2017, shipments to the EMEA region were largely concentrated in two countries,the United Kingdom ($595,629), Germany ($212,036) and Israel and Germany.($249,422). For the three-monthsthree months ended September 30,March 31, 2016 revenues to Israel and Germany for all reportable segments amounted to $349,418 and $100,653 of all shipmentssales to the EMEA region respectively.were largely concentrated in Germany ($236,400). For the three-monthsthree months ended September 30,March 31, 2016 and 2015 revenues to Israel and Germany for all reportable segments amounted to $338,867 and $229,682, respectively of all shipments to the EMEA region. For the nine-months ended September 30, 2016, revenues to Israel and Germany amounted to $722,595 and $573,058 of all the shipments to the EMEA region, respectively. For the nine-months ended September 30, 2015, revenues to Israel and Germany amounted to $1,247,182 and $891,234, respectively of all shipments to the EMEA region. Shipmentssales to the APAC region were largely concentrated in China. For the three-months ended September 30, 2016China and 2015, revenues in China for all reportable segments amounted to $231,485were $437,951 and $303,263,187,171, respectively. For the nine-months ended September 30, 2016 and 2015, revenues in China for all reportable segments amounted to $652,654 and $900,592, respectively.
NOTE 9 -11 – COMMITMENTS AND CONTINGENCIES
Warranties:
The Company typically provides one-year warranties on all of its products covering both parts and labor. The Company, at its option, repairs or replaces products that are defective during the warranty period if the proper preventive maintenance procedures have been followed by its customers. Historically, the Company’s warranty expense has been minimal.
Leases:
In May 2015, the Company and its landlord entered into an amendment to the existing lease agreement to provide for the Company to remain at its principal corporate headquarters in Hanover Township, Parsippany, New Jersey through March 31, 2023. Monthly lease payments range from approximately $33,000 in year one to approximately $41,000 in year eight. Additionally, the Company has available an allowance of approximately $300,000 towards alterations and improvements to the premises, through November 30, 2016which expired on January 31, 2017. The Company used substantially all of which the Company has used approximately $249,000improvement allowance prior to date.its expiration. The lease can be renewed at the Company’s option for one five-year period at fair market value to be determined at term expiration.
WIRELESS TELECOM GROUP, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 9 - COMMITMENTS AND CONTINGENCIES (Continued)
The following is a summary of the Company’s contractual obligations as of September 30, 2016:
Table of Contractual Obligations
Payments by Period | ||||||||||||||||||||
Less than | More than | |||||||||||||||||||
Total | 1 Year | 1-3 Years | 4-5- Years | 5 Years | ||||||||||||||||
Facility Leases | $ | 2,950,012 | $ | 418,049 | $ | 1,330,913 | $ | 955,152 | $ | 245,898 | ||||||||||
Operating and Equipment Leases | 138,180 | 63,775 | 74,405 | — | — | |||||||||||||||
$ | 3,088,192 | $ | 481,824 | $ | 1,405,318 | $ | 955,152 | $ | 245,898 |
Environmental Contingencies:
In 1982, the Company and the New Jersey Department of Environmental Protection (the “NJDEP”) agreed upon a plan to correct ground water contamination at a site, formerly leased by Boonton, located in the Township of Parsippany-Troy Hills, pursuant to which wells have been installed by the Company. The plan contemplates that the wells will be operated and that soil and water samples will be taken and analyzed until such time that contamination levels are satisfactory to the NJDEP. In 2014, the Company received approval for a groundwater permit from the NJDEP to carry out the final Remedial Action Work Plan and report. Under the final phase of the Remedial Action Work Plan, there will be limited and reduced monitoring and testing as long as concentrations at the site continue on a decreasing trend.
While management anticipates that the expenditures in connection with this site will not be substantial in future years, the Company could be subject to significant future liabilities and may incur significant future expenditures if further contaminants from Boonton’s testing are identified and the NJDEP requires additional remediation activities. Management is unable to estimate future remediation costs, if any, at this time. The Company will continue to be liable under the plan, in all future years, until such time as the NJDEP releases it from all obligations applicable thereto.
At this time, the Company believes that it is in material compliance with all environmental laws, does not anticipate any material expenditure to meet current or pending environmental requirements, and generally believes that its processes and products do not present any unusual environmental concerns. Besides the matter referred to above with the NJDEP, the Company is unaware of any existing, pending or threatened contingent liability that may have a material adverse effect on its ongoing business operations.
Line of Credit:
The Company maintains a line of credit with a bank. The credit facility provides borrowing availability of up to 100% of the Company’s money market account balance and 99% of the Company’s short-term investment securities (U.S. Treasury bills) and, under the terms and conditions of the loan agreement, the facility is fully secured by the Company’s money fund account and short-term investment holdings held with the bank. Advances under the facility will bear interest at a variable rate equal to the London InterBank Offered Rate (“LIBOR”) in effect at the time of borrowing. Additionally, under the terms and conditions of the loan agreement, there is no annual fee and any amount outstanding under the loan facility may be paid at any time in whole or in part without penalty.
As of September 30, 2016, the Company had no borrowings outstanding under the facility and approximately $4,500,000 of borrowing availability. The Company has no current plans to borrow from this credit facility as it believes its present cash balances will adequately meet near-term working capital requirements.March 31, 2017:
WIRELESS TELECOM GROUP, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 9 - COMMITMENTS AND CONTINGENCIES (Continued)
Payments by Period | ||||||||||||||||||||
Less than | More than | |||||||||||||||||||
Total | 1 year | 1-3 Years | 4-5 Years | 5 Years | ||||||||||||||||
Facility Leases | $ | 2,906,871 | $ | 468,626 | $ | 1,468,978 | $ | 477,472 | $ | 491,796 | ||||||||||
Purchase Obligations | 2,739,602 | 2,739,602 | - | - | - | |||||||||||||||
Operating and Equipment Leases | 265,665 | 54,034 | 162,101 | 49,531 | - | |||||||||||||||
$ | 5,912,138 | $ | 3,262,262 | $ | 1,631,079 | $ | 527,003 | $ | 491,796 |
Risks and Uncertainties:
Proprietary information and know-how are important to the Company’s commercial success. There can be no assurance that others will not either develop independently the same or similar information or obtain and use proprietary information of the Company. Certain key employees have signed confidentiality and non-compete agreements regarding the Company’s proprietary information.
The Company believes that its products do not infringe the proprietary rights of third parties. There can be no assurance, however, that third parties will not assert infringement claims in the future.
ITEM 2 -– MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
The statements contained in this Quarterly Report on Form 10-Q that are not historical facts, including, without limitation, the statements under “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Such forward-looking statements may be identified by, among other things, the use of forward-looking terminology such as “believes,” “expects,” “intends,” “plans,” “may,” “will,” “should,” “anticipates” or “continues” or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy that involve risks and uncertainties. These statements are based on the Company’s current expectations of future events and are subject to a number of risks and uncertainties that may cause the Company’s actual results to differ materially from those described in the forward-looking statements. These risks and uncertainties include, but are not limited to, the ability of our management to successfully implement our business plan and strategy, product demand and development of competitive technologies in our market sector, the impact of competitive products and pricing, the loss of any significant customers, our abilities to protect our property rights, the effects of adoption of newly announced accounting standards, the effects of economic conditions and trade, legal and other economic risks, among others. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. These risks and uncertainties are disclosed from time to time in the Company’s filings with the Securities and Exchange Commission the Company’s press releases and in oral statements made by or with the approval of authorized personnel of the Company. You should also consider carefully the statementsincluding in our Annual Report on Form 10-K for the year ended December 31, 2015, which address additional risks that could cause our actual results to differ from those set forth in any forward-looking statements.2016. The Company’s forward-looking statements speak only as of the date of this Quarterly Report. The Company undertakes no obligation to publicly update or review any forward-looking statements whether as a result of new information, future developments or otherwise.
INTRODUCTION
The Company develops, manufactures and markets a wide variety of electronic noise sources, electronic testing and measuring instruments including power meters, voltmeters and modulation meters and high-power passive microwave components for wireless products. Additionally, the Company is a supplier of signal processing technology for network validation systems, supporting LTE and emerging 5G networks and its products and services solve unique solutions in LTE/4G. The majority of the Company’s current business relates to its networkCompany serves both commercial and government markets with work-flow-oriented, built-for-purpose solutions products, which are primarily used by its customers in relation to commercial infrastructure development in support of the expansion and upgrade to distributed antenna systems (“DAS”)., cellular/mobile, WiFi, satellite, cable, radar and computing applications. In addition, the Company’s products are used to test the performance and capability of cellular/PCS and satellite communication systems and to measure the power of radiofrequency (RF) and microwave systems. Other applications include radio, radar, wireless local area network (WLAN) and digital television.
The operating businesses of the Company are segregated into twothree reportable segments: (1) network solutions and (2) test and measurement.measurement and (3) embedded solutions. The network solutions segment is comprised primarily of the operations of the Company’s subsidiary, Microlab. The test and measurement segment is comprised primarily of the Company’s operations (Noisecom) and the operations of its subsidiary, Boonton. The embedded solutions segment is comprised primarily of the operations of the Company’s subsidiary, CommAgility Limited. Additional financial information on the Company’s reportable segments as of September 30, 2016March 31, 2017 and December 31, 2015,2016, as well as for the threethree-months ended March 31, 2017 and nine-months ended September 30, 2016 and 2015 is included in Note 8 to the Company’s interim condensed consolidated financial statements set forth in this current report on Form 10-Q.
The financial information presented herein includes:
(i) Condensed Consolidated Balance Sheets as of September 30, 2016March 31, 2017 (unaudited) and as of December 31, 2015;2016; (ii) Condensed Consolidated Statements of Operations and Comprehensive (Loss) for the three and nine-monththree-month periods ended September 30, 2016March 31, 2017 (unaudited) and 20152016 (unaudited); (iii) Condensed Consolidated Statements of Cash Flows for the nine-monththree-month periods ended September 30, 2016March 31, 2017 (unaudited) and 20152016 (unaudited); and (iv) Condensed Consolidated Statement of Shareholders’ Equity for the nine-monththree-month period ended September 30, 2016March 31, 2017 (unaudited).
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Critical Accounting Policies
CRITICAL ACCOUNTING POLICIESEstimates and Assumptions
Management’s discussion and analysis of the financial condition and results of operations are based upon the Company’s interim condensed consolidated financial statements, which werehave been prepared in accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP. The preparation of these financial statements requiredrequires the Company to make estimates and judgments that affect the reported amountsamount of assets and liabilities (including inventory valuation, accounts receivable, valuation of deferred tax assets and estimated fair value of stock options) and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amountsamount of net salesrevenues and expenses for each period.
ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
On a regular basis, management evaluates its assumptions, judgments and estimates. Management believes that there have been no material changes to the items that the Company disclosed as its significant accounting policies and estimates under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in the Company’s December 31, 2015 Form 10-K.
The following represents a summary of the Company’s critical accounting policies, defined as those policies that the Company believes are: (a) the most important to the portrayal of itsour financial condition and results of operations, and (b) that require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effects of matters that are inherently uncertain. Estimates and assumptions are made by management to assess the overall likelihood that an accounting estimate or assumption may require adjustment. Management assumptions have been reasonably accurate in the past, and future estimates or assumptions are likely to be calculated on the same basis.
Share-BasedStock-based Compensation
The Company follows the provisions of ASCAccounting Standards Codification (ASC) 718, “Share-Based Payment.”Payment” which requires that compensation expense be recognized based on the fair value of the stock awards less estimated forfeitures. The fair value of the stock awards is equal to the fair value of the Company’s stock on the date of grant. The fair value of options at the date of grant wasis estimated using the Black-Scholes option pricing model. For any performance-based or service-basedWhen options are granted, the Company takes into consideration guidance under ASC 718 and SEC Staff Accounting Bulletin No. 107 (SAB 107) when reviewing and updatingdetermining assumptions. The expected option life is derived from assumed exercise rates based upon historical exercise patterns and represents the period of time that options granted are expected to be outstanding. The expected volatility is based upon historical volatility of our shares using weekly price observations over an observation period that approximates the expected life of three years.the options. The risk-free rate is based on the U.S. Treasury yield curve rate in effect at the time of grant for periods similar to the expected option life. The estimated forfeiture rate included in the option valuation is based on the Company’sour past history of forfeitures. Due to the limited amount of forfeitures in the past, the Company’s estimated forfeiture rate has been zero.
Management estimates are necessary in determining compensation expense for stock options with performance-based vesting criteria. Compensation expense for this type of stock-based award is recognized over the period from the date the performance conditions are determined to be probable of occurring through the date the applicable conditions are expected to be met. If the performance conditions are not considered probable of being achieved, no expense is recognized until such time as the performance conditions are considered probable of being met, if ever. Management evaluates whether performance conditions are probable of occurring on a quarterly basis.
Revenue Recognition
Revenue from product shipments, including shipping and handling fees, is recognized once delivery has occurred, provided that persuasive evidence of an arrangement exists, the price is fixed or determinable, and collectability is reasonably assured. Delivery is considered to have occurred when title and risk of loss have transferred to the customer. Revenues tofrom international distributors are recognized in the same manner. If title does not pass until the product reaches the customer’s delivery site, then revenue recognition of revenue is deferred until that time. There are no formal revenuesales incentives offered to any of the Company’s customers. Volume discounts may be offered from time to time to customers purchasing large quantities on a per transaction basis. There
Standalone sales of software or software-related items are no material special post shipment obligationsrecognized in accordance with the software revenue recognition guidance. For multiple deliverable arrangements that only include software items, the Company generally uses the residual method to allocate the arrangement consideration. Under the residual method, the amount of consideration allocated to the delivered items equals the total arrangement consideration, less the fair value of the undelivered items. Where vendor-specific objective evidence of fair value for the undelivered items cannot be determined, the Company generally defers revenue until all items are delivered and services have been performed, or acceptance provisionsuntil such evidence of fair value can be determined for the undelivered items.
26 |
Software arrangements that exist with any sales arrangements.require significant customization or modification of software are accounted for under percentage of completion accounting. The Company uses the input method to measure of progress for arrangements accounted for under percentage of completion accounting.
Inventories and Inventory Valuation of Inventory
Raw material inventoriesInventories are stated at the lower of cost (first-in, first-out method)(average cost) or market. Finished goods and work-in-process are valued at average cost of production, which includes material, labor and manufacturing expenses.
Reserve on Inventory
The Company maintains reserves to reduce the value of inventory to the lower of cost or market and reserves for excess and obsolete inventory. The Company reviews inventory for excess and obsolescence based on its best estimates of future demand, product lifecycle status and product development plans. The Company uses historical information along with those future estimates to reduce the inventory cost basis to its estimated realizable value.
ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
AllowanceAllowances for Doubtful Accounts
The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. A key consideration in estimating the allowance for doubtful accounts has been, and will continue to be, the Company’s customers’our customer’s payment history and aging of its accounts receivable balance. If the financial condition of any of the Company’s customers were to decline, additional allowances may be required.
Income Taxes
The Company records deferred taxes in accordance with ASC 740, “Accounting“Accounting for Income TaxesTaxes”.” This ASC requires recognition of deferred tax assets and liabilities for temporary differences between tax basis of assets and liabilities and the amounts at which they are carried in the financial statements, based upon the enacted rates in effect for the year in which the differences are expected to reverse. The Company establishes a valuation allowance when necessary to reduce deferred tax assets to the amount expected to be realized.
The Company periodically assesses the value of its deferred tax asset a majority of which has been generated by a history of net operating losses and determines the necessity for a valuation allowance. The Company evaluates which portion, if any, will more likely than not be realized by offsetting future taxable income, taking into consideration any limitations that may exist on its use of its net operating loss carry-forwards.carryforwards.
Uncertain Tax Positions
Under ASC 740, the Company must recognize theand disclose uncertain tax benefit from an uncertain positionpositions only if it is more-likely-than-not that the tax position will be sustained on examination by the taxing authority, based on the technical merits of the position. The tax benefitsamounts recognized in the financial statements attributable to such position, if any, are measured based on the largest benefit that hasrecorded if there is a greater than 50% likelihood of being realized upon the ultimate resolution of the position.
The Company has analyzed its filing positions in all of the Federalfederal and state jurisdictions where it is required to file income tax returns. As of September 30,December 31, 2016 and December 31, 2015, the Company has identified its U.S. Federalfederal tax return and its state tax return in New Jersey as “major” tax jurisdictions, as defined in ASC 740, in which it is required to file income tax returns. Based on the evaluations noted above, the Company has concluded that there are no significant uncertain tax positions requiring recognition or disclosure in its condensed consolidated financial statements.
Based on a review of tax positions for all open years and contingencies as set out in the Company’s notesNotes to the condensed consolidated financial statements, no reserves for uncertain income tax positions have been recorded pursuant to ASC 740 during the periodsyears ended September 30,December 31, 2016 and 2015, and the Company does not anticipate that it is reasonably possible that any material increase or decrease in its unrecognized tax benefits will occur within the next twelve months.
Valuation of Goodwill
Goodwill represents the excess of the aggregate purchase price over the fair value of the net assets acquired in a purchase business combination. Goodwill is not amortized but rather is reviewed for impairment at least annually or more frequently if a triggering event occurs. Management first makes a qualitative assessment of whether it is more-likely-than-not that a reporting unit’s fair value is less than its carrying amount. If, based on the qualitative assessment, the estimated fair value is well in excess of its carrying amount, no impairment is recorded. If, however, the reporting unit’s carrying value exceeds its fair value an impairment is recorded by the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill.
27 |
Intangible and Long-lived Assets
Intangible assets include patents and customer relationships and are amortized using the straight-line method over the estimated economic lives of the assets, which range from five to seven years. Long-lived assets, including intangible assets with finite lives, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. Measurement of an impairment loss for long-lived assets that management expects to hold and use is based on the estimated fair value of the asset. Long-lived assets to be disposed of are reported at the lower of carrying amount or estimated fair value less costs to sell. The estimated useful lives of intangible and long-lived assets are based on many factors including assumptions regarding the effects of obsolescence, demand, competition and other economic factors, expectations regarding the future use of the asset, and our historical experience with similar assets. The assumptions used to determine the estimated useful lives could change due to numerous factors including product demand, market conditions, technological developments, economic conditions and competition.
RESULTS OF OPERATIONS
The following discussion of our financial condition and results of operations should be read in conjunction with our interim condensed consolidated financial statements and the notes to those statements included in Part I, Item I of this Quarterly Report on Form 10-Q and in conjunction with the consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2015.2016.
Three months ended March 31, | ||||||||||||||||||||||||
Revenue | % of Rev | Change | ||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | Amount | Pct. | |||||||||||||||||||
Network solutions | $ | 5,515,301 | $ | 4,213,314 | 57.8 | % | 66.2 | % | $ | 1,301,987 | 30.9 | % | ||||||||||||
Test and measurement | 3,036,681 | 2,155,101 | 31.8 | % | 33.8 | % | 881,580 | 40.9 | % | |||||||||||||||
Embedded solutions | 996,776 | - | 10.4 | % | 0.0 | % | 996,776 | - | ||||||||||||||||
Total revenue | $ | 9,548,758 | $ | 6,368,415 | 100.0 | % | 100.0 | % | $ | 3,180,343 | 49.9 | % |
For
Net consolidated revenues for the nine-monthsthree months ended September 30, 2016March 31, 2017 were $9,548,758 as compared to $6,368,415 for the corresponding periodthree months ended March 31, 2016, an increase of $3,180,343 or 49.9%. Net revenue from the previous year, consolidated net revenues were approximately $22,323,000 and $25,180,000, respectively, a decrease of approximately $2,857,000 or 11.3%. ForNetwork solutions segment was $5,515,301 for the three-monthsthree months ended September 30, 2016March 31, 2017 as compared to $4,213,314 for the corresponding period of the previous year, consolidated net revenues were approximately $8,344,000 and $8,339,000, respectively, a slightthree months ended March 31, 2016, an increase of approximately $5,000.$1,301,987 or 30.9%. Net revenue from the Test and measurement segment was $3,036,681 for the three months ended March 31, 2017 as compared to $2,155,101 for the three months ended March 31, 2016, an increase of $881,580 or 40.9%. The Embedded solutions segment which was acquired on February 17, 2017 contributed $996,776 in revenue for the stub period from acquisition date to March 31, 2017.
Net revenues from the Company’s Network solutions products for the three months ended March 31, 2017 were $5,515,301 as compared to $4,213,314 for the three months ended March 31, 2016, an increase of $1,301,987 or 30.9%. Net revenues from Network solutions products accounted for 57.8% and 66.2% of net consolidated revenues for the three months ended March 31, 2017 and 2016, respectively. The increase in revenues was primarily due to increased demand for the Company’s passive RF components and subassemblies, largely as a result of increased capital spending by certain domestic wireless operators.
Net revenues from the Company’s Test and measurement products for the three months ended March 31, 2017 were $3,036,681 as compared to $2,155,101 for the three months ended March 31, 2016, an increase of $881,580 or 40.9%. Net revenues from Test and measurement products accounted for
ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
The decrease in consolidated net revenues for the nine-months ended September 30, 2016 was the result of a decline in sales order flow for the Company’s network solutions products, which started in the second half of 201531.8% and continued through the first quarter of 2016, due to reductions in customer capital spending, particularly by certain domestic wireless operators. The Company also experienced a decline in sales order flow during the first quarter of 2016 in the Company’s test and measurement segment, which was primarily due to a delay in the execution of orders on government projects, which impacted sales orders for the first fiscal half of 2016. The slight increase in consolidated net revenues for the three-months ended September 30, 2016 was the result of increased order flow in both of the Company’s business segments during the second and third quarters. During the three-months ended September 30, 2016, as expected, the Company realized increased carrier and government spending on specific projects the Company was pursuing, which resulted in a 25% increase in sales order flow (to approximately $11,200,000 across the Company’s two business segments) during the three-months ended September 30, 2016 as compared to the sales order flow realized during the second quarter of 2016.
The Company expects long-term demand for its network solutions products to improve due to the continuing worldwide expansion of broadband coverage. Additionally, sales orders in the Company’s test and measurement segment increased during the three-months ended September 30, 2016 as compared to the first two quarters of 2016 primarily due to program funding by governmental agencies supporting radar applications.
Net revenues of the Company’s network solutions products for the nine-months ended September 30, 2016 were approximately $15,197,000 as compared to approximately $16,708,000 for the nine-months ended September 30, 2015, a decrease of approximately $1,511,000 or 9.0%. Net revenues of network solutions products accounted for approximately 68% and 66% of consolidated net revenues for each of the nine-month periods ended September 30, 2016 and 2015, respectively. Net revenues of the Company’s network solutions products for the three-months ended September 30, 2016 were approximately $5,507,000 as compared to approximately $5,482,000 for the three-months ended September 30, 2015, an increase of approximately $25,000 or 0.5%. Net revenues of network solutions products accounted for approximately 66% of consolidated net revenues for each of the three-month periods ended September 30, 2016 and 2015, respectively.
Net revenues of the Company’s test and measurement products for the nine-months ended September 30, 2016 were approximately $7,126,000 as compared to approximately $8,472,000 for the nine-months ended September 30, 2015, a decrease of approximately $1,346,000 or 15.9%. Net revenues of test and measurement products accounted for approximately 32% and 34% of consolidated net revenues for each of the nine-month periods ended September 30, 2016 and 2015, respectively. Net revenues of the Company’s test and measurement products for the three-months ended September 30, 2016 were approximately $2,837,000 as compared to approximately $2,858,000 for the three-months ended September 30, 2015, a slight decrease of approximately $21,000 or 0.7%. Net revenues of test and measurement products accounted for approximately 34% of consolidated net revenues for each of the three-month periods ended September 30, 2016 and 2015, respectively.
Gross profit on net consolidated revenues for the nine-months ended September 30, 2016 was approximately $9,882,000 or 44.3% as compared to approximately $11,053,000 or 43.9%33.8% of net consolidated revenues for the nine-monthsthree months ended September 30, 2015. Gross profitMarch 31, 2017 and 2016, respectively. The increase in revenues was primarily due to an increase in government spending.
The Company acquired CommAgility Limited on net consolidated revenuesFebruary 17, 2017 which represents the Company’s Embedded solutions segment. Embedded Solutions contributed $996,776 of revenue for the three-months ended September 30, 2016 was approximately $3,823,000 or 45.8% as comparedperiod from acquisition to approximately $3,623,000 or 43.4% of net consolidated revenues for the three-months ended September 30, 2015.March 31, 2017.
Gross profit margins are higher for the three and nine-months ended September 30, 2016 as compared to the same period of the previous year. Consolidated gross profit margins increased due to lower manufacturing labor costs during the three and nine-months ended September 30, 2016 as compared to the same periods in 2015, offset by lower volumes. The decrease in manufacturing labor costs are primarily the result of the Company’s cost reduction plans implemented in August 2015.
Three months ended March 31, | ||||||||||||||||||||||||
Gross Profit | Gross Margin | Change | ||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | Amount | Pct. | |||||||||||||||||||
Network solutions | $ | 2,460,482 | $ | 1,782,990 | 44.6 | % | 42.3 | % | 677,492 | 38.0 | % | |||||||||||||
Test and measurement | 1,334,207 | 937,124 | 43.9 | % | 43.5 | % | 397,083 | 42.4 | % | |||||||||||||||
Embedded solutions | 537,821 | - | 54.0 | % | 0.0 | % | 537,821 | - | ||||||||||||||||
Total gross profit | $ | 4,332,510 | $ | 2,720,114 | 45.4 | % | 42.7 | % | 1,612,396 | 59.3 | % |
The Company’s products consist of several models with varying degrees of capabilities which can be customized to meet particular customer requirements. They may be incorporated directly into the electronic equipment concerned or may be stand-alone components or devices that are connected to, or used in conjunction with, such equipment from an external site, in the factory or in the field. Prices of products range from approximately $100 to $100,000 per unit, with most sales occurring between approximately $2,000 and $35,000 per unit.The Company can experience variations in gross profit based uponon consolidated net revenues for the mix of these products soldthree months ended March 31, 2017 was $4,332,510 or 45.4% as wellcompared to $2,720,114 or 42.7% as variationsreported for the three months ended March 31, 2016. Gross profit increased primarily due to increased revenue volume and economieshigher absorption of scale. The Company will continuefixed manufacturing costs for the three months ended March 31, 2017 as compared to rigidly monitor costs associated with material acquisition, manufacturing and production.
ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)same period in 2016. Gross profit of the Company’s newly acquired Embedded solutions segment contributed $537,820 to the overall gross profit increase from the same period last year.
Consolidated operating expenses for the nine-monthsthree months ended September 30, 2016March 31, 2017 were approximately $10,888,000$6,051,491 or 49%63.4% of consolidated net consolidated revenues as compared to approximately $10,404,000$3,640,765 or 41%57.2% of consolidated net consolidated revenues for the nine-monthsthree months ended September 30, 2015.March 31, 2016. For the three months ended March 31, 2017 as compared to the prior year, consolidated operating expenses increased by $2,410,726 or 66.2%. Consolidated operating expenses were higher forin the nine-monthsthree months ended September 30, 2016March 31, 2017 due to increasesthe inclusion of $767,292 of expenses associated with the Embedded solutions segment which was acquired on February 17, 2017 and included $200,645 of amortization expense related to purchased intangibles as well as $156,436 of non-recurring expenses associated with establishing Wireless Telecommunications Ltd. Additionally, operating expenses increased from the same period in consolidated generalthe prior year due to acquisition and administrative expenses and consolidated research and development expensesclosing costs associated with the CommAgility acquisition of approximately $549,000$1,200,000, increased incentive compensation expense associated with new stock option and $143,000, respectively, offset by a decrease in consolidated sales and marketing expensesrestricted stock grants of approximately $208,000. Consolidated operating expenses for the three-months ended September 30, 2016 were approximately $3,555,000 or 43% of net consolidated revenues as compared to approximately $3,461,000 or 42% of net consolidated revenues for the three-months ended September 30, 2015. Consolidated operating expenses were higher for the three-months ended September 30, 2016 due to an increase in consolidated$200,000, increased general and administrative expenses of approximately $180,000, offset by decreases in consolidated research and development expenses and sales and marketing expenses of approximately $78,000 and $8,000, respectively. Consolidated operating expenses during the nine-month periods ended September 30, 2016, included approximately $416,000 of professional fees related to the Company’s Strategic Planning and Operating Committee’s strategic evaluations.
The increase in consolidated general and administrative expenses for the nine-months ended September 30, 2016 was primarily due to an increase in non-cash stock compensation expense of approximately $209,000, an increase in administrative salaries of approximately $190,000, and an increase in corporate legal fees. Consolidated research and development expenses increased for the nine-months ended September 30, 2016 primarily$125,000 due to an increase in costs associated with product development projects in bothexpanded executive team and increased commissions to our network solutions and test and measurement segmentsthird party sales reps of approximately $230,000. Consolidated sales and marketing expenses decreased for the nine-months ended September 30, 2016 primarily$140,000 due to lower non-employee sales commissions and lower salary expenses, offset by a slight increase in trade show expenses.
The increase in consolidated general and administrative expenses for the three-months ended September 30, 2016 was primarily due to an increase in non-cash stock compensation expense of approximately $184,000. Consolidated research and development expenses increased for the three-months ended September 30, 2016 primarily due to an increase in costs associated with product development projects in both our network solutions and test and measurement segments. Consolidated sales and marketing expenses decreased for the three-months ended September 30, 2016 primarily due to lower non-employee sales commission and lower salary expenses.higher sales.
Other expenses increased by approximately $21,000 and $76,000 fordecreased $40,000 as the Company incurred $38,000 in the three months ended March 31, 2016 related to ground water remediation efforts. Interest expense increased $49,000 related to our new credit facility and nine-months ended September 30, 2016, as compared to the corresponding periodsaccretion of the previous year. The increase is primarily due to increases in costs in connection with the Company’s ground water management plan.contingent consideration liability.
For the three and nine-monthsmonths ended September 30,March 31, 2017, the Company recorded a tax benefit of $538,301. The tax benefit was primarily due to losses generated from the Company’s operations. For the three months ended March 31, 2016, the Company recorded a tax expense of approximately $119,000 and a tax benefit of approximately $412,000, respectively. For the three and nine-months ended September 30, 2015, the Company recorded a tax expense of approximately $81,000 and $293,000, respectively.$385,928. The tax benefit recorded for the nine-monthsthree-months ended September 30,March 31, 2016 was primarily due to losses generated from the Company’s operations during the first six-months of 2016. The tax expense recorded for the three and nine-months ended September 30, 2015 was primarily the result of income generated from the Company’s operations and was predominantly comprised of a non-cash deferred tax expense for Federal income taxes and a current provision for state income taxes for which the Company makes estimated tax payments on a quarterly basis, when applicable.period.
For the nine-monthsthree months ended September 30, 2016,March 31, 2017, the Company realized a net loss of approximately $673,000$1,231,443 or $0.04$0.06 loss per share on a basic and diluted basis, as compared to a net incomeloss of approximately $353,000$576,327 or $0.02 income$0.03 loss per share on a basic and diluted basis for the corresponding period of the previous year,three months ended March 31, 2017, a decrease of approximately $1,026,000. For the three-months ended September 30, 2016, the Company realized net income of approximately $122,000$655,116 or $0.01 income$0.03 per share on a basic and diluted basis, as compared to net income of approximately $75,000 or $0.00 income per share on a basic and diluted basis for the corresponding period of the previous year, an increase of approximately $47,000.share. The net income and loss fluctuations were primarilydecrease was due to the factors discussed above.
ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
LIQUIDITY AND CAPITAL RESOURCES
The Company’s working capital has decreasedWe expect our existing cash balance, cash generated by approximately $1,034,000operations and borrowings available under our new credit facility (as described in Note 8 to approximately $21,030,000the financial statements) to be our primary sources of short-term liquidity, and we believe these sources will be sufficient to meet our liquidity needs for at September 30, 2016, from approximately $22,064,000 at December 31, 2015. At September 30, 2016least the next twelve months. Our ability to meet our cash requirements will depend on our ability to generate cash in the future, which is subject to general economic, financial, competitive, legislative, regulatory and December 31, 2015, the Company had a current ratio of 8.4 to 1 and 13.5 to 1, respectively.other factors that are beyond our control.
The Company had cash and cash equivalents of approximately $8,102,000 at September 30, 2016, compared to approximately $9,726,000 at December 31, 2015. The Company believes its current level of cash and cash equivalents is sufficient to fund the current operating, investing and financing activities.
The Company expects to realize tax benefits in future periods due to the available net operating loss carryforwards resulting from the disposition of a former wholly-owned subsidiary in 2010. Accordingly, future taxable income is expected to be offset by the utilization of net operating loss carryforwards and as a result, will increase the Company’s liquidity as cash needed to pay Federal income taxes will be substantially reduced.
The Company used cash for operating activities of approximately $742,000 for the nine-month period ending September 30, 2016. The primary use of this cash was due to a net loss from operating activities, an increase in inventories, an increase in accounts receivable, and an increase in prepaid expenses and other current assets, partially offset by an increase in accounts payable and an increase in accrued expenses and other current liabilities.
The Company provided cash from operating activities of approximately $519,000 for the nine-month period ending September 30, 2015. The primary source of this cash was due to net income from operations for the nine-month period, a decrease in prepaid expenses and other assets and an increase in accounts payable, partially offset by a decrease in accrued expenses and other current liabilities, an increase in accounts receivable and an increase in inventories.
The Company has historically been able to turn over its accounts receivable approximately every two months. This average collection period has been sufficient to provide the working capital and liquidity necessary to operate the Company.
Net cash used for investing activities for the nine-months ended September 30, 2016 and 2015 was approximately $715,000 and $372,000, respectively. The use of these funds was for capital expenditures.Operating Activities
Cash used by operating activities was $(899,832) for the three months ended March 31, 2017 as compared to cash provided by operating activities of $227,614 for the three months ended March 31, 2016. During the three months ended March 31, 2017 changes in our operating assets and liabilities resulted in a net decrease in cash of $(6,354) primarily due to cash used for inventory and higher accounts receivable. During the three months ended March 31, 2016, changes in our operating assets and liabilities resulted in a net increase in cash of $935,225. The increase was driven by increased accounts payable and accounts receivable collections in the three months ended March 31, 2016. These increases were offset by cash used for inventory. Cash used for the three months ended March 31, 2017 was primarily generated by the net operating loss incurred by the Company driven by high acquisition expenses associated with the CommAgility acquisition.
Investing Activities
Cash used by investing activities was $(8,788,258) and $(74,474) for the three months ended March 31, 2017 and 2016, respectively, and included capital expenditures of $192,075 and $74,474, respectively. For the three months ended March 31, 2017 cash used for the acquisition of CommAgility was $8,596,183 net of cash acquired.
Financing Activities
Cash provided by financing activities was $2,486,179 for the nine-monthsthree months ended September 30,March 31, 2017 as compared to cash used of $(107,557) for the three months ended March 31, 2016. During the three months ended March 31, 2017 the Company received net proceeds of $1,904,037 and $760,000 from the asset based revolver and term loan, respectively. The Company paid $215,358 in debt issuance costs associated with the new credit facility. During the three months ended March 31, 2016 was approximately $167,000. The use of these funds was for periodic payments on anthe Company paid $(42,089) related to a capital equipment lease and $(65,468) related to the repurchase of 42,995 shares of the Company’s outstanding common stock. Cash used for financing activities for the nine-months ended September 30, 2015 was approximately $92,000. The use of these funds was for periodic payments on an equipment lease, partially offset by proceeds from the exercise of stock options.
The stock repurchase program may continue to be modified or re-initiated at any time. The Company will continue to monitor market conditions and evaluate opportunities to allocate its capital, which may include the repurchasing of the Company’s outstanding common stock.
As noted in Note 7 to the financial statements, on February 16, 2017 the Company entered into a Credit Agreement which provided for a term loan in the aggregate principal amount of September 30, 2016,$760,000 and an asset based revolving loan, which is subject to a Borrowing Base Calculation (as defined in the New Credit Facility) of up to a maximum availability of $9,000,000. The proceeds of the term loan and revolver were used to finance the acquisition of CommAgility. As of March 31, 2017, $1,904,037 was outstanding on the asset based revolver. At March 31, 2017 the Company has excess availability under the Revolver of $3,410,000.
As of March 31, 2017, future minimum lease payments related to the Company’s facility lease and equipment leases are shown below:
Table of Contractual Obligations
Payments by Period | |||||||||||||||||||||
Less than | More than | ||||||||||||||||||||
Total | 1 Year | 1-3 Years | 4-5- Years | 5 Years | |||||||||||||||||
Facility Leases | $ | 2,950,012 | $ | 418,049 | $ | 1,330,913 | $ | 955,152 | $ | 245,898 | |||||||||||
Operating and Equipment Leases | 138,180 | 63,775 | 74,405 | — | — | ||||||||||||||||
$ | 3,088,192 | $ | 481,824 | $ | 1,405,318 | $ | 955,152 | $ | 245,898 |
Payments by Period | ||||||||||||||||||||
Less than | More than | |||||||||||||||||||
Total | 1 year | 1-3 Years | 4-5 Years | 5 Years | ||||||||||||||||
Facility Leases | $ | 2,906,871 | $ | 468,626 | $ | 1,468,978 | $ | 477,472 | $ | 491,796 | ||||||||||
Purchase Obligations | 2,739,602 | 2,739,602 | - | - | - | |||||||||||||||
Operating and Equipment Leases | 265,665 | 54,034 | 162,101 | 49,531 | - | |||||||||||||||
$ | 5,912,139 | $ | 3,262,262 | $ | 1,631,079 | $ | 527,003 | $ | 491,796 |
ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
The Company maintains a line of credit with a bank. The credit facility provides borrowing availability of up to 100% of the Company’s money market account balance and 99% of the Company’s short-term investment securities (U.S. Treasury bills) and, under the terms and conditions of the loan agreement, the facility is fully secured by our money fund account and short-term investment holdings held with the bank. Advances under the facility will bear interest at a variable rate equal to LIBOR in effect at time of borrowing. Additionally, there is no annual fee and any amount outstanding under the loan facility may be paid at any time in whole or in part without penalty. As of September 30, 2016, the Company had no borrowings outstanding under the facility and approximately $4,500,000 of borrowing availability.
The Company is currently pursuingpursue strategic opportunities, including potential acquisitions, mergers, divestitures or other activities, which may require significant use of the Company’s capital resources. These sources may include using operating cash , entering into asset-based lending arrangements with financial institutions, entering into term loan agreements, or issuing the Company’s common stock. Additionally, theThe Company may incur costs as a result of such activities and such activities may affect the Company’s liquidity in future periods.
In 2015, the Company instituted cost reduction plans, which reduced overall headcount and other operating expenses, to better position it to take advantage of growth opportunities. The reduction in total headcount reduced annualized salary and benefit costs in 2015 by over $1,500,000, net of severance charges of $137,000, which have been reinvested by the Company in its business to improve the strength of its management team and support new product innovations. During the nine-months ended September 30, 2016, the Company continued its restructuring efforts by instituting a plan to further reduce costs. As a result of this most recent effort, the Company expects to generate annualized cost reductions of approximately $600,000, net of severance charges of $50,000, which are being reinvested in strategic initiatives. The Company believes these cost reduction efforts, and continued diligent monitoring of its current operating expenses, will help position the Company for growth and ongoing development of new products.
The Company believes that its financial resources from working capital and availability under the asset based revolver are adequate to meet its current needs. The Company expects the cash flow of CommAgility to fund the deferred purchase price and contingent consideration liabilities. However, should current global economic conditions deteriorate, additional working capital funding may be required which may be difficult to obtain due to restrictive credit markets.
OFF-BALANCE SHEET ARRANGEMENTS
The Company does not have any off-balance sheet arrangements.
INFLATION AND SEASONALITY
The Company does not anticipate that inflation will significantly impact its business or its results of operations nor does it believe that its business is seasonal.
ITEM 3 -– QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 4 - – CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, as of the end of the period covered by this report, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended. Our disclosure controls and procedures are designed to ensure that the information required to be included in our Securities and Exchange Commission (“SEC”) reports is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that the information relating to Wireless Telecom Group, Inc., including our consolidated subsidiaries, is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. Based on this evaluation, our principal executive officer and principal financial officer concluded that, as of the period covered by this report, our disclosure controls and procedures are effective.
(b) Changes in Internal Controls over Financial Reporting
In connection withWe acquired CommAgility on February 17, 2017. We have begun the evaluation required by paragraph (d)process to integrate the operations of Rule 13a-15 under the Securities Exchange ActCommAgility into our overall system of 1934, as amended, there was no change identified in our internal control over financial reporting.
There were no other changes over financial reporting that occurred as ofduring the end of the period covered by this report that hasthree months ended March 31, 2017that have materially affected, or is reasonablyarereasonably likely to materially affect, our internal control over financial reporting.reporting, as described in our 2016 Annual Report on Form 10-K.
There have been no material developments in the legal proceedings described in Item 3 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.
There have been no material changes in our risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2015.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the period covered by this report, we have not sold any unregistered equity securities.
Item 3. DEFAULTS UPON SENIOR SECURITIES
None.
Item 4. MINE SAFETY DISCLOSURES
Not applicable.
None.
Exhibit No. | Description | |
3.1 | Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to | |
3.2 | Amended and Restated | |
10.1 | ||
10.2 | Registration Rights Agreement, dated February 17, 2017, by and among Wireless Telecom Group, Inc., Edward De Salis Young, Paul Moakes, Simon Pack and Martin Hollinshead (incorporated herein by reference to Exhibit 10.2 to Wireless Telecom Group Inc.’s Current Report on Form 8-K, filed on February 21, 2017, Commission File No. 001-11916) | |
10.3 | Lock Up Agreement, dated February 17, 2017, by and among Wireless Telecom Group, Inc., Edward De Salis Young, Paul Moakes, Simon Pack and Martin Hollinshead (incorporated herein by reference to Exhibit 10.3 to Wireless Telecom Group Inc.’s Current Report on Form 8-K, filed on February 21, 2017, Commission File No. 001-11916) | |
10.4 | Voting Agreement, dated February 17, 2017, by and among Wireless Telecom Group, Inc., Edward De Salis Young, Paul Moakes, Simon Pack and Martin Hollinshead (incorporated herein by reference to Exhibit 10.4 to Wireless Telecom Group Inc.’s Current Report on Form 8-K, filed on February 21, 2017, Commission File No. 001-11916) | |
10.5 | Loan and Security Agreement, dated February 16, 2017, Wireless Telecom Group, Inc. Boonton Electronics Corporation, Microlab/FXR and Bank of America, N.A. (incorporated |
32 |
herein by reference to Exhibit 10.5 to Wireless Telecom Group Inc.’s Current Report on Form 8-K, filed on February 21, 2017, Commission File No. 001-11916) | ||
31.1* | Certification Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002 (Principal Executive Officer) | |
31.2* | Certification Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002 (Principal Financial Officer) | |
32.1* | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002 (Principal Executive Officer) | |
32.2* | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002 (Principal Financial Officer) |
101** | The following financial statements from Wireless Telecom Group, Inc.’s Quarterly Report on Form 10-Q for the quarter ended |
101.INS** | XBRL INSTANCE DOCUMENT | |
101.SCH** | XBRL TAXONOMY EXTENSION SCHEMA DOCUMENT | |
101.CAL** | XBRL TAXONOMY EXTENSION CALCULATION LINKBASE DOCUMENT | |
101.DEF** | XBRL TAXONOMY EXTENSION DEFINITION LINKBASE DOCUMENT | |
101.LAB** | XBRL TAXONOMY EXTENSION LABEL LINKBASE DOCUMENT | |
101.PRE** | XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE DOCUMENT |
*Filed herewith.
** Furnished herewith.
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
WIRELESS TELECOM GROUP, INC. | |||
(Registrant) | |||
Date: | /s/ Timothy Whelan | ||
Timothy Whelan | |||
Chief Executive Officer | |||
Date: | /s/ | ||
Michael Kandell | |||
Chief Financial Officer |
Exhibit | Description | |
31.1* | Certification Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002 (Principal Executive Officer) | |
31.2* | Certification Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002 (Principal Financial Officer) | |
32.1* | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002 (Principal Executive Officer) | |
32.2* | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002 (Principal Financial Officer) | |
101** | The following financial statements from Wireless Telecom Group, Inc.’s Quarterly Report on Form 10-Q for the quarter ended |
101.INS** | XBRL INSTANCE DOCUMENT | |
101.SCH** | XBRL TAXONOMY EXTENSION SCHEMA DOCUMENT | |
101.CAL** | XBRL TAXONOMY EXTENSION CALCULATION LINKBASE DOCUMENT | |
101.DEF** | XBRL TAXONOMY EXTENSION DEFINITION LINKBASE DOCUMENT | |
101.LAB** | XBRL TAXONOMY EXTENSION LABEL LINKBASE DOCUMENT | |
101.PRE** | XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE DOCUMENT |
*Filed herewith.
** Furnished herewith.