UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,Washington, D.C. 20549
FORM 10-Q
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 June 30, 20172018
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
number:1-11916
WIRELESS TELECOM GROUP, INC.
(Exact name of registrantRegistrant as specified in its charter)
( | (I.R.S. Employer Identification No.) | |
of | ||
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)telephone number, including area code)
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.
YesxNoo
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
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | o | Accelerated filer | o | ||
Non-accelerated filer | o (Do not check if a smaller reporting company) | Smaller reporting company | x | ||
Emerging growth company | o |
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 July 26, 2017: 22,381,87431, 2018: 20,979,651
1 |
WIRELESS TELECOM GROUP, INC.
Form 10-Q
Table of Contents
2 |
PART 1 – FINANCIAL INFORMTION
WIRELESS TELECOM GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except number of shares and par value)
PART I – FINANCIAL INFORMATION
Item 1 –1. Financial Statements
June 30 | December 31, | June 30 | December 31 | |||||||||||||
Assets | 2017 | 2016 | ||||||||||||||
2018 | 2017 | |||||||||||||||
(unaudited) | (Unaudited) | |||||||||||||||
CURRENT ASSETS | ||||||||||||||||
Cash & cash equivalents | $ | 2,814,839 | $ | 9,350,803 | $ | 2,635 | $ | 2,458 | ||||||||
Accounts receivable - net of reserves of $6,892 and $10,740, respectively | 6,866,188 | 5,183,869 | ||||||||||||||
Inventories - net of reserves of $2,572,851 and $1,549,089, respectively | 7,326,706 | 8,452,751 | ||||||||||||||
Accounts receivable - net of reserves of $66and$44,respectively | 10,979 | 9,041 | ||||||||||||||
Inventories - net of reserves of $1,661 and $1,856, respectively | 7,565 | 6,526 | ||||||||||||||
Prepaid expenses and other current assets | 2,563,984 | 866,035 | 1,358 | 4,733 | ||||||||||||
TOTAL CURRENT ASSETS | 19,571,717 | 23,853,458 | 22,537 | 22,758 | ||||||||||||
PROPERTY PLANT AND EQUIPMENT - NET | 2,410,918 | 2,166,566 | 2,760 | 2,730 | ||||||||||||
OTHER ASSETS | ||||||||||||||||
Goodwill | 8,879,991 | 1,351,392 | 10,066 | 10,260 | ||||||||||||
Acquired Intangible Assets, net | 9,351,256 | - | 3,864 | 4,511 | ||||||||||||
Deferred income taxes | 8,895,791 | 7,403,600 | 6,146 | 5,939 | ||||||||||||
Other long term assets | 784,826 | 660,119 | ||||||||||||||
Other | 647 | 723 | ||||||||||||||
TOTAL OTHER ASSETS | 27,911,864 | 9,415,111 | 20,723 | 21,433 | ||||||||||||
TOTAL ASSETS | 49,894,499 | 35,435,135 | $ | 46,020 | $ | 46,921 | ||||||||||
Liabilities and Shareholders’ Equity | ||||||||||||||||
CURRENT LIABILITIES | ||||||||||||||||
Short term debt | $ | 1,674,426 | - | $ | 2,583 | $ | 1,335 | |||||||||
Accounts payable | 3,414,665 | 2,986,797 | 4,007 | 4,109 | ||||||||||||
Accrued expenses and other current liabilities | 4,739,720 | 673,067 | 5,133 | 2,894 | ||||||||||||
Deferred Revenue | 385,731 | - | 376 | 629 | ||||||||||||
TOTAL CURRENT LIABILITIES | 10,214,542 | 3,659,864 | 12,099 | 8,967 | ||||||||||||
LONG TERM LIABILITIES | ||||||||||||||||
Long term debt | 570,000 | - | 418 | 494 | ||||||||||||
Other long term liabilities | 1,516,916 | 69,058 | 98 | 1,590 | ||||||||||||
Deferred Tax Liability | 1,590,150 | - | 1,033 | 767 | ||||||||||||
TOTAL LONG TERM LIABILITIES | 3,677,067 | 69,058 | 1,549 | 2,851 | ||||||||||||
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, 33,416,752 and 29,786,224 shares issued, 22,381,874 and 18,751,346 shares outstanding | 334,167 | 297,862 | ||||||||||||||
Common stock, $.01 par value, 75,000,000 shares authorized, 34,168,252 and 33,868,252 shares issued, 20,979,651 and 22,772,167 shares outstanding | 342 | 339 | ||||||||||||||
Additional paid in capital | 46,846,617 | 40,563,002 | 48,127 | 47,494 | ||||||||||||
Retained earnings | 9,069,252 | 11,668,829 | 7,791 | 7,176 | ||||||||||||
Treasury stock at cost, - 11,034,878 and 11,034,878 shares, respectively | (20,823,480 | ) | (20,823,480 | ) | ||||||||||||
Treasury stock at cost, 13,188,601 and 11,096,085 shares, respectively | (24,509) | (20,910) | ||||||||||||||
Accumulated Other Comprehensive Income | 576,334 | - | 621 | 1,004 | ||||||||||||
TOTAL SHAREHOLDERS’ EQUITY | 36,002,890 | 31,706,213 | 32,372 | 35,103 | ||||||||||||
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | 49,894,499 | $ | 35,435,135 | $ | 46,020 | $ | 46,921 |
TheSee accompanying notes are an integral part of these condensed consolidated financial statements.Notes to Condensed Consolidated Financial Statements.
3 |
WIRELESS TELECOM GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME/(LOSS)
(UNAUDITED)
(In thousands, except share and per share amounts)
Three Months Ended June 30 | Six Months Ended June 30 | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
NET REVENUES | $ | 13,414 | $ | 11,933 | $ | 26,678 | $ | 21,482 | ||||||||
COST OF REVENUE | 7,244 | 8,589 | 14,239 | 13,805 | ||||||||||||
GROSS PROFIT | 6,170 | 3,344 | 12,439 | 7,677 | ||||||||||||
Operating Expenses | ||||||||||||||||
Research and Development | 1,313 | 1,130 | 2,469 | 2,217 | ||||||||||||
Sales and Marketing | 1,933 | 1,663 | 3,844 | 3,215 | ||||||||||||
General and Administrative | 2,678 | 2,821 | 5,311 | 6,233 | ||||||||||||
Loss on change in fair value of contingent consideration | 213 | - | 213 | - | ||||||||||||
Total Operating Expenses | 6,137 | 5,614 | 11,837 | 11,665 | ||||||||||||
Operating income/(loss) | 33 | (2,270) | 602 | (3,988) | ||||||||||||
Other income/(expense) | 33 | (2) | (13) | (3) | ||||||||||||
Interest Expense | (141) | (110) | (234) | (159) | ||||||||||||
(Loss)/Income before taxes | (75) | (2,382) | 355 | (4,150) | ||||||||||||
Tax Provision/(Benefit) | 105 | (1,012) | 161 | (1,551) | ||||||||||||
Net (Loss)/Income | $ | (180) | $ | (1,370) | $ | 194 | $ | (2,599) | ||||||||
Other Comprehensive (Loss)/Income: | ||||||||||||||||
Foreign currency translation adjustments | (963) | 635 | (383) | 576 | ||||||||||||
Comprehensive (Loss) | $ | (1,143) | $ | (735) | $ | (189) | $ | (2,023) | ||||||||
Net (Loss)/Income per common share: | ||||||||||||||||
Basic | $ | (0.01) | $ | (0.07) | $ | 0.01 | $ | (0.13) | ||||||||
Diluted | $ | (0.01) | $ | (0.07) | $ | 0.01 | $ | (0.13) | ||||||||
Weighted average shares outstanding: | ||||||||||||||||
Basic | 20,864,428 | 19,765,101 | 20,755,027 | 19,577,271 | ||||||||||||
Diluted | 20,864,428 | 19,765,101 | 21,510,539 | 19,577,271 |
In periods with a net loss, the basic loss per share equals the diluted loss per share as all common stock equivalents are excluded from the per share calculation because they are anti-dilutive.
See accompanying Notes to Condensed Consolidated Financial Statements.
4 |
WIRELESS TELECOM GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
For the Six Months | ||||||||
Ended June 30 | ||||||||
2018 | 2017 | |||||||
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES | ||||||||
Net Income/(Loss) | $ | 194 | $ | (2,599) | ||||
Adjustments to reconcile net income/(loss) to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 1,237 | 1,059 | ||||||
Amortization of debt issuance fees | 39 | 29 | ||||||
Share-based compensation expense | 348 | 284 | ||||||
Deferred rent | 7 | 13 | ||||||
Deferred income taxes | 88 | (1,492) | ||||||
Provision for (recovery of) doubtful accounts | 22 | (4) | ||||||
Inventory reserves | 45 | 1,278 | ||||||
Changes in assets and liabilities, net of acquisition: | ||||||||
Accounts receivable | (2,090) | 658 | ||||||
Inventories | (1,101) | 1,005 | ||||||
Prepaid expenses and other assets | (154) | 84 | ||||||
Accounts payable | (50) | (771) | ||||||
Accrued expenses and other liabilities | 1,611 | 945 | ||||||
Net cash provided by operating activities | 196 | 489 | ||||||
CASH FLOWS (USED) BY INVESTING ACTIVITIES | ||||||||
Capital expenditures | (583) | (318) | ||||||
Proceeds from asset disposal | - | 7 | ||||||
Acquisition of business net of cash acquired | (811) | (8,842) | ||||||
Net cash (used) by investing activities | (1,394) | (9,153) | ||||||
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES | ||||||||
Revolver borrowings | 19,721 | 15,794 | ||||||
Revolver repayments | (18,473) | (14,272) | ||||||
Term loan borrowings | - | 760 | ||||||
Term loan repayments | (76) | (38) | ||||||
Debt issuance fees | - | (215) | ||||||
Proceeds from exercise of stock options | 288 | 38 | ||||||
Net cash provided by financing activities | 1,460 | 2,067 | ||||||
Effect of exchange rate changes on cash and cash equivalents | (85) | 61 | ||||||
NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS | 177 | (6,536) | ||||||
Cash and cash equivalents, at beginning of period | 2,458 | 9,351 | ||||||
CASH AND CASH EQUIVALENTS, AT END OF PERIOD | $ | 2,635 | $ | 2,815 | ||||
SUPPLEMENTAL INFORMATION: | ||||||||
Cash paid during the period for interest | $ | 78 | $ | 73 | ||||
Cash paid during the period for income taxes | $ | 24 | $ | 34 |
See accompanying Notes to Condensed Consolidated Financial Statements.
5 |
WIRELESS TELECOM GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTSSTATEMENT OF OPERATIONS AND COMPREHENSIVE (LOSS)SHAREHOLDERS’ EQUITY(unaudited)(UNAUDITED)
(In thousands, except share amounts)
Three Months Ended | Year to Date Ended | |||||||||||||||
June 30 | June 30 | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
NET REVENUES | $ | 11,933,174 | $ | 7,610,104 | $ | 21,481,932 | $ | 13,978,519 | ||||||||
COST OF REVENUES | 8,589,013 | 4,271,214 | 13,805,262 | 7,919,515 | ||||||||||||
GROSS PROFIT | 3,344,161 | 3,338,890 | 7,676,670 | 6,059,004 | ||||||||||||
Operating Expenses | ||||||||||||||||
Research and development | 1,129,809 | 1,029,941 | 2,216,723 | 2,094,262 | ||||||||||||
Sales and marketing | 1,662,652 | 1,236,081 | 3,214,738 | 2,487,257 | ||||||||||||
General and administrative | 2,820,816 | 1,426,256 | 6,233,307 | 2,751,524 | ||||||||||||
Total Operating Expenses | 5,613,277 | 3,692,278 | 11,664,768 | 7,333,043 | ||||||||||||
Other income/(expense) | (1,674 | ) | (9,913 | ) | (3,220 | ) | (51,517 | ) | ||||||||
Interest Expense | (109,627 | ) | (353 | ) | (158,846 | ) | (353 | ) | ||||||||
Income/(Loss) Before Taxes | (2,380,417 | ) | (363,653 | ) | (4,150,164 | ) | (1,325,909 | ) | ||||||||
Tax Provision/(Benefit) | (1,012,286 | ) | (145,461 | ) | (1,550,587 | ) | (531,389 | ) | ||||||||
Net (Loss)/Income | $ | (1,368,131 | ) | $ | (218,192 | ) | $ | (2,599,577 | ) | $ | (794,520 | ) | ||||
Other Comprehensive Income/(Loss): | ||||||||||||||||
Foreign currency translation adjustments | 635,242 | - | 576,334 | - | ||||||||||||
Comprehensive (Loss) | $ | (732,889 | ) | $ | (218,192 | ) | $ | (2,023,243 | ) | $ | (794,520 | ) | ||||
Net (Loss)/Income Per Common Share: | ||||||||||||||||
Basic | $ | (0.07 | ) | $ | (0.01 | ) | $ | (0.13 | ) | $ | (0.04 | ) | ||||
Diluted | $ | (0.07 | ) | $ | (0.01 | ) | $ | (0.13 | ) | $ | (0.04 | ) | ||||
Weighted Average Shares Outstanding: | ||||||||||||||||
Basic | 19,765,101 | 18,622,116 | 19,577,271 | 18,614,350 | ||||||||||||
Diluted | 19,765,101 | 18,622,116 | 19,577,271 | 18,614,350 |
Common Stock Issued | Common Stock Amount | Additional Paid In Capital | Retained Earnings | Treasury Stock | Accumulated Other Comprehensive Loss | Total Shareholders’ Equity | ||||||||||||||||||||||
Balances at December 31, 2017 | 33,868,252 | $ | 339 | $ | 47,494 | $ | 7,176 | $ | (20,910) | $ | 1,004 | $ | 35,103 | |||||||||||||||
Adoption of Accounting Standard | - | - | - | 421 | - | - | 421 | |||||||||||||||||||||
Adjusted Opening Equity | 33,868,252 | $ | 339 | $ | 47,494 | $ | 7,597 | $ | (20,910) | $ | 1,004 | $ | 35,524 | |||||||||||||||
Net Income/(Loss) | - | - | - | 194 | - | - | 194 | |||||||||||||||||||||
Issuance of shares in connection with stock options exercised | 300,000 | 3 | 285 | - | - | - | 288 | |||||||||||||||||||||
Forfeiture of shares issued in connection with CommAgility acquistion | - | - | - | - | (3,599) | - | (3,599) | |||||||||||||||||||||
Share-based compensation expense | - | - | 348 | - | - | - | 348 | |||||||||||||||||||||
Cumulative translation adjustment | - | - | - | - | - | (383) | (383) | |||||||||||||||||||||
Balances at June 30, 2018 | 34,168,252 | $ | 342 | $ | 48,127 | $ | 7,791 | $ | (24,509) | $ | 621 | $ | 32,372 |
TheSee accompanying notes are an integral part of these condensed consolidated financial statements.Notes to Condensed Consolidated Financial Statements.
WIRELESS TELECOM GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
For the Six Months | ||||||||
Ended June 30, | ||||||||
2017 | 2016 | |||||||
CASH FLOWS PROVIDED/USED BY OPERATING ACTIVITIES | ||||||||
Net income (loss) | $ | (2,599,577 | ) | $ | (794,520 | ) | ||
Adjustments to reconcile net income (loss) to net cash provided/(used) by operating activities: | ||||||||
Depreciation and amortization | 1,059,355 | 232,696 | ||||||
Amortization of debt issuance fees | 28,758 | - | ||||||
Share-based compenation expense | 283,872 | 197,238 | ||||||
Deferred rent | 13,215 | 19,302 | ||||||
Deferred income taxes | (1,492,191 | ) | (531,389 | ) | ||||
Provision for doubtful accounts | (3,848 | ) | (38,646 | ) | ||||
Inventory reserves | 1,278,036 | 121,369 | ||||||
Changes in assets and liabilities: | ||||||||
Accounts receivable | 657,526 | 798,730 | ||||||
Inventories | 1,005,156 | (719,034 | ) | |||||
Prepaid expenses and other assets | 84,385 | 84,203 | ||||||
Accounts payable | (771,055 | ) | 302,650 | |||||
Accrued expenses and other current liabilities | 944,532 | (137,824 | ) | |||||
Net cash provided/(used) by operating activities | 488,164 | (465,225 | ) | |||||
CASH FLOWS (USED) BY INVESTING ACTIVITIES | ||||||||
Capital expenditures | (318,074 | ) | (502,023 | ) | ||||
Proceeds from asset disposal | 7,397 | - | ||||||
Acquisition of business net of cash acquired | (8,842,122 | ) | - | |||||
Net cash (used by) investing activities | (9,152,799 | ) | (502,023 | ) | ||||
CASH FLOWS PROVIDED/(USED) BY FINANCING ACTIVITIES | ||||||||
Revolver borrowings | 15,794,004 | - | ||||||
Revolver repayments | (14,271,578 | ) | - | |||||
Term loan borrowings | 760,000 | - | ||||||
Term loan repayments | (38,000 | ) | - | |||||
Debt issuance fees | (215,358 | ) | - | |||||
Proceeds from exercise of stock options | 37,500 | - | ||||||
Repayments of equipment lease payable | - | (79,180 | ) | |||||
Repurchase of common stock - 42,995 shares | - | (65,468 | ) | |||||
Net cash provided/(used by) financing activities | 2,066,568 | (144,648 | ) | |||||
Effect of exchange rate changes on cash and cash equivalents | 62,103 | - | ||||||
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | (6,535,964 | ) | (1,111,893 | ) | ||||
Cash and cash equivalents, at beginning of period | 9,350,803 | 9,726,007 | ||||||
CASH AND CASH EQUIVALENTS, AT END OF PERIOD | $ | 2,814,839 | $ | 8,614,114 | ||||
SUPPLEMENTAL INFORMATION: | ||||||||
Cash paid during the period for interest | $ | 73,184 | $ | - | ||||
Cash paid during the period for income taxes | $ | 38,780 | $ | 35,938 | ||||
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: | ||||||||
Capital expenditures | $ | - | $ | (41,904 | ) | |||
Equipment lease payable | $ | - | $ | 41,904 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
WIRELESS TELECOM GROUP, INC.CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY(unaudited)
Common | Other | Total | ||||||||||||||||||||||||||
Common | Stock | Additional Paid | Retained | Comprehensive | Shareholders’ | |||||||||||||||||||||||
Stock Issued | Amount | In Capital | Earnings | Income | 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) | (2,599,577 | ) | (2,599,577 | ) | ||||||||||||||||||||||||
Issuance of shares in connection with stock options exercised | 50,000 | 500 | 37,000 | 37,500 | ||||||||||||||||||||||||
Issuance of shares in connection with CommAgility acquisition | 3,487,528 | 34,875 | 5,963,673 | 5,998,548 | ||||||||||||||||||||||||
Issuance of restricted stock | 150,000 | 1,500 | (1,500 | ) | ||||||||||||||||||||||||
Forfeiture of Restricted Stock | (57,000 | ) | (570 | ) | 570 | |||||||||||||||||||||||
Share-based compensation expense | 283,872 | 283,872 | ||||||||||||||||||||||||||
Cumulative translation adjustment | 576,334 | 576,334 | ||||||||||||||||||||||||||
Balances at June 30, 2017 | 33,416,752 | $ | 334,167 | $ | 46,846,617 | $ | 9,069,252 | $576,334 | ($20,823,480 | ) | $ | 36,002,890 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
WIRELESS TELECOM GROUP, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(unaudited)(UNAUDITED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES AND POLICIESSummary of Significant Accounting Principles and Policies
Basis of Presentation and Preparation
Wireless Telecom Group, Inc., a New Jersey corporation, together with its subsidiaries (“we”, “us”, “our” or the “Company”), is a global designer and manufacturer of advanced radio frequency (“RF”) and microwave components, modules, systems and instruments and currently markets its products and services worldwide under the Boonton, Microlab, Noisecom and CommAgility brands. Serving the wireless, telecommunication, satellite, military, aerospace, and semiconductor industries, Wireless Telecom Group products enable innovation across a wide range of traditional and emerging wireless technologies. With a unique set of high-performance products including peak power meters, signal analyzers, signal processing modules, long-term evolution (“LTE”) physical layer (“PHY”) and stack software, power splitters and combiners, global positioning system (“GPS”) repeaters, public safety monitors, noise sources, and programmable noise generators, Wireless Telecom Group supports the development, testing, and deployment of wireless technologies around the globe.
The condensed consolidated balance sheetCondensed Consolidated Balance Sheet as of June 30, 2017,2018, the condensed consolidated statementsCondensed Consolidated Statements of operationsOperations and comprehensive (loss)Comprehensive Income/(Loss) for the three and six months ended June 30, 2018 and 2017, and 2016 and the condensed consolidated statementsCondensed Consolidated Statements of cash flows and shareholders’ equityCash Flows for the six months ended June 30, 2018 and 2017 and the Condensed Consolidated Statement of Shareholders’ Equity for the six months ended June 30, 2018 have been prepared by the Company (as defined below) without audit. The condensed consolidated financial statementsCondensed Consolidated Financial Statements include the accounts of Wireless Telecom Group, Inc., doing business as and operating under the trade name, NoiseCom,Noisecom, and its wholly owned subsidiaries including Boonton Electronics Corporation (“Boonton”), Microlab/FXR (“Microlab”), Wireless Telecommunications Ltd. and CommAgility Limited (“CommAgility”) which are collectively referred to herein as, the “Company”. All intercompany transactions and balances have been eliminated in consolidation.
The Company presents its operations in three reportable segments: (1) Network Solutions, (2) Test and Measurement and (3) Embedded Solutions. The Network Solutions segment is comprised primarily of the operations of Microlab. The Test and Measurement segment is comprised of the operations of Boonton and Noisecom. The Embedded Solutions segment is comprised of the operations of CommAgility.
It is suggested that these Interim Condensed Consolidated Financial Statements be read in conjunction with the Audited Consolidated Financial Statements, and the notes thereto, included in the Company’s latest Shareholders’ Annual Report (Form 10-K).
Condensed Consolidated Financial Statements
In the opinion of management, the accompanying condensed consolidated financial statementsCondensed 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, 2016.2017. 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)(“US GAAP”) have been condensed or omitted from this report.reduced for interim periods in accordance with SEC rules.
The results of operations for the three and six month periodsmonths period ended June 30, 20172018 are not necessarily indicative of the results to be expected for the full year ending December 31, 2017.2018.
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 estimated fair values of acquired assets and liabilities in business combinations) and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of net revenues and expenses during the reporting period. Actual results could differ from those estimates.
7 |
WIRELESS TELECOM GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 weighted average spot rate for the periods presented. Translation gains or losses related to net assets located outside the U.S. are shown as a component of accumulated other comprehensive income in the Condensed Consolidated Statement of 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 Consolidated Statements of Operations and Comprehensive Income/(Loss).
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 generally has limited concentration of credit risk in accounts receivable due to the large number of entities comprising the Company’s 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
For the three and six months ended June 30, 2018, one customer accounted for approximately 25% and 21% of the Company’s sales team to ensure segregation of duties.
WIRELESS TELECOM GROUP, INC.NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(unaudited)
consolidated revenues, respectively. For the three and six months ended June 30, 2017, one customer accounted for approximately 16% and 11% of the Company’s consolidated revenues, respectively. For the three and six months ended June 30, 2016, one customer accounted for approximately 12% and 11%, respectively, of the Company’s consolidated revenues. At June 30, 20172018, one customer represented 19%exceeded 10% of the Company’sconsolidated gross accounts receivable.receivable at 32%. At December 31, 2016, one customer represented 16%2017, two customers exceeded 10% of the Company’sconsolidated gross accounts receivable balance.at 18% and 11%, respectively.
Fair 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 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 the Company may be required to pay additional purchase price if certain financial targets are achieved for the years ending December 31, 2017 and December 31, 2018 (“CommAgility Earn-Out”). The financial targets for 2017 were not achieved therefore there was no earn-out payment made in the six months ended June 30, 2018. As of the acquisition date,December 31, 2017, the Company estimated the fair value of the contingent consideration remaining to be $1,509,000 (see Note 3) andpaid based on the 2018 financial results to be $0.6 million. 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 CommAgility gross revenues 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).outcome. 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 accrued expense and other current liabilities and 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.
8 |
WIRELESS TELECOM GROUP, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(unaudited)(UNAUDITED)
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,During 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.
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,three months ended June 30, 2018 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 therecorded a loss on change in fair value of contingent consideration liability of $0.2 million as a result of the undelivered items. Where vendor-specific objective evidenceimproved financial forecast at CommAgility as compared to prior estimates. As of June 30, 2018, the Company’s contingent consideration liability has been estimated at $0.9 million and is recorded in other current liabilities in the accompanying condensed consolidated balance sheet. The Company will satisfy this obligation, if ultimately earned by the CommAgility sellers, with a cash payment to the sellers of CommAgility upon the achievement of the financial targets for 2018. The contingent consideration liability is considered a Level 3 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 until such evidence of fair value can be determined for the undelivered items.
Software arrangements that require significant customization or modification 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 weighted average spot rate for the periods presented. Translation gains or losses related to net assets located outside the U.S. are shown as a component of accumulated other comprehensive income in the Condensed Consolidated Statements of 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 and Comprehensive (Loss).
Other Comprehensive Income (Loss)
Other comprehensive income (loss) is recorded directly to a separate section of shareholders’ equity in accumulated other comprehensive income 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.
Intangible and Long-lived Assets
Intangible assets include patents, non-competition agreements 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
WIRELESS TELECOM GROUP, INC.NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(unaudited)
determine the estimated useful lives could change due to numerous factors including product demand, market 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 evaluated for impairment annually by first performing a qualitative assessment to determine whether a quantitative goodwill test is necessary. After assessing the totality of events or circumstances, if we determine it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then we perform additional quantitative tests to determine the magnitude of any impairment.measurement.
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 statementsCondensed Consolidated Financial Statements, and the notes thereto, through the date the financial statements were issued.
NOTE 2 – RECENT ACCOUNTING PRONOUNCEMENTSAccounting Pronouncements
Recently Adopted Accounting Standards
On January 1, 2018, the Company adopted Accounting Standards Update (“ASU”) 2014-09,Revenue from Contracts with Customers (Topic 606) (“Topic 606”), using the “modified retrospective” method, meaning the standard is applied only to the most current period presented in the financial statements. Furthermore, we elected to apply the standard only to those contracts which were not completed as of the date of the adoption. Results for reporting periods beginning on the date of adoption are presented under Topic 606, while prior period amounts have not been adjusted and continue to be reported in accordance with accounting standards in effect for those periods (see Note 3).
Upon adoption, a cumulative effect adjustment of $0.4 million was made and the impact resulted in an increase to the January 1, 2018 opening balance of retained earnings. The adjustment was based on customer-specific contracts in effect at December 31, 2017 and reflects revenue that would have been recognized in 2018 in accordance with Accounting Standard Codification (“ASC”) Topic 605,Revenue Recognition, and Subtopic 985,Software, collectively referred to as “Topic 605”. The beginning balance of deferred revenue decreased by $0.3 million representing amounts that were invoiced to customers and not recognized and prepaid and other current assets increased by $0.2 million representing unbilled receivables recognized under Topic 606. Further, accounts receivable increased $0.2 million as the contra accounts receivable balance representing estimated product returns was reclassified to other current liabilities.
The most significant impact of Topic 606 relates to the Company’s accounting for software license agreements which have multiple deliverables. Under Topic 605 the Company could not establish vendor specific objective evidence of fair value (“VSOE”) for its undelivered elements and therefore was not able to separate its delivered software licenses from its future undelivered software license releases. Topic 606 no longer requires separability of promised goods, such as software licenses, on the basis of VSOE. Rather, Topic 606 requires the Company to identify the performance obligations in the contract — that is, those promised goods and services (or bundles of promised goods or services) that are distinct — and allocate the transaction price of the contract to those performance obligations on the basis of estimated standalone selling prices (“SSPs”). For these arrangements, the Company will recognize revenue for each deliverable at a point in time when control is transferred to the customer since each deliverable has standalone value.
The primary impact of adopting the new standard results in an acceleration of revenues recognized for the aforementioned multiple deliverable software license arrangements, which are primarily in the Embedded Solutions segment. These multiple deliverable arrangements represented less than 2% of total consolidated revenues for the year ended December 31, 2017.
The timing of revenue recognition for digital signal processing hardware in the Embedded Solutions segment, radio frequency solutions in the Network Solutions segment and noise generators and components and power meters and analyzers and related services in the Test and Measurement segment remains substantially unchanged.
9 |
WIRELESS TELECOM GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following line items in our Condensed Consolidated Statement of Operations and Comprehensive Income/(Loss) for the current reporting period and Condensed Consolidated Balance Sheet as of June 30, 2018 have been provided to reflect both the adoption of Topic 606 as well as a comparative presentation in accordance with Topic 605 previously in effect (dollars in thousands):
Three Months Ended June 30, 2018 | ||||||||||||
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME/(LOSS) | As Reported (in Accordance with ASC Topic 606) | Balances Without Adoption of ASC Topic 606 | Impact of Adoption Higher/(Lower) | |||||||||
Net revenues | $ | 13,414 | $ | 13,414 | $ | - | ||||||
Operating income | 33 | 33 | - | |||||||||
Net income/(loss) | (180) | (180) | - | |||||||||
Six Months Ended June 30, 2018 | ||||||||||||
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME/(LOSS) | As Reported (in Accordance with ASC Topic 606) | Balances Without Adoption of ASC Topic 606 | Impact of Adoption Higher/(Lower) | |||||||||
Net revenues | $ | 26,678 | $ | 26,372 | $ | 306 | ||||||
Operating income | 602 | 296 | 306 | |||||||||
Net income/(loss) | 194 | (112) | 306 | |||||||||
As of June 30, 2018 | ||||||||||||
CONDENSED CONSOLIDATED BALANCE SHEET | As Reported (in Accordance with ASC Topic 606) | Balances Without Adoption of ASC Topic 606 | Impact of Adoption Higher/(Lower) | |||||||||
CURRENT ASSETS | ||||||||||||
Prepaid expenses and other current assets | $ | 1,358 | $ | 1,358 | - | |||||||
CURRENT LIABILITIES | ||||||||||||
Deferred revenue | 376 | 1,081 | (705) | |||||||||
SHAREHOLDERS’ EQUITY | ||||||||||||
Retained earnings | 32,372 | 32,066 | 306 |
In 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:Combinations (Topic 805): 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 ofCompany adopted this ASU is not expectedstandard on January 1, 2018 and will apply the standard to have a material impact on our consolidated financial statements.any future business combinations.
In August 2016, the FASB issued ASU 2016-15,Statement of Cash Flows (Topic 230); 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 beis effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Earlyyears and early adoption is permitted. The Company isadopted this standard on January 1, 2018, and it had no material impact on our financial statements.
10 |
WIRELESS TELECOM GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Except for the change in accounting policies for revenue recognition as a result of adopting Topic 606, there have been no other changes to our significant accounting policies as described in the process of evaluating the2017 Form 10-K that had a material impact of the adoption of ASU 2016-15 on itsour condensed consolidated financial statements.statements and related notes.
Recent Accounting Pronouncements Not Yet Adopted
In February 2016, the FASB issued ASU 2016-02,Leases (Topic 842), which creates new accounting and reporting guidelines for leasing arrangements. The new guidance 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 guidance also requires new disclosures to help financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. The new standard is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period, with early application permitted.
The newCompany is currently evaluating its population of leases which includes its current operating leases included in its commitment schedules as well as any embedded leases. The Company does anticipate recognition of additional assets and corresponding liabilities related to leases upon adoption, but has not yet quantified these at this time. The Company is continuing to asses all potential impacts of ASU 2016-02, including ASU 2018-10Codification Improvements to Topic 842, Leases. During the continued assessment, the Company may identify additional impacts this ASU will have on its financial statements and related disclosures. The Company plans to adopt the standard effective January 1, 2019 but has not selected a transitional method and it is reviewing all practical expedients.
On June 20, 2018, the FASB issued ASU 2018-07,Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. ASU 2018-07 is intended to reduce cost and complexity and to improve financial reporting for share-based payments issued to nonemployees. This ASU expands the scope of ASC Topic 718,Compensation - Stock Compensation, which currently only includes share-based payments issued to employees, to also include share-based payments issued to nonemployees for goods and services. Consequently, the accounting for share-based payments to nonemployees and employees will be substantially aligned. ASU 2018-07 supersedes ASCSubtopic 505-50, Equity - Equity-Based Payments to Non-Employees. The amendments in this ASU are effective for public companies for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. Early adoption is permitted, but no earlier than a company’s adoption date of Topic 606. The Company does not expect the adoption of this standard to have a material impact on our financial statements.
NOTE 3 – Revenue
Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration to which the Company expects to be applied usingentitled in exchange for promised goods or services. The Company’s performance obligations are satisfied either over time or at a modifiedpoint in time. Revenue from performance obligations that transferred at a point in time accounted for approximately 95% of the Company’s total revenue for the three and six months ended June 30, 2018.
Nature of Products and Services
Hardware
The Company generally has one performance obligation in its arrangements involving the sales of radio frequency solutions in the Network Solutions segment, digital signal processing hardware in the Embedded Solutions segment and noise generators and components and power meter and analyzers in the Test and Measurement segment. When the terms of a contract include the transfer of multiple products, each distinct product is identified as a separate performance obligation. Generally, satisfaction occurs when control of the promised goods is transferred to the customer in exchange for consideration in an amount for which we expect to be entitled. Generally, control is transferred when legal title of the asset moves from the Company to the customer. We sell our products to a customer based on a purchase order, and the shipping terms per each individual order are primarily used to satisfy the single performance obligation. However, in order to determine control has transferred to the customer, the Company also considers:
· | when the Company has a present right to payment for the asset | |
· | when the Company has transferred physical possession of the asset to the customer | |
· | when the customer has the significant risks and rewards of ownership of the asset | |
· | when the customer has accepted the asset |
WIRELESS TELECOM GROUP, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(unaudited)(UNAUDITED)
retrospective approach.Software
Arrangements involving licenses of software in the Embedded Solutions segment may involve multiple performance obligations, most notably subsequent releases of the software. The Company ishas concluded that each software release in a multiple deliverable arrangement in the processEmbedded Solutions segment is a distinct performance obligation and, accordingly, transaction price is allocated to each release when the customer obtains control of evaluating the impact of ASU 2016-02 on its consolidated financial statements.software.
In May 2014,Performance obligations that are not distinct at contract inception are combined. Specifically, with 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 depictCompany’s sales of software, contracts that include customization may result in 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): Deferralcombination of the Effective Date, which deferscustomization services with the effective date bylicense as one distinct performance obligation and recognized over time. The duration of these performance obligations are typically one year with early adoption on the original effective date permitted. As a result, ASU 2014-09 will be effective for annualor less.
Services
Arrangements involving calibration and interim periods beginning after December 15, 2017. The Company isrepair services in the processCompany’s Test and Measurement segment are generally considered a single performance obligation and are recognized as the services are rendered.
Shipping and Handling
Shipping and handling activities performed after the customer obtains control are accounted for as fulfillment activities and recognized as cost of evaluatingrevenues.
Significant Judgments
For the impactCompany’s more complex software and services arrangements significant judgment is required in determining whether licenses and services are distinct performance obligations that should be accounted for separately, or, are not distinct, and thus accounted for together. Further, in cases where we determine that performance obligations should be accounted for separately, judgement is required to determine the standalone selling price for each distinct performance obligation.
Certain of this ASU on its consolidated financial statements.the Company’s shipments include a limited return right. In accordance with Topic 606 the Company recognizes revenue net of expected returns.
Contract Balances
The Company does not believe there are any other recently issued, but not yet effective accounting pronouncements, if adopted, that would have a material effecttiming of revenue recognition may differ from the timing of invoicing to customers and these timing differences result in contract assets or contract liabilities (deferred revenue) on the accompanyingCompany’s condensed consolidated financial statements.balance sheet. The Company records a contract asset when revenue is recognized prior to invoicing, or deferred revenue when revenue is recognized subsequent to invoicing. Contract assets are recorded in prepaid expenses and other current assets and are $0.3 million and $0.2 million as of June 30, 2018 and December 31, 2017 (as adjusted), respectively. The increase in contract assets from December 31, 2017 is due to contract assets recognized in the current period. Deferred revenue is $0.4 million and $0.3 million as of June 30, 2018 and December 31, 2017 (as adjusted), respectively.
Disaggregated Revenue
We disaggregate our revenue from contracts with customers by product family and geographic location for each of our segments as we believe it best depicts how the nature, timing and uncertainty of our revenue and cash flows are affected by economic factors. See details in the tables below (dollars in thousands).
12 |
WIRELESS TELECOM GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Three Months Ended June 30, 2018 | Six Months Ended June 30, 2018 | |||||||||||||||||||||||||||||||
Network Solutions | Test and Measurement | Embedded Solutions | Total | Network Solutions | Test and Measurement | Embedded Solutions | Total | |||||||||||||||||||||||||
Total Net Revenues by Revenue Type | ||||||||||||||||||||||||||||||||
Passive RF Components | $ | 5,636 | $ | - | $ | - | $ | 5,636 | $ | 11,147 | $ | - | $ | - | $ | 11,147 | ||||||||||||||||
Noise Generators and Components | - | 1,588 | - | 1,588 | - | 3,087 | - | 3,087 | ||||||||||||||||||||||||
Power Meters and Analyzers | - | 1,574 | - | 1,574 | - | 3,554 | - | 3,554 | ||||||||||||||||||||||||
Signal Processing Hardware | - | - | 3,555 | 3,555 | - | - | 6,461 | 6,461 | ||||||||||||||||||||||||
Software Licenses | - | - | 28 | 28 | - | - | 511 | 511 | ||||||||||||||||||||||||
Services | - | 372 | 661 | 1,033 | - | 656 | 1,262 | 1,918 | ||||||||||||||||||||||||
Total Net Revenue | $ | 5,636 | $ | 3,534 | $ | 4,244 | $ | 13,414 | $ | 11,147 | $ | 7,297 | $ | 8,234 | $ | 26,678 | ||||||||||||||||
Total Net Revenues by Geographic Areas | ||||||||||||||||||||||||||||||||
Americas | $ | 4,978 | $ | 2,242 | $ | 762 | $ | 7,982 | $ | 9,137 | $ | 4,757 | $ | 2,185 | $ | 16,079 | ||||||||||||||||
EMEA | 491 | 514 | 3,480 | 4,485 | 1,432 | 963 | 5,850 | 8,245 | ||||||||||||||||||||||||
APAC | 167 | 778 | 2 | 947 | 578 | 1,577 | 199 | 2,354 | ||||||||||||||||||||||||
Total Net Revenue | $ | 5,636 | $ | 3,534 | $ | 4,244 | $ | 13,414 | $ | 11,147 | $ | 7,297 | $ | 8,234 | $ | 26,678 | ||||||||||||||||
Three Months Ended June 30, 2017 | Six Months Ended June 30, 2017 | |||||||||||||||||||||||||||||||
Network Solutions | Test and Measurement | Embedded Solutions | Total | Network Solutions | Test and Measurement | Embedded Solutions | Total | |||||||||||||||||||||||||
Total Net Revenues by Revenue Type | ||||||||||||||||||||||||||||||||
Passive RF Components | $ | 5,617 | $ | - | $ | - | $ | 5,617 | $ | 11,133 | $ | - | $ | - | $ | 11,133 | ||||||||||||||||
Noise Generators and Components | - | 1,598 | - | 1,598 | - | 2,815 | - | 2,815 | ||||||||||||||||||||||||
Power Meters and Analyzers | - | 1,470 | - | 1,470 | - | 3,006 | - | 3,006 | ||||||||||||||||||||||||
Signal Processing Hardware | - | - | 1,971 | 1,971 | - | - | 2,353 | 2,353 | ||||||||||||||||||||||||
Software Licenses | - | - | 76 | 76 | - | - | 161 | 161 | ||||||||||||||||||||||||
Services | - | 248 | 953 | 1,201 | - | 531 | 1,483 | 2,014 | ||||||||||||||||||||||||
Total Net Revenue | $ | 5,617 | $ | 3,316 | $ | 3,000 | $ | 11,933 | $ | 11,133 | $ | 6,352 | $ | 3,997 | $ | 21,482 | ||||||||||||||||
Total Net Revenues by Geographic Areas | ||||||||||||||||||||||||||||||||
Americas | $ | 4,762 | $ | 2,485 | $ | 1,047 | $ | 8,294 | $ | 9,473 | $ | 4,174 | $ | 1,612 | $ | 15,259 | ||||||||||||||||
EMEA | 735 | 414 | 1,949 | 3,098 | 1,307 | 968 | 2,346 | 4,621 | ||||||||||||||||||||||||
APAC | 120 | 417 | 4 | 541 | 353 | 1,210 | 39 | 1,602 | ||||||||||||||||||||||||
Total Net Revenue | $ | 5,617 | $ | 3,316 | $ | 3,000 | $ | 11,933 | $ | 11,133 | $ | 6,352 | $ | 3,997 | $ | 21,482 |
13 |
WIRELESS TELECOM GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 34 – ACQUISITIONPrepaid Expenses and Other Current Assets
Prepaid expenses and other current assets generally consist of income tax receivables, prepaid insurance, prepaid maintenance agreements and the short-term portion of debt issuance costs. As of December 31, 2017, prepaid and other current assets included a $3.6 million contingent asset representing the fair value of consideration shares issued in connection with the CommAgility acquisition. Under the claw back provision of the Share Purchase Agreement (see Note 5) the consideration shares were forfeited in March 2018 and are no longer outstanding. Accordingly, prepaid expenses and other current assets decreased by $3.6 million from December 31, 2017. The forfeited shares are recorded as treasury stock in the condensed consolidated statement of shareholders’ equity as of June 30, 2018.
NOTE 5 – Acquisition of CommAgility
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 Company paid $11,317,500$11.3 million in cash on acquisition date and issued 3,487,528 shares of newly issued Company 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.$6.0 million. In addition to the acquisition date cash purchase price the sellers are to bewere paid an additional £2,000,000 (approximately $2,500,000 at acquisition date)$2.5 million in the form of deferred purchase price payable in installments beginning in March 2017 through January 2019 and are duewere paid an additional purchase price adjustment based on working capital and cash levels delivered to the buyer as of February 17, 2017 (“Completion Cash Adjustment”).$1.4 million. Lastly, the sellers may earn up tocould have earned an additional £10,000,000 (approximately $12,500,000 at the acquisition date) payment£10.0 million in purchase price if certain financial targets are achieved by CommAgility during calendarwere met for the years ending December 31, 2017 and December 31, 2018. (See Note 1).
Pursuant to the Share Purchase Agreement, 2,092,516 of the Consideration Shares arewere subject to forfeiture and return to the Company if (a) 2017 Adjusted EBITDA, as defined, generated by CommAgility is less than £2,400,000;£2.4 million; or (b) 2018 Adjusted EBITDA, as defined, generated by CommAgility is less than £2,400,000£2.4 million (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). As of acquisition dateDuring the Company recorded a contingent asset of $1,619,607 based on a probability factor that the 2,092,516 of Consideration Shares will be forfeited. This contingent asset is included in prepaid expenses and other current assets in the Condensed Consolidated Balance Sheet as of June 30, 2017.
The acquisition has been accounted for under the acquisition method of accounting in accordance with ASC 805, Business Combinations.Accounting for acquisitions requires us to recognize separately from goodwill the assets acquired and the liabilities assumed at their acquisition date fair values. Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net of the acquisition date fair values of the assets acquired and the liabilities assumed. While we use our best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date as well as contingent consideration, where applicable, our estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, we record adjustments to the assets acquired and liabilities
WIRELESS TELECOM GROUP, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(unaudited)
assumed with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to our consolidated statements of operations and comprehensive (loss).
The Company incurred $17,434 and $1,289,517of acquisition-related costs during the three months and six months ended June 30, 2018 all consideration shares were forfeited as the 2017 respectively, 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 $3,000,216 and $3,996,992 of net sales to the Company for the three and six months ended June 30, 2017, respectively.
Various valuation techniques were used to estimate theEBITDA threshold was not achieved. 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 completesshares of $3.6 million 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:
Amounts Recognized as of Acquisition Date | Measurement Period Adjustments | Amounts Recognized as of Acquisition Date (as adjusted) | ||||||||||
Cash at close | $11,317,500 | $11,317,500 | ||||||||||
Equity issued at close | 5,998,548 | 5,998,548 | ||||||||||
Completion Cash Adjustment | 1,382,288 | 1,382,288 | ||||||||||
Deferred Purchase Price | 2,515,000 | 2,515,000 | ||||||||||
Contingent Consideration | 2,700,353 | (1,191,353 | ) | 1,509,000 | ||||||||
Total Purchase Price | 23,913,689 | (1,191,353 | ) | 22,722,336 | ||||||||
Cash | 4,566,510 | 4,566,510 | ||||||||||
Accounts Receivable | 2,267,124 | 2,267,124 | ||||||||||
Inventory | 1,125,532 | 1,125,532 | ||||||||||
Intangible Assets | 9,657,600 | 9,657,600 | ||||||||||
Contingent Asset | 1,619,607 | 1,619,607 | ||||||||||
Other Assets | 167,650 | 167,650 | ||||||||||
Fixed Assets | 303,904 | 303,904 | ||||||||||
Accounts Payable | (1,171,846 | ) | (1,171,846 | ) | ||||||||
Accrued Expenses | (417,213 | ) | (417,213 | ) | ||||||||
Deferred Revenue | (638,671 | ) | (638,671 | ) | ||||||||
Deferred Tax Liability | (1,701,586 | ) | 95,366 | (1,606,220 | ) | |||||||
Other Long Term Liabilities | (339,096 | ) | (339,096 | ) | ||||||||
Net Assets Acquired | 13,819,908 | 15,534,881 | ||||||||||
Goodwill | $10,093,781 | $ 7,187,455 |
WIRELESS TELECOM GROUP, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(unaudited)
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.treasury stock as of June 30, 2018.
The following table summarizes the activity related to contingent consideration and deferred purchase price for the three and six months ended June 30, 2017:2018 (dollars in thousands):
Contingent Consideration | Deferred Purchase Price | Contingent Consideration | Deferred Purchase Price | |||||||||||||
Balance at Beginning of Period | $ | - | $ | - | ||||||||||||
Fair Value At Acquisition Date | 2,700,353 | 2,515,000 | ||||||||||||||
Balance at December 31, 2017 | $ | 630 | $ | 1,230 | ||||||||||||
Accretion of Interest | 21,916 | 96 | - | |||||||||||||
Payment | (419,166 | ) | - | (811) | ||||||||||||
Fair Value Adjustment | 213 | - | ||||||||||||||
Foreign Currency Translation | (8,521 | ) | (6,834 | ) | (17) | 21 | ||||||||||
Balance as of March 31, 2017 | $ | 2,713,748 | $ | 2,089,000 | ||||||||||||
Accretion of Interest | 46,287 | |||||||||||||||
Payment | (325,000 | ) | ||||||||||||||
Measurement Period Adjustment | (1,191,353 | ) | ||||||||||||||
Foreign Currency Translation | 101,617 | 77,667 | ||||||||||||||
Balance as of June 30, 2017 | $ | 1,670,299 | $ | 1,841,667 | ||||||||||||
Balance as of June 30, 2018 | $ | 922 | $ | 440 |
As of June 30, 2017, $1,040,000 of2018, the contingent consideration liability and $1,408,333 of deferred purchase price isare included in accrued expenses and other current liabilities on the condensed consolidated balance sheet. As of June 30, 2017, $630,299 of contingent consideration and $433,334 of deferred purchase price is included in other long term liabilities on the condensed consolidated balance sheet.Condensed Consolidated Balance Sheet.
Pro Forma Information(Unaudited)
The following unaudited pro forma information presents 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 8) 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.
Pro-forma results for the three months ended June 30, 2016 are presented below:
(Unaudited) | 2016 | |||
Net Revenues | $ | 10,277,273 | ||
Net (loss) | $ | (198,089 | ) | |
Basic net (loss) per share | $ | (0.01 | ) | |
Diluted net (loss) per share | $ | (0.01 | ) |
WIRELESS TELECOM GROUP, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(unaudited)(UNAUDITED)
Pro-forma results for the six months ended June 30, 2016 and 2017 are presented below:
(Unaudited) | 2017 | 2016 | ||||||
Net Revenues | $ | 22,855,776 | $ | 19,452,462 | ||||
Net (loss) | $ | (1,852,342 | ) | $ | (1,812,036 | ) | ||
Basic net (loss) per share | $ | (0.09 | ) | $ | (0.09 | ) | ||
Diluted net (loss) per share | $ | (0.09 | ) | $ | (0.09 | ) |
NOTE 46 – INCOME TAXESIncome Taxes
The Company records deferred taxes in accordance with Accounting Standards Codification (“ASC”)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.
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 amount of deferred tax assets considered realizable is subject to adjustment in future periods if estimates of future taxable income are changed.
The effective rate of income tax benefitprovision of 37%45.2% for the six months ended June 30, 20172018 was higher than the statutory rate of 34%rates in the United States and United Kingdom primarily due to the impact of global intangible low-taxed income or “GILTI” related to our controlled foreign corporation offset by research and development deductions state tax benefits related to net operating losses offset by nondeductible expenses and a lower rate in the United Kingdom.UK and non-qualified stock option deductions in the U.S.
NOTE 57 - INCOME (LOSS) PER COMMON SHAREIncome/(Loss) per Common Share
Basic earnings (loss) per share is calculated by dividing income income/(loss) available to common shareholders by the weighted averageweighted-average number of shares of common stock outstanding during the period. Diluted earnings (loss) per share areis calculated by usingdividing income/(loss) available to common shareholders by the weighted averageweighted-average number of common shares of common stock outstanding for the period and, when dilutive, potential shares from stock options contingent shares and restricted shares, using the treasury stock method.method, unvested restricted shares and the weighted-average number of restricted stock units outstanding for the period. In periods with a net loss, the basic loss per share equals the diluted loss per share as all common stock equivalents are excluded from the per share calculation because they are anti-dilutive. In accordance with ASC 260, “Earnings Per Share”, the following table reconciles basic shares outstanding to fully diluted shares outstanding.
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Weighted average common shares outstanding | 19,765,101 | 18,622,116 | 19,577,271 | 18,614,350 | ||||||||||||
Potentially dilutive shares | — | — | — | — | ||||||||||||
Weighted average common shares outstanding, assuming dilution | 19,765,101 | 18,622,116 | 19,577,271 | 18,614,350 |
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||
2018 | 2017 | 2018 | 2017 | ||||||
Weighted-average common shares outstanding | 20,864,428 | 19,765,101 | 20,755,027 | 19,577,271 | |||||
Potentially dilutive shares | 736,469 | 175,212 | 755,512 | 239,051 | |||||
Weighted-average common shares outstanding, assuming dilution | 21,600,897 | 19,940,313 | 21,510,539 | 19,816,322 |
Common stock optionsequivalents are included in the diluted earnings income/(loss) per share calculation only when the various option exercise prices are lesslower than their relativethe average market price duringof the periods presented in
WIRELESS TELECOM GROUP, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(unaudited)common shares for the period presented.
this quarterly report.For the three and six month period ended June 30, 2018 the option exercise price of all outstanding options was lower than the average market price thus included in the potentially dilutive shares in the table above. The weighted averageweighted-average number of sharesoptions to purchase common stock not included in diluted earnings (loss)loss per share, because the effects are anti-dilutive, was 2,921,500513,722 and 352,073for271,519 for the three-months ended June 30, 2017three and 2016, respectively. For the six months ended June 30, 2017 and 2016, the weighted average number of shares not included in diluted earnings (loss) per share was 2,476,598 and 425,601, respectively.
15 |
WIRELESS TELECOM GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 68 – INVENTORIESInventories
Inventory carrying value is net of inventory reserves of $2,572,851$1.7 million and $1,549,089$1.9 million at June 30, 20172018 and December 31, 2016,2017, respectively.
Inventories consist of:
June 30, 2017 | December 31, 2016 | ||||||||||
Raw materials | $ | 2,954,106 | $ | 3,558,430 | |||||||
Work-in-process | 689,408 | 531,210 | |||||||||
Finished goods | 3,683,192 | 4,363,111 | |||||||||
$ | 7,326,706 | $ | 8,452,751 |
During the three month period ended June 30, 2017 the Company recorded inventory adjustments totaling $1,930,000, comprised of an increase to the Company’s excess and obsolescence reserve of $1,121,000 and the write off of gross inventory of $809,000.The charge was effected as a result of a review of inventory balances and net realizable value of the inventory following the launch of the Company’s lean manufacturing initiative and the adoption of a strategic product plan focused on product lifecycle acceleration.
June 30, 2018 | December 31, 2017 | |||||||
Raw materials | $ | 3,960 | $ | 3,231 | ||||
Work-in-process | 838 | 631 | ||||||
Finished goods | 2,767 | 2,664 | ||||||
$ | 7,565 | $ | 6,526 |
NOTE 79 – GOODWILL AND INTANGIBLE ASSETSGoodwill and Intangible Assets
The Company’s goodwill balance of $8,879,991$10.1 million at June 30, 20172018 relates to two of the Company’s reporting units, MicrolabNetwork Solutions ($1,351,392)1.4 million) and Embedded Solutions ($7,528,599)8.7 million). Management’s qualitative assessment performed in the fourth quarter of 20162017 did not indicate any impairment of Microlab’s goodwill as itseach reporting units 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:following (dollars in thousands):
June 30, 2017 | ||||
Beginning Balance | $ | 1,351,392 | ||
CommAgility Acquisition | 10,093,781 | |||
Measurement Period Adjustment | (2,906,326 | ) | ||
Foreign Currency Translation | 341,144 | |||
Ending Balance | $ | 8,879,991 |
WIRELESS TELECOM GROUP, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(unaudited)
Beginning Balance at December 31 | $ | 10,260 | ||
Foreign Exchange Translation | (194) | |||
Ending Balance at June 30 | $ | 10,066 |
Intangible assets consist of the following:following (dollars in thousands):
June 30, 2018 | ||||||||||||||||||||||||||||||||
Gross Carrying Amount | Accumulated Amortization | Foreign Exchange Translation | Net Carrying Amount | Gross Carrying Amount | Accumulated Amortization | Foreign Exchange Translation | Net Carrying Amount | |||||||||||||||||||||||||
Customer Relationships | $7,419,250 | ($400,240 | ) | $239,246 | $7,258,256 | $ | 2,766 | $ | (796) | $ | 136 | $ | 2,106 | |||||||||||||||||||
Patents | 1,320,375 | (99,682 | ) | 41,932 | 1,262,625 | 615 | (177) | 30 | 468 | |||||||||||||||||||||||
Non-Compete Agreements | 917,975 | (115,504 | ) | 27,904 | 830,375 | 1,107 | (536) | 59 | 630 | |||||||||||||||||||||||
Tradename | 629 | - | 31 | 660 | ||||||||||||||||||||||||||||
Total | $9,657,600 | ($615,426 | ) | $309,082 | $9,351,256 | $ | 5,117 | $ | (1,509) | $ | 256 | $ | 3,864 |
December 31, 2017 | ||||||||||||||||
Gross Carrying Amount | Accumulated Amortization | Foreign Exchange Translation | Net Carrying Amount | |||||||||||||
Customer Relationships | $ | 2,766 | $ | (494) | $ | 178 | $ | 2,450 | ||||||||
Patents | 615 | (109) | 39 | 545 | ||||||||||||
Non-Compete Agreements | 1,107 | (334) | 69 | 842 | ||||||||||||
Tradename | 629 | - | 45 | 674 | ||||||||||||
Total | $ | 5,117 | $ | (937) | $ | 331 | $ | 4,511 |
Amortization of acquired intangible assets was $414,781$0.3 million and $615,426$0.6 million for the three and six months ended June 30, 2017.2018, respectively. Amortization of acquired intangible assets is included as part of general and administrative
16 |
WIRELESS TELECOM GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
expenses in the accompanying condensed consolidated statementsCondensed Consolidated Statements of operationsOperations and comprehensive (loss)Comprehensive Income/(Loss).
The estimated future amortization expense related to intangible assets is as follows as of June 30, 2017:2018 (dollars in thousands):
Remainder of 2017 | $ 842,524 | ||||||||
2018 | 1,685,048 | ||||||||
Remainder 2018 | $ | 549 | |||||||
2019 | 1,685,048 | 1,098 | |||||||
2020 | 1,408,255 | 759 | |||||||
2021 | 1,368,714 | 710 | |||||||
Thereafter | 2,361,667 | ||||||||
2022 | 88 | ||||||||
Total | $9,351,256 | $ | 3,204 |
NOTE 810 – DEBTDebt
Debt consists of the following:following (in thousands):
WIRELESS TELECOM GROUP, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(unaudited)
June 30, 2018 | ||||
Revolver at LIBOR Plus Margin | $ | 2,431 | ||
Term Loan at LIBOR Plus Margin | 570 | |||
Total Debt | 3,001 | |||
Debt Maturing within one year | (2,583) | |||
Non-current portion of long term debt | $ | 418 |
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“Credit Facility”), which provided for a term loan in the aggregate principal amount of $760,000$0.8 million (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$9.0 million (“Revolver Commitment Amount”). The borrowing base is calculated as 85% of Eligibleeligible 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 CompanypaidCompany paid lender and legal fees of $215,358$0.2 million 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.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 quarterbeginningquarter beginning April 1, 2017 and continuing until the term loan maturity date, on which the remaining balance is due in a final installment. The future principal payments under the term loan are $76,000 for the remainder of 2017, $152,000$0.1 million in 2018 and $494,000$0.5 million in 2019. The Term Loan and Revolver are both scheduled to mature onNovemberon November 16, 2019.
The Term and RevolvingRevolver Loans bear interest at the LIBOR rate plus a margin. The margin on the outstanding balance of the Company’s Term Loans and RevolvingRevolver Loans is3.50%were fixed at 3.50% and 3.00%per annum, respectively, at June 30, 2017 and will continue at these rates untilthrough September 30, 2017. Thereafter, the margins shall bewere 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 defined in the Credit Facility) as of the most recently ended fiscal quarter falling into one of three levels. If the Company’s Fixed Charge 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 an 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 NewCredit
17 |
WIRELESS TELECOM GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Facility. The Company’s interest rate plus margin as of June 30, 2018 on the Credit Facility.Facility was 4.88% and 5.38% for the Revolver and Term Loan, respectively. The Company’s interest rate plus margin as of December 31, 2017 on the Credit Facility was 4.38% and 4.88% for the Revolver and Term Loan, respectively.
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 2/1/3% 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. Events of default under the New Credit Facility include but are not limited to: failure to pay obligations when due, breach or failure of any covenant, insolvency or bankruptcy, materially misleading representations or warranties, occurrence of a Change in Control (as defined) or occurrence of conditions that have a Material Adverse Effect (as defined).
On August 3, 2017 the Company entered into Amendment No. 1 to the New Credit Facility, effective June 30, 2017, which amended the definition of EBITDA“EBITDA” to exclude the non-cash inventory adjustment of $1,930,000$1.9 million recorded during the three months ended June 30, 2017 and to reduce the pledge of equity interests in the Company’s Foreign Subsidiaries from 66 2/3% to 66 1/3%. Accordingly, as
As of June 30, 2017,2018, and the date hereof, the Company is in compliance with the covenants of the New Credit Facility.
WIRELESS TELECOM GROUP, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(unaudited)
NOTE 911 - ACCOUNTING FOR SHARE BASED COMPENSATIONAccounting for Share-based Compensation
The Company follows the provisions of ASC 718, “Share-Based Payment.” The Company’s results for the three month period ended June 30, 2017 includes a credit of $17,517 related to share-based compensation expense due to forfeitures during the quarter. The Company’s results for the six month period ended June 30, 2017 include share-based compensation expense totaling $283,872. Results for the three and six month period ended June 30, 2016 include2018 includes $0.2 million and $0.3 million related to share-based compensation expense, totaling $98,619 and $197,238, respectively. Such amounts have been included in the Condensed Consolidated StatementsStatement of Operations and Comprehensive Income/(Loss) within general and administrative expenses in operating expenses.
For the three months ended June 30, 2017 the Company reversed $324,922 and $52,117 in stock compensation expense for stock options and restricted shares, respectively, that were forfeited as a result of employees exiting the Company. The total amounts forfeited during the quarter were 87,000 restricted shares and 655,000 stock options. The result on total share-based compensation expense for the quarter is net credit to expense in the amount of $17,517. The Company had assumed a zero forfeiture rate in prior periods.accounts for forfeitures when they occur.
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 equity, including restricted stock awards, restricted stock units, 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 2,000,0002 million shares of common stock, plus those shares still availablesubject to awards previously issued under the Company’s prior incentive compensation plan.2000 Stock Option Plan that expire, are canceled or are terminated after adoption of the Initial 2012 Plan without having been exercised in full and would have been available for subsequent grants under the 2000 Stock Option Plan. In June 2014, the Company’s shareholders approved the Amended and Restated 2012 Incentive Compensation Plan (the “2012 Plan”) allowing for an additional 1,658,0451.6 million shares of the Company’s common stock to be available for future grants under the 2012 Plan. The 2012 Plan provides that if awards are forfeited, expire or otherwise terminate without issuance of the shares underlying the awards, or if the award does not result in issuance of all or part of the shares underlying the award, the unissued shares are again available for awards under the 2012 Plan. As a result of certain award forfeitures and cancellations, as of June 30, 2017,2018, there were 26,000sharesare approximately 2.3 million shares available for issuance under the 2012 Plan, including those shares available under the Company’s prior incentive compensation plan as of such date.Plan.
All service-based (time vesting) 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 compensation committee of the boardBoard of directors.
Directors. Under the 2012 Plan, options may be granted to purchase shares of the Company’s common stock exercisable only at prices equal to or above 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 six months ended June 30:
WIRELESS TELECOM GROUP, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(unaudited)
Three Months Ended | ||||||||
June 30, | ||||||||
2017 | 2016 | |||||||
Service - based Restricted Common Stock | $87,685 | $55,500 | ||||||
Performance-based Stock Options | (216,138 | ) | 28,650 | |||||
Service -based Stock Options | 152,346 | 9,116 | ||||||
Performance-based Restricted Common Stock | (41,410 | ) | 5,353 | |||||
($17,517 | ) | $98,619 |
Six Months Ended | ||||||||
June 30, | ||||||||
2017 | 2016 | |||||||
Service - based Restricted Common Stock | $144,433 | $111,000 | ||||||
Performance-based Stock Options | (157,497 | ) | 57,300 | |||||
Service -based Stock Options | 332,993 | 18,232 | ||||||
Performance-based Restricted Common Stock | (36,057 | ) | 10,706 | |||||
$283,872 | $197,238 |
As of June 30, 2017, $1,125,7222018, $0.4 million of unrecognized compensation costs related to unvested stock options is expected to be recognized over a remaining weighted average period of 3.32.5 years and $250,780$0.3 million of unrecognized compensation costs related to unvested restricted sharesstock awards/units is expected to be recognized over a remaining weighted averageweighted-average period of 1.31.0 years.
Restricted Common Stock Awards:
A summary of the status of the Company’s non-vested restricted common stock asawards, granted under the Company’s shareholder approved equity compensation plans, as of June 30, 2017,2018, and changes during the six months ended June 30, 2017,2018, are presented below:
18 |
WIRELESS TELECOM GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Non-vested Restricted Shares | Number of Shares | Weighted Average Grant Date Fair Value | ||||||
Non-vested at January 1, 2017 | 244,291 | $1.52 | ||||||
Granted | 150,000 | $1.65 | ||||||
Forfeited | (87,000 | ) | $1.77 | |||||
Vested | (121,042 | ) | $1.40 | |||||
Non-vested at June 30, 2017 | 186,249 | $1.66 |
Restricted Shares | Number of Shares | Weighted Average Grant Date Fair Value | ||
Non-vested as of December 31 | 159,207 | $1.64 | ||
Granted | - | - | ||
Vested and Issued | (151,042) | $1.64 | ||
Forfeited | - | - | ||
Non-vested as of June 30 | 8,165 | $1.55 |
Restricted Stock Units:
On June 5, 2018 the Company granted 25,000 Restricted Stock Units (“RSU”) to each of our five independent board members under the 2012 Plan. Each RSU represents the Company’s obligation to issue one share of the Company’s common stock subject to the RSU award agreement and 2012 Plan. The grant date fair value was $2.25 per share and the RSU’s vest on the day before the first anniversary of the grant date or, if earlier, the effective date of a separation of service due to death or disability, provided the board member has rendered continuous service to the Company as a member of the board of directors from grant date to vesting date. Once vested the RSU will be settled by delivery of shares to the board member no later than 30 days following: (1) the third anniversary of the grant date, (2) separation from service following, or coincident with, a vesting date, or (3) a change in control.
A summary of restricted stock unit activity for the six months ended June 30, 2018 follows:
Restricted Stock Units | Number of Shares | Weighted Average Grant Date Fair Value | ||
Non-vested as of December 31 | - | - | ||
Granted | 125,000 | $2.25 | ||
Vested | - | - | ||
Forfeited | - | - | ||
Non-vested as of June 30 | 125,000 | $2.25 |
19 |
WIRELESS TELECOM GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Performance-Based Stock Option Awards:
A summary of performance-based stock option activity, and related information for the six months ended June 30, 20172018 follows:
WIRELESS TELECOM GROUP, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(unaudited)
Options | Weighted Average Exercise Price | Options | Weighted Average Exercise Price | |||||||||||||
Outstanding, January 1, 2017 | 2,165,000 | $1.32 | ||||||||||||||
Outstanding as of December 31 | 605,000 | $1.21 | ||||||||||||||
Granted | - | - | - | - | ||||||||||||
Exercised | (50,000 | ) | $0.75 | (300,000) | $0.96 | |||||||||||
Forfeited | (540,000 | ) | $1.77 | - | - | |||||||||||
Expired | - | - | - | - | ||||||||||||
Outstanding, June 30, 2017 | 1,575,000 | $1.18 | ||||||||||||||
Outstanding as of June 30 | 305,000 | $1.45 | ||||||||||||||
Options exercisable: | ||||||||||||||||
June 30, 2017 | 1,040,000 | $0.95 | ||||||||||||||
Exercisable at June 30 | 20,000 | $0.78 |
The aggregate intrinsic value of performance-based stock options outstanding (regardless of whether or not such options are exercisable) as of June 30, 20172018 was $721,000$0.2 million and the weighted averageweighted-average remaining contractual life was 3.97.1 years. The aggregate intrinsic value of performance-based stock options exercisable as of June 30, 20172018 was $673,000$28,400 and the weighted averageweighted-average remaining contractual life was 2.02.5 years. The intrinsic value of options exercised during the six months ended June 30, 20172018 was $36,550.$0.4 million.
Under the terms of the performance-based stock option agreements, 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. As of June 30, 2017,2018, the Company has determined that the performance conditions on 285,000 options granted in 2013 and later are probable of being achieved by the year ending 2020.2021. The Company’s performance-based stock options granted prior to 2013 (consisting of 1,040,00020,000 options) are fully amortized.
Service-Based Stock Option Awards:
A summary of service-based stock option activity and related information for the six months ended June 30, 20172018 follows:
Options | Weighted Average Exercise Price | |||||||
Outstanding, January 1, 2017 | 1,198,000 | $1.51 | ||||||
Granted | 845,000 | 1.68 | ||||||
Exercised | - | - | ||||||
Forfeited | (115,000 | ) | 1.45 | |||||
Expired | (3,000 | ) | 2.40 | |||||
Outstanding, June 30, 2017 | 1,925,000 | $1.59 | ||||||
Options exercisable: | ||||||||
June 30, 2017 | 290,000 | $1.80 |
Options | Weighted Average Exercise Price | |||||||
Outstanding as of December 31 | 1,815,000 | $1.53 | ||||||
Granted | - | - | ||||||
Exercised | - | - | ||||||
Forfeited | - | - | ||||||
Expired | - | - | ||||||
Outstanding as of June 30 | 1,815,000 | $1.53 | ||||||
Exercisable at June 30 | 1,110,833 | $1.50 |
The aggregate intrinsic value of service-based stock options (regardless of whether or not such options are exercisable) as of June 30, 20172018 was $212,250$1.2 million and the weighted average remaining contractual life was 9.08.4 years. The aggregate intrinsic value of service-based stock options exercisable as of June 30, 20172018 was $56,700$0.8 million and the weighted average remaining contractual life was 6.58.3 years.
The following table presents the assumptions used to estimate the fair value of stock option awards granted during the six months ended June 30, 2016:
20 |
WIRELESS TELECOM GROUP, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(unaudited)(UNAUDITED)
Option Term (in years) | Exercise Price | Risk Free Interest Rate | Expected Volatility | Fair Value at Grant Date | Expected Dividend Yield | Expected Forfeiture Rate | |
1/2/17 Grant | 4 | $1.91 | 1.94% | 77.78% | $1.11 | 0 | 0 |
1/12/17 Grant | 4 | 1.92 | 1.87% | 77.88% | 1.11 | 0 | 0 |
2/17 17 Grant | 4 | 1.72 | 1.92% | 72.01% | 0.94 | 0 | 0 |
5/22/17 Grant | 4 | 1.38 | 1.80% | 68.93% | 0.73 | 0 | 0 |
6/5/17 Grant | 1 | 1.65 | 1.74% | 69.02% | 0.46 | 0 | 0 |
6/5/17 Grant | 4 | 1.65 | 1.74% | 69.02% | 0.87 | 0 | 0 |
6/15/17 Grant | 4 | 1.60 | 1.76% | 69.09% | 0.84 | 0 | 0 |
NOTE 1012 – SEGMENT INFORMATION
The operating businesses of the Company are segregated into three reportable segments: (i) network solutions,Network Solutions, (ii) testTest and measurementMeasurement and (iii) embedded solutions. Embedded Solutions.
Network Solutions
The network solutionsNetwork Solutions segment is comprised primarily of the operations of Wireless Telecom Group Inc.’sthe Company’s subsidiary, Microlab. Network Solutions designs and manufactures a wide selection of RF passive components and integrated subsystems for signal conditioning and distribution in the wireless infrastructure markets, particularly for small cell deployments, distributed antenna systems (“DAS”), the in-building wireless solutions industry and radio base-station market. Network Solutions also offers active solution sets to assist in network timing for tunnels and in-building wireless signaling. Network Solutions customers include telecommunications service providers, systems integrators, neutral host operators and distributors.
Test and Measurement
The testTest and measurementMeasurement segment is comprised primarily of the Company’s operations of the Noisecom product line and the operations of its subsidiary, Boonton. Noisecom designs and produces noise generation equipment and instruments, calibrated noise sources, noise modules and diodes. Noise components and instruments are used as a method to provide wide band signals for sophisticated telecommunication and defense applications, and as a stable reference standard for instruments and systems, including radar and satellite communications. Boonton products are also used to test terrestrial and satellite communications, radar and telemetry. Certain power meter products are designed for measuring signals based on wideband modulation formats, allowing a variety of measurements to be made, including maximum power, peak power, average power and minimum power. Customers of the Test and Measurement segment include large defense contractors and the U.S. and foreign governments.
Embedded Solutions
The embedded solutionsEmbedded Solutions segment is comprised of the operations of CommAgility Limited which was acquired on February 17, 2017. Embedded Solutions supplies signal processing technology for network validation systems supporting LTE and emerging 5G networks. Additionally, this segment licenses, implements and configures LTE PHY layer and stack software for private LTE networks supporting satellite communications, the military and aerospace industries. Customers include wireless communication test equipment companies, defense subcontractors and global technology and services companies.
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 respective periods is set forth below:below (in thousands):
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Net revenues by segment: | ||||||||||||||||
Network solutions | $ | 5,617,263 | $ | 5,476,421 | $ | 11,132,564 | $ | 9,689,734 | ||||||||
Test and measurement | 3,315,695 | 2,133,683 | 6,352,376 | 4,288,785 | ||||||||||||
Embedded solutions | 3,000,216 | - | 3,996,992 | - | ||||||||||||
Consolidated net revenues of reportable segments | 11,933,174 | 7,610,104 | 21,481,932 | 13,978,519 | ||||||||||||
Segment income (loss): | ||||||||||||||||
Network solutions | (329,899) | 1,044,335 | 578,322 | 1,384,261 | ||||||||||||
Test and measurement | (541,338) | (366,652) | (516,132) | (679,099) | ||||||||||||
Embedded solutions | 75,327 | - | (154,146) | - | ||||||||||||
Income (loss) from reportable segments | $ | (795,910) | $ | 677,683 | $ | (91,956) | $ | 705,162 | ||||||||
Other unallocated amounts: | ||||||||||||||||
Corporate expenses | (1,473,206) | (1,031,071) | (3,896,142) | (1,979,201) | ||||||||||||
Other (expenses) income - net | (111,301) | (10,266) | (162,066) | (51,870) | ||||||||||||
Consolidated income (loss) before | - | - | ||||||||||||||
Income tax provision (benefit) | $ | (2,380,417) | $ | (363,653) | $ | (4,150,164) | $ | (1,325,909) |
21 |
WIRELESS TELECOM GROUP, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(unaudited)(UNAUDITED)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Depreciation and amortization by segment: | ||||||||||||||||
Network solutions | 103,628 | 57,957 | 204,992 | 113,704 | ||||||||||||
Test and measurement | 95,247 | 58,881 | 188,634 | 118,992 | ||||||||||||
Embedded solutions | 446,359 | - | 665,729 | - | ||||||||||||
Total depreciation and amortization for reportable segments | $ | 645,234 | $ | 116,838 | $ | 1,059,355 | $ | 232,696 | ||||||||
Capital expenditures by segment: | ||||||||||||||||
Network solutions | 58,580 | 228,149 | 142,539 | 283,379 | ||||||||||||
Test and measurement | 40,691 | 199,400 | 106,830 | 218,644 | ||||||||||||
Embedded solutions | 26,728 | - | 68,705 | - | ||||||||||||
Total consolidated capital expenditures by reportable segment | $ | 125,998 | $ | 427,549 | $ | 318,074 | $ | 502,023 | ||||||||
2017 | 2016 | |||||||||||||||
Total assets by segment: | ||||||||||||||||
Network solutions | $ | 9,167,082 | $ | 10,594,770 | ||||||||||||
Test and measurement | 6,733,907 | 7,851,479 | ||||||||||||||
Embedded solutions | 22,057,874 | - | ||||||||||||||
Total assets for reportable segments | $ | 37,958,863 | $ | 18,446,249 | ||||||||||||
Corporate assets, principally cash and cash equivalents and deferred income taxes | $ | 11,935,636 | $ | 16,988,886 | ||||||||||||
Total consolidated assets | $ | 49,894,499 | $ | 35,435,135 |
For the three months ended June 30, | For the six months ended June 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Net revenue by segment: | ||||||||||||||||
Network Solutions | $ | 5,636 | $ | 5,617 | $ | 11,147 | $ | 11,133 | ||||||||
Test and Measurement | 3,534 | 3,316 | 7,297 | 6,352 | ||||||||||||
Embedded Solutions | 4,244 | 3,000 | 8,234 | 3,997 | ||||||||||||
Total consolidated net revenue of reportable segments | $ | 13,414 | $ | 11,933 | $ | 26,678 | $ | 21,482 | ||||||||
Segment income/(loss): | ||||||||||||||||
Network Solutions | $ | 758 | $ | (330 | ) | $ | 1,571 | $ | 578 | |||||||
Test and Measurement | 416 | (541 | ) | 926 | (516 | ) | ||||||||||
Embedded Solutions | 273 | 75 | 883 | (154 | ) | |||||||||||
Income/(loss) from reportable segments | 1,447 | (796 | ) | 3,380 | (92 | ) | ||||||||||
Other unallocated amounts: | ||||||||||||||||
Corporate expenses | (1,414 | ) | (1,473 | ) | (2,778 | ) | (3,896 | ) | ||||||||
Other (expenses) income - net | (108 | ) | (113 | ) | (247 | ) | (162 | ) | ||||||||
Consolidated income/(loss) before Income tax provision/(benefit) | $ | (75 | ) | $ | (2,382 | ) | $ | 355 | $ | (4,150 | ) | |||||
Depreciation and amortization by segment: | ||||||||||||||||
Network Solutions | $ | 172 | $ | 104 | $ | 309 | $ | 204 | ||||||||
Test and Measurement | 123 | 95 | 297 | 189 | ||||||||||||
Embedded Solutions | 316 | 446 | 631 | 666 | ||||||||||||
Total depreciation and amortization for reportable segments | $ | 611 | $ | 645 | $ | 1,237 | $ | 1,059 | ||||||||
Capital expenditures by segment: | ||||||||||||||||
Network Solutions | $ | 204 | $ | 59 | $ | 282 | $ | 142 | ||||||||
Test and Measurement | 27 | 41 | 129 | 107 | ||||||||||||
Embedded Solutions | 152 | 27 | 172 | 69 | ||||||||||||
Total consolidated capital expenditures by reportable segment | $ | 383 | $ | 127 | $ | 583 | $ | 318 |
22 |
WIRELESS TELECOM GROUP, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(unaudited)(UNAUDITED)
June 30, 2018 | December 31, 2017 | |||||||
Total assets by segment: | ||||||||
Network Solutions | $ | 11,214 | $ | 10,442 | ||||
Test and Measurement | 6,522 | 6,163 | ||||||
Embedded Solutions | 18,830 | 21,733 | ||||||
Total assets for reportable segments | 36,566 | 38,338 | ||||||
Corporate assets, principally cash and cash equivalents and deferred income taxes | 9,454 | 8,583 | ||||||
Total consolidated assets | $ | 46,020 | $ | 46,921 |
Consolidated net sales by region were as follows:
Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||||
June 30, | June 30, | Three Months Ended June 30 | Six Months Ended June 30 | |||||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||||||||
Sales by region | ||||||||||||||||||||||||||||||||
Americas | $ | 8,294,953 | $ | 5,802,032 | $ | 15,259,706 | $ | 10,867,668 | $ | 7,982 | $ | 8,294 | $ | 16,079 | $ | 15,259 | ||||||||||||||||
Europe, Middle East, Africa (EMEA) | 3,235,077 | 1,493,030 | 5,202,116 | 2,441,387 | 4,485 | 3,098 | 8,245 | 4,621 | ||||||||||||||||||||||||
Asia Pacific (APAC) | 403,144 | 315,042 | 1,020,110 | 669,464 | 947 | 541 | 2,354 | 1,602 | ||||||||||||||||||||||||
Total Sales | $ | 11,933,174 | $ | 7,610,104 | $ | 21,481,932 | $ | 13,978,519 | ||||||||||||||||||||||||
Total sales | $ | 13,414 | $ | 11,933 | $ | 26,678 | $ | 21,482 |
Net sales are attributable to a geographic area based on the destination of the product shipment.
The majority of shipments in the Americas are to customers located within the United States. For the three-monthsthree months ended June 30, 20172018 and 2016,2017, revenues in the United States for all reportable segments amounted to $7,965,566$7.8 million and $5,611,283,$8.0 million, respectively. For the six-monthssix months ended June 30, 2018 and 2017, and 2016, revenuesrevenue in the United States for all reportable segments amounted to $14,430,391$15.8 million and $10,383,454,$14.4 million, respectively.
Shipments for the three months ended June 30, 2018 to the EMEA region for all reportable segments were largely concentrated in the UK and Italy at $3.6 million and $0.2 million, respectively. For the three months ended June 30, 2017 shipments were largely concentrated in UK, Germany and Israel.Israel amounting to $2.2 million, $0.3 million and $0.2 million, respectively. Shipments for the six months ended June 30, 2018 to the EMEA region for all reportable segments were largely concentrated in the UK and Luxembourg at $5.9 million and $0.4 million, respectively. For the three-monthssix months ended June 30, 2017 shipments to the UK, Germany and Israel amounted to $2,183,460, $288,782$2.8 million, $0.5 million and $118,322, respectively. For the three-months ended June 30, 2016 shipments were largely concentrated in Israel and Germany amounting to $340,750 and $236,005, respectively. For the six-months ended June 30, 2017 shipments to the UK, Germany and Israel amounted to $2,784,356, $543,792 and $367,744, respectively. For the six-months ended June 30, 2016, shipments to Israel and Germany amounted to $373,177 and $472,405,$0.4 million, respectively.
The largest concentration of shipments in the APAC region is to China. For the three-monththree month period ending June 30, 20172018 and 2016,2017, shipments to China amounted to $159,789$0.5 million and $233,999,$0.2 million, respectively. For the six-monthsix month period ending June 30, 20172018 and 20162017, shipments to China amounted to $608,847$1.5 million and $421,169,$0.9 million, respectively.
NOTE 1113 – 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 proceduresThere have been followed by its customers. Historically, the Company’s warranty expense has been minimal.
Leases:
In May 2015, the Companyno material changes in our commitments 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 had available an allowance of approximately $300,000 towards alterationscontingencies and improvements to the premises, which expired on January 31, 2017. The Company used substantially all of the improvement allowance prior to 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.
The following is a summary of the Company’s contractual obligationsrisks and uncertainties as of June 30, 2017:
2018 from that as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2017.
23 |
WIRELESS TELECOM GROUP, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(unaudited)
Payments by Period | ||||||||||||||||||||
Remainder | ||||||||||||||||||||
Total | 2017 | 2018-2019 | 2020-2021 | Thereafter | ||||||||||||||||
Facility Leases | $ | 2,791,517 | $ | 242,813 | $ | 1,003,356 | $ | 934,184 | $ | 611,164 | ||||||||||
Purchase Obligations | 2,966,875 | 2,966,875 | - | - | - | |||||||||||||||
Operating and Equipment Leases | 252,157 | 27,017 | 108,067 | 108,067 | 9,006 | |||||||||||||||
$ | 6,010,549 | $ | 3,236,705 | $ | 1,111,423 | $ | 1,042,251 | $ | 620,169 |
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 OPERATIONS2. Management’s Discussion and Analysis of Financial Condition and 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 audited consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2016.2017.
INTRODUCTION
The Company develops, manufactures and markets a wide variety of radio frequency and microwave noise sources, electronic testing and measuring instruments including power meters, voltmeters and modulation meters and passive components for wireless radio frequency conditioning. Additionally, the Company is a supplier of signal processing technology for network validation systems, supporting LTE/4G and emerging 5G networks. The majority of the Company’s products are primarily used by its customers in relation to commercial infrastructure development in support of the expansion and upgrade to distributed antenna systems, deployment of small cell technology and private LTE networks. 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 radio frequency and microwave systems. Other applications include radio, radar, wireless local area network and digital television.
Highlights from the Second Quarter:
· | Net revenues of |
· | Operating income of $33,000 for the three months ended June 30, | |
· | Consolidated gross profit of 46% for the three months ended June 30, 2018 as compared to 28% in the year | |
· | Net cash provided from operations of |
RESULTS OF OPERATIONS
Three Months Ended June 30, 20172018 Compared with Three Months Ended June 30, 20162017
Net Revenues (in thousands)
Three months ended June 30, | ||||||||||||||||||||||||
Revenue | % of Rev | Change | ||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | Amount | Pct. | |||||||||||||||||||
Network solutions | $ | 5,617,263 | $ | 5,476,421 | 47.1 | % | 72.0 | % | $ | 140,842 | 2.6 | % | ||||||||||||
Test and measurement | 3,315,695 | 2,133,683 | 27.8 | % | 28.0 | % | 1,182,012 | 55.4 | % | |||||||||||||||
Embedded solutions | 3,000,216 | - | 25.1 | % | 0.0 | % | 3,000,216 | - | ||||||||||||||||
Total net revenues | $ | 11,933,174 | $ | 7,610,104 | 100.0 | % | 100.0 | % | $ | 4,323,070 | 56.8 | % |
Three months ended June 30 | ||||||||||||||||||||||||
Revenue | % of Revenue | Change | ||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | Amount | Pct. | |||||||||||||||||||
Network Solutions | $ | 5,636 | $ | 5,617 | 42.0 | % | 47.1 | % | $ | 19 | 0.3 | % | ||||||||||||
Test and Measurement | 3,534 | 3,316 | 26.4 | % | 27.8 | % | 218 | 6.6 | % | |||||||||||||||
Embedded Solutions | 4,244 | 3,000 | 31.6 | % | 25.1 | % | 1,244 | 41.5 | % | |||||||||||||||
Total net revenues | $ | 13,414 | $ | 11,933 | 100.0 | % | 100.0 | % | $ | 1,481 | 12.4 | % |
Net consolidated revenues increased $1.5 million due primarily to Embedded Solutions segment net revenue which increased $1.2 million due to increased shipments of digital signal processing hardware. Test and Measurement segment revenue increased primarily due to an increase in government and international orders in 2018 as compared to 2017. Network Solutions revenue is flat compared to the prior year period.
Gross Profit (in thousands)
Three months ended June 30 | ||||||||||||||||||||||||
Gross Profit | Gross Profit % | Change | ||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | Amount | Pct. | |||||||||||||||||||
Network Solutions | $ | 2,468 | $ | 1,182 | 43.8 | % | 21.0 | % | $ | 1,286 | 108.9 | % | ||||||||||||
Test and Measurement | 1,815 | 832 | 51.4 | % | 25.1 | % | 983 | 118.1 | % | |||||||||||||||
Embedded Solutions | 1,887 | 1,330 | 44.5 | % | 44.3 | % | 557 | 41.9 | % | |||||||||||||||
Total gross profit | $ | 6,170 | $ | 3,344 | 46.0 | % | 28.0 | % | $ | 2,826 | 84.5 | % |
Net consolidated revenues for the three months ended June 30, 2017 were $11,933,174 as compared to $7,610,104 for the three months ended June 30, 2016, an increase of $4,323,070 or 56.8%. The primary driver for the year over year increase is the inclusion of the Embedded solutions segment which was acquired on February 17, 2017 and contributed $3,000,216 in revenue for the period.
Net revenues from the Company’s Network solutions products for the three months ended June 30, 2017 were up modestly. Net revenues from Network solutions products accounted for 47.1% and 72.0% of net consolidated revenues for the three months ended June 30, 2017 and 2016, respectively. The increase in revenues in this segment was primarily due to increased demand for the Company’s passive radio frequency components and subassemblies, largely as a result of increased capital spending by domestic wireless carriers and tower operators.
Net revenues from the Company’s Test and measurement products for the three months ended June 30, 2017 were up significantly over the prior year period. Net revenues from Test and measurement products accounted for 27.8% and 28.0% of net consolidated revenues for the three months ended June 30, 2017 and 2016, respectively. The increase in revenues was primarily due to an increase in military and government spending as compared to the corresponding period in the prior year.
Gross Profit
Three months ended June 30, | ||||||||||||||||||||||||
Gross Profit | Gross Margin | Change | ||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | Amount | Pct. | |||||||||||||||||||
Network solutions | $ | 1,182,027 | $ | 2,503,137 | 21.0 | % | 45.7 | % | (1,321,110 | ) | -52.8 | % | ||||||||||||
Test and measurement | 832,129 | 835,753 | 25.1 | % | 39.2 | % | (3,623 | ) | -0.4 | % | ||||||||||||||
Embedded solutions | 1,330,005 | - | 44.3 | % | 0.0 | % | 1,330,005 | - | ||||||||||||||||
Total gross profit | $ | 3,344,161 | $ | 3,338,890 | 28.0 | % | 43.9 | % | 5,271 | 0.2 | % |
Consolidated gross profit for the three months ended June 30, 2017 was negatively impacted by a2018 increased from 28.0% to 46.0% due primarily to the non-cash inventory adjustment that was recorded in the prior year period of $1,930,000. The adjustment$1.9 million, of which $1.2 million was effected as a result of a review of inventory balances and net realizable value of the inventory following the launch of the Company’s lean manufacturing initiative and the adoption of product lifecycle acceleration. The lean manufacturing program focuses on inventory reductions, the minimization of product redesign for alternate use, and the acceleration of the evaluation process of slow moving inventory for product redesign and repurpose. This, combined with the needattributable to focus manufacturing, operations and engineering efforts on the increasingcurrent order flow, dictated the significant write down at the end of the quarter. The inventory adjustments negatively impacted the Network solutionsSolutions segment gross margin by $1,206,266 and $0.7 million was attributable to the Test and measurementMeasurement segment. Embedded Solutions segment gross margin by $723,734. The impact of the inventory adjustmentprofit was offset by theconsistent year over year. Embedded Solutions segment hardware revenues, which carry a lower gross profit than software and services, constituted a higher percentage of thetotal Embedded solutionsSolutions segment sales in 2018 but at higher volumes which contributed $1,330,005 to the overallresulted in higher absorption of fixed overhead expenses. Consolidated gross profit increase fromwas also favorably impacted by higher volumes in the same period last year.Test and Measurement segment resulting in higher absorption of fixed overhead expenses.
Operating Expenses (in thousands)
Three months ended June 30 | ||||||||||||||||||||||||
Operating Expenses | % of Revenue | Change | ||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | Amount | Pct. | |||||||||||||||||||
Research and Development | $ | 1,313 | $ | 1,130 | 9.8 | % | 9.5 | % | $ | 183 | 16.2 | % | ||||||||||||
Sales and Marketing | 1,933 | 1,663 | 14.4 | % | 13.9 | % | 270 | 16.2 | % | |||||||||||||||
General and Administrative | 2,678 | 2,821 | 20.0 | % | 23.6 | % | (143) | -5.1 | % | |||||||||||||||
Loss on change in fair value of contingent consideration | 213 | - | 1.6 | % | 0.0 | % | 213 | - | ||||||||||||||||
Total Operating Expenses | $ | 6,137 | $ | 5,614 | 45.8 | % | 47.0 | % | $ | 523 | 9.3 | % |
Consolidated operating
Research and development expenses for the three months ended June 30, 2017 were $5,613,277 or 47.0% of consolidated net revenues as compared to $3,692,278 or 48.5% of consolidated net revenues for the three months ended June 30, 2016. For the three months ended June 30, 2017 as compared toincreased $0.2 million from the prior year consolidated operatingperiod due to increased headcount to assist with product roadmap initiatives specifically at the Embedded Solutions segment.
Sales and marketing expenses increased by $1,920,999 or 52.0%. Consolidated operating expenses were higher$0.3 million over the prior year period primarily due to increased sales headcount specifically in the three months ended June 30, 2017US.
General and administrative expenses decreased $0.1 million due to the inclusion of $1,254,678 of expenses associated with the Embedded solutions segment which was acquired on February 17, 2017 and included $414,781 oflower intangible amortization expense related to purchased intangibles. Additionally, operating expenses increased fromintangible assets as the same period infinal purchase price allocation had not been completed as of the prior year due to severance and legal chargesperiod thus intangible amortization expense was an estimate.
The loss on change in fair value of $470,273 associated with two restructuring actionscontingent consideration recorded during the three months ended June 30, 2017 and2018 is the result of our revised estimate of the total contingent consideration liability related to the CommAgility acquisition in connection with the improved financial forecast at CommAgility as compared to prior estimates. Based on revised estimates of full year 2018 Adjusted EBITDA (as defined in the CommAgility stock purchase agreement) of CommAgility the Company increased commissionthe contingent consideration liability resulting in an operating expense charge of $181,783 due to higher revenues.$0.2 million.
Interest Expense
InterestConsolidated interest expense increased $109,274$31,000 due to higher accretion expense on the estimated contingent consideration liability related to CommAgility. Interest expense related to our new credit facility which is comprised of cash interest and amortization of capitalized debt issuancedeferred financing costs and accretion of the contingent consideration liability.was flat year over year at approximately $63,000.
Taxes
For the three months ended June 30, 2018 the Company recorded tax expense of $0.1 million. Our effective tax rate for the current period is higher than the US and UK statutory rates primarily due to the impact of the global intangible low-taxed income, or “GILTI”, of our controlled foreign corporation offset by research and development deductions in the UK and non-qualified stock option deductions in the U.S. For the three months ended June 30, 2017 the Company recorded a tax benefit of $1,012,286$1.0 million due primarily to operating losses generated fromin the Company’s operations. For the three months ended June 30, 2016, the Company recorded a tax benefit of $145,461 primarily due to losses generated from the Company’s operations during the period.prior year.
Net LossIncome
For the three months ended June 30, 2017, theThe Company realizedrecorded a net loss of $1,368,131 or $.07 loss per share on a basic and diluted basis,$0.2 million in the current period as compared to a$1.4 million net loss of $218,192 or $.01 loss per share on a basic and diluted basis for the three months ended June 30, 2016, a decrease of $1,149,939 or $.06 per diluted share. The decrease was due to the factors discussed above.
Six Months Ended June 30, 2017 Compared with Six Months Ended June 30, 2016
Net Revenues
Six months ended June 30, | ||||||||||||||||||||||||
Revenue | % of Rev | Change | ||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | Amount | Pct. | |||||||||||||||||||
Network solutions | $ | 11,132,564 | $ | 9,689,735 | 51.8 | % | 69.3 | % | $ | 1,442,829 | 14.9 | % | ||||||||||||
Test and measurement | 6,352,376 | 4,288,784 | 29.6 | % | 30.7 | % | 2,063,592 | 48.1 | % | |||||||||||||||
Embedded solutions | 3,996,992 | - | 18.6 | % | 0.0 | % | 3,996,992 | - | ||||||||||||||||
Total net revenues | $ | 21,481,932 | $ | 13,978,519 | 100.0 | % | 100.0 | % | $ | 7,503,413 | 53.7 | % |
Net consolidated revenues for the six months ended June 30, 2017 were $21,481,932 as compared to $13,978,519 for the six months ended June 30, 2016, an increase of $7,503,413 or 53.7%. The primary driver for the year over year increase is the inclusion of the Embedded solutions segment which was acquired on February 17, 2017 and contributed $3,996,992 in revenue for the period.
Net revenues from the Company’s Network solutions products were up significantly over the prior year period. Net revenues from Network solutions products accounted for 51.8% and 69.3% of net consolidated revenues for the six months ended June 30, 2017 and 2016, respectively. The increase in revenues was primarily due to increased demand for the Company’s passive radio frequency components and subassemblies, largely as a result of increased capital spending by domestic wireless carriers and tower operators.
Net revenues from the Company’s Test and measurement products were up significantly over the prior year period. Net revenues from Test and measurement products accounted for 29.6% and 30.7% of net consolidated revenues for the six months ended June 30, 2017 and 2016, respectively. The increase in revenues was primarily due to an increase in military and government spending as compared to the corresponding period in the prior year.
period due to higher net revenues and gross profit offset by higher operating expenses as described above.
Gross ProfitSix Months Ended June 30, 2018 Compared with Six Months Ended June 30, 2017
Six months ended June 30, | ||||||||||||||||||||||||
Gross Profit | Gross Margin | Change | ||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | Amount | Pct. | |||||||||||||||||||
Network solutions | $ | 3,642,509 | $ | 4,286,127 | 32.7 | % | 44.2 | % | (643,618 | ) | -15.0 | % | ||||||||||||
Test and measurement | 2,166,337 | 1,772,877 | 34.1 | % | 41.3 | % | 393,460 | 22.2 | % | |||||||||||||||
Embedded solutions | 1,867,826 | - | 46.7 | % | 0.0 | % | 1,867,826 | - | ||||||||||||||||
Total gross profit | $ | 7,676,670 | $ | 6,059,004 | 35.7 | % | 43.3 | % | 1,617,666 | 26.7 | % |
Net Revenues (in thousands)
Six months ended June 30 | ||||||||||||||||||||||||
Revenue | % of Revenue | Change | ||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | Amount | Pct. | |||||||||||||||||||
Network Solutions | $ | 11,147 | $ | 11,133 | 41.8 | % | 51.8 | % | $ | 14 | 0.1 | % | ||||||||||||
Test and Measurement | 7,297 | 6,352 | 27.3 | % | 29.6 | % | 945 | 14.9 | % | |||||||||||||||
Embedded Solutions | 8,234 | 3,997 | 30.9 | % | 18.6 | % | 4,237 | 106.0 | % | |||||||||||||||
Total net revenues | $ | 26,678 | $ | 21,482 | 100.0 | % | 100.0 | % | $ | 5,196 | 24.2 | % |
The Company’sNet consolidated revenues increased $5.2 million over the prior year period due primarily to the inclusion of Embedded Solutions segment net revenue for a full six months in 2018 compared to only 133 days in 2017 as well as increased shipments of digital signal processing hardware. Test and Measurement segment revenue increased primarily due to an increase in government and international orders in 2018 as compared to 2017. Network Solutions revenue is flat compared to the prior year period.
Gross Profit (in thousands)
Six months ended June 30 | ||||||||||||||||||||||||
Gross Profit | Gross Profit % | Change | ||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | Amount | Pct. | |||||||||||||||||||
Network Solutions | $ | 4,911 | $ | 3,643 | 44.1 | % | 32.7 | % | $ | 1,268 | 34.8 | % | ||||||||||||
Test and Measurement | 3,660 | 2,166 | 50.2 | % | 34.1 | % | 1,494 | 69.0 | % | |||||||||||||||
Embedded Solutions | 3,868 | 1,868 | 47.0 | % | 46.7 | % | 2,000 | 107.1 | % | |||||||||||||||
Total gross profit | $ | 12,439 | $ | 7,677 | 46.6 | % | 35.7 | % | $ | 4,762 | 62.0 | % |
Consolidated gross profit on consolidated net revenues for the six months ended June 30, 2017 was negatively impacted by a non cash2018 increased from 35.7% to 46.6% due primarily to the non-cash inventory adjustment that was recorded in the prior year period of $1,930,000. The adjustment$1.9 million, of which $1.2 million was effected as a result of a review of inventory balances and net realizable value of the inventory following the launch of the Company’s lean manufacturing initiative and the adoption of product lifecycle acceleration. The lean manufacturing program focuses on inventory reductions, the minimization of product redesign for alternate use, and the acceleration of the evaluation process of slow moving inventory for product redesign and repurpose. This, combined with the needattributable to focus manufacturing, operations and engineering efforts on the increasing current order flow, dictated the significant write down at the end of the quarter. The inventory adjustments negatively impacted the Network solutionsSolutions segment gross margin by $1,206,266 and $0.7 million was attributable to the Test and measurement segment gross margin by $723,734. The impact of the inventory adjustment was offset by the gross profit of theMeasurement segment. Embedded Solutions segment hardware revenues, which contributed $1,867,826 to the overallcarry a lower gross profit increase fromthan software and services, constituted a higher percentage of total Embedded Solutions segment sales in 2018 but at higher volumes which resulted in higher absorption of fixed overhead expenses. Consolidated gross profit was also favorably impacted by higher volumes in the same period last year.Test and Measurement segment resulting in higher absorption of fixed overhead expenses.
Operating Expenses (in thousands)
Six months ended June 30 | ||||||||||||||||||||||||
Operating Expenses | % of Revenue | Change | ||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | Amount | Pct. | |||||||||||||||||||
Research and Development | $ | 2,469 | $ | 2,217 | 9.3 | % | 10.3 | % | $ | 252 | 11.4 | % | ||||||||||||
Sales and Marketing | 3,844 | 3,215 | 14.4 | % | 15.0 | % | 629 | 19.6 | % | |||||||||||||||
General and Administrative | 5,311 | 6,233 | 19.9 | % | 29.0 | % | (922) | -14.8 | % | |||||||||||||||
Loss on change in fair value of contingent consideration | 213 | - | 0.8 | % | 0.0 | % | 213 | - | ||||||||||||||||
Total Operating Expenses | $ | 11,837 | $ | 11,665 | 44.4 | % | 54.3 | % | $ | 172 | 1.5 | % |
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Consolidated operatingResearch and development expenses forincreased $0.3 million from the prior year period due to increased headcount to assist with product roadmap initiatives as well as the impact of a full six months of research and development expenses at the Embedded Solutions segment as compared with only 133 days in the prior period. This was offset by lower third party research and development spend at the Test and Measurement and Network Solutions segments year over year.
Sales and marketing expenses increased $0.6 million over the prior year period primarily due to increased sales headcount specifically in the US as well as a full six months of sales and marketing expense at the Embedded Solutions segment as compared to only 133 days in the prior period.
General and administrative expenses decreased $0.9 due to the acquisition expenses incurred in the prior year period associated with the CommAgility transaction. This was marginally offset by a full six months of general and administrative expenses incurred in 2018 at the Embedded Solutions segment as compared to 133 days in the prior year period.
The loss on change in fair value of contingent consideration recorded during the six months ended June 30, 2017 were $11,664,768 or 54.3%2018 is the result of consolidated net revenuesour revised estimate of the total contingent consideration liability related to the CommAgility acquisition in connection with the improved financial forecast at CommAgility as compared to $7,333,043 or 52.5%prior estimates. Based on revised estimates of consolidated net revenues forfull year 2018 Adjusted EBITDA (as defined in the CommAgility stock purchase agreement) of CommAgility the Company increased the contingent consideration liability resulting in an operating expense charge of $0.2 million.
Interest Expense
Consolidated interest expense increased $75,000 due to a full six months ended June 30, 2016. of interest expense in 2018 associated with our credit facility as compared to 133 days in 2017 and increased accretion expense associated with the contingent consideration liability.
Taxes
For the six months ended June 30, 2017 as compared to2018 the prior year, consolidated operating expenses increased by $4,331,724 or 59.1%. Consolidated operating expenses were higher inCompany recorded tax expense of $0.2 million. Our effective tax rate for the six months ended June 30, 2017month period is higher than the US and UK statutory rates primarily due to the inclusionimpact of $2,021,970the global intangible low-taxed income or “GILTI” of expenses associated with the Embedded solutions segment which was acquired on February 17, 2017our controlled foreign corporation offset by research and included $615,426 of amortization expense related to purchased intangibles. Additionally, operating expenses increased from the same perioddevelopment deductions in the prior year due to $1,289,517 of expenses related to the CommAgility acquisition consisting primarily of professional fees, severanceUK and legal charges of $470,273 associated with two restructuring actions during the three months ended June 30, 2017, increased commission expenses of $375,263 due to higher revenues and higher salaries and benefits due to increased headcount.
Other Expenses
Other expenses decreased $48,297 as the Company incurred $38,000non-qualified stock option deductions in the six months ended June 30, 2016 related to ground water remediation efforts. Interest expense increased $158,493 related to our new credit facility, amortization of capitalized debt issuance costs and accretion of the contingent consideration liability.
Tax
U.S. For the six months ended June 30, 2017 the Company recorded a tax benefit of $1,550,587$1.6 million due primarily to operating losses generated fromin the Company’s operations. For the six months ended June 30, 2016, the Company recorded a tax benefit of $531,389 primarily due to losses generated from the Company’s operations during the period.prior year.
Net LossIncome
ForThe Company recorded net income of $0.2 million in the three months ended June 30, 2017, the Company realized a net loss of $2,599,577 or $.13 loss per share on a basic and diluted basis,current period as compared to a$2.6 million net loss of $794,520 or $.04 loss per share on a basic and diluted basis forin the three months ended June 30, 2016, a decrease of $1,805,057 or $.09 per diluted share. The decrease wasprior period due to the factors discussedhigher net revenues and gross profit offset by higher operating expenses as described above.
LIQUIDITY AND CAPITAL RESOURCES
We expect our existing cash balance, cash generated by operations and borrowings available under our new credit facilityCredit Facility (as described in Note 8 to the financial statements)10) to be our primary sources of short-term liquidity, and we believe these sources will be sufficient to meet our liquidity needs for at least 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 other factors that are beyond our control.
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 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.
Cash and cash equivalents increased from $2.5 million at December 31, 2017 to $2.6 million at June 30, 2018 primarily due to the cash provided by operating activities and cash generated by our borrowings under our Credit Facility offset by capital expenditures and payment of deferred purchase price related to the CommAgility acquisition. As of June 30, 2018, substantially all of our cash and cash equivalents are held outside the United States. The asset based Revolver under our Credit Facility is secured by the Company’s U.S. assets. Income taxes have been provided on foreign earnings such that there would be no significant income tax expense to repatriate the portion of this cash that is not required to meet operational needs of our international subsidiary.
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Operating Activities
Cash provided by operating activities was $488,164$0.2 million for the six months ended June 30, 2017 as compared to cash used by operating activities2018 which is lower than the prior year period of $465,225 for the six months ended June 30, 2016.$0.5 million. During the six months ended June 30, 20172018 changes in our operating assets and liabilities resulted in a net increasedecrease in cash of $1,920,544$1.9 million primarily due to cash provided fromincreases in accounts receivable, inventory and higher accruedprepaid expenses and other liabilities.current assets. The increase in working capital was offset by positive income from operations. During the six months ended June 30, 2016,2017, cash provided by operations was primarily due to changes in our operating assets and liabilities resultedresulting in a net cash increase in cash of $328,728 primarily due to cash provided by accounts receivable and an increase in accounts payable. These increases were$1.9 million which was offset by cash used for inventory.an operating loss incurred in the period.
Investing Activities
Cash used by investing activities was $9,152,799$1.4 million for the six months ended June 30, 20172018 and was primarily comprised of cash usedcapital expenditures and payment of deferred purchase price for the CommAgility acquisition of $8,842,122, net of cash acquired and capital expenditures of $318,074.acquisition. For the six months ended June 30, 20162017 cash used by investing activities was $502,023$9.2 million and was primarily related to capital expenditures.the cash purchase price of the CommAgility acquisition.
Financing Activities
Cash provided by financing activities was $2,066,568$1.5 million for the six months ended June 30, 20172018 as compared to cash used of $144,648$2.1 million for the six months ended June 30, 2016. During the six months ended June 30, 2017 the Company received net proceeds of $1,522,4262017. The decrease from the asset based revolver and received $760,000prior year is primarily due to the receipt of cash from the term loan. Principal repayments ofTerm Loan under the term loan duringCredit Facility in the six months ended June 30, 2017 were $38,000. Additionally, the Company paid $215,358 in debt issuance costs associated with the new credit facility. During the six months ended June 30, 2016 the Company paid $79,180 related to a capital equipment lease and $65,468 related to the repurchase of common stock.prior year period.
As noted in Note 8 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 $760,000 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. The proceeds of the term loan and revolver were used to finance the acquisition of CommAgility. As of June 30, 2017, $1,522,426 was outstanding on the asset based revolver. At June 30, 2017 the Company has excess availability under the Revolver of $3,198,163.
On August 3, 2017 the Company entered into Amendment No. 1 to the New Credit Facility, effective June 30, 2017, which amended the definition of EBITDA to exclude the non-cash inventory adjustment of $1,930,000 recorded during the three months ended June 30, 2017 and to reduce the pledge of equity interests in the Company’s Foreign Subsidiaries from 66 2/3% to 66 1/3%. Accordingly, as of June 30, 2017, and the date hereof, the Company is in compliance with the covenants of the New Credit Facility.
As of June 30, 2017,2018, future minimum lease payments related to the Company’s facility lease and equipment leases are shown below:below (purchase obligations consist of inventory that arises in the normal course of business operations) (in thousands):
Payments by Period | ||||||||||||||||||||||||||||||||||||||||||||||||
Remainder | ||||||||||||||||||||||||||||||||||||||||||||||||
Total | 2017 | 2018-2019 | 2020-2021 | Thereafter | Total | Remaining 2018 | 2019 | 2020 | 2021 | 2022 | Thereafter | |||||||||||||||||||||||||||||||||||||
Facility Leases | $ | 2,791,517 | $ | 242,813 | $ | 1,003,356 | $ | 934,184 | $ | 611,164 | $ | 2,390 | $ | 284 | $ | 509 | $ | 512 | $ | 474 | $ | 488 | $ | 123 | ||||||||||||||||||||||||
Purchase Obligations | 2,966,875 | 2,966,875 | - | - | - | 7,727 | 7,727 | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||
Operating and Equipment Leases | 252,157 | 27,017 | 108,067 | 108,067 | 9,006 | 198 | 27 | 54 | 54 | 54 | 9 | - | ||||||||||||||||||||||||||||||||||||
$ | 6,010,549 | $ | 3,236,705 | $ | 1,111,423 | $ | 1,042,251 | $ | 620,169 | $ | 10,315 | $ | 8,038 | $ | 563 | $ | 566 | $ | 528 | $ | 497 | $ | 123 |
The Company may pursue strategic opportunities, including potential acquisitions, mergers, divestitures or other activities, which may require significant use of the Company’s capital resources. The Company may incur costs as a result of such activities and such activities may affect the Company’s liquidity in future periods. In order to fund such activities, the Company may need to incur additional debt or issue additional securities if market conditions are favorable. However, there can be no certainty that such funding will be available in needed quantities oron terms favorable to the Company.Company or at all.
The Company believes that its financial resources from working capital and availability under the asset based revolverasset-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.liabilities related to the CommAgility acquisition. 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.markets and covenants of our Credit Facility.
OFF-BALANCE SHEET ARRANGEMENTSOff-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements.
INFLATION AND SEASONALITYEffects Of Inflation And Changing Prices
The Company does not anticipate that inflation or other expected changes in prices will significantly impact its business or its results of operations nor does it believe that its business is seasonal.business.
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Critical Accounting Policies
There have been no changechanges in our critical accounting policies or significant accounting estimates as disclosed in our 20162017 Form 10-K, except as disclosed below:
Revenue Recognition
Revenue from product shipments, including shipping and handling fees,for adoption of Topic 606 which 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 recognizeddescribed 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.
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 items are delivered and services have been performed, or until such evidence of fair value can be determined for the undelivered items.
Software arrangements that 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.
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 evaluated for impairment annually by first performing a qualitative assessment to determine whether a quantitative goodwill test is necessary. After assessing the totality of events or circumstances, if we determine it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then we perform additional quantitative tests to determine the magnitude of any impairment.
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.Note 2.
FORWARD LOOKING STATEMENTSForward Looking Statements
The statements contained in this Quarterly Report on Form 10-Q that are not historical facts, including, without limitation, some of 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 mayinclude statements about our sources of short-term liquidity and our belief that these sources will be identified by, among other things,sufficient to meet our liquidity needs for at least the use of forward-looking terminology such as “believes,” “expects,” “intends,” “plans,” “may,” “will,” “should,” “anticipates” or “continues” ornext 12 months; that financial resources from working capital and our availability under the negative thereof or other variations thereon or comparable terminology, or by discussions of strategyasset-based revolver are adequate to meet our current needs; and that cash flow from CommAgility will fund the deferred purchase price and contingent consideration. These statements 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, our ability to manage risks related to our information technology and cyber security, 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 including in our Annual Report on Form 10-K for the year ended December 31, 2016.2017 and elsewhere in this Quarterly Report on Form 10-Q. 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.
ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
ITEM 4 – CONTROLS AND PROCEDURES4. 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 Control over Financial Reporting
We acquired CommAgility on February 17, 2017. We have begun the process to integrate the operations of CommAgility into our overall system of internal control over financial reporting.
There were no other changes in our internal control over financial reporting during the three or six months ended June 30, 20172018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, as described in our 20162017 Annual Report on Form 10-K.
Item 1. | Legal Proceedings |
There have been no material developments in the legal proceedings as previously disclosed in Part I, Item 3 of our Annual Report on Form 10-K for the year ended December 31, 2017.
Item |
There have been no material changes to our risk factors as previously disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2017.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
None.
Item 3. | Defaults Upon Senior Securities |
None.
Item 4. | Mine Safety Disclosures |
Not applicable.
Item 5. | Other Information |
None.
Item 6. | Exhibits |
Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to our Annual Report on Form 10-K/A filed with the SEC on April 22, 2005, |
3.2 | Amended and Restated By-laws (incorporated herein by reference to Exhibit 3.1 to Wireless Telecom Group, Inc.’s Current Report on Form 8-K, filed on July 1, |
10.1* | Form |
31.1 | Certification |
31.2 | Certification |
32.1 | Certification |
32.2 | Certification |
101** | The following financial |
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 | |
* Denotes a management contract or compensatory plan or arrangement.
** Furnished herewith.
* | Constitutes a management compensatory agreement. | ||
** | 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. | |||||
August 9, | |||||
By: | /s/ Timothy Whelan | ||||
Timothy Whelan | |||||
Chief Executive Officer | |||||
Dated: | August 9, 2018 | ||||
By: | /s/ Michael Kandell | ||||
Michael Kandell | |||||
Chief Financial Officer |
EXHIBIT INDEX
Exhibits Number No. | Exhibit | |
10.1* |
31.1 | Certification |
31.2 | Certification |
32.1 | Certification |
32.2 | Certification |
101** | The following financial |
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 | |
*Denotes a management contract or compensatory plan or arrangement.
** Furnished herewith.
* | Constitutes a management compensatory agreement. | ||
** | Furnished herewith. |