UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON,Washington, D.C. 20549

 

 

 

FORM 10-Q

(Mark One)

 

x[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 20172020

 

OR

 

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

 

For the transition period fromto

 

Commission file number

number: 1-11916

 

WIRELESS TELECOM GROUP, INC.

(Exact name of registrantRegistrant as specified in its charter)

 

New Jersey22-2582295
(State or Other Jurisdiction
of Incorporation or Organization)
 (I.R.S. Employer
Identification No.)22-2582295

(State or other jurisdiction

(I.R.S. Employer Identification No.)
of incorporation or organization)
25 Eastmans Road,

Parsippany, New Jersey

07054
(Address of Principal Executive Offices) 07054
(Address of principal executive offices)(Zip Code)

 

(973) 386-9696

(Registrant’s Telephone Number, Including Area Code)telephone number, including area code)

 

Not Applicable

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

 

  

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

Title of each classTrading SymbolName of each exchange on which registered
Common StockWTTNYSE American

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

 

Yes [X] No [  ]

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). YesxNoo

Yes [X] No [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See 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 filero[  ]Accelerated filero[  ]
Non-accelerated filero[  ]Smaller reporting companyx[X]
Emerging growth companyo[  ]

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.o [  ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YesoNox

Yes [  ] No [X]

 

Number of shares of Common Stock outstanding as of October 22, 2017: 22,790,667November 1, 2020: 21,695,010

 

WIRELESS TELECOM GROUP, INC.

Form 10-Q

Table of Contents

 

PART I – FINANCIAL INFORMATION 3
   
Item 1. FINANCIAL STATEMENTSFinancial Statements (Unaudited)3
   
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSManagement’s Discussion and Analysis of Financial Condition and Results of Operations2622
   
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKQuantitative and Qualitative Disclosures About Market Risk3328
   
Item 4. CONTROLS AND PROCEDURESControls and Procedures3328
   
PART II – OTHER INFORMATION 
34
Item 1.Legal Proceedings30
   
Item 1A.Item 1. LEGAL PROCEEDINGSRisk Factors3430
   
Item 2.Item 1A. RISK FACTORSUnregistered Sales of Equity Securities and Use of Proceeds3431
   
Item 3.Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDSDefaults Upon Senior Securities3431
   
Item 4.Item 3. DEFAULTS UPON SENIOR SECURITIESMine Safety Disclosures3431
   
Item 5. OTHER INFORMATIONOther Information3431
   
Item 6. EXHIBITSExhibits3432
   
SIGNATURES3633
2

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

 

 September 30
2017
 December 31  
2016
  (Unaudited)    
 (unaudited)      September 30
2020
 December 31
2019
 
CURRENT ASSETS                
Cash & cash equivalents $2,266,532  $9,350,803  $2,203  $4,245 
Accounts receivable - net of reserves of $23,026 and $10,740, respectively  8,107,931   5,183,869 
Inventories - net of reserves of $2,067,103 and $1,549,089, respectively  6,485,796   8,452,751 
Accounts receivable - net of reserves of $42 and $69, respectively  8,040   6,152 
Inventories - net of reserves of $1,082 and $969, respectively  9,074   7,325 
Prepaid expenses and other current assets  4,789,567   866,036   2,074   1,871 
TOTAL CURRENT ASSETS  21,649,826   23,853,459   21,391   19,593 
PROPERTY PLANT AND EQUIPMENT – NET  2,428,245   2,166,566 
        
PROPERTY PLANT AND EQUIPMENT - NET  1,898   2,147 
        
OTHER ASSETS                
Goodwill  10,113,158   1,351,392   15,881   10,069 
Acquired Intangible Assets, net  4,756,386   - 
Acquired intangible assets, net  5,479   2,219 
Deferred income taxes  8,822,687   7,403,600   4,956   6,013 
Right of use assets  1,814   1,436 
Other  794,058   660,118   1,617   874 
TOTAL OTHER ASSETS  24,486,289   9,415,110   29,747   20,611 
        
TOTAL ASSETS $48,564,360  $35,435,135  $53,036  $42,351 
                
CURRENT LIABILITIES                
Short term debt  1,423,927   -  $84  $2,696 
Accounts payable  2,416,202   2,986,797   1,894   2,227 
Short term leases  527   440 
Accrued expenses and other current liabilities  3,290,598   673,067   8,497   2,657 
Deferred Revenue  573,477   - 
Deferred revenue  170   42 
TOTAL CURRENT LIABILITIES  7,704,204   3,659,864   11,172   8,062 
        
LONG TERM LIABILITIES                
Long term debt  532,000   -   9,290   - 
Long term leases  1,338   1,018 
Other long term liabilities  1,810,990   69,058   89   77 
Deferred Tax Liability  789,263   - 
Deferred tax liability  492   503 
TOTAL LONG TERM LIABILITIES  3,132,253   69,058   11,209   1,598 
                
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, 33,886,752 and 29,786,224 shares issued, 22,790,667 and 18,751,346 shares outstanding  338,867   297,862 
Common stock, $.01 par value, 75,000,000 shares authorized
34,905,571 and 34,488,252 shares issued, 21,695,010 and 21,300,252 shares outstanding
  349   345 
Additional paid in capital  47,453,286   40,563,002   50,049   49,062 
Retained earnings  9,722,650   11,668,829   4,552   7,142 
Treasury stock at cost, - 11,096,085 and 11,034,878 shares, respectively  (20,910,394)  (20,823,480)
Accumulated Other Comprehensive Income  1,123,494   - 
Treasury stock at cost, 13,210,561 and 13,188,000 shares  (24,540)  (24,509)
Accumulated other comprehensive income  245   651 
TOTAL SHAREHOLDERS’ EQUITY  37,727,903   31,706,213   30,655   32,691 
                
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $48,564,360  $35,435,135  $53,036  $42,351 

 

TheSee accompanying notes are an integral part of these condensed consolidated financial statements.Notes to Consolidated Financial Statements.

3

WIRELESS TELECOM GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTSTATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME/(LOSS)

(unaudited) (UNAUDITED)

(In thousands, except per share amounts)

 

  Three Months Ended
September 30
  Nine Months Ended
September 30
 
  2017  2016  2017  2016 
NET SALES $12,560,298  $8,344,301  $34,042,230  $22,322,820 
                 
COST OF SALES  6,446,992   4,521,302   20,252,254   12,440,817 
                 
GROSS PROFIT  6,113,306   3,822,999   13,789,976   9,882,003 
                 
Operating Expenses                
Research and Development  1,051,233   948,654   3,267,955   3,042,916 
Sales and Marketing  1,946,443   1,216,265   5,161,181   3,703,522 
General and Administrative  2,333,795   1,389,996   8,567,102   4,141,520 
Total Operating Expenses  5,331,471   3,554,915   16,996,238   10,887,958 
                 
Other income/(expense)  (1,033)  (27,090)  (4,253)  (78,675)
                 
Interest Expense  (70,607)  (178)  (229,453)  (463)
                 
Income/(loss) before taxes  710,195   240,816   (3,439,968)  (1,085,093)
                 
Tax Provision/(Benefit)  56,799   118,980   (1,493,789)  (412,409)
                 
Net Income/(Loss)  653,396   121,836   (1,946,179)  (672,684)
                 
Other Comprehensive Income/(Loss):                
Foreign currency translation adjustments  547,160   -   1,123,494   - 
Comprehensive Income/(Loss) $1,200,556  $121,836  $(822,685) $(672,684)
                 
Net Income/(Loss) per common share:                
                 
Basic $0.03  $0.01  $(0.10) $(0.04)
Diluted $0.03  $0.01  $(0.10) $(0.04)
                 
Weighted average shares outstanding:                
Basic  20,235,876   18,721,346   19,799,219   18,650,274 
Diluted  22,938,188   19,358,968   19,799,219   18,650,274 
  For the Three Months Ended  For the Nine Months Ended 
  September 30  September 30 
  2020  2019  2020  2019 
Net revenues $10,868  $10,812  $31,404  $37,353 
                 
Cost of revenues  5,214   5,987   15,655   20,668 
                 
Gross profit  5,654   4,825   15,749   16,685 
                 
Operating expenses                
Research and development  1,826   1,343   5,080   4,556 
Sales and marketing  1,732   1,753   5,111   5,718 
General and administrative  2,444   2,407   7,322   7,341 
Total operating expenses  6,002   5,503   17,513   17,615 
                 
Operating loss  (348)  (678)  (1,764)  (930)
                 
Other income/(expense)  (43)  108   252   273 
Interest (expense)  (256)  (60)  (727)  (248)
                 
Loss before taxes  (647)  (630)  (2,239)  (905)
                 
Tax provision/(benefit)  128   (169)  352   (256)
                 
Net Loss $(775) $(461) $(2,591) $(649)
                 
Other comprehensive income/(loss):                
Foreign currency translation adjustments  565   (491)  (406)  (566)
Comprehensive loss $(210) $(952) $(2,997) $(1,215)
                 
Loss per share:                
Basic $(0.04) $(0.02) $(0.12) $(0.03)
Diluted $(0.04) $(0.02) $(0.12) $(0.03)
                 
Weighted average shares outstanding:                
Basic  21,703   20,866   21,643   20,854 
Diluted  21,703   20,866   21,643   20,854 

 

TheIn 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 are an integral part of these condensed consolidated financial statements.Notes to Consolidated Financial Statements.

4

WIRELESS TELECOM GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTSTATEMENTS OF CASH FLOWS

(unaudited) (UNAUDITED)

(In thousands)

 

For the Nine Months
Ended September 30
  For the Nine Months Ended 
 2017 2016  September 30 
CASH FLOWS PROVIDED/(USED) BY OPERATING ACTIVITIES        
Net income (loss) $(1,946,179) $(672,684)
Adjustments to reconcile net income/(loss) to net cash provided/(used) by operating activities:        
 2020 2019 
CASH FLOWS USED BY OPERATING ACTIVITIES        
Net Loss $(2,591) $(649)
Adjustments to reconcile net loss to net cash used by operating activities:        
Depreciation and amortization  1,345,806   363,634   1,631   1,671 
Amortization of debt issuance fees  48,503   -   215   47 
Share-based compensation expense  507,791   432,612   360   560 
Deferred rent  18,277   27,454   (22)  (18)
Deferred income taxes  (1,419,087)  (434,333)  1,057   (309)
Provision for doubtful accounts  12,286   (8,788)  (28)  20 
Inventory reserves  1,314,528   221,369   119   139 
Changes in assets and liabilities, net of acquisition:                
Accounts receivable  (529,198)  (176,019)  (1,343)  520 
Inventories  1,820,249   (1,603,381)  (461)  (1,627)
Prepaid expenses and other assets  238,351   (14,162)  (226)  993 
Accounts payable  (1,776,291)  1,091,071   (451)  (567)
Payment of contingent consideration  -   (772)
Accrued expenses and other liabilities  814,989   30,818   888   (1,635)
Net cash provided/(used) by operating activities  450,025   (742,409)
CASH FLOWS (USED) BY INVESTING ACTIVITIES        
Net cash used by operating activities  (852)  (1,627)
        
CASH FLOWS USED BY INVESTING ACTIVITIES        
Capital expenditures  (588,180)  (715,128)  (228)  (339)
Proceeds from asset disposal  7,397   - 
Acquisition of business net of cash acquired  (9,137,534)  - 
Net cash (used by) investing activities  (9,718,317)  (715,128)
CASH FLOWS PROVIDED/(USED) BY FINANCING ACTIVITIES        
Acquisition of business, net of cash acquired  (7,189)  (426)
Net cash used by investing activities  (7,417)  (765)
        
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES        
Revolver borrowings  25,281,935   -   27,432   27,408 
Revolver repayments  (24,010,007)  -   (29,786)  (26,333)
Term loan borrowings  760,000   -   8,400   - 
Term loan repayments  (76,000)  -   (405)  (114)
Debt issuance fees  (215,358)  -   (1,305)  - 
Paycheck protection program loan  2,045   - 
Payment of contingent consideration  -   (782)
Proceeds from exercise of stock options  424,950   -   15   - 
Repayments of equipment lease payable  -   (101,296)
Repurchase of stock  (86,914)  (65,468)
Net cash provided/(used by) financing activities  2,078,606   (166,764)
Effect of exchange rate changes on cash and cash equivalents  105,415   - 
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS  (7,084,271)  (1,624,301)
Cash and cash equivalents, at beginning of period  9,350,803   9,726,007 
Shares withheld for employee taxes  (31)  - 
Net cash provided by financing activities  6,365   179 
        
Effect of Exchange Rate Changes on Cash and Cash Equivalents  (138)  (67)
NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS  (2,042)  (2,280)
        
Cash and Cash Equivalents, at Beginning of Period  4,245   5,015 
        
CASH AND CASH EQUIVALENTS, AT END OF PERIOD $2,266,532  $8,101,706  $2,203  $2,735 
                
SUPPLEMENTAL INFORMATION:                
Cash paid during the period for interest $90,084  $-  $527  $143 
Cash paid during the period for income taxes $58,454  $67,438  $53  $69 
        
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:        
Capital expenditures $-  $(41,904)
Equipment lease payable $-  $41,904 

 

TheSee accompanying notes are an integral part of these condensed consolidated financial statements.Notes to Consolidated Financial Statements.

5

WIRELESS TELECOM GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTSSTATEMENT OF SHAREHOLDERS’ EQUITY

(unaudited)(UNAUDITED)

(In thousands, except share amounts)

 

  Common
Stock Issued
  Common Stock
Amount
  Additional
Paid
In Capital
  Retained
Earnings
  Accumulated
Other
Comprehensive
Loss
  Treasury Stock   Total
Shareholders’
Equity
 
Balances at December 31, 2016  29,786,224  $297,862  $40,563,002  $11,668,829   -  $(20,823,480) $31,706,213 
                             
Net Income (loss)  -   -   -   (1,946,179)  -   -   (1,946,179)
                             
Issuance of shares in connection with stock options exercised  550,000   5,500   419,450   -   -   -   424,950 
                             
Share-based compensation expense  -   -   507,791   -   -   -   507,791 
                             
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  (87,000)  (870)  870   -   -   -   - 
                             
Cumulative translation adjustment  -   -   -   -   1,123,494   -   1,123,494 
                             
Repurchase of Stock  -   -   -   -   -   (86,914)  (86,914)
                             
Balances at September 30, 2017  33,886,752  $338,867  $47,453,286  $9,722,650  $1,123,494  $(20,910,394) $37,727,903 
  Common
Stock Issued
  Common
Stock
Amount
  Additional Paid
In Capital
  Retained
Earnings
  Treasury
Stock
  Accumulated
Other
Comprehensive
Income/(Loss)
  Total
Shareholders’
Equity
 
Balances at December 31, 2018  34,393,252  $344  $48,479  $7,556  $(24,509) $112  $          31,982 
                             
Net income/(loss)  -   -   -   (344)  -   -   (344)
Issuance of restricted stock  95,000   1   (1)  -   -   -   - 
Share-based compensation expense  -   -   209   -   -   -   209 
Cumulative translation adjustment  -   -   -   -   -   305   305 
Balances at March 31, 2019  34,488,252  $345  $48,687  $7,212  $(24,509) $417  $32,152 
                             
Net income/(loss)  -   -   -   156   -   -   156 
Share-based compensation expense  -   -   191   -   -   -   191 
Cumulative translation adjustment  -   -   -   -   -   (380)  (380)
Balances at June 30, 2019  34,488,252  $345  $48,878  $7,368  $(24,509) $37  $32,119 
                             
Net income/(loss)  -   -   -   (461)  -   -   (461)
Share-based compensation expense  -   -   160   -   -   -   160 
Cumulative translation adjustment  -   -   -   -   -   (491)  (491)
Balances at September 30, 2019  34,488,252  $345  $49,038  $6,907  $(24,509) $(454) $31,327 

  Common
Stock Issued
  Common
Stock
Amount
  Additional Paid
In Capital
  Retained
Earnings
  Treasury
Stock
  Accumulated
Other
Comprehensive
Income/(Loss)
  Total
Shareholders’
Equity
 
Balances at December 31, 2019  34,488,252  $345  $49,062  $7,142  $(24,509) $651  $          32,691 
                             
Net income/(loss)  -   -   -   (1,147)  -   -   (1,147)
Issuance of shares in connection with
Holzworth acquisition
  347,319   3   462   -   -   -   465 
Issuance of warrants in connection with term debt  -   -   151   -   -   -   151 
Shares withheld for employee taxes  -   -   -   -   (26)  -   (26)
Share-based compensation expense  -   -   81   -   -   -   81 
Cumulative translation adjustment  -   -   -   -   -   (935)  (935)
Balances at March 31, 2020  34,835,571  $348  $49,756  $5,995  $(24,535) $(284) $31,280 
                             
Net income/(loss)  -   -   -   (668)  -   -   (668)
Share-based compensation expense  -   -   128   -   -   -   128 
Cumulative translation adjustment  -   -   -   -   -   (36)  (36)
Balances at June 30, 2020  34,835,571  $348  $49,884  $5,327  $(24,535) $      (320) $30,704 
                             
Net income/(loss)  -   -   -   (775)  -   -   (775)
Issuance of shares in connection with stock options exercised  20,000   -   15   -   -   -   15 
Issuance of restricted stock  50,000   1   (1)  -   -   -   - 
Shares withheld for employee taxes  -   -   -   -   (5)  -   (5)
Share-based compensation expense  -   -   151   -   -   -   151 
Cumulative translation adjustment  -   -   -   -   -   565   565 
Balances at September 30, 2020  34,905,571  $349  $50,049  $4,552  $(24,540) $245  $30,655 

 

TheSee accompanying notes are an integral part of these condensed consolidated financial statements.Notes to Consolidated Financial Statements.

6

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”), specializes in the design and manufacture of advanced radio frequency and microwave devices which enable the development, testing and deployment of wireless technology. The Company provides unique, highly customized and configured solutions which drive innovation across a wide range of traditional and emerging wireless technologies.

In 2019, Wireless Telecom Group was comprised of four brands – Microlab, Boonton, Noisecom, and CommAgility. Since our acquisition of Holzworth Instrumentation, Inc. (“Holzworth”) in February of 2020 (see Note 3), we are also offering the Holzworth brand.

Our customers include wireless carriers, defense contractors, military and government agencies, satellite communication companies, network equipment manufacturers, tower companies, semiconductor device manufacturers, system integrators and medical device manufacturers.

Our products include components, modules, systems and instruments used across the lifecycle of wireless connectivity and communication development, deployment and testing. Our customers use these products in relation to commercial infrastructure development, the expansion and upgrade of distributed antenna systems, deployment of small cell technology, use of medical devices and private long-term evolution (“LTE”) networks. In addition, the Company’s products are used in the development and testing of satellite communication systems, radar systems, semiconductor devices, automotive electronics and avionics.

 

The condensed consolidated balance sheet as of September 30, 2017,2020, the condensed consolidated statements of operations and comprehensive income/loss(loss) for the three and nine months ended September 30, 20172020 and 2016,2019, the condensed consolidated statements of cash flows for the nine months ended September 30, 20172020 and 20162019 and the condensed consolidated statement of shareholder’sshareholders’ equity for the three and nine months ended September 30, 20172020 and 2019 have been prepared by the Company (as defined below) without audit. The condensed 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 LLC (“Microlab”), Holzworth Instrumentation, Inc. (“Holzworth”), 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.

 

In June of 2020 the Company completed an internal reorganization and now presents its operations as one reportable segment. Prior to the second quarter of 2020 the Company presented its operations in three reportable segments. The Company identifies segments in accordance with ASC 280 Segment Reporting (“ASC 280”). As a result of internal reorganizations that occurred over the six to nine months prior to June 30th the Company evaluated its segment reporting. We determined that the Chief Operating Decision Maker (“CODM”) as defined in ASC 280 evaluates operating results and makes decisions on how to allocate resources at the consolidated level. Although the CODM reviews key performance indicators including bookings, shipments and gross profit at a product group level, this information by itself is not sufficient enough to make operating decisions. Rather, operating decisions are made based on review of consolidated profitability metrics rather than the individual results of each product group.

It is suggested that these condensedinterim consolidated financial statements be read in conjunction with the audited consolidated financial statements, and the notes thereto, included in the company’sCompany’s latest shareholders’ annual report (Form 10-K).

 

InterimThe Company’s fiscal periods are based on the calendar year. Except as otherwise specified, references to “third quarter(s)” or “three months” indicate the Company’s fiscal periods ending September 30, 2020 and September 30, 2019, and references to “year-end” indicate the fiscal year ended December 31, 2019.

Consolidated Financial Statements

 

In the opinion of management, the accompanying condensed consolidated financial statements referred to above contain all necessary adjustments, consisting of normal accruals and recurring entries, which are necessary to fairly present the Company’s results for the interim periods being presented.

 

The accounting policies followed by the Company are set forth in Note 1 to the Company’s consolidated financial statements included in its annual report on Form 10-K for the year ended December 31, 2016.2019. 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.

WIRELESS TELECOM GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

The results of operations for the three and nine month periodsmonths ended September 30, 20172020 are not necessarily indicative of the results to be expected for the full year ending December 31, 2017.2020.

 

Use ofCritical Accounting Estimates

 

The preparation of our consolidated financial statements in conformity with US GAAP requires managementthe Company to make estimates and assumptionsjudgments that affect the reported amountsamount 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 the reported amountsamount of net revenues and expenses duringfor each period. We base our assumptions, judgements and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. At least quarterly, we evaluate our assumptions, judgments and estimates, and make changes as deemed necessary.

Due to the COVID-19 pandemic, there has been uncertainty and disruption in the global economy and financial markets. As noted in our Form 10-K for the fiscal year ended December 31, 2019, due to declining demand of our digital signal processing hardware cards we performed a quantitative assessment of the CommAgility goodwill as of the fourth fiscal quarter of 2019. Our quantitative assessment did not identify any goodwill impairment. Furthermore, the Company applied a hypothetical 10% decrease to the fair value of the CommAgility reporting period. Actualunit and compared those values to the carrying values which also did not result in a goodwill impairment. The Covid-19 pandemic has had an impact on our financial results for the three and nine months ended September 30, 2020. However, we believe the markets we serve and the industries in which we operate will recover in the long term. Accordingly, we are not aware of any specific event or circumstance related to the COVID-19 pandemic that would require updates to our estimates or judgments or require us to revise the carrying value of our assets or liabilities as of November 13, 2020, the date of issuance of this Quarterly Report on Form 10-Q. It is, however, reasonably possible that changes in judgements, assumptions and estimates we made in assessing the fair value of goodwill could cause us to consider some portion of the remaining CommAgility goodwill to become impaired because of the evolving disruptions and uncertainties caused by Covid-19, as described below.

Although disruptions related to the Covid-19 pandemic did not impact our estimates and judgements as of the date of this report, it is reasonably possible that the expected ongoing lack of sales of digital signal processing hardware cards and significant uncertainty around other sales, cash collections, and costs could impact our mediation efforts in the fourth quarter of the fiscal year and beyond. These uncertainties include the duration and severity of the pandemic and containment measures and how our compliance with these measures will impact our day-to-day operations as well as that of our key customers, suppliers (including contract manufacturers) and other counterparties. Our accounting estimates and judgements may change as new events occur and additional information becomes available or is obtained. Furthermore, actual results could differ materially from those estimates.our estimates as of the date of issuance of this Quarterly Report on Form 10-Q under different assumptions or conditions.

For further information about our critical accounting estimates, see the discussion in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” under the heading “Critical Accounting Policies” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

 

Concentration Risk

 

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents and trade accounts receivable. The majority of the Company’s cash balance is held outside of the United States.

 

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 of the Company’s sales team to ensure segregation of duties.

7

WIRELESS TELECOM GROUP, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

For the three months ended September 30, 2017,2020, one customer accounted for approximately 13% of the Company’s consolidated revenues and forrevenues. For the nine months ended September 30, 20172020 no one customer accounted for approximatelygreater than 10% of the Company’s consolidated revenue.revenues. For the three and nine months ended September 30, 2016,2019, one customer accounted for approximately 11%19% and 10%, respectively,29% of the Company’s consolidated revenues. Atrevenues, respectively.

WIRELESS TELECOM GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

No customer accounted for more than 10% of consolidated accounts receivable as of September 30, 2017 two customers represented 19% and 17% of the Company’s gross accounts receivable, respectively.2020. At December 31, 2016,2019, one customer represented 16%accounted for 13% of the Company’s grossconsolidated accounts receivable balance.receivable.

 

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—1 - Quoted prices in active markets for identical assets or liabilities.

 

Level 2—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—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. We believe the carrying value of the loan obtained under the Paycheck Protection Program approximates fair value due to the expected short term nature of the loan.

 

Contingent Consideration

 

Under the terms of the CommAgilityHolzworth Share Purchase Agreement (See Note 3) the Company may be required to pay additional purchase price in the form of deferred purchase price payments and an earnout if certain financial targets are achieved for the years ending December 31, 20172020 and December 31, 2018 (“CommAgility Earn-Out”).2021. See Note 3 for a discussion of the first deferred purchase price payment related to financial targets set for 2019. As of the acquisition date,September 30, 2020, the Company estimated the fair value of the contingent considerationdeferred purchase price and earnout remaining to be $754,500 (see Note 3)paid related to the 2020 and 2021 financial targets to be $660,000 and $2.4 million, respectively. The earnout may be paid in cash or common stock at the Company’s option. 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 estimated gross revenues and Adjusted EBITDA, as defined in the Holzworth Share Purchase Agreement, and scenarios for the earn-outearnout 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 CommAgilityHolzworth or changes in the future, may result in different estimated amounts.

The contingent consideration is included in other long term liabilities in the accompanying condensed consolidated balance sheets. The Company will satisfy this obligation with a cash payment to the sellers of CommAgility upon the achievement of the respective milestone discussed above.

8

WIRELESS TELECOM GROUP, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(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, the price is fixed or determinable, and collectability is reasonably assured. Deliveryliability 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, 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 theLevel 3 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 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 Income/(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 and Comprehensive Income/(Loss). These unrealized gains and losses consist of changes in foreign currency translation.

Intangible and Long-lived Assets

Intangible assets include patents, non-competition agreements, customer relationships and trademarks. Intangible assets with finite lives 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,

9

WIRELESS TELECOM GROUP, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

economic conditions and competition. Intangible assets determined to have indefinite useful lives are not amortized but are tested for impairment annually and more frequently if event occur or circumstances change that indicate an asset may be impaired.

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 thereThere were no subsequent events or transactions requiring recognition or disclosure in the condensed consolidated financial statements, and the notes thereto, through the date the financial statements were issued.

WIRELESS TELECOM GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 2 – RECENT ACCOUNTING PRONOUNCEMENTSAccounting Pronouncements

 

In January 2017, the FinancialRecently Adopted Accounting Standards Board (“FASB”)

In August 2018, the FASB issued Accounting Standards Update (“ASU”) No. 2017-04,ASU 2018-15, Intangibles - Goodwill and Other (Topic 350): Simplifying the– Internal-Use Software, Customers Accounting for Goodwill ImpairmentImplementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract. (“ASU 2017-04”). ASU 2017-04 removes2018-15 aligns the requirementrequirements for capitalizing implementation costs in cloud computing arrangements with the requirements for capitalizing implementation costs incurred 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 2017-04develop or obtain internal-use software. This pronouncement is effective for annual periods and interim periods within those annual periods beginning after December 15, 2019, andthe Company’s 2020 calendar year, with early adoption is permitted. The Company early adoptedadoption of this standard as of January 1, 2017.did not have a material impact on our consolidated financial statements.

 

There have been no changes to our significant accounting policies as described in the 2019 Form 10-K that had a material impact on our consolidated financial statements and related notes.

Recent Accounting Pronouncements Not Yet Adopted

In MarchJune 2016, the FASB issued ASU 2016-09, Compensation-Stock Compensation2016-13, Financial Instruments – Credit Losses (Topic 718), Improvements to Employee Share-Based Payment Accounting. Under ASU 2016-09, companies will no longer record excess tax benefits and certain tax deficiencies in additional paid in capital (“APIC”). Instead, they will record all excess tax benefits and tax deficiencies as income tax expense or benefit in the income statement and the APIC pools will be eliminated. In addition, ASU 2016-09 eliminates the requirement that excess tax benefits be realized before companies can recognize them. ASU 2016-09 also requires companies to present excess tax benefits as an operating activity on the statement of cash flows rather than as a financing activity. Furthermore, ASU 2016-09 will increase the amount an employer can withhold to cover income taxes on awards and still qualify for the exception to liability classification for shares used to satisfy the employer’s statutory income tax withholding obligation. An employer with a statutory income tax withholding obligation will now be allowed to withhold shares with the fair value up to the amount of taxes owed using the maximum statutory rate in the employee’s applicable jurisdiction(s)326). ASU 2016- 09 requires a company to classify2016-13 changes the cash paid to a tax authority when shares are withheld to satisfy its statutory income tax withholding obligationimpairment model for most financial assets and will require the use of an “expected loss” model for instruments measured as a financing activity on the statement of cash flows. Under current U.S. GAAP, itamortized cost. This pronouncement is not specified how these cash flows should be classified. In addition, companies will now have to elect whether to account for forfeitures on share-based payments by (1) recognizing forfeiture awards as they occur or (2) estimating the number of awards expected to be forfeited and adjusting the estimate when it is likely to change, as is currently required. The amendments of this ASU are effective for small reporting companies for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2016, with early adoption permitted but all of2022. The Company plans to adopt the guidance must be adopted instandard effective January 1, 2023. We do not expect the same period. The adopted standard has not had any impact on the Company’s financial statements.

In January 2017, the FASB issued ASU No. 2017-01, Business Combinations: Clarifying the Definition of a Business (“ASU 2017-01”). ASU 2017-01 clarifies the definition of a business for determining whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. ASU 2017-01 is effective for annual periods and interim periods within those annual periods beginning

10

WIRELESS TELECOM GROUP, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

after December 15, 2017, and early adoption is permitted. The adoption of this ASU is not expectedstandard to have a material impact on our consolidated financial statements.

 

In August 2016,December 2019, the FASB issued ASU 2016-15,2019-12, ClassificationIncome Taxes (Topic 740) Simplifying the Accounting for Income Taxes. The amendments simplify the accounting for income taxes by removing certain exceptions to the general principles of Certain Cash ReceiptsTopic 740 and Cash Payments, to address some questions about the presentationimprove consistent application by clarifying and classification of certain cash receiptsamending existing guidance. The new standard is effective for fiscal years, and payments in the statement of cash flows. The update addresses eight specific issues, including contingent consideration payments made after a business combination, distribution received from equity method investees and the classification of cash receipts and payments that have aspects of more than one class of cash flows. This standard will be effective forinterim periods within those fiscal years, beginning after December 15, 2017, including interim periods within those fiscal years.2020. Early adoption is permitted.permitted, with the amendments to be applied on a retrospective, modified retrospective or prospective basis, depending on the specific amendment. The Company is in the process ofcurrently evaluating the impact of the adoption of ASU 2016-15 on its consolidated financial statements.adopting this guidance.

 

In February 2016,March 2020, the FASB issued ASU 2016-02,2020-04, LeasesReference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting,, which creates new The amendments provide optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships, and reporting guidelinesother transactions affected by reference rate reform if certain criteria are met. The amendments are intended to ease the potential burden in accounting for, leasing arrangements. The new guidance requires organizations that lease assets to recognize assets and liabilitiesor recognizing the effects of, reference rate reform 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.reporting. The new standard is effective for annual reporting periods beginning afterMarch 12, 2020 through December 15, 2018, including interim periods within that reporting period,31, 2022, with early application permitted. The new standard is to be applied using a modified retrospective approach.the adoption date being dependent upon the Company’s election. The Company is in the process ofcurrently evaluating the impact of ASU 2016-02 on its consolidated financial statements.adopting this guidance.

 

In May 2014,NOTE 3 – Acquisition of Holzworth

On November 13, 2019 the FASB issued ASU 2014-09,RevenueCompany entered into a Share Purchase Agreement with Holzworth Instrumentation Inc. (“Holzworth”), Jason Breitbarth, Joe Koebel, and Leyla Bly (collectively, the “Sellers”), and Jason Breitbarth, as the designated representative of the Sellers, as amended by a First Amendment to Share Purchase Agreement, dated January 31, 2020 (collectively, the “Share Purchase Agreement”). On February 7, 2020, the Company completed the acquisition (the “Acquisition”) of all of the outstanding shares of Holzworth, from Contracts with Customers (Topic 606). ASU 2014-09the Sellers. Holzworth instruments which include signal generators and phased noise analyzers are used by government labs, the semiconductor industry, and network equipment providers, among others, in research and automated test environments. Holzworth is a complimentary business for our Boonton and Noisecom brands with a common customer base and channel partners. For the three and nine months ended September 30, 2020, net revenues of $2.8 million and $5.7 million, respectively and operating income of $744,000 and $1.2 million, respectively, was included in the consolidated statements of operations and comprehensive new revenue recognition model requiringincome/(loss) related to the Holzworth business, representing the results from the date of acquisition. For the three and nine months ended September 30, 2020, the Company recorded $15,000 and $243,000, respectively of transaction expenses related to the Acquisition and these expenses were recognized in general and administrative expenses in the consolidated statements of operations and comprehensive income/(loss).

WIRELESS TELECOM GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The aggregate purchase price for the Acquisition is a companymaximum of $17.0 million, consisting of payments in cash and stock, deferred purchase price payments and contingent consideration in the form of an earnout. At the closing, the Company issued a promissory note, which required the Company to recognize revenuepay on the next business day $465,000 of the purchase price by issuing 347,319 shares of its common stock (the “Stock Consideration”), and $8.0 million in cash (the “Cash Consideration”), reduced by an indemnification holdback of $800,000 and payment of certain of Sellers’ transaction expenses and indebtedness of Holzworth. Additionally, the final purchase price is subject to depictadjustment based on the transferclosing working capital amounts, as defined in the Share Purchase Agreement, of goods or servicesHolzworth as of the closing balance sheet date as compared to a customer at an amount reflectingdefined target. The parties intend to make a 338(h)(10) election to treat the consideration it expectsAcquisition as a purchase and sale of assets, and the Company has agreed to receivepay any incremental taxes of Sellers resulting from that election.

There are two deferred purchase price payments that total $1.5 million. Each deferred payment may be reduced as provided in exchangethe Share Purchase Agreement if Holzworth’s EBITDA (as defined in the Share Purchase Agreement) for those goods or services. In August 2015,each fiscal year ending December 31, 2019 and December 31, 2020, respectively, is less than $1.25 million. Holzworth met the FASB issued ASU 2015-14,Revenue from Contracts with Customers (Topic 606): DeferralEBITDA target for the fiscal year ended December 31, 2019, and thereby earned the first deferred purchase price payment of $750,000 which is payable in three equal quarterly installments on March 31, 2020, June 30, 2020 and September 30, 2020, respectively. Under the terms of the Effective Date, which defersworking capital adjustment definition the effective date by one year, with early adoption on the original effective date permitted. As a result, ASU 2014-09 will be effective for annual and interim periods beginning after December 15, 2017. During the third quartersellers owed the Company began an implementation project regarding adoptionapproximately $292,000. Accordingly, this amount was netted against the first deferred purchase price installment of Topic 606.$250,000 and a portion of the second deferred purchase price installment. The Company believes that adoptionpaid the second deferred purchase price installment in the net amount of Topic 606 will not have a material impactapproximately $208,000 on the Company’s resultsJuly 1st. The third quarterly deferred purchase price installment of operations, however, the implementation project$250,000 was paid in full on October 1, 2020. The second deferred purchase price payment of $750,000, if earned, is on-going.payable on March 31, 2021.

 

The Company does not believe there aremay also be required to pay additional amounts in cash and stock as earnout consideration. The first earnout payment will be equal to two times the amount, if any, other recently issued, but not yet effective accounting pronouncements, thatby which Holzworth’s EBITDA for the fiscal year ending December 31, 2020 exceeds $1.25 million. The second earnout payment will be equal to two times the amount, if adopted would have a material effect onany, by which Holzworth’s EBITDA for the accompanying consolidated financial statements.fiscal year ending December 31, 2021 exceeds the greater of $1.25 million or Holzworth’s EBITDA for the prior fiscal year. The aggregate earnout payments, if any, cannot exceed $7.0 million.

 

NOTE 3 – ACQUISITION

On February 17, 2017, Wireless Telecommunications, Ltd. (the “Acquisition Subsidiary”), a company incorporated in England and Wales which is a wholly owned subsidiary of Wireless Telecom Group, Inc., completed the acquisition of all of the issued shares in CommAgility Limited, (“CommAgility”) a company incorporated in England and Wales (the “Acquisition”) from CommAgility’s founders. The Acquisition was completed pursuant to the terms of a Share Purchase Agreement, dated February 17, 2017, and entered into by and among the Company, the Acquisition Subsidiary and the founders. The Company paid $11,317,500 in cash on acquisition date and issued 3,487,528 shares of newly issued common stock (“Consideration Shares”) with an acquisition date fair value of $5,998,548. The Company financed the cash portion of the transaction with proceeds from a term loan totaling $760,000, proceedsfrom an asset based revolver totaling $1,098,000 and cash on hand of $9,459,500. Refer to Note 8 for additional details regarding the financing arrangement entered into in connection with this transaction. In addition to the acquisition date cash purchase price the sellers are to be paid an additional £2,000,000 (approximately $2,500,000 at acquisition date) in the form of deferred purchase price payable beginning in March 2017 through January 2019 and are due an additional purchase price adjustment based on working capital and cash levels delivered to the buyer as of February 17, 2017 (“Completion Cash Adjustment”). Lastly, the sellers may earn up to an

11

WIRELESS TELECOM GROUP, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

additional £10,000,000 (approximately $12,500,000 at the acquisition date) payment if certain financial targets are achieved by CommAgility during calendar years 2017 and 2018.

Pursuant to the Share Purchase Agreement 2,092,516the Company entered into a lock-up and voting agreement (the “Lock-up and Voting Agreement”) with each of the Sellers. Pursuant to the Lock-up and Voting Agreement, each Seller agrees to restrict the sale, assignment, transfer, encumbrance or other disposition of its portion of the Stock Consideration (the “Lock-up Shares”). For a period commencing on the closing date of the Acquisition (the “Effective Date”) and ending on the date which is 36 calendar months following the Effective Date, each Seller agrees that, without the prior written consent by the Company, such Seller shall not sell, assign, transfer, encumber or otherwise dispose of the Lock-up Shares are subjector enter into any swap, option or short sale, among other transactions. Upon the prior written consent of the Company, a Seller may transfer Lock-up Shares as a bona fide gift, by will or intestacy or to forfeiturea family member or trust for the benefit of the Seller or a family member; provided that any recipient of the Lock-up Shares sign and returndeliver to the Company if (a) 2017 EBITDA, as defined, generated by CommAgility is less than £2,400,000; or (b) 2018 EBITDA, as defined, generated by CommAgility is less than £2,400,000 (in each case as determined by an audit of CommAgility conducted bya lock-up and voting agreement substantially in the accountantsform of the Acquisition SubsidiaryLock-up and Voting Agreement. The Lock-up Shares cease to be locked up in the event of a Change of Control of the Company (as defined in the Lock-up and Voting Agreement).

In addition, each Seller, subject to certain limitations, agrees, among other things, to appear at each meeting of the shareholders of the Company and vote all of such Seller’s Lock-up Shares (a) in favor or against any proposal presented to the shareholders in the same manner that the Company’s Board of Directors (the “Board”) recommends shareholders vote on such proposal and (b) in favor of any proposal presented to the shareholders with respect to an action of the Company which the Board has approved, but as to which the Board has not made any recommendation, including in favor of any proposal to adjourn or postpone any meeting of the Company’s shareholders if such adjournment or postponement is conducted in accordance with the terms of the Lock-up and Voting Agreement.

To the extent any shares of Company common stock are issued in payment of any Earnout Consideration (as defined in the Share Purchase Agreement) in accordance with the terms of the Share Purchase Agreement). AsAgreement, such shares shall be subject to all applicable transfer restrictions, voting and other provisions set forth in the Lock-up and Voting Agreement, with the Effective Date with respect to such shares being the date such shares are issued; provided that, to the extent the portion of acquisition date the first $1.5 million of Earnout Consideration that is paid in cash represents less than 30% of such Earnout Consideration, the portion of shares of Company estimates thatcommon stock issued as Earnout Consideration constituting the 2017 Adjusted EBITDA target willdifference between the cash percentage paid and 30% of the first $1.5 of Earnout Consideration shall not be met thus we believe all 2,092,516 Consideration shares will be forfeited. Accordingly, the Company recorded a contingent asset of $3,599,128 which represents the fair value of the consideration shares as of acquisition date. This contingent asset is included in prepaid expenses and other current assets in the Condensed Consolidated Balance Sheet as of September 30, 2017.considered Lock-Up Shares.

 

The acquisition has been accounted for under the acquisition method of accounting in accordance with ASC 805, Business Combinations.“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. During the three months ended September 30, 2017 the Company recorded measurement period adjustments related to the completion of the valuation of intangible assets, contingent consideration and contingent asset associated with the equity claw back and deferred taxes. The Company incurred $0 and $1,289,517 of acquisition-related costs during the three and nine months ended September 30, 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 $2,231,166 and $6,228,157 of net sales to the Company for the three and nine months ended September 30, 2017, respectively.

Various valuation techniques were used to estimate the fair value of assets acquired and the liabilities assumed which use significant unobservable inputs, or Level 3 inputs as defined by the fair value hierarchy. Using these valuation approaches requires the Company to make significant estimates and assumptions. Thefollowing table summarizes

WIRELESS TELECOM GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

As of September 30, 2020, the allocation of the purchase considerationvaluation studies necessary to determine the fair market value of the assets acquired and liabilities assumed athave been completed, including the datevalidation of acquisition:

12

WIRELESS TELECOM GROUP, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)the underlying cash flows used to determine the fair value of the identified intangible assets and contingent consideration. The following amounts represent the determination of the fair value of identifiable assets acquired and liabilities assumed from the Acquisition along with measurement period adjustments recorded from the preliminary purchase price allocation to September 30, 2020 (in thousands):

 

        
  As Reported
3/31/2017
  Measurement
Period
Adjustments
  Revised
9/30/2017
 
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  (1,945,853) 754,500 
          
Total Purchase Price 23,913,689  (1,945,853) 21,967,836 
          
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  (4,540,833) 5,116,768 
Contingent Asset    3,599,128  3,599,128 
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) 867,308  (834,279)
Other Long Term Liabilities (339,096)    (339,096)
          
Net Assets Acquired 13,819,908     13,745,511 
          
Goodwill $10,093,781     $8,222,325 
13

WIRELESS TELECOM GROUP, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

  Amounts
Recognized as of
Acquisition Date
  Measurement
Period
Adjustments
  Amounts
Recognized as of
Acquisition Date
(as adjusted)
 
Cash at close $7,219  $-  $7,219 
Equity issued at close  465   -   465 
Purchase price holdback  800   -   800 
Working capital adjustment  (295)  3   (292)
Deferred purchase price  1,300   110   1,410 
Contingent consideration  555   1,885   2,440 
             
Total purchase price  10,044   1,998   12,042 
             
Cash  30   -   30 
Accounts receivable  485   29   514 
Inventory  1,218   220   1,438 
Intangible assets  4,500   (240)  4,260 
Other assets  960   7   967 
Fixed assets  144   -   144 
Accounts payable  (129)  -   (129)
Accrued expenses  (425)  (4)  (429)
Deferred revenue  (13)  -   (13)
Other long term liabilities  (740)  -   (740)
             
Net assets acquired  6,030   12   6,042 
             
Goodwill $4,014  $1,986  $6,000 

 

Goodwill is calculated as the excess of consideration paid over the net assets acquired and represents synergies, assembled workforce, organic growth and other benefits that are expected to arise from integrating CommAgilityHolzworth into our operations. None of theThe goodwill recorded in this transaction is expected to be tax deductible.

 

The following table summarizes the activity related to Contingent Consideration and Deferred Purchase Price for the nine months ended September 30, 2017:Company’s post acquisition consolidated goodwill is shown below (in thousands):

 

  Contingent
Consideration
  Deferred Purchase
Price
 
Balance at Beginning of Period $-  $- 
Fair Value At Acquisition Date  2,700,353   2,515,000 
Accretion of Interest  68,204     
Payment      (1,071,666)
Measurement Period Adjustment  (1,945,853)    
Foreign Currency Translation  52,571   120,000 
Balance as of September 30, 2017 $875,275  $1,563,334 
  Holzworth  Microlab  CommAgility  Total 
Balance as of December 31, 2019 $-  $1,351  $8,718  $10,069 
Holzworth acquisition  6,000   -   -   6,000 
Foreign currency translation  -   -   (188)  (188)
Balance as of September 30, 2020 $6,000  $1,351  $8,530  $15,881 

 

As of September 30, 2017, $1,116,666 of deferred purchase price is included in accrued expenses and other current liabilities on the condensed consolidated balance sheet. As of September 30, 2017, $875,275 of contingent consideration and $446,668 of deferred purchase price is included in other long term liabilities on the condensed consolidated balance sheet.

Pro Forma Information(Unaudited)

The following unaudited pro forma information presents the Company’s operations as if the CommAgilityHolzworth acquisition and related financing activities had occurred on January 1, 2016.2019. 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 CreditTerm Loan Facility (described in further detail in Note 8)4) used to finance the acquisition of CommAgility;Holzworth; and (iii) inclusion of acquisition-related expenses in the earliest period presented.Thepresented. The amounts related to Holzworth included in the following unaudited pro forma combined statementsinformation are based on their historical results and, therefore, may not be indicative of operations arethe actual results when operated as part of the Company. The pro forma adjustments represent management’s best estimates based on information available at the time the pro forma information was prepared and may differ from the adjustments that may actually have been required. Accordingly, the unaudited pro forma financial information should not necessarilybe relied upon as being indicative of the results of operations as theythat would have been realized had the transaction been effected onAcquisition occurred as of the assumed date and are not intended toindicated or that may be a projection of future results.achieved in the future.

WIRELESS TELECOM GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Pro-formaThe following table presents the unaudited pro forma consolidated results of operations for the Company for the three months ended September 30, 2016 are presented below:

(Unaudited) 2016 
Net Revenues $11,613,576 
Net (loss) $(125,515)
Basic net (loss) per share $(0.01)
Diluted net (loss) per share $(0.01)

Pro-forma results for the2019 and nine months ended September 30, 20162020 and 2017 are presented below:2019 as though the Acquisition had been completed as of January 1, 2019 (in thousands, except per share amounts):

 

(Unaudited) 2017  2016 
Net Revenues $35,416,074  $31,066,037 
Net (loss) $(1,441,141) $(1,602,277)
Basic net (loss) per share $(0.07) $(0.08)
Diluted net (loss) per share $(0.07) $(0.08)
14

WIRELESS TELECOM GROUP, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

  Q3 2019 WTG Pro Forma  Year to Date September 2020 Pro-forma  Year to Date September 2019 Pro-forma 
Net revenues $12,917  $31,502  $41,689 
Net income/(loss) $(431) $(2,714) $(1,700)
Earnings per diluted share $(0.02) $(0.13) $(0.08)

 

NOTE 4 – INCOME TAXESDebt

 

Debt consists of the following (in thousands):

  September 30, 2020 
Revolver at LIBOR plus margin $- 
Term loan at LIBOR plus margin  8,337 
Less: Debt issuance costs, net of amortization  (877)
Less: Fair value of warrants, net of amortization  (131)
Paycheck Protection Program loan  2,045 
Total Debt  9,374 
Less: Debt maturing within one year  (84)
Non-current portion of long term debt $9,290 

Term loan payments by period (in thousands):

Remainder of 2020 $21 
2021  84 
2022  2,130 
2023  84 
2024  84 
Thereafter  7,979 
Total $10,382 

In connection with the Holzworth Acquisition, on February 7, 2020, the Company, as borrower, and its subsidiaries, as guarantors, and Muzinich BDC, Inc., as lender (“Muzinich”), entered into a Term Loan Facility, which provides for a term loan in the principal amount of $8.4 million (the “Initial Term Loan”). All proceeds of the Initial Term Loan were used to fund the cash portion of the purchase price for the Holzworth acquisition. Principal payments on the Initial Term Loan are $21,000 per quarter with a balloon payment at maturity which is February 7, 2025. The term loan bears interest at LIBOR (subject to a floor of 1.0%) plus a margin of 7.25%. The Term Loan Facility includes an upfront fee of 2.50% of the aggregate principal amount of the Initial Term Loan. In connection with the Term Loan Facility, the Company incurred costs of $1.0 million, including the aforementioned 2.5% upfront fee to Muzinich, which were recorded as a reduction of the carrying amount of the debt and are being amortized over the term of the loan.

The Company may prepay the Initial Term Loan at any time. Prepayments made prior to (a) February 7, 2022 are subject to a prepayment premium in the amount of 2.0% of the prepaid principal amount and (b) February 7, 2023 are subject to a prepayment premium in the amount of 1.0% of the prepaid principal amount. The Company is required to make prepayments of the Initial Term Loan with the proceeds of certain asset dispositions, insurance recoveries and extraordinary receipts, subject to specified reinvestment rights. The Company is also required to make prepayments of the Initial Term Loan upon the issuance of certain indebtedness and to make an annual prepayment based upon the Company’s excess cash flow. Mandatory prepayments with asset sale, insurance or condemnation proceeds and excess cash flow may be made without penalty. Mandatory prepayments with the proceeds of indebtedness are subject to the same prepayment penalties as are applicable to voluntary prepayments.

WIRELESS TELECOM GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The Term Loan Facility provides for an additional $11.6 million term loan (the “Second Term Loan”) to be used for a second unannounced acquisition opportunity (the “Additional Acquisition”). There can be no assurance that the Additional Acquisition will be completed. In the event the Additional Acquisition is completed, the Second Term Loan will be made available to the Company on the same terms and conditions as the Initial Term Loan, including interest rate, amortization schedule and financial covenants, subject to the payment of an additional upfront fee and satisfaction of customary conditions to funding.

The Term Loan Facility is secured by liens on substantially all of the Company’s and its subsidiaries’ assets including a pledge of the equity interests in the Company’s subsidiaries. The Term Loan 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. In addition, the Company must maintain certain financial covenants typical for this type of arrangement, including a consolidated leverage ratio, a consolidated fixed charge coverage ratio and minimum liquidity of its foreign subsidiaries. The consolidated leverage ratio is defined as the ratio of total consolidated indebtedness, as defined, to consolidated EBITDA, as defined. The required leverage ratio starts at 4.75 to 1.0 for the twelve month periods ended March 31, 2020 and June 30, 2020, and decreases in various increments to 4.0 to 1.0 for the twelve months ended September 30, 2020, 3.75 to 1.0 for the twelve months ended December 31, 2020, 2.75 to 1.0 for the twelve months ended December 31, 2021 and 2.0 to 1.0 for the twelve months ended December 31, 2022 and thereafter. The consolidated fixed charge coverage ratio is the ratio of consolidated EBITDA, as defined, less consolidated capital expenditures and cash income taxes paid to consolidated fixed charges, as defined, calculated on a twelve-month basis. The consolidated fixed charge coverage ratio for the twelve month periods ended March 31, 2020, June 30, 2020 and September 30, 2020 must be 1.35 to 1 and increases in various increments on a quarterly basis to 1.5 to 1.0 for the twelve month period ended December 31, 2020 and 2021, and to 1.75 to 1.0 for the 12 months ending December 31, 2022 and thereafter. Lastly, the Company must maintain minimum liquidity, defined as cash and availability under the UK borrowing base, as defined, of $1.0 million over any trailing four-week period until such time as the foreign subsidiary has positive EBITDA, as defined, for three consecutive quarters and the Holzworth deferred purchase price has been paid in full. The Term Loan Facility also provides for a number of events of default, including, among others, nonpayment, bankruptcy, inaccuracy of representations and warranties, breach of covenant, change in control, entry of final judgement or order, breach of material contracts, and as long as the Company’s consolidated leverage ratio is greater than 1.0 to 1.0 (as calculated in accordance with the terms of the Term Loan Facility), the cessation of service of any two of Tim Whelan, Michael Kandell or Daniel Monopoli as Chief Executive Officer, Chief Financial Officer or Chief Technology Officer, respectively, of the Borrower without a satisfactory replacement within 60 days. Any exercise of remedies by Muzinich is subject to compliance with the intercreditor agreement entered into at the closing of the Term Loan Facility among the Company, Muzinich and Bank of America, N.A., as lender under the Credit Facility referenced below. It is reasonably possible that the disruptions caused by Covid-19 and the ongoing lack of demand for our digital signal processing cards will have an impact on our ability to comply with our financial debt covenants which could result in a default under either or both of our Credit Facility and Term Loan for the twelve months ended December 31, 2020. Management is actively discussing these issues with lenders and believes the risk of default will be eliminated through appropriate cash flow management, including with respect to potential earn out payments and amendments of credit agreements.

The Company entered into a Credit Facility with Bank of America, N.A. (the “Lender”) on February 16, 2017 (the “Credit Facility”), which provided for a term loan in the aggregate principal amount of $760,000 (the “Term Loan”) and an asset based revolving loan (the “Revolver”), which is subject to a Borrowing Base Calculation (as defined in the Credit Facility) of up to a maximum availability of $9.0 million (“Revolver Commitment Amount”). The borrowing base is calculated as a percentage of eligible accounts receivable and inventory, as defined, subject to certain caps and limits. The borrowing base is calculated on a monthly basis and interest is calculated at LIBOR plus a margin. The proceeds of the Term Loan and Revolver were used to finance the acquisition of CommAgility in 2017.

In connection with the Acquisition, on February 7, 2020, the Company and certain of its subsidiaries (the “Borrowers”), and Bank of America, N.A. entered into Amendment No. 5 (the “Amendment”) to the Credit Facility. By entering into the Amendment, Holzworth, together with CommAgility Limited, became borrowers under the Credit Facility. The obligations of the Borrowers under the Credit Facility are guaranteed by Wireless Telecom Group, Ltd. CommAgility Limited and Wireless Telecom Group, Ltd. are both wholly owned subsidiaries of the Company.

WIRELESS TELECOM GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

The Amendment (a) effected certain modifications to the Credit Facility to accommodate the Acquisition, the Company’s incurrence of the Initial Term Loan and the granting of the related liens and security interests, (b) subject to the satisfaction of certain conditions precedent, made available to CommAgility an asset based revolving loan, subject to a borrowing base calculation applicable to CommAgility’s assets, of up to a maximum availability of $5.0 million (the “UK Revolver Commitment”), (c) reduced the interest rate margin applicable to revolving loans made under the Credit Facility from a range of 2.75% to 3.25% to a range of 2.00% to 2.50%, based on the Borrowers’ Fixed Charge Coverage Ratio (as defined in the Credit Facility) of the most recently completed fiscal quarter, (d) extended the Revolver Termination Date to March 31, 2023 and (e) conditioned the Borrowers’ ability to make certain debt payments under the Term Loan Facility (described above) upon compliance with a liquidity test. In all other material respects, the Credit Facility remains unchanged.

Effectiveness of the Amendment was conditioned upon, among other things, the prepayment of the remaining principal balance ($304,000) of the $760,000 term loan made available under the Credit Facility and the payment of a closing fee in the amount of $25,000. The Borrowers satisfied all such conditions on February 7, 2020. In connection with the Amendment the Company incurred costs of $270,000 which are capitalized as other current and non-current assets in the Consolidated Balance Sheets and are being amortized over the term of the revolver.

As of September 30, 2020, the interest rate on the Term Loan Facility was 8.25% and the interest rate on the Revolver was 2.25%. As of September 30, 2020, and the date hereof the Company is in compliance with all covenants of the Credit Facility and the Term Loan Facility.

On May 4, 2020, the Company received $2.0 million pursuant to a loan from Bank of America N.A. under the Paycheck Protection Program (“PPP”) of the 2020 Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) administered by the Small Business Association (“SBA”). The loan has an interest rate of 1% and a term of 24 months. A repayment schedule has not yet been provided by Bank of America. Accordingly, the full amount of the term loan has been shown as due in May 2022. Funds from the loan may only be used for certain purposes, including payroll, benefits, rent and utilities. The CARES Act and the PPP provide a mechanism for forgiveness of up to the full amount of the loan upon application to the SBA for forgiveness by the Company. The loan is evidenced by a promissory note, which contains customary events of default relating to, among other things, payment defaults and breaches of representations and warranties. The Company may prepay the loan at any time prior to maturity with no prepayment penalties. The Company expects to apply for forgiveness of the loan, however, has elected to account for the loan in accordance with Accounting Standard Codification 470 Debt until such time that forgiveness is approved by the SBA. The Company can provide no assurance that the loan will be forgiven in whole or in part.

On May 4, 2020 the Company also entered into Amendment No. 6 to the Credit Facility with Bank of America N.A. and Amendment No. 1 to the Term Loan facility with Muzinich. The amendments allowed the Company to accept the PPP loan and provide that the PPP loan shall not be deemed to constitute “Debt” or “Indebtedness”, as defined, under the Credit Facility and the Term Loan Facility, respectively, as long as the proceeds of the PPP loan are used for allowable purposes under the provisions of the CARES Act and the PPP in order to permit the Company to obtain forgiveness of substantially all of the PPP loan. The amendments to the Credit Facility and Term Loan Facility also contain certain representations and warranties of the Company.

Issuance of Stock Warrants

Pursuant to the Term Loan Facility, the Company issued a Warrant, dated February 7, 2020 (the “Warrant”), to Muzinich. Under the Warrant, Muzinich has the right to purchase 266,167 shares of common stock of the Company at an exercise price of $1.3923 per share (an aggregate value of approximately $370,588), based on a 90-day volume weighted average price for shares of stock of the Company (the “Warrant Stock”). The Warrant is exercisable for an indefinite period from the date of the Warrant and may be exercised on a cashless basis. The number of shares of common stock deliverable upon exercise of the Warrant is subject to adjustment for subdivision or consolidation of shares and other standard dilutive events. In connection with the issuance of the Warrant, the Company granted Muzinich one demand registration right and piggyback registration rights with respect to the Warrant Stock, subject to certain exceptions.

If the Additional Acquisition is consummated, the Company has agreed to issue to Muzinich at the closing of the Additional Acquisition an additional Warrant for the right to purchase 367,564 shares of common stock of the Company at an exercise price of $1.3923 per share (an aggregate value of approximately $511,765), based upon a 90-day volume weighted average price for shares of stock of the Company as of February 7, 2020 (the “Additional Warrant”). The Additional Warrant will contain the same terms and conditions as the Warrant, except that Muzinich will have only one demand registration right, subject to certain exceptions, with respect to shares of common stock of the Company issued under the Warrant and the Additional Warrant.

The stock warrants issued to Muzinich are classified as equity. The fair value of the warrants, as calculated using the Black Scholes model as of the issuance date, was approximately $150,000 and was recorded as a reduction to the carrying value of the debt. The significant inputs included in the Black Scholes calculation were a risk free rate of 1.41%, volatility of 48.7% and the stock price on date of grant of $1.34.

WIRELESS TELECOM GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 5 – Leases

The Company’s lease agreements consist of building leases for its operating locations and office equipment leases for printers and copiers with lease terms that range from less than 12 months to 8 years. At inception, the Company determines if an arrangement contains a lease and whether that lease meets the classification criteria of a finance or operating lease. The Company’s leases for office equipment such as printers and copiers contain lease and non-lease components (i.e. maintenance). The Company accounts for lease and non-lease components of office equipment as a single lease component.

All of the Company’s leases are operating leases and are presented as right of use lease asset, short term lease liability and long term lease liability on the consolidated balance sheets as of September 30, 2020 and December 31, 2019. These assets and liabilities are recognized at the commencement date based on the present value of remaining lease payments over the lease term using the Company’s incremental borrowing rate. Short-term leases, which have an initial term of 12 months or less, are not recorded on the balance sheet.

Lease expense is recognized on a straight-line basis over the lease term and is included in cost of revenues and general and administrative expenses on the consolidated statement of operations and comprehensive income/(loss).

Operating lease costs for the three and nine months ended September 30, 2020 were $296,000 and $791,000, respectively. Operating lease costs for the three and nine months ended September 30, 2019 were $222,000 and $669,000, respectively.

The following table presents information about the amount and timing of cash flows arising from the Company’s leases as of September 30, 2020:

(in thousands) September 30, 2020 
Maturity of Lease Liabilities    
Remainder of 2020 $157 
2021  619 
2022  637 
2023  276 
2024  158 
Thereafter  231 
Total Undiscounted operating lease payments  2,078 
Less: imputed interest  (213)
Present value of operating lease liabilities $1,865 
     
Balance sheet classification    
Current lease liabilities $527 
Long-term lease liabilities  1,338 
Total operating lease liabilities $1,865 
     
Other information    
Weighted-average remaining term (months) for operating leases  46 
Weighted-average discount rate for operating leases  5.87%

WIRELESS TELECOM GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

NOTE 6 – Disaggregated Revenue

We disaggregate our revenue from contracts with customers by product family and geographic location as we believe it best depicts how the nature, timing and uncertainty of our revenue and cash flows are affected by economic factors. For the three and nine months ended September 30, 2020 and 2019, 99% of our revenue is recognized at a point in time. See details in the tables below (in thousands).

  

Three Months

Ended

September 30, 2020

  

Three Months Ended

September 30, 2019

  

Nine Months

Ended

September 30, 2020

  

Nine Months Ended

September 30, 2019

 
Total net revenues by revenue type                
Passive and active RF components $4,407  $5,185  $14,527  $16,518 
Signal generators and components  3,970   1,337   8,598   4,362 
Signal analyzers and power meters  1,451   1,323   4,297   3,946 
Signal processing hardware  106   2,506   1,471   11,154 
Software licenses  443   5   1,157   11 
Services  491   456   1,354   1,362 
Total net revenue $10,868  $10,812  $31,404  $37,353 
                 
Total net revenues by geographic areas                
Americas $8,958  $7,177  $23,598  $21,623 
EMEA  1,145   3,184   4,793   14,103 
APAC  765   451   3,013   1,627 
Total net revenue $10,868  $10,812  $31,404  $37,353 

NOTE 7 – Income 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.

 

As of September 30, 2020, the Company’s net deferred tax asset of approximately $4.5 million is net of a valuation allowance of approximately $7.1 million which is associated with the Company’s foreign net operating loss carryforward from an inactive foreign entity, state net operating loss carryforward and a state research and development credit.

The Company recorded a tax provision of $352,000 for the nine months ended September 30, 2020 due to estimated taxable income in the U.S. as qualified expenses under the PPP loan are not deductible for tax purposes. In recording the tax provision for the nine months ended September 30, 2020, the Company has assumed that the PPP loan will be forgiven and, therefore, all PPP qualified expenses are being treated as non-deductible. This was offset somewhat by estimated losses as well as research and development deductions in the UK.

The effective rate of income tax benefit of 44%28.3% for the nine months ended September 30, 20172019 was higher than the statutory rates in the United States and United Kingdom primarily due to the impact of research and development deductions state tax benefits related to net operating losses, non-qualified stock option deductions offset by nondeductible expenses and a lower rate in the United Kingdom.UK.

WIRELESS TELECOM GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 5 - INCOME (LOSS) PER COMMON SHARE8 – Earnings (Loss) Per Share

 

Basic earnings (loss) per share is calculated by dividing net 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 net 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.

  For the Three Months
Ended September 30,
  For the Nine Months
Ended September 30,
 
  2017  2016  2017  2016 
Weighted average common shares outstanding  20,235,876   18,721,346   19,799,219   18,650,274 
                 
Potentially dilutive shares  2,702,312   637,622   -   - 
Weighted average common shares outstanding, assuming dilution  22,938,188   19,358,968   19,799,219   18,650,274 

Commonmethod, the weighted average number of unvested restricted shares, the weighted-average number of restricted stock units and the weighted average number of warrants to purchase common stock outstanding for the period. Shares from stock options are included in the diluted earnings (loss) per share calculation only when the various optionoptions exercise prices are lesslower than their relativethe average market price duringvalue of the common shares for the period presented. In periods presented in this quarterly report. Thewith 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.

  For the Three Months Ended September 30,  For the Nine Months Ended September 30, 
  2020  2019  2020  2019 
             
Weighted average common shares outstanding  21,703,268   20,865,751   21,642,955   20,854,244 
Potentially dilutive equity awards  388,366   655,351   295,186   654,239 
Weighted average common shares outstanding, assuming dilution  22,091,634   21,521,102   21,938,141   21,508,483 

For the three and nine months ended September 30, 2020, the weighted average number of sharesoptions and warrants to purchase common stock not included in diluted earnings (loss)loss per share because the effects are anti-dilutive, or the performance condition was 2,810,143not met was 3,246,167 and 2,781,844for2,924,650, respectively. The estimated maximum weighted-average number of shares issuable under the three-months ended September 30, 2017terms of the Holzworth earnout, if all paid in shares of common stock, (see Note 3) for the three and 2016, respectively. For the nine months ended September 30, 20172020 are 1,468,374 and 2016,367,094, respectively.

For the weighted averagethree and nine months ended September 30, 2019 the weighted-average number of sharesoptions to purchase common stock not included in diluted earnings (loss)loss per share because the effects are anti-dilutive or the performance condition was 5,755,490not met was 1,445,000 and 3,980,229,1,275,000, respectively.

15

WIRELESS TELECOM GROUP, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

NOTE 69INVENTORIESInventories

 

Inventory carrying value is net of inventory reserves of $2,067,103 and $1,549,089$1.1 million at September 30, 20172020 and $1.0 million at December 31, 2016, respectively.2019.

 

Inventories consist of (in thousands):     
 September 30,
2017
  December 31,
2016
  September 30,
2020
 December 31,
2019
 
Inventories consist of:     
Raw materials $3,214,276   $3,558,430  $4,911  $4,024 
Work-in-process  641,449   531,210   716   406 
Finished goods  2,630,071   4,363,111   3,447   2,895 
 $6,485,796  $8,452,751  $9,074  $7,325 

During the nine month period ended September 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.

NOTE 7 – GOODWILL AND INTANGIBLE ASSETS

The Company’s goodwill balance of $10,113,158 at September 30, 2017 relates to two of the Company’s reporting units, Microlab ($1,351,392) and Embedded Solutions ($8,761,766). Management’s qualitative assessment performed in the fourth quarter of 2016 did not indicate any impairment of Microlab’s goodwill as its fair value was estimated to be in excess of its carrying value. Furthermore, no events have occurred since then that would change this assessment. The Embedded Solutions reporting unit was acquired on February 17, 2017 (see Note 3). No events have occurred since the acquisition date that would indicate any impairment of Embedded Solutions goodwill.

Goodwill consists of the following:


September 30,
2017
Beginning Balance$1,351,392
CommAgility Acquisition10,093,781
Measurement Period Adj(1,871,456)
Foreign Currency Translation539,441
Ending Balance$10,113,158
16

WIRELESS TELECOM GROUP, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)(UNAUDITED)

 

Intangible assets consist of the following:

  Gross Carrying
Amount
  Accumulated
Amortization
  Foreign
Exchange
Translation
  Net Carrying
Amount
 
             
Customer Relationships  $2,766,500   ($346,437)  $159,437   $2,579,500 
                 
Patents  614,918   (76,593)  35,028   573,353 
                 
Non Compete Agreements  1,106,600   (236,133)  63,069   933,535 
                 
Tradename  628,750   -   41,250   670,000 
Total  $5,116,768   (659,163)  $298,784   $4,756,388 

Amortization of acquired intangible assets was $47,737Note 10 – Accrued Expenses and $659,163 for the three and nine months ended September 30, 2017. As a result of finalizing the fair value of intangible assets the Company recorded measurement period adjustments of $4,540,833 to reduce gross intangible assets and increase goodwill during the three months ended September 30, 2017. Additionally, the Company recorded an indefinite lived intangible asset representing the fair value of the CommAgility tradename. As a result of the measurement period adjustments the Company recorded a reduction of intangible amortization expense of $228,459 during the three months ended September 30, 2017 which represents a year to date true up of amortization expense based on the final intangible asset fair value. Amortization of acquired intangible assets is included as part of general and administrative expenses in the accompanying condensed consolidated statements of operations and comprehensive income/(loss).

The estimated future amortization expense related to intangible assets is as follows as of September 30, 2017:

Remainder of 2017   $278,430 
      
2018   1,113,719 
2019   1,113,719 
2020   769,786 
2021   720,652 
Thereafter   90,082 
      
Total   $4,086,388 

NOTE 8 – DEBT

Debt consists of the following:

September 30, 2017
Revolver at LIBOR Plus Margin$1,271,927
Term Loan at LIBOR Plus Margin684,000
Total Debt1,955,927
Debt Maturing within one year(1,423,927)
Non-current portion of long term debt$532,000
17

WIRELESS TELECOM GROUP, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

In connection with the acquisition of CommAgility, the Company entered into a Credit Agreement with Bank of America, N.A. (the “Lender”) on February 16, 2017 (the “New Credit Facility”), which provided for a term loan in the aggregate principal amount of $760,000 (the “Term Loan”) and an asset based revolving loan (the “Revolver”), which is subject to a Borrowing Base Calculation (as defined in the New Credit Facility) of up to a maximum availability of $9,000,000 (“Revolver Commitment Amount”). The borrowing base is calculated as 85% of Eligible accounts receivable and inventory, as defined, subject to certain caps and limits. The borrowing base is calculated on a monthly basis. The proceeds of the term loan and revolver were used to finance the acquisition of CommAgility.

In connection with the issuance of the New Credit Facility, the Companypaid lender and legal fees of $215,358 which were primarily related to the Revolver and are capitalized and presented as other current and non-current assets in the condensed consolidated balance sheets. These costs are recognized as additional interest expense over the term of the related debt instrument using the straight line method.

The Company must repay the Term Loan in installments of $38,000 per quarter due on the first day of each fiscal quarterbeginning April 1, 2017 and continuing until the term loan maturity date, on which the remaining balance is due in a final installment. The future principal payments under the term loan are $38,000 for the remainder of 2017, $152,000 in 2018 and $494,000 in 2019. The Term Loan and Revolver are both scheduled to mature onNovember 16, 2019.

The Term and Revolving Loans bear interest at the LIBOR rate plus a margin. The margin on the outstanding balance of the Company’s Term Loans and Revolving Loans is3.50% and 3.00%per annum, respectively, at June 30, 2017 and will continue at these rates until September 30, 2017. Thereafter, the margins shall be subject to increase or decrease by Lender on the first day of each of the Borrowers’ fiscal quarters based upon the Fixed Charge Coverage Ratio as of the most recently ended fiscal quarter falling into three levels. If the Company’s Fixed Coverage Leverage Ratio (as defined in the New Credit Facility) is greater than or equal to ratio 1.25 to 1.00, a margin of 3.25% and 2.75%, respectively, is added to LIBOR rate with a step up to 3.50% and 3.00%, respectively, if the ratio is greater than or equal 1.00 to 1.00 but less than 1.25 to 1.00 and another step up to 3.75% and 3.25%, respectively, if the ratio is less than 1.00 to 1.00. The Company is also required to pay a commitment fee on the unused commitments under the Revolver at a rate equal to 0.50% per annum and early termination fee of (a) 2% of the Revolver Commitment Amount and Term Loan if termination occurs before the first anniversary of the New Credit Facility or (b) 1% of the Revolver Commitment Amount and Term Loan if termination occurs after the first anniversary of the New Credit Facility but before the second anniversary of the New Credit Facility.

The New Credit Facility is secured by liens on substantially all of the Company’s and its domestic subsidiaries’ assets including a pledge of 66 2/3% of the equity interests in the Company’s Foreign Subsidiaries (as defined in the New Credit Facility). The New Credit Facility contains customary affirmative and negative covenants for a transaction of this type, including, among others, the provision of annual, quarterly and monthly financial statements and compliance certificates, maintenance of property, insurance, compliance with laws and environmental matters, restrictions on incurrence of indebtedness, granting of liens, making investments and acquisitions, paying dividends, entering into affiliate transactions and asset sales. 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 to exclude the non-cash inventory adjustment of $1,930,000 recorded during the three months ended June 30, 2017 and the reduce the pledge of equity interests in the Company’s Foreign Subsidiaries from 66 2/3% to 66 1/3%.Other Current Liabilities

 

As of September 30, 2017,2020, and the date hereof, the Company is in compliance with the covenantsDecember 31, 2019 accrued expenses and other current liabilities consisted of the New Credit Facility.

18

WIRELESS TELECOM GROUP, INC.following (in thousands):

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

  September 30,
2020
  December 31
2019
 
Contingent consideration $2,440  $- 
Deferred purchase price  1,510   - 
Professional fees  1,047   513 
Payroll and related benefits  908   308 
Commissions  535   430 
Goods received not invoiced  478   346 
Bonus  279   126 
Sales and use and VAT tax  262   355 
Returns reserve  219   199 
Warranty Reserve  160   160 
Severance  3   102 
Other  656   118 
Total $8,497  $2,657 

(unaudited)

 

NOTE 911 - ACCOUNTING FOR SHARE BASED COMPENSATIONAccounting for Stock Based Compensation

 

The Company follows the provisions of ASC 718, “Share-Based Payment.The Company’s results for the three and nine monthsmonth periods ended September 30, 20172020 include share-based$151,000 and $360,000, respectively, related to stock based compensation expense totaling $223,919 and $507,791, respectively. Resultsexpense. The Company’s results for the three and nine month periodperiods ended September 30, 20162019 include share-based$160,000 and $560,000, respectively, related to stock based compensation expense totaling $235,374 and $432,612, respectively.expense. Such amounts have been included in the Condensed Consolidated Statementsconsolidated statement of Operationsoperations and Comprehensive Income/(Loss)comprehensive income/(loss) within general and administrative expenses in operating expenses.

During the nine months ended September 30, 2017 the Company reversed $324,922 and $92,017 in stock compensation expense for unvested stock options and restricted shares, respectively, that were forfeited as a result of employees exiting the Company. The total amounts forfeited were 87,000 restricted shares and 655,000 stock options. The Company had assumed a zero forfeiture rate in prior periods.accounts for forfeitures when they occur.

 

Incentive Compensation Plan: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 September 30, 2017,2020, there were 26,000sharesare approximately 243,000 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.

19

WIRELESS TELECOM GROUP, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)(UNAUDITED)

 

The following summarizes the components of share-based compensation expense by equity type for the three and nine months ended September 30:

  Three Months Ended 
  September 30 
  2017  2016 
Service - based Restricted Common Stock  $22,673   $40,598 
Performance-based Restricted Common Stock  1,846   5,353 
Performance-based Stock Options  21,500   28,650 
Service -based Stock Options  177,900   160,773 
   223,919   235,374 
    
  Nine Months Ended
September 30
 
   2017   2016 
Service - based Restricted Common Stock  $167,106   $151,598 
Performance-based Restricted Common Stock  (34,211)  16,059 
Performance-based Stock Options  (135,997)  85,950 
Service -based Stock Options  510,893   179,005 
   507,791   432,612 

As of September 30, 2017, $926,322 of unrecognized compensation costs related to unvested stock options is expected to be recognized over a remaining weighted average period of 3.06 years and $186,361 of unrecognized compensation costs related to unvested restricted shares is expected to be recognized over a remaining weighted average period of 1.2 years.Outstanding Stock Options

 

Restricted Common Stock Awards:

A summary ofOn August 4, 2020 the status of the Company’s non-vested restricted common stock, asCompany granted under the Company’s approved equity compensation plans, as of September 30, 2017, and changes during the nine months ended September 30, 2017, are presented below:

Non-vested Restricted Shares Number of Shares  Weighted
Average Grant
Date Fair Value
 
         
Non-vested as of January 1, 2017  244,291   $1.52 
Granted  150,000   $1.65 
Vested and Issued  (121,563)  $1.40 
Forfeited  (87,000)  $1.62 
Non-vested as of September 30, 2017  185,728   $1.66 
20

WIRELESS TELECOM GROUP, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Performance-Based Stock Option Awards:

A summary of performance-based stock option activity, and related information for the nine months ended September 30, 2017 follows:

  Options  Weighted
Average
Exercise Price
 
Outstanding as of January 1, 2017  2,165,000   $1.32 
Granted  -   - 
Exercised  (550,000)  $0.77 
Forfeited  (540,000)  $1.77 
Expired  -   - 
Outstanding as of September 30, 2017  1,075,000   $1.38 
         
Exercisable at September 30, 2017  540,000   $1.14 

The aggregate intrinsic value of150,000 performance-based stock options outstanding (regardless of whether or not such options are exercisable) as of September 30, 2017 was $347,800 andto our Chief Revenue Officer under the weighted average remaining contractual life was 4.4 years. The aggregate intrinsic value of2012 Plan.

On April 7, 2020 the Company granted 970,000 performance-based stock options exercisableto various employees under the 2012 Plan.

The performance options granted on both August 4th and April 7th vest when the Company achieves consolidated revenue targets as of September 30, 2017 was $285,800 andoutlined in the weighted average remaining contractual life was 1.7 years. The intrinsic value of options exercised during the nineschedule below:

Consolidated annualized gross revenues $55.0 million – 25% vesting
Consolidated annualized gross revenues $61.5 million – 50% vesting
Consolidated annualized gross revenues $69.0 million – 75% vesting
Consolidated annualized gross revenues $77.5 million – 100% vesting

Consolidated annualized gross revenues include revenue from Holzworth from acquisition date (February 7, 2020) forward, but do not include any additional acquisitions from February 7, 2020 forward. Consolidated annualized gross revenues is calculated on a calendar year basis (i.e. twelve months ended September 30, 2017 was $359,100.December 31).

 

Under the termsThe grant price of the performance-based stock option agreements, the awards will fully vestAugust 4th grant is $1.20 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 September 30, 2017, the Company has determined that the performance conditions on 535,000 options granted 2013 and later are probable of being achieved by the year ending 2020. The Company’s performance-based stock options granted prior to 2013 (consisting of 540,000 options) are fully amortized.

Service-Based Stock Option Awards:

A summary of service-based stock option activity and related information for the nine months ended September 30, 2017 follows:

  Options  Weighted Average Exercise Price 
Outstanding as of January 1, 2017  1,198,000   $1.51 
Granted  845,000   $1.68 
Exercised  -   - 
Forfeited  (115,000) $1.45 
Expired  (83,000)  $3.00 
Outstanding as of September 30, 2017  1,845,000   $1.53 
         
Exercisable at September 30, 2017  508,333   $1.40 
21

WIRELESS TELECOM GROUP, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

The aggregate intrinsic value of service-based stock options (regardless of whether or not such options are exercisable) as of September 30, 2017 was $297,750 and the weighted average remaining contractual life was 9.1 years. The aggregate intrinsic value of service-based stock options exercisable as of September 30, 2017 was $137,608 and the weighted average remaining contractual life was 8.8 years.

The following table presents the assumptions used to estimate the fair value of the August 4th performance-based option are as follows: Option Term (in years) – 10; Exercise price $1.20; Risk Free Interest Rate 0.19%; Expected Volatility 52.06%; Expected Dividend Yield 0.00.

The grant price of the April 7th grants is $1.50 and the assumptions used to estimate the fair value of the April 7th performance-based options are as follows: Option Term (in years) – 10; Exercise price $1.50; Risk Free Interest Rate 0.48%; Expected Volatility 50.85%; Expected Dividend Yield 0.00.

In accordance with ASC 718 Compensation-Stock Compensation, compensation expense is recognized over the period from the date the performance conditions are determined to be probable of occurring through the implicit service period, which is the date the applicable conditions are expected to be met. If the performance conditions are not considered probable of being achieved, no expense is recognized until such time as the performance conditions are considered probable of being met, if ever. If the award is forfeited because the performance condition is not satisfied, previously recognized compensation cost is reversed. Management evaluates performance conditions on a quarterly basis. For the three and nine months ended September 30, 2020 the Company recorded $38,000 and $68,000 of expense in general and administrative expenses related to the April and August performance-based stock option awards granted duringoptions, respectively. The estimated implicit service period is April 2020 thru December 2025 for the April performance-based options and August 2020 thru December 2025 for the August performance-based options.

As of September 30, 2020, there were 1,925,000 service based stock options outstanding and 1,205,000 performance based stock options outstanding. The range of exercise prices of outstanding stock options is $1.20 to $1.92. For the nine months ended September 30, 2017:2020 there were no potentially dilutive common shares from the stock options as all options outstanding had an exercise price higher than the average market value of common shares.

 

  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 

Restricted Stock Units

On June 4, 2020 the Company granted 25,000 Restricted Stock Units (“RSU”) to each of our six 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 $1.18 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.

As of September 30, 2020, there were 272,917 vested RSU’s and 150,000 unvested RSU’s.

WIRELESS TELECOM GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Unvested Restricted Share Awards

On August 4th the Company granted 50,000 restricted share awards to our Chief Revenue Officer under the 2012 plan. The fair market value of the award is $1.20 per granted share and the award vests in four equal installments of 12,500 shares on August 1 of 2021, 2022, 2023 and 2024, respectively

As of September 30, 2020, there were 238,170 unvested restricted share awards outstanding.

 

NOTE 1012 – SEGMENT INFORMATION

 

The operating businessesIn June 2020, as a result of certain internal reorganizations completed over the prior six to nine months, the Company are segregated intoconcluded it now operates as one reportable segment in accordance with ASC 280 Segment Reporting. Prior to June the Company operated as three reportable segments: (i) network solutions, (ii) testsegments. In June we determined that the Chief Operating Decision Maker (“CODM”) as defined in ASC 280 evaluates operating results and measurementmakes decisions on how to allocate resources as the consolidated level. Although the CODM reviews key performance indicators including bookings, shipments and (iii) embedded solutions. The network solutions segmentgross profit at a product group level, this information by itself is comprised primarily of the operations of Wireless Telecom Group Inc.’s subsidiary, Microlab. The test and measurement segment is comprised primarily of the Company’s operations of the Noisecom product line and the operations of its subsidiary, Boonton. The embedded solutions segment is comprised of the operations of CommAgility Limited which was acquired on February 17, 2017.

The accounting policies of the reportable segmentsnot sufficient enough to make operating decisions. Rather, operating decisions are the same as those described in the summary of significant accounting policies. The Company allocates resources and evaluates the performance of segmentsmade based on income or loss from operations, excluding interest, corporate expenses and other income (expenses).

Financial information by reportable segment forreview of consolidated profitability metrics rather than the three and nine months ended September 30, 2017 and 2016 is set forth below:

22

WIRELESS TELECOM GROUP, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

  Three Months Ended September 30, Nine Months Ended September 30,
  2017 2016 2017 2016
Net sales by segment:            
Network solutions $6,427,646  $5,507,065  $17,560,210  $15,196,799 
Test and measurement 3,901,486  2,837,236  10,253,863  7,126,021 
Embedded solutions 2,231,166  -  6,228,157  - 
Total consolidated net sales of reportable segments 12,560,298  8,344,301  34,042,230  22,322,820 
             
Segment income (loss):            
Network solutions 1,424,496  1,081,854  2,002,818  2,466,115 
Test and measurement 769,603  179,879  253,471  (499,220)
Embedded solutions 41,206  -  (112,939) - 
Income (loss) from reportable segments 2,235,305  1,261,733  2,143,350  1,966,895 
             
             
Other unallocated amounts:            
Corporate expenses (1,453,470) (993,650) (5,349,614) (2,972,851)
Other (expenses) income - net (71,640) (27,267) (233,705) (79,137)
Consolidated income (loss) before Income tax provision (benefit) 710,195  240,816  (3,439,968) (1,085,093)
             
Depreciation and amortization by segment:            
Network solutions 106,785  68,002  311,777  181,706 
Test and measurement 96,696  62,936  285,329  181,928 
Embedded solutions 82,972  -  748,700  - 
Total depreciation and amortization for reportable segments 286,453  130,938  1,345,806  363,634 
             
Capital expenditures by segment:            
Network solutions 107,162  132,022  249,701  415,401 
Test and measurement 94,665  81,083  201,495  299,727 
Embedded solutions 68,278  -  136,984  - 
Total consolidated capital expenditures by reportable segment 270,104  213,105  588,180  715,128 
             
  September 30,
2017
  December 31,
2016
       
Total assets by segment:            
Network solutions 10,055,232  10,594,770       
Test and measurement 6,441,510  7,851,479       
Embedded solutions 20,588,726  -       
Total assets for reportable segments 37,085,468  18,446,249       
             
Corporate assets, principally cash and cash equivalents and deferred income taxes 11,478,892  16,988,886       
Total consolidated assets 48,564,360  35,435,135       
23

WIRELESS TELECOM GROUP, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Consolidated net sales by region were as follows:

  Three Months Ended Nine Months Ended
  September 30 September 30
  2017 2016 2017 2016
Sales by region            
Americas $10,083,348  $6,394,496  $25,343,053  $17,262,164 
Europe, Middle East, Africa(EMEA) 2,051,218  1,600,694  7,253,334  4,042,081 
Asia Pacific (APAC) 425,732  349,111  1,445,843  1,018,575 
Total sales $12,560,298  $8,344,301  $34,042,230  $22,322,820 

Net sales are attributable to a geographic area based on the destinationindividual results of theeach product shipment.group.

The majority of shipments in the Americas are to customers located within the United States. For the three-months ended September 30, 2017 and 2016, revenues in the United States for all reportable segments amounted to $9,685,577 and $6,210,423, respectively. For the nine months ended September 30, 2017 and 2016, revenues in the United States for all reportable segments amounted to $24,115,968 and $16,593,877, respectively.

Shipments to the EMEA region for all reportable segments were largely concentrated in the UK, Germany and Israel. For the three-months ended September 30, 2017 shipments to the UK and Germany amounted to $1,294,150 and $187,373, respectively. For the three-months ended September 30, 2016 shipments were largely concentrated in Israel and Germany amounting to $349,418 and $100,653, respectively. For the nine months ended September 30, 2017 shipments to the UK, Germany and Israel amounted to $4,078,506, $731,165 and $374,298, respectively. For the nine months ended September 30, 2016, shipments to Israel and Germany amounted to $722,595 and $573,058, respectively.

The largest concentration of shipments in the APAC region is to China. For the three month period ending September 30, 2017 and 2016, shipments to China amounted to $188,426 and $231,485, respectively. For the nine month period ending September 30, 2017 and 2016 shipments to China amounted to $797,273 and $652,654, respectively.

 

NOTE 1113 – COMMITMENTS AND CONTINGENCIES

 

Warranties:Legal Proceeding

As previously disclosed, on June 5, 2019 Harris Corporation (“Harris”) filed a request for arbitration before the American Arbitration Association in accordance with the terms of an executed purchase order, statement of work and software license agreement (collectively referred to as “Agreements”) with CommAgility entered into in 2014. Harris claims that CommAgility breached the Agreements and infringed Harris’ copyrighted “Work Product” (as defined in the Agreements) by offering for sale, marketing, and promoting techniques, capabilities, products and services that incorporate Work Product owned by Harris. In its arbitration demand, Harris claims that CommAgility has caused Harris significant monetary damages, the sum of which cannot be determined until such time as discovery has been conducted but is estimated by Harris to be less than $250,000. Harris did not include a request for monetary damages in its Statement of Claim, which was filed with the arbitration panel on May 22, 2020. Harris is seeking a declaration of ownership and an injunction against CommAgility’s use of the Work Product which includes rights to certain technology used for air-to-ground communications. The Company believes the claims are without merit and intends to defend all of the claims vigorously. The Company has not accrued any amounts in respect of this matter and cannot estimate the possible loss, if any, that the Company may incur with respect to it. The arbitration proceedings have been suspended by consent as the parties engage in settlement discussions.

 

The Company typically provides one to two year warranties on allultimate outcome of its products, covering both parts and labor. The Company, at its option, repairsthis matter is unknown but, in the opinion of management, we do not believe this proceeding will have a material adverse effect upon our financial condition, cash flows or replaces products thatfuture results of operations. Legal expenses incurred in connection with the arbitration from August 2019 are defective during the warranty period if the proper preventive maintenance procedurescovered by our professional indemnity insurance policy.

There have been followed by its customers. Historically, the Company’s warranty expense has been minimal.

Leases:

In May 2015, the Companyno other 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.

24

WIRELESS TELECOM GROUP, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

The following is a summary of the Company’s contractual obligationsrisks and uncertainties as of September 30, 2017:

  Payments by Period
   Remainder   
  Total 2017 2018-2019 2020-2021 Thereafter
Facility Leases $2,674,362  $121,879  $1,007,135  $934,184  $611,164 
Purchase Obligations 4,866,041  4,866,041  -  -  - 
Operating and Equipment Leases 238,648  13,508  108,067  108,067  9,006 
  $7,779,051  $5,001,428  $1,115,202  $1,042,251  $620,170 

Risks and Uncertainties:

Proprietary information and know-how are important to2020 from that previously disclosed in our annual report on Form 10-K for 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.year ended December 31, 2019.

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.

The Company’s deferred tax asset is recorded at tax rates expected to be in existence when those assets are utilized. Should the tax rates change materially in the future the amount of deferred tax asset could be materially impacted.

25

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 Reportannual report on Form 10-K for the year ended December 31, 2016.2019.

 

INTRODUCTIONCOVID-19 Impact

 

In March 2020, the World Health Organization declared the outbreak of COVID-19 a pandemic, which continues to spread throughout the U.S. and the world and has resulted in authorities implementing numerous measures to contain the virus, including travel bans and restrictions, quarantines, shelter-in-place orders, and business limitations and shutdowns. The Company develops, manufacturesis considered an “essential business” due to the industries and markets a wide variety of radio frequencycustomers we serve, including critical telecommunications infrastructure, the U.S. government and microwave noise sources, electronic testingnumerous U.S. defense subcontractors. Accordingly, we have continued operations throughout the pandemic including at our manufacturing facilities in Parsippany, New Jersey 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 radiofrequency and microwave systems. Other applications include radio, radar, wireless local area network and digital television.Boulder, Colorado.

 

The company has accomplished its highest quarterTo support the health and well-being of revenueour employees, customers, partners and communities, since approximately March 16, 2020, all of our employees who do not have critical in-person functions have been working remotely. For those employees working in three years for the combined Testour facilities we have instituted mediation measures including flexible work arrangements, increased distancing of workstations, and measurement and Network solutions segments, reflecting successful execution in both segments. The additionother safety precautions. As of the strong performing Embedded solutions segment helped drive consolidated revenues 50.5% higher than the third quarter of 2016. Management is pleased with the revenue performance and profitabilitydate of the Embedded solutions segment sincefiling of this Form 10-Q, approximately two-thirds of our employees are working remotely. In October the acquisitionCompany implemented a decision framework which will guide our approach to returning to a normal working state including bringing employees that have been working remotely back into our facilities. The decision framework is based on data, facts and advice of federal, state and local government leaders in the jurisdictions in which we operate as well as medical professionals. Under our current plans, the Company expects to continue to have some portion of our workforce working remotely until January 4, 2021. However, this timeline may be adjusted based on the facts and circumstances of each jurisdiction in which we operate.

We believe our financial results in the first quarternine months of 20172020 were adversely impacted by the COVID-19 pandemic as we experienced a decrease in orders related to our Boonton and expects it to continue to contributeNoisecom brands as customers closed facilities, slowed orders and instituted capital expenditure freezes due to the company’s growth.pandemic. We also saw a decline in Microlab orders due primarily to large venue project delays and cancellations. We believe this was caused by the uncertainty of reopening guidelines from states, as well as the uncertainty of conventions, college and professional sports, and college and university return to campus schedules for students. Further, we believe certain project timelines and decisions on large private network projects on which our CommAgility brand is bidding are being delayed given the economic uncertainty driven by the pandemic.

 

Highlights fromThere continues to be significant uncertainty around sales, cash collections, costs related to our mediation efforts and costs and timing related to anticipated easing of shelter-in-place and shut-down orders in the Third Quarter:fourth quarter of the fiscal year. These uncertainties include the duration and severity of the pandemic and containment measures and how our compliance with these measures will impact our day-to-day operations as well as that of our key customers, suppliers (including contract manufacturers) and other counterparties.

 

·Net revenues of $12,560,298 and $34,042,230 for the three and nine months ended September 30, 2017, a year over year increase of 50.5% and 52.5%, respectively, reflecting the inclusion of the new Embedded solutions segment.

We are continuing to monitor developments related to the pandemic on our own operations as well as on our suppliers, contract manufacturers and customers. We intend to adapt to the changing environment while acting to ensure the health and safety of our employees.

·Income before taxes of $710,195 for the three months ended September 30, 2017 representing an increase of $469,379 over the prior year period.

·New customer orders of $15,430,000 for the three months ended September 30, 2017representing a year over year increase of $4,284,000 or 38%

·September 30, 2017 order backlog of $9,950,000 representing a year over year increase of $3,821,000 or 62%, reflecting the inclusion of the Embedded solutions segment.

 

On May 4, 2020, the Company received $2.0 million pursuant to a loan under the Paycheck Protection Program (“PPP”) of the 2020 Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) administered by the Small Business Association (see description in Liquidity and Capital Resources below). The Company’s covered period as defined by the terms of the PPP loan ended on October 19, 2020. The Company used the funds only for those purposes as defined under the terms of the PPP loan, most notably payroll expenses for our U.S. based employees. The Company intends to file for forgiveness before the end of November.

RESULTS OF OPERATIONS

 

Our brands are organized in three product groups. The Test and Measurement Solutions (“T&M”) product group is comprised of our Boonton, Noisecom and Holzworth brands. The RF Components (“RFC”) product group is comprised of our Microlab brand. And, the Radio, Baseband and Software (“RBS”) product group is comprised of our CommAgility brand. We believe that revenue and gross profit by product brand are key performance indicators and, accordingly, are presented in the results of operations section of MD&A.

Our results of operations for fiscal year 2020 include the results of Holzworth from the date of acquisition which was February 7, 2020.

Three Months Ended September 30, 20172020 Compared with Three Months Ended September 30, 20162019

Net Revenues (in thousands)

 Three months ended September 30 Three months ended September 30, 
 Revenue % of Rev Change Revenue % of Revenue Change 
 2017 2016 2017 2016 Amount Pct. 2020 2019 2020 2019 Amount Pct. 
Network solutions $6,427,646  $5,507,065  51.2% 66.0% $920,581  16.7%
RF components $4,418  $5,185   40.7%  48.0% $(767)  -14.8%
Test and measurement 3,901,486  2,837,236  31.0% 34.0% 1,064,250  37.5%  5,797   2,996   53.3%  27.7%  2,801   93.5%
Embedded solutions 2,231,166  -  17.8% 0.0% 2,231,166  - 
Radio, baseband, software  653   2,631   6.0%  24.3%  (1,978)  -75.2%
Total net revenues $12,560,298  $8,344,301  100.0% 100.0% $4,215,997  50.5% $10,868  $10,812   100.0%  100.0% $56   0.5%

 

Net consolidated revenuesrevenue was flat with the prior year period. Revenue in the RBS product group declined $2.0 million due to the ongoing lack of sales of our digital signal processing hardware cards to our then largest customer. Revenue in the RFC product group declined $767,000 on lower demand for passive components due to lower spending by carriers on large venues and campuses due to the three months ended September 30, 2017uncertainty caused by the Covid 19 pandemic. These declines were $12,560,298 as comparedoffset by increased revenue in our T&M product group due to $8,344,301 for the three months ended September 30, 2016, an increaseHolzworth acquisition which contributed $2.8 million in revenue in the third quarter of $4,215,997 or 50.5%. The primary driver for2020.

Gross Profit (in thousands)

  Three months ended September 30, 
  Gross Profit  Gross Profit %  Change 
  2020  2019  2020  2019  Amount  Pct. 
RF components $1,927  $2,104   43.6%  40.6% $(177)  -8.4%
Test and measurement  3,182   1,497   54.9%  50.0%  1,685   112.6%
Radio, baseband, software  545   1,224   83.5%  46.5%  (679)  -55.5%
Total gross profit $5,654  $4,825   52.0%  44.6% $829   17.2%

Consolidated gross profit increased $829,000 due primarily to the year over year increase isrevenue contribution of Holzworth to the inclusionT&M product group which offset volume declines at the RFC and RBS product groups. Gross profit margin increased from 44.6% to 52.0% due to higher margin software sales in the RBS product group, the contribution of higher margin Holzworth products at the T&M product group and the impact of cost savings activities initiated by the Company at the beginning of the Embedded solutions segment which was acquired on February 17, 2017 and contributed $2,231,166 in revenue for the period.year.

2623

Net revenues from the Company’s Network solutions products for the three months ended September 30, 2017 were up 16.7%

Operating Expenses (in thousands)

  Three months ended September 30, 
  Operating Expenses  % of Revenue  Change 
  2020  2019  2020  2019  Amount  Pct. 
Research and development $1,826  $1,343   16.8%  12.4% $483   36.0%
Sales and marketing  1,732   1,753   15.9%  16.2%  (21)  -1.2%
General and administrative  2,444   2,407   22.5%  22.3%  37   1.5%
Total operating expenses $6,002  $5,503   55.2%  50.9% $499   9.1%

Research and development expenses increased $483,000 from the prior year. Net revenues from Network solutions products accounted for 51.2%year period due primarily to third party costs of $296,000 associated with projects related to our T&M product line as well as the inclusion of Holzworth research and 66.0%development expenses of net consolidated revenues for$166,000 in the three months ended September 30, 2017current year.

Sales and 2016, respectively. The increasemarketing expenses were flat with the prior year period as the inclusion of Holzworth sales and marketing expenses of $400,000 in revenuesthe current year period were offset by decreases in this segment wassales and marketing expenses due to increased demand for the Company’s passive radio frequency componentsexpense reductions. These expense reductions included reductions in salaries and subassemblies, largelybenefits of $265,000 due to headcount reductions as a result of increased capital spending by domestic wireless carrierswell as reductions in travel expenses and tower operators in capacity densification projects and small cell deployments.commissions.

 

Net revenuesGeneral and administrative expense were flat with the prior year period as the inclusion of Holzworth general and administrative expenses of $246,000 were offset by lower merger and acquisition expenses and other discretionary expense reductions.

Other Income/(Expense)

Other income decreased $151,000 from the Company’s Testprior year period due primarily to foreign exchange losses recognized on monetary assets and measurement products forliabilities denominated in currencies other than our functional currencies.

Interest Expense

Consolidated interest expense increased $196,000 due primarily to interest on the three months ended September 30, 2017 were up 37.5% overnew Term Loan Facility.

Taxes

Consolidated tax provision increased $297,000 from the prior year period. The tax provision in the third quarter of 2020 includes the accounting for non-deductible qualified expenses related to the PPP loan, for which the Company intends to file for forgiveness before the end of November.

Net revenues from Test and measurement products accounted for 31.1% and 34.0% ofIncome/Loss

Consolidated net consolidated revenuesloss for the three months ended September 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 September 30
  Gross Profit Gross Margin Change
  2017 2016 2017 2016 Amount Pct.
Network solutions $2,981,120  $2,512,910  46.4% 45.6% 468,210  18.6%
Test and measurement 2,165,830  1,310,089  55.5% 46.2% 855,741  65.3%
Embedded solutions 966,356  -  43.3% 0.0% 966,356  - 
Total gross profit $6,113,306  $3,822,999  48.7% 45.8% 2,290,307  59.9%

Consolidated gross profit for the three months ended September 30, 2017 was $6,113,306 as compared to $3,822,999 in the corresponding period in the prior year. The increase was primarily due to the contribution of the Embedded solutions segment in the currentthird quarter and improved profitability in the Test and measurement segment due to higher sales of products which have a high gross profit margin. Also contributing to the increase was higher absorption of our fixed labor and manufacturing overhead costs as a result of2020 increased volumes in the Network solutions and Test and measurement segments.

Operating Expenses

Consolidated operating expenses for the three months ended September 30, 2017 were $5,331,471 or 42.4% of consolidated net revenues as compared to $3,554,915 or 42.6% of consolidated net revenues for the three months ended September 30, 2016. For the three months ended September 30, 2017 as compared to$314,000 from the prior year consolidated operating expenses increased by $1,776,556 or 50.0%. Consolidated operating expenses were higher in the three months ended September 30, 2017 due to the inclusion of $925,150 of expenses associated with the Embedded solutions segment which was acquired on February 17, 2017 and included $43,737 of amortization expense related to purchased intangibles. Additionally, operating expenses increased from the same period in the prior year due to higher commission expense of $373,691, increased employee compensation and benefits of $165,500 associated with higher headcount and higher corporate expenses primarily due to integration related expenses of $158,447.

Interest Expense

Interest expense increased $70,429 related to our new credit facility and amortization of capitalized debt issuance costs.

Other Income/(Expense)

Other expense decreased $26,057 due to reduction in environmental remediation costs from the prior year.

27

Taxes

For the three months ended September 30, 2017 and 2016, the Company recorded tax expense of $56,799 and $118,980, respectively, due primarily to income generated from the Company’s operations during those periodshigher research and was predominately comprised of non-cash deferred tax expense.development expenses, higher foreign exchange losses and higher interest expense offset by greater gross profit margin contribution.

 

Net Income

For the three months ended September 30, 2017, the Company realized net income of $653,396 or $.03 per share on a basic and diluted basis, as compared to a net income of $121,836 or $.01 per share on a basic and diluted basis for the three months ended September 30, 2016, an increase of $531,560 or $.02 per basic and diluted share. The increase was due to the factors discussed above.

Nine Months Ended September 30, 20172020 Compared with Nine Months Ended September 30, 20162019

 

Net Revenues (in thousands)

 

  Nine months ended September 30
  Revenue % of Rev Change
  2017 2016 2017 2016 Amount Pct.
Network solutions $17,560,210  $15,196,800  51.6% 68.1% $2,363,410  15.6%
Test and measurement 10,253,863  7,126,020  30.1% 31.9% 3,127,843  43.9%
Embedded solutions 6,228,157  -  18.3% 0.0% 6,228,157  - 
Total net revenues $34,042,230  $22,322,820  100.0% 100.0% $11,719,410  52.5%

  Nine months ended September 30, 
  Revenue  % of Revenue  Change 
  2020  2019  2020  2019  Amount  Pct. 
RF components $14,555  $16,518   46.4%  44.2% $(1,963)  -11.9%
Test and measurement  14,013   9,219   44.6%  24.7%  4,794   52.0%
Radio, baseband, software  2,836   11,616   9.0%  31.1%  (8,780)  -75.6%
Total net revenues $31,404  $37,353   100.0%  100.0% $(5,949)  -15.9%

Net consolidated revenuesrevenue decreased $5.9 million or 15.9% from the prior year period due primarily to a reduction in revenue at our RBS product group. The decline in revenue at RBS was due to a reduction in sales of our digital signal hardware processing cards in the first quarter to our then largest customer and ongoing lack of sales to that customer due to lack of demand which represented $9.4 million of the decrease. As previously disclosed, demand from our formerly largest customer for the nine months ended September 30, 2017 were $34,042,230our digital signal processing cards was expected to significantly decline in 2020 as compared to $22,322,820 for2019. This decrease of signal processing card revenue in the nine months ended September 30, 2016,RBS product group was offset by an increase of $11,719,410 or 52.5%. $1.2 million in revenues from sales of our LTE software licenses and services.

Also contributing to the consolidated revenue decrease from the prior year is a $2.0 million decrease in RFC revenues due to lower spending by carriers on large venues and campuses due to the uncertainty caused by the Covid 19 pandemic.

The primary driver fordeclines in RBS and RFC were offset by a $4.8 million increase in revenue at the year over year increase isT&M product group primarily due to the inclusion of Holzworth revenues of $5.7 million from the Embedded solutions segmentdate of acquisition offset by lower revenues in other product groups. The decline in other T&M revenue is due primarily to lower capital expenditures by our customers due to the Covid 19 pandemic.

Gross Profit (in thousands)

  Nine months ended September 30, 
  Gross Profit  Gross Profit %  Change 
  2020  2019  2020  2019  Amount  Pct. 
RF components $6,576  $6,893   45.2%  41.7% $(317)  -4.6%
Test and measurement  7,451   4,843   53.2%  52.5%  2,608   53.9%
Radio, baseband, software  1,722   4,949   60.7%  42.6%  (3,227)  -65.2%
Total gross profit $15,749  $16,685   50.1%  44.7% $(936)  -5.6%

Consolidated gross profit decreased $936,000 primarily due to lower sales volumes at the RBS and RFC product groups as described above, which was acquired on February 17, 2017were only partially offset by the gross profit contribution of Holzworth in the T&M product group. Gross profit margin increased from 44.7% to 50.1% due to higher margin software sales at the RBS product group, the contribution of higher margin Holzworth products at the T&M product group and contributed $6,228,157 in revenue for the period.impact of cost savings activities initiated by the Company at the beginning of the year.

 

Net revenuesOperating Expenses (in thousands)

  Nine months ended September 30, 
  Operating Expenses  % of Revenue  Change 
  2020  2019  2020  2019  Amount  Pct. 
Research and development $5,080  $4,556   16.2%  12.2% $524   11.5%
Sales and marketing  5,111   5,718   16.3%  15.3%  (607)  -10.6%
General and administrative  7,322   7,341   23.3%  19.7%  (19)  -0.3%
Total operating expenses $17,513  $17,615   55.8%  47.2% $(102)  -0.6%

Research and development expenses increased $524,000 from the Company’s Network solutions products were up significantly over the prior year period. Net revenues from Network solutions products accounted for 51.6% and 68.1% of net consolidated revenues for the nine months ended September 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 in capacity densification projects and small cell deployments.

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 30.1% and 31.9% of net consolidated revenues for the nine months ended September 30, 2017 and 2016, respectively. The increase in revenues was primarilyperiod due to an increase in militarythird party research and government spendingdevelopment expenses of $619,000 due to 5G product development and T&M product development as well as the inclusion of $410,000 of Holzworth research and development expenses in the current year. These increases were partially offset by a decrease in salaries and benefits of $466,000 due to expense reductions initiated at the beginning of the year.

Sales and marketing expense decreased $607,000 from the prior year period due primarily to expense reductions. These expense reductions included lower salaries and benefits of $680,000 due to lower headcount primarily as a result of costs savings initiatives, lower commissions expense of $265,000, lower depreciation expense of $201,000 and reduction of $298,000 related to lower travel and marketing expenses. These reductions were offset by the inclusion of $845,000 of sales and marketing expenses related to Holzworth.

General and administrative expenses were flat with the prior period. The inclusion of $553,000 of Holzworth general and administrative expenses was offset by lower intangible amortization expense, stock compensation expense and other discretionary expense reductions as a result of cost savings initiatives.

Other Income/(Expense)

Other income was flat with the prior year period as an increase in foreign exchange losses recognized on monetary assets and liabilities was offset by gains on asset sales as compared to the corresponding period in the prior year.year period.

28

Gross Profit

Interest Expense

 

  Nine months ended September 30
  Gross Profit Gross Margin Change
  2017 2016 2017 2016 Amount Pct.
Network solutions $6,623,630  $6,799,036  37.7% 44.7% (175,406) -2.6%
Test and measurement 4,332,165  3,082,967  42.2% 43.3% 1,249,198  40.5%
Embedded solutions 2,834,181  -  45.5% 0.0% 2,834,181  - 
Total gross profit $13,789,976  $9,882,003  40.5% 44.3% 3,907,973  39.5%

Consolidated interest expense increased $479,000 primarily related to interest on the new Term Loan Facility.

Taxes

The Company’s gross profit on consolidated net revenues for the nine months ended September 30, 2017 was negatively impacted byCompany recorded a non cash inventory adjustment of $1,930,000 recorded in the second quarter of 2017. The adjustment 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 need to focus manufacturing, operations and engineering efforts on the increasing current order flow, dictated the significant write down at the end of the second quarter. The inventory adjustments negatively impacted the Network solutions and Test and measurement segments gross profit by $1,206,266 and $723,734, respectively, for the nine months ended September 30, 2017. The impact of the inventory adjustment was offset by the gross profit of the Embedded Solutions segment which contributed $2,834,181 to the overall gross profit increase from the same period last year as well as improved profitability in the Test and measurement segment due to higher sales of products which have a high gross profit margin. Also offsetting the inventory impairment chargetax provision in the nine months ended September 30, 2017 was higher absorption2020 of fixed labor and manufacturing overhead associated with higher volumes$352,000 as compared to the prior period for the Network solutions and Test and measurement segments.

Operating Expenses

Consolidated operating expenses for the nine months ended September 30, 2017 were $16,996,238 or 49.9%a tax benefit of consolidated net revenues as compared to $10,887,958 or 48.8% of consolidated net revenues for the nine months ended September 30, 2016. For the nine months ended September 30, 2017 as compared to$256,000 in the prior year consolidated operating expenses increased by $6,108,280 or 56.1%. Consolidated operating expenses were higherperiod. The tax provision in the nine months ended September 30, 2017 due2020 includes the accounting for non-deductible qualified expenses related to the inclusionPPP loan for which the Company intends to file for forgiveness before the end of $2,947,120 of expenses associated with the Embedded solutions segment which was acquired on February 17, 2017 and included $659,163 of amortization expense related to purchased intangibles. Additionally, operating expensesNovember.

Net Income/Loss

Net loss increased from the same period$649,000 in the prior year dueperiod to $1,289,517 of expenses related to the CommAgility acquisition consisting primarily of professional fees, increased commission expenses of $748,954 due to higher revenues, severance and legal charges of $572,912 associated with restructuring actions during the nine months ended September 30, 2017, increased employee compensation and benefits of $336,735 due to increased headcount and higher corporate expenses primarily due to integration expenses.

Other Expenses

Other expenses decreased $74,422 due to the reduction in environmental remediation expenses from the prior year. Interest expense increased $228,990 related to our new credit facility, amortization of capitalized debt issuance costs and accretion of the contingent consideration liability.

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Tax

For the nine months ended September 30, 2017, the Company recorded a tax benefit of $1,493,789$2.6 million due primarily to losses generated from the Company’s operations. For the nine months ended September 30, 2016, the Company recorded alower gross profit caused by lower revenues, increased interest expense and increased tax benefit of $412,409 primarily due to losses generated from the Company’s operations during the period.expense.

Net Loss

For the nine months ended September 30, 2017, the Company realized a net loss of $1,946,179 or $.10 loss per share on a basic and diluted basis, as compared to a net loss of $672,684 or $.04 loss per share on a basic and diluted basis for the nine months ended September 30, 2016, a decrease of $1,273,495 or $.06 per diluted share. The decrease was due to the factors discussed above.

LIQUIDITY AND CAPITAL RESOURCES

 

As disclosed in Note 4 to the Consolidated Financial Statements, on February 7, 2020 the Company entered into the Term Loan Facility with Muzinich in the principal amount of $8.4 million to fund the cash portion of the purchase price for the Holzworth acquisition. Additionally, on February 7, 2020 the Company and certain of its subsidiaries entered into Amendment No. 5 to the Credit Facility with Bank of America N.A. By entering into the Amendment, Holzworth, and CommAgility Limited became borrowers under the Credit Facility. Effectiveness of Amendment No. 5 was conditioned upon, among other things, the prepayment of the remaining principal balance ($304,000) of the $760,000 term loan made available under the Credit Facility.

On May 4, 2020 the Company received $2.0 million pursuant to a loan under the PPP of the 2020 CARES Act administered by the Small Business Association. The loan is from Bank of America N.A., has an interest rate of 1% and a term of 24 months. Funds from the loan may only be used for certain purposes, including payroll, benefits, rent and utilities, and a portion of the loan used to pay certain costs may be forgivable, all as provided by the terms of the PPP. The loan is evidenced by a promissory note, which contains customary events of default relating to, among other things, payment defaults and breaches of representations and warranties. The Company may prepay the loan at any time prior to maturity with no prepayment penalties.

On May 4, 2020 the Company entered into Amendment No. 6 to the Credit Facility with Bank of America N.A. and Amendment No. 1 to the Term Loan facility with Muzinich. The amendments allowed the Company to accept the PPP loan and provide that the PPP loan shall not be deemed to constitute “Debt” or “Indebtedness” as defined in the Credit Facility and the Term Loan Facility, respectively, as long as the proceeds of the PPP loan are used for allowable purposes under the provisions of CARES Act that should permit the Company to obtain forgiveness of substantially all of the loan. The amendments to the Credit Facility and Term Loan Facility also contain certain representations and warranties of the Company.

On October 19, 2020 the Company’s covered period, as defined by the PPP loan, expired. The Company used the funds received by the PPP loan for allowable purposes, most notably payroll expenses of our U.S. based employees. The Company intends to apply for forgiveness before the end of November, however, no assurance can be provided that the Company will obtain forgiveness of the PPP loan in whole or in part.

As of September 30, 2020, the Company had consolidated cash of $2.2 million, availability under our asset-based Credit Facility of $6.5 million and gross debt of $10.4 million. As of December 31, 2019, the Company had consolidated cash of $4.2 million, availability under our asset-based Credit Facility of $2.7 million and gross debt of $2.7 million. The increase in our debt position is attributable to the term loan used to finance the Holzworth acquisition and the PPP loan offset partially by a reduction in our Revolver balance. As of September 30, 2020, $1.6 million of our cash and cash equivalents are held outside the United States. 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.

As of September 30, 2020, there was no outstanding balance on our asset based Revolver, $8.3 million was outstanding on our Term Loan and $2.0 million was outstanding on our PPP loan. As of September 30, 2020, and the date hereof, the Company is in compliance with the covenants of the Credit Facility and the Term Loan Facility.

We expect borrowings available to us under our Credit Facility, our existing cash balance and cash generated by operations and borrowings available under our new credit facility (as described in Note 8 ) 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.control, including the Covid-19 pandemic and the significantly decreased demand in the first quarter from our formerly largest customer for our digital signal processing cards and ongoing lack of sales to that customer due to lack of demand, as well as delayed decisions on large private network projects that we believe are caused by economic uncertainty driven by the pandemic. We expect these uncertainties to extend to our business in the fourth quarter, as sales, deliveries, cash collections, our supply chain and our business partners could be adversely affected. It is reasonably possible, that the disruptions caused by Covid-19 and the ongoing lack of demand for our digital signal processing cards will have an impact on our ability to comply with our financial debt covenants which could result in a default under either or both of our Credit Facility and Term Loan, which requires an increasing consolidated fixed charge coverage ratio for the 12-months ended December 31, 2020, and minimum liquidity under our UK borrowing base. A default under one would cause a cross default under the other. If the Company were unable to cure any defaults, the lenders could demand immediate repayment of all outstanding borrowings and/or foreclose on all or part of the collateral pledged to them as security for the indebtedness. Management is actively discussing these issues with lenders and believes the risk of default will be eliminated through appropriate cash flow management, including with respect to potential earn out payments and amendments of credit agreements.

 

Operating Activities

 

Cash providedused by operating activities was $450,025$852,000 for the nine months ended September 30, 20172020 as compared to cash used by operating activities of $742,409 for$1.6 million in the nine months ended September 30, 2016. During the nine months ended September 30, 2017 changes in our operating assets and liabilities resulted in a net increase in cash of $568,100 primarily due to reductions in inventory, prepaids and other asset and higher accrued expenses and other liabilities. This was offset by lower accounts payable and an increase in accounts receivable. During the nine months ended September 30, 2016, changes in our operating assets and liabilities resulted in a netprior year period. The decrease in cash of $671,673 primarilyused from operating activities was due to an increasethe CommAgility contingent consideration payment in inventory offset by an increasethe prior year period and favorable impact of working capital in accounts payable.the current year period.

 

Investing Activities

 

Cash used by investing activities was $9,718,317$7.4 million for the nine months ended September 30, 2017 and2020 which was primarily comprised ofhigher than the prior year period cash used forof $765,000 due to the CommAgility acquisitionpurchase of $9,137,534, net of cash acquired and capital expenditures of $588,180. For the nine months ended September 30, 2016 cash used by investing activities was $715,128 and was related to capital expenditures.Holzworth.

 

Financing Activities

 

Cash provided by financing activities was $2,078,606$6.4 million for the nine months ended September 30, 20172020 as compared to cash used of $166,764$179,000 for the nine months ended September 30, 2016. During the nine months ended September 30, 2017 the Company received net proceeds of $1,271,928 from the asset based revolver and received $760,000 from the term loan. Principal repayments ofprior year period. The increase was due to the term loan duringfinancing used for the nine months ended September 30, 2017 were $76,000. Additionally,cash portion of the Company paid $215,358 inHolzworth purchase price offset by debt issuance costs associated withfees as well as the new credit facility. During the nine months ended September 30, 2016 the Company paid $101,296 related to a capital equipment lease and $65,468 related to the repurchase of common stock.

As disclosed in Note 8, 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 proceedsreceipt of the termPPP loan andoffset by a reduced revolver were used to finance the acquisition of CommAgility. As of September 30, 2017, $1,271,928 was outstanding on the asset based revolver. At September 30, 2017 the Company has excess availability under the Revolver of $4,252,538.balance.

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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 the reduce the pledge of equity interests in the Company’s Foreign Subsidiaries from 66 2/3% to 66 1/3%.

As of September 30, 2017, and the date hereof, the Company is in compliance with the covenants of the New Credit Facility.

As of September 30, 2017, future minimum lease payments related to the Company’s facility lease and equipment leases are shown below:

  Payments by Period
   Remainder   
  Total 2017 2018-2019 2020-2021 Thereafter
Facility Leases $2,674,362  $121,879  $1,007,135  $934,184  $611,164 
Purchase Obligations 4,866,041  4,866,041  -  -  - 
Operating and Equipment Leases 238,648  13,508  108,067  108,067  9,006 
  $7,779,051  $5,001,428  $1,115,202  $1,042,251  $620,170 

 

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.

On August 27, 2018 the Company filed a shelf registration statement on Form S-3 which was declared effective on September 17, 2018. The Form S-3 will permit the Company to issue and sell, from time to time, up to $40 million in aggregate value of shares of its common stock through one or more methods of distribution, subject to applicable SEC limits on the value of securities that the Company, as a smaller reporting company, may sell during an applicable period, market conditions, and the Company’s capital desires and needs. Given current market conditions, the Company has no current plans to offer any common stock under the shelf registration statement.

 

The Company believes that itsterms of any offering of the Company’s common stock, and the intended use of the net proceeds resulting therefrom, will be established at the times of the offerings and will be described in prospectus supplements filed with the SEC at the times of the offerings. The shelf registration statement is intended to provide financial resources from workingflexibility to access capital in a competitive and availability under the asset based revolverexpeditious manner when market conditions are adequate to meet its current needs.appropriate. The Company expects the cash flow of CommAgility to fund the deferred purchase price and contingent consideration liabilities. However, should current global economic conditions deteriorate, additional working capital funding may be required which may be difficult to obtain due to restrictive credit markets.shelf registration statement expires on September 17, 2021.

 

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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.

 

Critical Accounting Policies

 

There have been no changes in our critical accounting policies or significant accounting estimates as disclosed in our 20162019 Form 10-K, except as disclosed below:10-K.

 

Revenue Recognition

Revenue from product shipments, including shipping and handling fees, is recognized once delivery has occurred, provided that persuasive evidence of an arrangement exists, the price is fixed or determinable, and collectability is reasonably assured. Delivery is considered to have occurred when title and risk of loss have transferred to the customer. Revenues from international distributors are recognized in the same manner. If title does not pass until the product reaches the customer’s delivery site, then revenue recognition is deferred until that time. There are no formal sales incentives offered to any of the Company’s customers. Volume discounts may be offered from time to time to customers purchasing large quantities on a per transaction basis.

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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, non-competition agreements, customer relationships and trademarks. Intangible assets with finite lives 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. Intangible assets determined to have indefinite useful lives are not amortized but are tested for impairment annually and more frequently if event occur or circumstances change that indicate an asset may be impaired.

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 include statements that adoption of ASU 2017-01 and Topic 606 are not expected to have a material impact on the Company’s financial statements or results of operations, respectively; about our sources of short-term liquidityexpectations with respect to borrowings available to us under the PPP Loan, the Term Loan Facility, the Credit Facility, our ability to comply with financial debt covenants, our ability to eliminate potential defaults under credit agreements, our existing cash balance and our belief that these sourcescash generated by operations will be sufficient to meet our liquidity needs for at least the next 12twelve months; that is financial resources from working capital and our availability under the asset based revolver are adequateexpectations with respect to meet our current needs; that Embedded solutions will continue to contribute to the company’s revenue and profitability growth; and that cash flow from CommAgility will fund the deferred purchase price and contingent consideration.earn out payments; and our expectation that uncertainties around the impact of the ongoing Covid-19 pandemic might extend to our business in the fourth quarter and beyond, as sales, deliveries, cash collections, our supply chain and our business partners could be adversely affected. 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 impact that the Covid-19 pandemic will have on our business and the economy in the future, our dependency on the deployment of 4G LTE and 5G NR private networks and related services to grow our business, the impact of the loss of any significant customers, the ability of our management to successfully implement our business plan and strategy, our ability to raise additional capital to fund our operations given our degree of leverage, product demand and development of competitive technologies in our market sector,

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our ability to successfully integrate the Holzworth acquisition, the impact of competitive products and pricing, the loss of any significant customers, our abilities to protect our intellectual property rights, the effects of adoption of newly announced accounting standards, the effects of economic conditionsour ability to manage risks related to our information technology and trade, legal and other economic risks,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 in our Annual Report on Form 10-K for the year ended December 31, 20162019 and elsewhere in this Quarterly Report on Form 10Q.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 CommAgilityHolzworth on February 17, 2017.7, 2020. We have begun the process to integrate the operations of CommAgilityHolzworth into our overall system of internal control over financial reporting.

During the nine months ended September 30, 2020, as a result of the Covid-19 pandemic, the majority of our workforce has transitioned to working remotely. There have been no significant changes to our internal controls over financial reporting as a result of our workforce working remotely.

 

There were no other changes in our internal control over financial reporting during the three orand nine months ended September 30, 20172020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, as described in our 20162019 Annual Report on Form 10-K.

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PART II – OTHER INFORMATION

 

Item 1. LEGAL PROCEEDINGSLegal Proceedings

There have been no

No material developmentschanges in the legal proceedings described in Item 3 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.quarter.

 

Item 1A. RISK FACTORSRisk Factors

There

The ongoing COVID-19 pandemic has caused and is expected to continue to cause significant uncertainty in the U.S. and global economies as well as the markets we serve and has and is expected to continue to adversely affect our business, results of operations and financial condition.

The Covid-19 pandemic continues to spread throughout the U.S. and in various parts of the world and has resulted in and is expected to continue to result in authorities implementing numerous measures to contain the virus, including travel bans and restrictions, quarantines, shelter-in-place orders, and business limitations and shutdowns. We have been no material changesand continue to be unable to accurately predict the full impact that Covid-19 will have on our results of operations, financial condition, liquidity and cash flows due to numerous uncertainties, including the duration and severity of the pandemic and containment measures, the nature and length of actions taken by governments, businesses and individuals to contain or mitigate its impact, the severity and duration of the economic impact caused by the pandemic, the uncertainty surrounding possible treatments or vaccines, along with the effectiveness of our response. Our compliance with containment and mitigation measures has impacted our day-to-day operations and is expected to continue to disrupt our business and operations, as well as that of our key customers, suppliers (including contract manufacturers) and other counterparties, for an indefinite period of time.

To support the health and well-being of our employees, customers, partners and communities, since approximately March 16, 2020, all of our non-essential employees have been working remotely. This represents approximately two thirds of our workforce. The increase in certain of our employees working remotely has amplified certain risks to our business, including increased demand on our information technology resources and systems, increased phishing, business email compromise and other cybersecurity attacks, including increased introduction of malware, as cybercriminals try to exploit the uncertainty surrounding the Covid-19 pandemic, and an increase in the number of points of potential attack, such as laptops and mobile devices (both of which are now being used in increased numbers), to be secured, and any failure to effectively manage these risks, including to timely identify and appropriately respond to any cyberattacks or other disruption to our technology infrastructure, may adversely affect our business.

In addition, we understand that the employees of many of our customers are working remotely, which may delay the timing of some orders as well as shipments and cash collections. The disruptions to our operations caused by Covid-19 could result in inefficiencies, delays and additional costs in our risk factors disclosedproduct development, sales, marketing, and customer service efforts that we cannot fully mitigate through remote or other alternative work arrangements. There remains significant uncertainty around sales, cash collections, costs related to our Covid-19 mediation efforts and costs and timing related to anticipated easing of shelter-in-place and shut-down orders in the third quarter and going forward into the remainder of the fiscal year.

More generally, the pandemic has resulted in and is expected to continue to result in an extended global economic downturn, causing volatility in financial markets, which has affected and is expected to continue to affect demand for our products and services and impact our results and financial condition even after the pandemic is contained and the shelter-in-place orders are lifted. For example, we may be unable to collect receivables from those customers significantly impacted by COVID-19. Decrease in orders in a given period have and are expected to continue to negatively affect our revenues in future periods, particularly if experienced on a sustained basis. The pandemic may also have the effect of heightening many of the other risks described in “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.2019, especially those risks associated with our customers and supply chain.

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Our degree of leverage could prevent us from meeting obligations on our indebtedness, adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry, and expose us to interest rate risk on our variable rate debt.

We currently have a credit facility with Bank of America providing an asset-based revolver and a term loan facility with Muzinich BDC which provides for a term loan in the amount of $8.4 million.

Our degree of leverage could have consequences, including:

making it more difficult for us to make payment on our indebtedness;
increasing our vulnerability to general economic and industry conditions;
requiring a substantial portion of cash flow from operations to be dedicated to the payment of principal and interest on our indebtedness, thereby reducing our ability to use our cash flow to fund our operations, capital expenditures, research and development and future business opportunities;
exposing us to the risk of increased interest rates;
limiting our ability to make strategic acquisitions and investments;
limiting our ability to refinance our indebtedness as it becomes due; and
limiting our ability to adjust quickly or at all to changing market conditions and placing us at a competitive disadvantage compared to our competitors who are less highly leveraged.

Our ability to continue to fund our obligations and to reduce debt may be affected by the Covid-19 pandemic and other general economic, financial market, competitive, legislative and regulatory factors, among other things. An inability to fund our debt requirements or reduce debt could have a material adverse effect on our business, operating results, cash flows and financial condition.

The ongoing uncertainties caused by the Covid-19 pandemic could have significant adverse consequences for our credit facility and term loan facility.

The agreements governing our term loan and credit facility limit our ability, among other things, to incur additional secured indebtedness, incur liens, pay dividends, enter into transactions with our affiliates, and sell assets. In addition, our credit facility contains restrictive covenants that limit our ability to engage in activities that might be in our long term best interest, such as, subject to permitted exceptions, making capital expenditures in excess of certain thresholds, making investments and acquisitions, and extending loans and other advances to affiliates. Furthermore, the term loan facility contains specific financial covenants including a quarterly leverage test, fixed charge coverage test and a liquidity requirement for our CommAgility business. The credit facility with Bank of America contains one financial covenant which is a fixed charge coverage test. The ongoing Covid-19 pandemic has given rise to significant uncertainties with respect to the U.S. and global economies as well as the markets we serve. The impact of those uncertainties has resulted in a significant downturn in our business, which is reasonably likely to make compliance with certain financial covenants challenging during the fourth quarter and beyond. A default of a covenant in our Muzinich term loan facility would trigger a cross default in our Bank of America credit facility and vice versa.

Our failure to comply with financial and other restrictive covenants could result in an event of default and cross default, which if not cured or waived, could result in the lenders requiring immediate payment of all outstanding borrowings or foreclosing on collateral pledged to them to secure the indebtedness.

 

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDSUnregistered Sales of Equity Securities and Use of Proceeds

None.

 

Item 3. DEFAULTS UPON SENIOR SECURITIESDefaults upon Senior Securities

None.

 

ItemItem 4. MINE SAFETY DISCLOSURESMine Safety Disclosures

 

Not applicable.

 

Item 5. OTHER INFORMATIONOther Information

None.

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Item 6. EXHIBITSExhibits

Exhibit No. 
NumberExhibit Description
   
3.1 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, Commission File No. 1-11916)001-11916)
   
3.2 Amended and Restated By-laws, as amended on April 7, 2020 (incorporated herein by reference to Exhibit 3.13.2 to Wireless Telecom Group, Inc.’s Currentour Quarterly Report on Form 8-K,10-Q filed with the SEC on July 1, 2016,May 13, 2020, Commission File No. 011-11916)001-11916)
   
10.1 Share Purchase Agreement, dated February 17, 2017, by and among Wireless Telecom Group, Inc., Edward De Salis Young, Paul Moakes, Simon Pack and Martin HollinsheadPromissory Note to Bank of America NA in the amount of $2,043,000 (“PPP loan”) (incorporated herein by reference to Exhibit 10.210.1 to Wireless Telecom Group Inc.’sour Current Report on Form 8-K filed with the SEC on February 21, 2017,May 7, 2020, Commission File No. 001-11916)
   
10.2 Registration RightsAmendment No. 6 to Loan and Security Agreement dated February 17, 2017, by and among Wireless Telecom Group, Inc., Edward De Salis Young, Paul Moakes, Simon PackBoonton Electronics Corporation, Microlab/FXR, Holzworth Instrumentation, Inc., CommAgility Limited and Martin HollinsheadBank of America, NA (incorporated herein by reference to Exhibit 10.2 to Wireless Telecom Group Inc.’sour Current Report on Form 8-K filed with the SEC on February 21, 2017,May 7, 2020, Commission File No. 001-11916)
   
10.3 Lock Up Agreement, dated February 17, 2017, by and among Wireless Telecom Group, Inc., Edward De Salis Young, Paul Moakes, Simon Pack and Martin Hollinshead (incorporated herein by reference to Exhibit 10.3 to Wireless Telecom Group Inc.’s Current Report on Form 8-K, filed on February 21, 2017, Commission File No. 001-11916)
10.4Voting Agreement, dated February 17, 2017, by and among Wireless Telecom Group, Inc., Edward De Salis Young, Paul Moakes, Simon Pack and Martin Hollinshead (incorporated herein by reference to Exhibit 10.4 to Wireless Telecom Group Inc.’s Current Report on Form 8-K, filed on February 21, 2017, Commission File No. 001-11916)
10.5Loan and Security Agreement, dated February 16, 2017, Wireless Telecom Group, Inc. Boonton Electronics Corporation, Microlab/FXR and Bank of America, N.A. (incorporated herein by reference to Exhibit 10.5 to Wireless Telecom Group Inc.’s Current Report on Form 8-K, filed on February 21, 2017, Commission File No. 001-11916)
10.6First Amendment No. 1 to the Loan and SecurityCredit Agreement by and among Wireless Telecom Group, Inc., Boonton Electronic Corporation, Microlab/FXR and Bank of America, N.A. dated August 3, 2017subsidiaries and Muzinich BDC, Inc. (incorporated herein by reference to Exhibit 10.6 to Wireless Telecom Group Inc.’s Quarterlyour Current Report on Form 10-Q8-K filed with the SEC on August 9, 2017,May 7,2020, Commission File No. 001-11916).
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10.7*Separation Agreement and General Release by and between Wireless Telecom Group, Inc. and Paul Steven Genova dated May 22, 2017 (incorporated herein by reference to Exhibit 10.7 to Wireless Telecom Group Inc.’s Quarterly Report on Form 10-Q filed on August 9, 2017, Commission File No. 001-11916).
10.8*Amendment to the Executive Employment Agreement by and between Wireless Telecom Group Inc. and Timothy Whelan (incorporated herein by reference to Exhibit 10.8 to Wireless Telecom Group Inc.’s Quarterly Report on Form 10-Q filed on August 9, 2017, Commission File No. 001-11916).
   
31.1 Certification Pursuantof Chief Executive Officer pursuant to Section 302 of Thethe Sarbanes-Oxley Act of 2002 (Principal Executive Officer)2002.
   
31.2 Certification Pursuantof Chief Financial Officer pursuant to Section 302 of Thethe Sarbanes-Oxley Act of 2002 (Principal Financial Officer)2002.
   
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuantof Chief Executive Officer pursuant to Section 906 of Thethe Sarbanes-Oxley Act of 2002 (Principal Executive Officer)2002.
   
32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuantof Chief Financial Officer pursuant to Section 906 of Thethe Sarbanes-Oxley Act of 2002 (Principal Financial Officer)2002.
   
101**The following financial statementsinformation from Wireless Telecom Group, Inc.’s Quarterly Report on Form 10-Q for the three and nine months ended September 30, 2017,2020, filed on November 9, 2017,13, 2020, formatted in Extensible Business Reporting Language (XBRL): (i) condensed consolidated balance sheets,Consolidated Balance Sheets, (ii) condensed consolidated statementsConsolidated Statements of operationsOperations and comprehensive (loss)Comprehensive Income/(Loss), (iii) condensed consolidated statementsConsolidated Statements of cash flows,Cash Flows, (iv) condensed consolidated statementConsolidated Statements of shareholders’ equity,Shareholders’ Equity, and (v) the notesNotes to interim condensed consolidated financial statements.the Consolidated Financial Statements.
   
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.

35

SIGNATURES

 

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

 

 WIRELESS TELECOM GROUP, INC.
(Registrant)
   
Date:Dated: November 9, 201713, 2020/s/ Timothy Whelan 
 By:/s/ Timothy Whelan
Chief Executive Officer
Date:  November 9, 2017/s/ Michael Kandell
Michael Kandell
Chief Financial Officer
36

EXHIBIT INDEX

Exhibit No.Description
  
31.1Certification Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002 (Principal Executive Officer)Timothy Whelan
  Chief Executive Officer
31.2Dated: November 13, 2020 Certification Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002 (Principal Financial Officer)
By:/s/ Michael Kandell
  
32.1Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002 (Principal Executive Officer)Michael Kandell
  
32.2Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002 (PrincipalChief Financial Officer)
101**The following financial statements from Wireless Telecom Group, Inc.’s Quarterly Report on Form 10-Q for the three and nine months ended September 30, 2017, filed on November 9, 2017, formatted in Extensible Business Reporting Language (XBRL): (i) condensed consolidated balance sheets, (ii) condensed consolidated statements of operations and comprehensive (loss), (iii) condensed consolidated statements of cash flows, (iv) condensed consolidated statement of shareholders’ equity, and (v) the notes to interim condensed consolidated financial statements.Officer

 

101.INS**XBRL INSTANCE DOCUMENT
 33 
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
37