UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 20202021
OR
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 1-11916
WIRELESS TELECOM GROUP, INC.
(Exact name of Registrant as specified in its charter)
| New Jersey | 22-2582295 | |
| (State or other jurisdiction | (I.R.S. Employer | |
| of incorporation or organization) | Identification No.) |
25 Eastmans Road, Parsippany, New Jersey | 07054 | |
| (Address of principal executive offices) | (Zip Code) |
(973)386-9696
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol | Name of each exchange on which registered | ||
| Common Stock | WTT | NYSE 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.
Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | Accelerated filer | |||
| Non-accelerated filer | Smaller reporting company | |||
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
Number of shares of Common Stock outstanding as of November 1, 2020: 21,695,0105, 2021:
WIRELESS TELECOM GROUP, INC.
Form 10-Q
Table of Contents
| 2 |
WIRELESS TELECOM GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except number of shares and par value)
PART I – FINANCIAL INFORMATION
| (Unaudited) | (Unaudited) | |||||||||||||||
| September 30 2020 | December 31 2019 | September 30 2021 | December 31 2020 | |||||||||||||
| CURRENT ASSETS | ||||||||||||||||
| Cash & cash equivalents | $ | 2,203 | $ | 4,245 | $ | 1,283 | $ | 4,910 | ||||||||
| 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 | ||||||||||||||
| Accounts receivable - net of reserves of $216 and $143, respectively | 7,420 | 5,520 | ||||||||||||||
| Inventories - net of reserves of $1,241 and $1,129 respectively | 9,655 | 8,796 | ||||||||||||||
| Prepaid expenses and other current assets | 2,074 | 1,871 | 2,058 | 2,172 | ||||||||||||
| TOTAL CURRENT ASSETS | 21,391 | 19,593 | 20,416 | 21,398 | ||||||||||||
| PROPERTY PLANT AND EQUIPMENT - NET | 1,898 | 2,147 | 1,629 | 1,824 | ||||||||||||
| OTHER ASSETS | ||||||||||||||||
| Goodwill | 15,881 | 10,069 | 11,461 | 11,512 | ||||||||||||
| Acquired intangible assets, net | 5,479 | 2,219 | 4,249 | 5,242 | ||||||||||||
| Deferred income taxes | 4,956 | 6,013 | 6,162 | 5,701 | ||||||||||||
| Right of use assets | 1,814 | 1,436 | 1,282 | 1,680 | ||||||||||||
| Other | 1,617 | 874 | ||||||||||||||
| Other assets | 548 | 561 | ||||||||||||||
| TOTAL OTHER ASSETS | 29,747 | 20,611 | 23,702 | 24,696 | ||||||||||||
| TOTAL ASSETS | $ | 53,036 | $ | 42,351 | $ | 45,747 | $ | 47,918 | ||||||||
| CURRENT LIABILITIES | ||||||||||||||||
| Short term debt | $ | 84 | $ | 2,696 | $ | 150 | $ | 512 | ||||||||
| Accounts payable | 1,894 | 2,227 | 2,205 | 1,546 | ||||||||||||
| Short term leases | 527 | 440 | 572 | 534 | ||||||||||||
| Accrued expenses and other current liabilities | 8,497 | 2,657 | 7,656 | 7,997 | ||||||||||||
| Deferred revenue | 170 | 42 | 691 | 924 | ||||||||||||
| TOTAL CURRENT LIABILITIES | 11,172 | 8,062 | 11,274 | 11,513 | ||||||||||||
| LONG TERM LIABILITIES | ||||||||||||||||
| Long term debt | 9,290 | - | 3,578 | 8,895 | ||||||||||||
| Long term leases | 1,338 | 1,018 | 766 | 1,200 | ||||||||||||
| Other long term liabilities | 89 | 77 | 1,678 | 82 | ||||||||||||
| Deferred tax liability | 492 | 503 | 444 | 377 | ||||||||||||
| TOTAL LONG TERM LIABILITIES | 11,209 | 1,598 | 6,466 | 10,554 | ||||||||||||
| 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 34,905,571 and 34,488,252 shares issued, 21,695,010 and 21,300,252 shares outstanding | 349 | 345 | ||||||||||||||
| Preferred stock, $ par value, shares authorized, issued | - | - | ||||||||||||||
| Common stock, $ par value, shares authorized and shares issued, and shares outstanding | 355 | 349 | ||||||||||||||
| Additional paid in capital | 50,049 | 49,062 | 51,305 | 50,163 | ||||||||||||
| Retained earnings | 4,552 | 7,142 | ||||||||||||||
| Treasury stock at cost, 13,210,561 and 13,188,000 shares | (24,540 | ) | (24,509 | ) | ||||||||||||
| Retained earnings/(deficit) | 171 | (946 | ) | |||||||||||||
| Treasury stock at cost, and shares | (24,600 | ) | (24,556 | ) | ||||||||||||
| Accumulated other comprehensive income | 245 | 651 | 776 | 841 | ||||||||||||
| TOTAL SHAREHOLDERS’ EQUITY | 30,655 | 32,691 | 28,007 | 25,851 | ||||||||||||
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | 53,036 | $ | 42,351 | $ | 45,747 | $ | 47,918 | ||||||||
See accompanying Notes to Consolidated Financial Statements.
| 3 |
WIRELESS TELECOM GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME/(LOSS)
(UNAUDITED)
(In thousands, except per share amounts)
| For the Three Months Ended | For the Nine Months Ended | For the Three Months Ended | For the Nine Months Ended | |||||||||||||||||||||||||||||
| September 30 | September 30 | September 30 | September 30 | |||||||||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||||
| Net revenues | $ | 10,868 | $ | 10,812 | $ | 31,404 | $ | 37,353 | $ | 12,824 | $ | 10,868 | $ | 36,168 | $ | 31,404 | ||||||||||||||||
| Cost of revenues | 5,214 | 5,987 | 15,655 | 20,668 | 6,284 | 5,214 | 17,549 | 15,655 | ||||||||||||||||||||||||
| Gross profit | 5,654 | 4,825 | 15,749 | 16,685 | 6,540 | 5,654 | 18,619 | 15,749 | ||||||||||||||||||||||||
| Operating expenses | ||||||||||||||||||||||||||||||||
| Research and development | 1,826 | 1,343 | 5,080 | 4,556 | 1,435 | 1,826 | 4,281 | 5,080 | ||||||||||||||||||||||||
| Sales and marketing | 1,732 | 1,753 | 5,111 | 5,718 | 1,854 | 1,732 | 5,266 | 5,111 | ||||||||||||||||||||||||
| General and administrative | 2,444 | 2,407 | 7,322 | 7,341 | 2,800 | 2,444 | 8,469 | 7,322 | ||||||||||||||||||||||||
| Loss on Change in Contingent Consideration | 1,000 | - | 1,000 | - | ||||||||||||||||||||||||||||
| Total operating expenses | 6,002 | 5,503 | 17,513 | 17,615 | 7,089 | 6,002 | 19,016 | 17,513 | ||||||||||||||||||||||||
| Operating loss | (348 | ) | (678 | ) | (1,764 | ) | (930 | ) | ||||||||||||||||||||||||
| Operating income/(loss) | (549 | ) | (348 | ) | (397 | ) | (1,764 | ) | ||||||||||||||||||||||||
| Extinguishment of PPP loan | - | - | 2,045 | - | ||||||||||||||||||||||||||||
| Other income/(expense) | (43 | ) | 108 | 252 | 273 | 20 | (43 | ) | 29 | 252 | ||||||||||||||||||||||
| Interest (expense) | (256 | ) | (60 | ) | (727 | ) | (248 | ) | ||||||||||||||||||||||||
| Interest expense | (365 | ) | (256 | ) | (947 | ) | (727 | ) | ||||||||||||||||||||||||
| Loss before taxes | (647 | ) | (630 | ) | (2,239 | ) | (905 | ) | ||||||||||||||||||||||||
| Income/(Loss) before taxes | (894 | ) | (647 | ) | 730 | (2,239 | ) | |||||||||||||||||||||||||
| Tax provision/(benefit) | 128 | (169 | ) | 352 | (256 | ) | (707 | ) | 128 | (386 | ) | 352 | ||||||||||||||||||||
| Net Loss | $ | (775 | ) | $ | (461 | ) | $ | (2,591 | ) | $ | (649 | ) | ||||||||||||||||||||
| Net income/(loss) | $ | (187 | ) | $ | (775 | ) | $ | 1,116 | $ | (2,591 | ) | |||||||||||||||||||||
| Other comprehensive income/(loss): | ||||||||||||||||||||||||||||||||
| Foreign currency translation adjustments | 565 | (491 | ) | (406 | ) | (566 | ) | (152 | ) | 565 | (64 | ) | (406 | ) | ||||||||||||||||||
| Comprehensive loss | $ | (210 | ) | $ | (952 | ) | $ | (2,997 | ) | $ | (1,215 | ) | ||||||||||||||||||||
| Comprehensive income/(loss) | $ | (339 | ) | $ | (210 | ) | $ | 1,052 | $ | (2,997 | ) | |||||||||||||||||||||
| Loss per share: | ||||||||||||||||||||||||||||||||
| Income/(Loss) per share: | ||||||||||||||||||||||||||||||||
| Basic | $ | (0.04 | ) | $ | (0.02 | ) | $ | (0.12 | ) | $ | (0.03 | ) | $ | (0.01 | ) | $ | (0.04 | ) | $ | 0.05 | $ | (0.12 | ) | |||||||||
| Diluted | $ | (0.04 | ) | $ | (0.02 | ) | $ | (0.12 | ) | $ | (0.03 | ) | $ | (0.01 | ) | $ | (0.04 | ) | $ | 0.05 | $ | (0.12 | ) | |||||||||
| Weighted average shares outstanding: | ||||||||||||||||||||||||||||||||
| Basic | 21,703 | 20,866 | 21,643 | 20,854 | 22,234 | 21,703 | 21,900 | 21,643 | ||||||||||||||||||||||||
| Diluted | 21,703 | 20,866 | 21,643 | 20,854 | 22,234 | 21,703 | 24,219 | 21,643 | ||||||||||||||||||||||||
In periods with a net loss, the basic loss per share equals the diluted loss per share as all common stock equivalents are excluded from the per share calculation because they are anti-dilutive.
See accompanying Notes to Consolidated Financial Statements.
| 4 |
WIRELESS TELECOM GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
| For the Nine Months Ended | ||||||||||||||||
| September 30 | For the Nine Months | |||||||||||||||
| 2020 | 2019 | Ended September 30 | ||||||||||||||
| CASH FLOWS USED BY OPERATING ACTIVITIES | ||||||||||||||||
| Net Loss | $ | (2,591 | ) | $ | (649 | ) | ||||||||||
| Adjustments to reconcile net loss to net cash used by operating activities: | ||||||||||||||||
| 2021 | 2020 | |||||||||||||||
| CASH FLOWS PROVIDED/(USED) BY OPERATING ACTIVITIES | ||||||||||||||||
| Net Income/(Loss) | $ | 1,116 | $ | (2,591 | ) | |||||||||||
| Adjustments to reconcile net income/(loss) to net cash provided/(used) by operating activities: | ||||||||||||||||
| Depreciation and amortization | 1,631 | 1,671 | 1,604 | 1,631 | ||||||||||||
| Extinguishment of PPP loan | (2,045 | ) | - | |||||||||||||
| Amortization of debt issuance fees | 215 | 47 | 217 | 215 | ||||||||||||
| Share-based compensation expense | 360 | 560 | 301 | 360 | ||||||||||||
| Deferred rent | (22 | ) | (18 | ) | (22 | ) | (22 | ) | ||||||||
| Deferred income taxes | 1,057 | (309 | ) | (387 | ) | 1,057 | ||||||||||
| Provision for doubtful accounts | (28 | ) | 20 | 72 | (28 | ) | ||||||||||
| Inventory reserves | 119 | 139 | 115 | 119 | ||||||||||||
| Changes in assets and liabilities, net of acquisition: | ||||||||||||||||
| Accounts receivable | (1,343 | ) | 520 | (1,998 | ) | (1,343 | ) | |||||||||
| Inventories | (461 | ) | (1,627 | ) | (993 | ) | (461 | ) | ||||||||
| Prepaid expenses and other assets | (226 | ) | 993 | 459 | (226 | ) | ||||||||||
| Accounts payable | (451 | ) | (567 | ) | 728 | (451 | ) | |||||||||
| Payment of contingent consideration | - | (772 | ) | |||||||||||||
| Accrued expenses and other liabilities | 888 | (1,635 | ) | 1,368 | 888 | |||||||||||
| Net cash used by operating activities | (852 | ) | (1,627 | ) | ||||||||||||
| Net cash provided/(used) by operating activities | 535 | (852 | ) | |||||||||||||
| CASH FLOWS USED BY INVESTING ACTIVITIES | ||||||||||||||||
| CASH FLOWS PROVIDED/(USED) BY INVESTING ACTIVITIES | ||||||||||||||||
| Capital expenditures | (228 | ) | (339 | ) | (417 | ) | (228 | ) | ||||||||
| Acquisition of business, net of cash acquired | (7,189 | ) | (426 | ) | (200 | ) | (7,189 | ) | ||||||||
| Net cash used by investing activities | (7,417 | ) | (765 | ) | ||||||||||||
| Net cash provided/(used) by investing activities | (617 | ) | (7,417 | ) | ||||||||||||
| CASH FLOWS PROVIDED BY FINANCING ACTIVITIES | ||||||||||||||||
| CASH FLOWS PROVIDED/(USED) BY FINANCING ACTIVITIES | ||||||||||||||||
| Revolver borrowings | 27,432 | 27,408 | 50,220 | 27,432 | ||||||||||||
| Revolver repayments | (29,786 | ) | (26,333 | ) | (50,175 | ) | (29,786 | ) | ||||||||
| Term loan borrowings | 8,400 | - | 345 | 8,400 | ||||||||||||
| Term loan repayments | (405 | ) | (114 | ) | (4,191 | ) | (405 | ) | ||||||||
| Debt issuance fees | (1,305 | ) | - | - | (1,305 | ) | ||||||||||
| Paycheck protection program loan | 2,045 | - | ||||||||||||||
| PPP loan | - | 2,045 | ||||||||||||||
| Payment of contingent consideration | - | (782 | ) | (460 | ) | - | ||||||||||
| Proceeds from exercise of stock options | 15 | - | 209 | 15 | ||||||||||||
| Shares withheld for employee taxes | (31 | ) | - | (44 | ) | (31 | ) | |||||||||
| Net cash provided by financing activities | 6,365 | 179 | ||||||||||||||
| ATM shares sold | 565 | - | ||||||||||||||
| Net cash provided/(used) by financing activities | (3,531 | ) | 6,365 | |||||||||||||
| Effect of Exchange Rate Changes on Cash and Cash Equivalents | (138 | ) | (67 | ) | (14 | ) | (138 | ) | ||||||||
| NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS | (2,042 | ) | (2,280 | ) | ||||||||||||
| NET DECREASE IN CASH AND CASH EQUIVALENTS | (3,627 | ) | (2,042 | ) | ||||||||||||
| Cash and Cash Equivalents, at Beginning of Period | 4,245 | 5,015 | 4,910 | 4,245 | ||||||||||||
| CASH AND CASH EQUIVALENTS, AT END OF PERIOD | $ | 2,203 | $ | 2,735 | $ | 1,283 | $ | 2,203 | ||||||||
| SUPPLEMENTAL INFORMATION: | ||||||||||||||||
| Cash paid during the period for interest | $ | 527 | $ | 143 | $ | 698 | $ | 527 | ||||||||
| Cash paid during the period for income taxes | $ | 53 | $ | 69 | $ | 150 | $ | 53 | ||||||||
| Non cash issuance of common stock in connection with acquisition – see Note 3 | ||||||||||||||||
See accompanying Notes to Consolidated Financial Statements.
| 5 |
WIRELESS TELECOM GROUP, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
(UNAUDITED)
(In thousands, except share amounts)
| Common Stock Issued | Common Stock Amount | Additional Paid In Capital | Retained Earnings | Treasury Stock | Accumulated Other Comprehensive Income/(Loss) | Total Shareholders’ Equity | ||||||||||||||||||||||
| Balances at January 1, 2020 | 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 stock options exercised | ||||||||||||||||||||||||||||
| Issuance of shares in connection with stock options exercised, shares | ||||||||||||||||||||||||||||
| Issuance of restricted stock | ||||||||||||||||||||||||||||
| Issuance of restricted stock, shares | ||||||||||||||||||||||||||||
| Forfeiture of restricted stock | (16,667 | ) | ||||||||||||||||||||||||||
| 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 | |||||||||||||||||||||
| ATM shares sold | ||||||||||||||||||||||||||||
| ATM shares sold, shares | ||||||||||||||||||||||||||||
| Cumulative translation adjustment | - | - | - | - | - | (935 | ) | (935 | ) | |||||||||||||||||||
| Balances at March 31, 2020 | 34,818,904 | $ | 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 | 34,818,904 | $ | 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, 2020 | 34,888,904 | $ | 349 | $ | 50,049 | $ | 4,552 | $ | (24,540 | ) | $ | 245 | $ | 30,655 | ||||||||||||||
| Common Stock Issued | Common Stock Amount | Additional Paid In Capital | Retained Earnings | Treasury Stock | Accumulated Other Comprehensive Income/(Loss) | Total Shareholders’ Equity | Common Stock Issued | Common Stock Amount | Additional Paid In Capital | Retained Earnings | Treasury Stock | Accumulated Comprehensive Income/(Loss) | Total Shareholders’ Equity | |||||||||||||||||||||||||||||||||||||||||||
| Balances at December 31, 2018 | 34,393,252 | $ | 344 | $ | 48,479 | $ | 7,556 | $ | (24,509 | ) | $ | 112 | $ | 31,982 | ||||||||||||||||||||||||||||||||||||||||||
| Balances at January 1, 2021 | 34,888,904 | $ | 349 | $ | 50,163 | $ | (946 | ) | $ | (24,556 | ) | $ | 841 | $ | 25,851 | |||||||||||||||||||||||||||||||||||||||||
| Net income/(loss) | - | - | - | (233 | ) | - | - | (233 | ) | |||||||||||||||||||||||||||||||||||||||||||||||
| Shares withheld for employee taxes | - | - | - | - | (17 | ) | - | (17 | ) | |||||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation expense | - | - | 114 | - | - | - | 114 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Cumulative translation adjustment | - | - | - | - | - | 75 | 75 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Balances at March 31, 2021 | 34,888,904 | $ | 349 | $ | 50,277 | $ | (1,179 | ) | $ | (24,573 | ) | $ | 916 | $ | 25,790 | |||||||||||||||||||||||||||||||||||||||||
| Net income/(loss) | - | - | - | (344 | ) | - | - | (344 | ) | - | - | - | 1,537 | - | - | 1,537 | ||||||||||||||||||||||||||||||||||||||||
| Issuance of restricted stock | 95,000 | 1 | (1 | ) | - | - | - | - | 223,517 | 2 | (2 | ) | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||
| Share-based compensation expense | - | - | 209 | - | - | - | 209 | - | - | 89 | - | - | - | 89 | ||||||||||||||||||||||||||||||||||||||||||
| Cumulative translation adjustment | - | - | - | - | - | 305 | 305 | - | - | - | - | - | 12 | 12 | ||||||||||||||||||||||||||||||||||||||||||
| Balances at March 31, 2019 | 34,488,252 | $ | 345 | $ | 48,687 | $ | 7,212 | $ | (24,509 | ) | $ | 417 | $ | 32,152 | ||||||||||||||||||||||||||||||||||||||||||
| Balances at June 30, 2021 | 35,112,421 | $ | 351 | $ | 50,364 | $ | 358 | $ | (24,573 | ) | $ | 928 | $ | 27,428 | ||||||||||||||||||||||||||||||||||||||||||
| Balances | 35,112,421 | $ | 351 | $ | 50,364 | $ | 358 | $ | (24,573 | ) | $ | 928 | $ | 27,428 | ||||||||||||||||||||||||||||||||||||||||||
| Net income/(loss) | - | - | - | 156 | - | - | 156 | - | - | - | (187 | ) | - | - | (187 | ) | ||||||||||||||||||||||||||||||||||||||||
| Issuance of shares in connection with stock options exercised | 140,000 | 1 | 208 | - | - | - | 209 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of shares in connection with Holzworth acquisition | 33,220 | - | 73 | - | - | - | 73 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Shares withheld for employee taxes | - | - | - | - | (27 | ) | - | (27 | ) | |||||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation expense | - | - | 191 | - | - | - | 191 | - | - | 98 | - | - | - | 98 | ||||||||||||||||||||||||||||||||||||||||||
| ATM shares sold | 264,701 | 3 | 562 | - | - | - | 565 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Cumulative translation adjustment | - | - | - | - | - | (380 | ) | (380 | ) | - | - | - | - | - | (152 | ) | (152 | ) | ||||||||||||||||||||||||||||||||||||||
| 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 | |||||||||||||||||||||||||||||||||||||||||
| Balances at September 30, 2021 | 35,550,342 | $ | 355 | $ | 51,305 | $ | 171 | $ | (24,600 | ) | $ | 776 | $ | 28,007 | ||||||||||||||||||||||||||||||||||||||||||
| Balances | 35,550,342 | $ | 355 | $ | 51,305 | $ | 171 | $ | (24,600 | ) | $ | 776 | $ | 28,007 | ||||||||||||||||||||||||||||||||||||||||||
| 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 | ||||||||||||||
See accompanying Notes to Consolidated Financial Statements.
WIRELESS TELECOM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| 6 |
NOTE 1 - Summary 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 (“RF”) 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.
OurOura customers include wireless carriers, aerospace companies, defense contractors, military and government agencies, satellite communication companies, network equipment manufacturers, tower companies, semiconductor device manufacturers, system integrators, neutral host providers and medical device manufacturers.
Our products include components, modules, instruments, systems and instrumentssoftware 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”) and 5G 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 consolidated balance sheet as of September 30, 2020, the consolidated statements of operations and comprehensive income/(loss) for the three and nine months ended September 30, 2020 and 2019, the consolidated statements of cash flows for the nine months ended September 30, 2020 and 2019 and the consolidated statement of shareholders’ equity for the three and nine months ended September 30, 2020 and 2019 have been prepared by the Company without audit. Theaccompanying consolidated financial statements include the accounts of Wireless Telecom Group, Inc., doing business as and operating under the trade name, 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”). They have been prepared using accounting principles generally accepted in the United States (“U.S. GAAP”). 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 interim consolidated financial statements be read in conjunction with the audited consolidated financial statements, and the notes thereto, included in the Company’s latest annual report (Form 10-K).
The 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 endingthree month period ended September 30, 20202021 and September 30, 2019,2020, and references to “year-end” indicate the fiscal year ended December 31, 2019.2020.
Consolidated Financial Statements
In the opinion of management, the accompanying 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, 2019.2020. 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”)GAAP have been 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 months ended September 30, 20202021 are not necessarily indicative of the results to be expected for the full year ending December 31, 2020.2021.
Critical Accounting Estimates
The preparation of our consolidated financial statements requires the Company to make estimates and judgments that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses for 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.
| 7 |
Due to the
The COVID-19 pandemic there has been uncertaintynegatively impacted regional and global economies, disrupted global supply chains and created significant volatility and disruption in the global economy andof 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 unit 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-19COVID-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 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, 2019.2020.
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.
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.
For the three months ended September 30, 2021 no one customer accounted for greater than 10% of consolidated revenue. For the nine months ended September 30, 2021 one customer accounted for 10.32% of consolidated revenue. For the three months ended September 30, 2020, one customer accounted for 13%12.5% of the Company’s consolidated revenues. For the nine months ended September 30, 2020 no one customer accounted for greater than 10% of the Company’s consolidated revenues. For the three and nine months ended September 30, 2019, one
One customer accounted for approximately 19% and 29% of the Company’s consolidated revenues, respectively.
WIRELESS TELECOM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
No customer accounted for more than 10%12.2% of consolidated accounts receivable as of September 30, 2020.2021. At December 31, 2019,2020, one customer accounted for 13%12.7% of consolidated accounts 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 - Quoted prices in active markets for identical assets or liabilities.
Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The categorization of a financial instrument within the valuation hierarchy is based on the lowest level of input that is significant to the fair value measurement.
The carrying amounts of the Company’s financial instruments, including cash, accounts receivable, accounts payable and accrued liabilities, approximate fair value due to their relatively short maturities. The Company’s term loan and revolving credit facility bear interest at a variable interest rate plus an applicable margin and, therefore, carrying amount approximates fair value. 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 Holzworth Share Purchase Agreement, (See Note 3) the Company may beis required to pay additional purchase price in the form of deferred purchase price payments and an earnout if certainbased on Holzworth’s financial targets are achievedresults for the years endingended December 31, 2020 and December 31, 2021. See Note 3 for a discussion of the first deferred purchase price payment related to financial targets set for 2019. As of September 30, 2020, the Company estimated the fair value of the deferred purchase price and earnout remaining to be 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 earnout periods for which probabilities are assigned to each scenario to arrive at a single estimated 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 Holzworth or changes in the future, may result in different estimated amounts. The contingent consideration liability isliabilities are considered a Level 3 fair value measurement.
| 8 |
Subsequent Events
There were no subsequent events or transactions requiring recognition or disclosureThe Company accounts for business acquisitions in accordance with ASC 805, Business Combinations. Under ASC 805 the Company is required to reassess contingent consideration liabilities as of each reporting date. Additionally, adjustments to contingent consideration liabilities that occur after the measurement period, which is typically one year, are recorded as a component of operating income in the consolidatedConsolidated Statement of Operations and Comprehensive Income/(Loss). Due to the anticipated better than expected financial statements,performance of the Holzworth reporting unit for fiscal year 2021, the Company recorded an increase to the contingent consideration liabilities in the amount of $1.0 million in the three months ended September 30, 2021, which represents the Company’s best estimate of the earnout payable based on the expected financial results for the year ending December 31, 2021. This earnout will be payable in four equal installments in fiscal 2022. The adjustment was recorded as a loss on change in contingent consideration in the Consolidated Statement of Operations and Comprehensive Income/(Loss).
As of September 30, 2021, amounts due for the notes thereto, through the date the financial statementsHolzworth deferred purchase price and earnout were issued.$ and $ million, respectively.
WIRELESS TELECOM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2 – Accounting Pronouncements
Recently Adopted Accounting Standards
In August 2018, the FASB issued ASU 2018-15, Intangibles – Goodwill and Other – Internal-Use Software, Customers Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract. ASU 2018-15 aligns the requirements for capitalizing implementation costs in cloud computing arrangements with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This pronouncement is effective for the Company’s 2020 calendar year, with early adoption permitted. The adoption of this standard 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 20192020 Form 10-K that had a material impact on our consolidated financial statements and related notes.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which simplifies the accounting for income taxes by removing certain exceptions related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The new ASU also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates. These changes aim to improve the overall usefulness of disclosures to financial statement users and reduce unnecessary costs to companies when preparing the disclosures. The guidance was effective for the Company beginning on January 1, 2021 and prescribes different transition methods for the various provisions. The adoption of this standard had no material impact on the Company’s financial statements or related disclosures.
Recent Accounting Pronouncements Not Yet Adopted
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326). ASU 2016-13 changes the impairment model for most financial assets and will require the use of an “expected loss” model for instruments measured as amortized cost. This pronouncement is effective for small reporting companies for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2022. The Company plans to adopt the standard effective January 1, 2023. We do not expect the adoption of this standard to have a material impact on our consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12, Income 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 Topic 740 and improve consistent application by clarifying and amending existing guidance. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption is permitted, with the amendments to be applied on a retrospective, modified retrospective or prospective basis, depending on the specific amendment. The Company is currently evaluating the impact of adopting this guidance.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting,Reporting. The amendments provide optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments are intended to ease the potential burden in accounting for, or recognizing the effects of, reference rate reform on financial reporting. The new standard is effective March 12, 2020 through December 31, 2022, with the adoption date being dependent upon the Company’s election. The Company is currently evaluatingWe do not expect the adoption of this standard to have a material impact of adopting this guidance.on our consolidated financial statements.
NOTE 3 – Acquisition of Holzworth
On November 13, 2019 the Company 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 the Sellers.Holzworth. 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 income/(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).
| 9 |
WIRELESS TELECOM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The aggregate purchase price for the Acquisition is a maximum 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 pay 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 adjustment based on the closing working capital amounts, as defined in the Share Purchase Agreement, of Holzworth as of the closing balance sheet date as compared to a defined target. The parties intend to make a 338(h)(10) election to treat the Acquisition as a purchase and sale of assets, and the Company has agreed to pay 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 the Share Purchase Agreement if Holzworth’s EBITDA (as defined in the Share Purchase Agreement) for each fiscal year ending December 31, 2019 and December 31, 2020, respectively, is less than $1.25 million. Holzworth met the EBITDA 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 working capital adjustment definition the sellers owed the Company approximately $292,000. Accordingly, this amount was netted against the first deferred purchase price installment of $250,000 and a portion of the second deferred purchase price installment. The Company paid the second deferred purchase price installment in the net amount of approximately $208,000 on July 1st. The third quarterly deferred purchase price installment of $250,000 was paid in full on October 1, 2020. The second deferred purchase price payment of $750,000, if earned, is payable on March 31, 2021.
The Company may 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, by 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 any, by which Holzworth’s EBITDA for the 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.
Pursuant to the Share Purchase Agreement the 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 or 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 a 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 deliver to the Company a lock-up and voting agreement substantially in the form of the Lock-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, 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 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 common stock issued as Earnout Consideration constituting the difference between the cash percentage paid and 30% of the first $1.5 of Earnout Consideration shall not be 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
At closing, a portion of the purchase price was paid to the Sellers through the issuance of shares of the Company’s common stock, valued at approximately $ based upon a 90-day volume weighted average price for shares of stock of the Company. The shares issued to the Sellers are subject to Lock-up and Voting Agreements.
During 2020, the Company paid $ million in net cash to the Sellers consisting of $ million in cash at close, $ in indemnification holdback payments and $ in deferred purchase price reduced by $ of a working capital adjustment that was owed to the Company by the Sellers. The final indemnification holdback payment of $ was paid on March 31, 2021.
The Sellers earned a second deferred purchase price payment of $ when Holzworth exceeded $ million in EBITDA (as defined in the Share Purchase Agreement) for the twelve months ended December 31, 2020. Additionally, the Sellers earned $ million in additional purchase price in the form of an earnout (“Year 1 Earnout”) which was also based on Holzworth’s EBITDA for the twelve months ended December 31, 2020.
On February 19, 2021, the Company entered into the Second Amendment to Share Purchase Agreement (the “Second Amendment”) with Holzworth. The Second Amendment, among other things, converted the second deferred purchase price of $ into unsecured seller notes with interest at an annual rate of starting from April 1, 2021 until final payment.
Additionally, the parties amended the payment dates of the earnout consideration. The payment for the Year 1 Earnout is $ million, of which $ was paid in cash and $ was issued in common stock as of September 30, 2021.
The Company may also be required to pay additional amounts in cash and stock as earnout consideration based on Holzworth’s EBITDA for the fiscal year ending December 31, 2021 (“Year 2 Earnout”). The Year 2 Earnout will be equal to two times the amount, if any, by which Holzworth’s EBITDA for fiscal year December 31, 2021 exceeds Holzworth’s EBITDA for fiscal year 2020. The aggregate payments of the Year 1 Earnout and Year 2 Earnout cannot exceed $ million and the aggregate purchase price cannot exceed $ million.
Due to the anticipated better than expected financial performance of the Holzworth reporting unit for fiscal year 2021, the Company recorded an increase to the contingent consideration liabilities in the amount of $ million in the three months ended September 30, 2021 which represents the Company’s best estimatesestimate of the Year 2 Earnout. The adjustment was recorded as a loss on change in contingent consideration in the Consolidated Statement of Operations and assumptions to accuratelyComprehensive Income/(Loss).
The following table summarizes the components of the purchase price and the allocation of the purchase price at fair value assets acquired and liabilities assumed at the acquisition date our estimates are inherently uncertain and subject to refinement. 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.
WIRELESS TELECOM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
As of September 30, 2020, the valuation studies necessary to determine the fair market value of the assets acquired and liabilities assumed have been completed, including the validation of 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):
Schedule of Business Consideration
| 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 | ||||||
| 10 |
| Amounts Recognized as of Acquisition Date | ||||
| Cash at close | $ | 7,219 | ||
| Equity issued at close | 465 | |||
| Purchase price holdback | 800 | |||
| Working capital adjustment | (292 | ) | ||
| Deferred purchase price | 1,410 | |||
| Contingent consideration | 2,440 | |||
| Total purchase price | 12,042 | |||
| Cash | 30 | |||
| Accounts receivable | 514 | |||
| Inventory | 1,438 | |||
| Intangible assets | 4,260 | |||
| Other assets | 967 | |||
| Fixed assets | 144 | |||
| Accounts payable | (129 | ) | ||
| Accrued expenses | (429 | ) | ||
| Deferred revenue | (13 | ) | ||
| Other long term liabilities | (740 | ) | ||
| Net assets acquired | 6,042 | |||
| Goodwill | $ | 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 Holzworth into our operations. The goodwill recorded in this transaction is expected to be tax deductible.
The Company’s post acquisition consolidated goodwill is shown below (in thousands):
Schedule of Post Acquisition Consolidated Goodwill
| Holzworth | Microlab | CommAgility | Total | Holzworth | Microlab | CommAgility | Total | |||||||||||||||||||||||||
| Balance as of December 31, 2019 | $ | - | $ | 1,351 | $ | 8,718 | $ | 10,069 | ||||||||||||||||||||||||
| Balance as of January 1, 2020 | $ | - | $ | 1,351 | $ | 8,718 | $ | 10,069 | ||||||||||||||||||||||||
| Holzworth acquisition | 6,000 | - | - | 6,000 | 6,000 | - | - | 6,000 | ||||||||||||||||||||||||
| Goodwill Impairment | - | - | (4,742 | ) | (4,742 | ) | ||||||||||||||||||||||||||
| Foreign currency translation | - | - | (188 | ) | (188 | ) | - | - | 185 | 185 | ||||||||||||||||||||||
| Balance as of September 30, 2020 | $ | 6,000 | $ | 1,351 | $ | 8,530 | $ | 15,881 | ||||||||||||||||||||||||
| Balance as of December 31, 2020 | $ | 6,000 | $ | 1,351 | $ | 4,161 | $ | 11,512 | ||||||||||||||||||||||||
| Foreign currency translation | - | - | 45 | 45 | ||||||||||||||||||||||||||||
| Balance as of March 31, 2021 | $ | 6,000 | $ | 1,351 | $ | 4,206 | $ | 11,557 | ||||||||||||||||||||||||
| Foreign currency translation | - | - | 7 | 7 | ||||||||||||||||||||||||||||
| Balance as of June 30, 2021 | $ | 6,000 | $ | 1,351 | $ | 4,213 | $ | 11,564 | ||||||||||||||||||||||||
| Beginning balance | $ | 6,000 | $ | 1,351 | $ | 4,213 | $ | 11,564 | ||||||||||||||||||||||||
| Foreign currency translation | - | - | (103 | ) | (103 | ) | ||||||||||||||||||||||||||
| Balance as of September 30, 2021 | $ | 6,000 | $ | 1,351 | $ | 4,110 | $ | 11,461 | ||||||||||||||||||||||||
| Closing balance | $ | 6,000 | $ | 1,351 | $ | 4,110 | $ | 11,461 | ||||||||||||||||||||||||
| 11 |
The following unaudited pro forma information presents the Company’s operations as if the Holzworth acquisition and related financing activities had occurred on January 1, 2019. The pro forma information includes the following adjustments (i) amortization of acquired intangible assets; (ii) interest expense incurred in connection with the Term Loan Facility (described in further detail in Note 4) used to finance the acquisition of Holzworth; and (iii) inclusion of acquisition-related expenses in the earliest period presented. The amounts related to Holzworth included in the following unaudited pro forma information are based on their historical results and, therefore, may not be indicative of the 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 be relied upon as being indicative of the results that would have been realized had the Acquisition occurred as of the date indicated or that may be achieved in the future.
WIRELESS TELECOM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following table presents the unaudited pro forma consolidated results of operations for the Company for the three months ended September 30, 2019 and nine months ended September 30, 2020 and 2019 as though the Acquisition had been completed as of January 1, 2019 (in thousands, except per share amounts):
| 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 – Debt
Debt consists of the following (in thousands):
Schedule of Debt
| September 30, 2020 | September 30, 2021 | |||||||
| Revolver at LIBOR plus margin | $ | - | $ | 45 | ||||
| Term loan at LIBOR plus margin | 8,337 | 4,125 | ||||||
| Less: Debt issuance costs, net of amortization | (877 | ) | (678 | ) | ||||
| Less: Fair value of warrants, net of amortization | (131 | ) | (101 | ) | ||||
| Paycheck Protection Program loan | 2,045 | |||||||
| CIBLS Loan at Bank of England plus margin | 337 | |||||||
| Total Debt | 9,374 | 3,728 | ||||||
| Less: Debt maturing within one year | (84 | ) | (150 | ) | ||||
| Non-current portion of long term debt | $ | 9,290 | $ | 3,578 | ||||
Term loan payments by period (in thousands):
Schedule of Term Loan Payments
| Remainder of 2020 | $ | 21 | ||||||
| 2021 | 84 | |||||||
| Remainder of 2021 | $ | 21 | ||||||
| 2022 | 2,130 | 126 | ||||||
| 2023 | 84 | 168 | ||||||
| 2024 | 84 | 168 | ||||||
| 2025 | 3,936 | |||||||
| Thereafter | 7,979 | 43 | ||||||
| Total | $ | 10,382 | $ | 4,462 | ||||
Muzinich Term Loan Facility
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$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$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%2025. The Term Loan Facility includesincluded an upfront fee of 2.50%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$1.0 million, including the aforementioned 2.5%2.50% 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.
TheOn May 4, 2020, the Company may prepayentered into 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 subjectFirst Amendment 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 termwhich, among other things, amended the definition of “Indebtedness” to include the PPP (as defined below) loan (the “Second Term Loan”) to beas long as the proceeds are used for a second unannounced acquisition opportunity (the “Additional Acquisition”). There can be no assurance thatallowable purposes under the Additional Acquisition will be completed. InCARES Act, the eventreceipt of the Additional Acquisition is completed,loan does not violate the Second Term Loan will be made available toCredit Facility and the Company on the same termssubmits an application for forgiveness 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’sloan is forgiven. The Company received notice in June 2021 that the loan and accrued interest were fully forgiven, as described below.
On February 25, 2021, the Company and its subsidiaries’ assets including a pledge ofsubsidiaries entered into the equity interestsSecond Amendment to the Credit Agreement and Limited Waiver (“Amendment 2”) with Muzinich, in which Muzinich agreed to waive the Company’s subsidiaries. The Term Loan Facility contains customary affirmative and negative covenants for a transaction of this type, including, among others,obligation to comply with 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 consolidatedand fixed charge coverage ratio and minimum liquidity of its foreign subsidiaries. The consolidated leverage ratio is defined asfinancial covenants in the ratio of total consolidated indebtedness, as defined, to consolidated EBITDA, as defined. The required leverage ratio starts at 4.75 to 1.0Term Loan Facility 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 endedfiscal quarter ending December 31, 2020, 2.75 to 1.0 for2020. We were not in compliance with such covenants primarily as a result of the twelve months ended December 31, 2021 and 2.0 to 1.0 forimpact the twelve months ended December 31, 2022 and thereafter. TheCOVID-19 pandemic had on our consolidated fixed charge coverage ratio isfinancial results. Amendment 2, among other things, amended the ratiodefinition of consolidated EBITDA as defined, lessto include certain cash tax benefits related to our U.K. tax jurisdiction and reduced our consolidated capital expenditures and cash income taxes paid to consolidated fixed charges, as defined, calculated on a twelve-month basis. The consolidated fixed charge coverageleverage ratio for the twelve month periods ended September 30, 2021 from 3.00 to 2.75, December 31, 2021 from 2.75 to 2.25, March 31, 2020,2022 from 2.50 to 2.00 and June 30, 20202022 from 2.25 to 2.00. Additionally, the interest rate margin was increased from 7.25% to 9.25% effective January 1, 2021 and September 30, 2020 must be 1.35will step down to 18.50% and increases in various increments7.25% upon the Company achieving consolidated EBITDA on a quarterlytrailing twelve-month basis to 1.5 to 1.0of $4.0 million and $6.3 million, respectively. Muzinich and the Company also agreed on an excess cash flow payment of $428,000 which was made in March 2021 and Muzinich provided consent for the Company to change the deferred purchase price payments to and enter into notes with the Holzworth sellers in the amount of $750,000, as described above in Note 3.
| 12 |
On May 27, 2021, the Company and its subsidiaries entered into the Third Amendment to the Credit Agreement and Limited Waiver (“Amendment 3)” with Muzinich in which Muzinich, among other things, permitted CommAgility to enter into the CIBLS Loan Agreement with Lloyds Bank Plc. See description below.
On September 28, 2021, the Company and its subsidiaries entered into the Fourth Amendment to Credit Agreement and Limited Waiver (“Amendment 4”) with Muzinich. Amendment 4 was executed in connection with a prepayment of the principal balance of the Muzinich term loan in the amount of $3.7 million and accrued interest thereon of $95,000 on September 28, 2021. Additionally, the Company paid a prepayment premium of 2% of the prepayment amount or $74,000.
Under the terms of Amendment 4, the interest rate margin was decreased from 9.25% to 8.75% when trailing twelve month period ended DecemberConsolidated EBITDA, as defined, excluding the US R&D tax credit, is less than or equal to $4.0 million and decreased from 8.50% to 8.00% when trailing twelve month Consolidated EBITDA, as defined, excluding the US R&D tax credit, is greater than $4.0 million but equal to or less than $6.3 million. Muzinich also agreed to waive compliance with the financial covenant set forth in Section 7.11(c) of the Credit Agreement from September 28, 2021 until March 31, 2020 and 2021, and to 1.75 to 1.0 for2022. Section 7.11(c) requires the 12 months ending December 31, 2022 and thereafter. Lastly, the Company must maintain minimumtrailing four week average 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 greaterCommAgility subsidiary to be no less than 1.0$1.0 million. The waiver of this covenant may be extended upon the consent of Muzinich. Additionally, under Amendment 4, the definition of Consolidated Interest Charges was amended to 1.0 (as calculated in accordancetreat the aforementioned principal prepayment of $3.7 million as being made on October 1, 2020.
Credit Facility 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”(“Bank of America”) on February 16, 2017 (the “Credit Facility”), which provided for a term loan in the aggregate principal amount of $760,000$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$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.Facility (“BOA Amendment 5”). By entering into theBOA Amendment 5, 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. Additionally, the Company prepaid the remaining principal balance of the BOA Term Loan in the amount of $304,000.
On May 4, 2020, the Company, its subsidiaries and Bank of America entered into Amendment No. 6 which, among other things, amended the definition of “Debt” to include the PPP loan as long as the proceeds are used for allowable purposes under the CARES Act and the Company promptly submits an application for forgiveness and substantially all of the loan is forgiven. The Company received notice in June 2021 that the loan and accrued interest were fully forgiven, as described below.
WIRELESS TELECOM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
TheOn February 25, 2021, the Company, its subsidiaries and Bank of America entered into Amendment (a) effected certain modifications toNo. 7 which revised the Credit Facility to accommodate the Acquisition,changes to the Company’s incurrencedeferred purchase price payments to and notes with the Holzworth sellers, as described above, and provided Bank of America’s consent to the Company entering into the Muzinich Second Amendment, as described above.
On September 28, 2021, the Company and its subsidiaries entered into Amendment No. 8 (“BOA Amendment 8”) in which Bank of America consented to the aforementioned principal prepayment of the Initial Term LoanMuzinich term loan and amended the grantingdefinition 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 definedto treat the Muzinich principal prepayment as being made on October 1, 2020. Additionally, Bank of America and the Company agreed that, 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 complianceaccordance 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 ofLIBOR should be replaced with a closing feesuccessor rate in the amount of $25,000. The Borrowers satisfied all such conditions on February 7, 2020. In connectionaccordance with the provisions of BOA Amendment 5. Accordingly, BOA Amendment 8 defines the Company incurred costsLIBOR successor rate for loans denominated in U.S. dollars to be the Bloomberg Short-Term Bank Yield Index rate (“BSBY”), loans denominated in Sterling to be the Sterling Overnight Index Average Reference Rate (“SONIA”) and loans denominated in Euros to be the Euro Interbank Offered Rate (“EURIBOR”). Loans drawn after the effective date of $270,000 which are capitalizedBOA Amendment 8 will bear interest as other current and non-current assets in the Consolidated Balance Sheets and are being amortized oversuccessor rates named above plus the term of the revolver.applicable margin, as defined.
| 13 |
As of September 30, 2020,2021, the interest rate on the Term Loan Facility was 8.25%9.75% and the interest rate on the Revolver was 2.25%2.13%. The Company had $45,000 drawn on the asset-based revolver as of September 30, 2021. As of September 30, 2020,2021, and the date hereof the Company is in compliance with all covenants of the Credit Facility and the Term Loan Facility.
PPP Loan
On May 4, 2020, the Company received $2.0$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 hashad an interest rate of 1%1% and a term of 24 months. A repayment schedule haswas not yet been provided by Bank of America. Accordingly, as of December 31, 2020 the full amount of the term loan has beenwas shown as due in May 2022. Funds from the loan maywere used only be used for certain permitted purposes, including payroll, benefits, rent and utilities. The CARES Act and the PPP provideprovided 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 applyapplied for forgiveness of the loan however, hasand received notice that the loan and accrued interest were fully forgiven, and that the SBA remitted payment in full to Bank of America N.A. on June 5, 2021. The Company elected to account for the loan in accordance with Accounting Standard Codification 470 Debt until such time that forgiveness. Accordingly, the Company recorded a gain on extinguishment of debt on the Consolidated Statement of Operations and Comprehensive Income/(Loss) in the nine months ended September 30, 2021.
CIBLS Loan
On May 27, 2021, CommAgility entered into the Coronavirus Business Interruption Loan Agreement (“CIBLS Loan”) with Lloyds Bank PLC (“Lloyds”). Under the terms of the CIBLS Loan CommAgility can draw up to a maximum of £250,000 for purposes of supporting daily business cash flow. The CIBLS Loan is approvedrepayable in 48 consecutive equal monthly installments beginning in month 13 after the initial loan drawdown (12 month principal repayment holiday). Interest is payable monthly at the official bank rate of the Bank of England plus an interest margin of 2.35% per annum. Interest payments are due monthly beginning in month 13 after the initial loan drawdown. The first twelve months of interest payments are paid by the SBA.U.K. government. The Company can provide no assurance thatCIBLS Loan is secured by the loan will be forgiven in whole or in part.
On May 4, 2020 the Company also entered into Amendment No. 6assets of CommAgility subject to the Credit Facility witha Deed of Priority between Muzinich, Bank of America N.A. and Amendment No. 1Lloyds. The CIBLS Loan ranks subordinate to both the Muzinich 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 theBank of America Credit Facility and the Term Loan Facility, respectively, as long as the proceedsFacility.
On July 1, 2021 CommAgility executed a draw down of the PPP loan are used for allowable purposes under the provisionsmaximum amount of the CARES Act and the PPP in order to permit the Company to obtain forgiveness£250,000. As 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 WarrantSeptember 30, 2021, $21,000 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 short term debt and $316,000 is included long term debt on 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.Consolidated Balance Sheet.
WIRELESS TELECOM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 5 – LeasesEquity
On July 21, 2021, the Company entered into an At Market Issuance Sales Agreement (the “Sales Agreement”) with B. Riley Securities, Inc. (the “Agent”), to issue and sell through the Agent, shares of the Company’s common stock, par value $ per share, having an aggregate offering price of up to $12,000,000 (the “Shares”). The Agent was not required to sell any specific number of Shares. Shares sold under the Sales Agreement were issued and sold pursuant to the Company’s previously filed registration statement on Form S-3 (File No. 333-227051) filed with the Securities and Exchange Commission (the “Commission”) on August 27, 2018 and declared effective on September 17, 2018. A prospectus supplement relating to the offering of the Shares was filed with the Commission on July 21, 2021.
From July 21, 2021 through August 6, 2021 the Agent sold shares of the Company’s common stock for net proceeds of $738,827, after deducting sales commissions paid to the Agent in accordance with the terms of the Sales Agreement.
The registration statement pursuant to which the shares were sold expired on September 17, 2021 and was not renewed.
| 14 |
NOTE 6 – 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, 20202021 and December 31, 2019.2020. 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 statementConsolidated Statement of operationsOperations and comprehensive income/(loss)Comprehensive Income/(Loss).
An initial right-of-use asset of $1.9 million was recognized as a non-cash asset addition with the adoption of the new lease accounting standard on January 1, 2019. With our acquisition of Holzworth on February 7, 2020, we acquired a right-of-use asset of $789,000. There have been no other right-of-use assets recognized since the date of adoption of the new lease standard. Cash paid for amounts included in the present value of operating lease liabilities was $168,000 and $500,000 for the three and nine months ended September 30, 2021, respectively, and was included in operating cash flows. Cash paid for amounts included in the present value of operating lease liabilities for the three and nine months ended September 30, 2020 was $167,000 and $483,000, respectively.
Operating lease costs for the three and nine months ended September 30, 2021 were $258,000 and $825,000, respectively. Operating lease costs for the three and nine months ended September 30, 2020 were $296,000$269,000 and $791,000,$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, 2020:2021:
Schedule of Maturity of Operating Lease Liabilities
| (in thousands) | September 30, 2020 | September 30, 2021 | ||||||
| Maturity of Lease Liabilities | ||||||||
| Remainder of 2020 | $ | 157 | ||||||
| 2021 | 619 | |||||||
| Remainder of 2021 | $ | 156 | ||||||
| 2022 | 637 | 637 | ||||||
| 2023 | 276 | 276 | ||||||
| 2024 | 158 | 158 | ||||||
| 2025 | 163 | |||||||
| Thereafter | 231 | 69 | ||||||
| Total Undiscounted operating lease payments | 2,078 | 1,459 | ||||||
| Less: imputed interest | (213 | ) | (121 | ) | ||||
| Present value of operating lease liabilities | $ | 1,865 | $ | 1,338 | ||||
| Balance sheet classification | ||||||||
| Current lease liabilities | $ | 527 | $ | 572 | ||||
| Long-term lease liabilities | 1,338 | 766 | ||||||
| Total operating lease liabilities | $ | 1,865 | $ | 1,338 | ||||
| Other information | ||||||||
| Weighted-average remaining term (months) for operating leases | 46 | 37 | ||||||
| Weighted-average discount rate for operating leases | 5.87 | % | 5.88 | % | ||||
| 15 |
NOTE 7 – Revenue
Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for promised goods or services. The Company’s performance obligations are satisfied either over time or at a point in time. Revenue from performance obligations that transferred at a point in time accounted for approximately 97% and 100% of the Company’s consolidated revenue for each of the three and nine months ended September 30, 2021 and 2020, respectively.
WIRELESS TELECOM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSNature of Products and Services
(UNAUDITED)
Hardware
NOTE 6 –
The Company generally has one performance obligation in its arrangements involving the sales of radio frequency solutions, digital signal processing hardware, power meters, analyzers, noise/signal generators, phase noise analyzers and other components. When the terms of a contract include the transfer of multiple products, each distinct product is identified as a separate performance obligation. Generally, satisfaction occurs when control of the promised goods is transferred to the customer in exchange for consideration in an amount for which we expect to be entitled. Generally, control is transferred when legal title of the asset moves from the Company to the customer. We sell our products to a customer based on a purchase order, and the shipping terms per each individual order are primarily used to satisfy the single performance obligation. However, in order to determine when control has transferred to the customer, the Company also considers:
| ● | when the Company has a present right to payment for the asset; | |
| ● | when the Company has transferred physical possession of the asset to the customer; | |
| ● | when the customer has the significant risks and rewards of ownership of the asset; and | |
| ● | when the customer has accepted the asset. |
Software
Arrangements involving licenses of software in the CommAgility brand may involve multiple performance obligations, most notably subsequent releases of the software. The Company has concluded that each software release in a multiple deliverable arrangement involving CommAgility software licenses is a distinct performance obligation and, accordingly, transaction price is allocated to each release when the customer obtains control of the software.
Performance obligations that are not distinct at contract inception are combined. Specifically, with the Company’s sales of software, contracts that include customization may result in the combination of the customization services with the license as one distinct performance obligation and recognized over time. The duration of these performance obligations are typically one year or less.
Services
Arrangements involving calibration and repair services of the Company’s products are generally considered a single performance obligation and are recognized as the services are rendered.
Shipping and Handling
Shipping and handling activities performed after the customer obtains control are accounted for as fulfillment activities and recognized as cost of revenues.
Significant Judgments
For the Company’s more complex software and services arrangements, significant judgment is required in determining whether licenses and services are distinct performance obligations that should be accounted for separately or are not distinct and thus accounted for together. Further, in cases where we determine that performance obligations should be accounted for separately, judgment is required to determine the standalone selling price for each distinct performance obligation.
Certain of the Company shipments include a limited return right. In accordance with Topic 606, the Company recognizes revenue net of expected returns.
| 16 |
Contract Balances
The timing of revenue recognition may differ from the timing of invoicing to customers and these timing differences result in contract assets (unbilled revenue) or contract liabilities (deferred revenue) on the Company’s consolidated balance sheet. The Company records unbilled revenue when revenue is recognized prior to invoicing, or deferred revenue when revenue is recognized subsequent to invoicing. Unbilled revenue was $179,000 and $260,000 as of September 30, 2021 and December 31, 2020, respectively, and recorded in prepaid expenses and other current assets. Deferred revenue was $691,000 and $924,000 as of September 30, 2021 and December 31, 2020, respectively. The decrease in deferred revenue from December 31, 2020 is primarily due to recognition of revenue for certain CommAgility projects involving multiple performance obligations, offset by billing in advance of revenue recognition for new projects with multiple performance obligations.
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 | ||||||||
Schedule of Disaggregated Revenue
Three Months Ended September 30, 2021 | Three Months Ended September 30, 2020 | Nine Months Ended September 30, 2021 | Nine Months Ended September 30, 2020 | |||||||||||||
| Total net revenues by revenue type | ||||||||||||||||
| Passive and active RF components | $ | 5,444 | $ | 4,407 | $ | 12,809 | $ | 14,527 | ||||||||
| Signal generators and components | 3,485 | 3,970 | 10,003 | 8,598 | ||||||||||||
| Signal analyzers and power meters | 1,996 | 1,451 | 5,392 | 4,297 | ||||||||||||
| Signal processing hardware | 813 | 106 | 3,825 | 1,471 | ||||||||||||
| Software licenses | 178 | 443 | 1,509 | 1,157 | ||||||||||||
| Services | 908 | 491 | 2,630 | 1,354 | ||||||||||||
| Total net revenue | $ | 12,824 | $ | 10,868 | $ | 36,168 | $ | 31,404 | ||||||||
| Total net revenues by geographic areas | ||||||||||||||||
| Americas | $ | 9,547 | $ | 8,958 | $ | 26,018 | $ | 23,598 | ||||||||
| EMEA | 1,815 | 1,145 | 5,390 | 4,793 | ||||||||||||
| APAC | 1,462 | 765 | 4,760 | 3,013 | ||||||||||||
| Total net revenue | $ | 12,824 | $ | 10,868 | $ | 36,168 | $ | 31,404 | ||||||||
NOTE 78 – Income Taxes
The Company records deferred taxes in accordance with 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 Company’s major tax jurisdictions are New Jersey, Colorado and the United Kingdom (“U.K.”). The amount of deferred tax assets considered realizable is subject to adjustment in future periods if estimates of future taxable income are changed.
| 17 |
As of September 30, 2020,2021, the Company’s net deferred tax asset of approximately $4.5$6.2 million is net of a valuation allowance of approximately $7.1$7.7 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 benefit of $386,000 for the nine months ended September 30, 2021 due to estimated taxable losses primarily as a result of anticipated research and development deductions in the U.K. This was partially offset by the recognition of tax provisions due to the impact of an increase of the deferred tax liability for the Company’s U.K. jurisdiction due to an increase in the enacted U.K. tax rate in the nine months ended September 30, 2021.
The Company recorded a tax provision of $352,000$352,000 for the nine months ended September 30, 2020 due to estimated taxable income in the U.S. asbecause qualified expenses under the PPP loan arewere not expected to be deductible for tax purposes. In recording the tax provision for the nine months ended September 30, 2020, the Company hashad assumed that the PPP loan willwould be forgiven and, therefore, all PPP qualified expenses are beingwere 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 28.3% for the nine months ended September 30, 2019 was higher than the statutory rates in the United States and United Kingdom primarily due to the impact of research and development deductions in the UK.
WIRELESS TELECOM GROUP, INC.
(UNAUDITED)
NOTE 89 – Earnings (Loss) Per Share
Basic earnings (loss) per share is calculated by dividing net income (loss) available to common shareholders by the weighted-average number of shares of common stock outstanding during the period. Diluted earnings (loss) per share is calculated by dividing net income (loss) available to common shareholders by the weighted-average number of common shares outstanding for the period and, when dilutive, potential shares from stock options using the treasury stock method, the weighted average number of unvested restricted shares, the weighted-average number of restricted stock units, the number of shares issuable under the terms of the Holzworth earnout 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 per share calculation only when options exercise prices are lower than the average market value of the common shares for the period presented. In periods with a net loss, the basic loss per share equals the diluted loss per share as all common stock equivalents are excluded from the per share calculation because they are anti-dilutive. In accordance with ASC 260, “Earnings Per Share”, the following table reconciles basic shares outstanding to fully diluted shares outstanding.
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| For the Three Months | For the Nine Months | |||||||||||||||
| Ended September 30, | Ended September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Weighted average common shares outstanding | 22,233,876 | 21,703,268 | 21,899,799 | 21,642,955 | ||||||||||||
| Potentially dilutive equity awards | 2,449,930 | 388,366 | 2,319,127 | 295,186 | ||||||||||||
| Weighted average common shares outstanding, assuming dilution | 24,683,806 | 22,091,634 | 24,218,926 | 21,938,141 | ||||||||||||
| 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, 2021, the weighted average number of options to purchase common stock not included in potentially dilutive equity awards because the performance condition was not met was . The number of shares issuable under the terms of the Holzworth earnout, if all paid in shares of common stock, is and is included in potentially dilutive equity awards in the chart above.
For the three and nine months ended September 30, 2020, the weighted average number of options and warrants to purchase common stock not included in diluted loss per share because the effects are anti-dilutive, or the performance condition was not met, was and , respectively. The estimated maximum weighted-average number of shares issuable under the terms of the Holzworth earnout, if all paid in shares of common stock, (see Note 3) for the three and nine months ended September 30, 2020 are 1,468,374 and 367,094, respectively.
| 18 |
For the three and nine months ended September 30, 2019 the weighted-average number of options to purchase common stock not included in diluted loss per share because the effects are anti-dilutive or the performance condition was not met was 1,445,000 and 1,275,000, respectively.NOTE 10 – Inventories
NOTE 9 – Inventories
Inventory carrying value is net of inventory reserves of $1.1$1.2 million at September 30, 20202021 and $1.0$1.1 million at December 31, 2019.2020.
| Inventories consist of (in thousands): | ||||||||
| September 30, 2020 | December 31, 2019 | |||||||
| Raw materials | $ | 4,911 | $ | 4,024 | ||||
| Work-in-process | 716 | 406 | ||||||
| Finished goods | 3,447 | 2,895 | ||||||
| $ | 9,074 | $ | 7,325 | |||||
WIRELESS TELECOM GROUP, INC.Inventories consist of (in thousands):
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSSchedule of Inventory
(UNAUDITED)
| September 30, 2021 | December 31, 2020 | |||||||
| Raw materials | $ | 6,067 | $ | 4,644 | ||||
| Work-in-process | 787 | 618 | ||||||
| Finished goods | 2,801 | 3,534 | ||||||
| Total Inventory | $ | 9,655 | $ | 8,796 | ||||
Note 10NOTE 11 – Accrued Expenses and Other Current Liabilities
As of September 30, 2020,2021, and December 31, 20192020 accrued expenses and other current liabilities consisted of the following (in thousands):
Schedule of Accrued Expenses and Other Current Liabilities
| September 30, 2020 | December 31 2019 | September 30, 2021 | December 31, 2020 | |||||||||||||
| Contingent consideration | $ | 2,440 | $ | - | ||||||||||||
| Deferred purchase price | 1,510 | - | ||||||||||||||
| Holzworth earnout – short term | $ | 2,521 | $ | 3,423 | ||||||||||||
| Payroll and related benefits | 1,141 | 864 | ||||||||||||||
| Goods received not invoiced | 1,085 | 458 | ||||||||||||||
| Holzworth deferred purchase price | 500 | 950 | ||||||||||||||
| Professional fees | 1,047 | 513 | 481 | 331 | ||||||||||||
| Payroll and related benefits | 908 | 308 | ||||||||||||||
| Commissions | 535 | 430 | 462 | 605 | ||||||||||||
| Goods received not invoiced | 478 | 346 | ||||||||||||||
| Bonus | 279 | 126 | 446 | 123 | ||||||||||||
| Returns reserve | 248 | 212 | ||||||||||||||
| Sales and use and VAT tax | 262 | 355 | 216 | 315 | ||||||||||||
| Returns reserve | 219 | 199 | ||||||||||||||
| Warranty Reserve | 160 | 160 | ||||||||||||||
| Severance | 3 | 102 | ||||||||||||||
| Warranty reserve | 140 | 140 | ||||||||||||||
| Harris arbitration liability | - | 116 | ||||||||||||||
| Other | 656 | 118 | 416 | 460 | ||||||||||||
| Total | $ | 8,497 | $ | 2,657 | $ | 7,656 | $ | 7,997 | ||||||||
NOTE 1112 - Accounting for Stock Based Compensation
The Company’s results for the three and nine month periodsmonths ended September 30, 2021 and 2020 include $151,000$ and $360,000,$, respectively, related to stock based compensation expense. The Company’s results for the three and nine month periodsmonths ended September 30, 20192021 and 2020 include $160,000$ and $560,000,$, respectively related to stock based compensation expense. Such amounts have been included in the consolidated statementConsolidated Statement of operationsOperations and comprehensive income/(loss)Comprehensive Income/(Loss) within general and administrative expenses in operating expenses. The Company accounts for forfeitures when they occur.
Incentive Compensation Plan
In 2012, the Company’s Board of Directors and shareholders approved the 2012 Incentive Compensation Plan (the “Initial 2012 Plan”), which provides for the grant of equity, including restricted stock awards, restricted stock units, non-qualified stock options and incentive stock options in compliance with the Internal Revenue Code of 1986, as amended, to employees, officers, directors, consultants and advisors of the Company who are expected to contribute to the Company’s future growth and success. When originally approved, the Initial 2012 Plan provided for the grant of awards relating to 2 million shares of common stock, plus those shares subject to awards previously issued under the Company’s 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 million shares of the Company’s common stock to be available for future grants under the 2012 Plan. The 2012 Plan provides that ifAs of September 30, 2021, there are 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 awardsgrant under the 2012 Plan. As a result
| 19 |
In the second quarter of certain award forfeitures and cancellations, as of September 30, 2020, there are approximately 243,000 shares available for issuance under the 2012 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 approved by2021, the Company’s compensation committeeBoard of Directors and shareholders approved the 2021 Long Term Incentive Plan (the “2021 Incentive Plan”), which provides for the grant of equity-based and cash incentives, including stock awards, stock unit awards, performance unit awards, non-qualified stock options, incentive stock options and cash awards, including dividend equivalent rights to employees, officers, directors or other service providers of the BoardCompany who are expected to contribute to the Company’s future growth and success. The 2021 Incentive Plan provides for the grant of Directors. Under the 2012 Plan, options may be grantedawards relating to purchase million 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.stock.
WIRELESS TELECOM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Outstanding Stock Options
On August 4, 20202, 2021 the Company granted 150,000 performance-based stock options to our Chief Revenue Officer under the 2012 Plan.
On April 7, 2020 the Company granted 970,000 performance-based stock options to 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 outlined in the schedule below:
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 December 31).
The grant price of the August 4th grant is $1.20 and 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 options, 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, 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.
Restricted Stock Units
On June 4, 2020 the Company granted Restricted Stock Units (“RSU”) to each of our six independent boardBoard members under the 20122021 Incentive 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 20122021 Incentive Plan. The grant date fair value was $1.18$ per share and the RSU’sRSUs 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 boardBoard member has rendered continuous service to the Company as a member of the boardBoard of directorsDirectors from grant date to vesting date. Once vested the RSU will be settled by delivery of shares to the boardBoard 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 12 – SEGMENT INFORMATION
In June 2020, as a result of certain internal reorganizations completed over the prior six to nine months, the Company concluded it now operates as one reportable segment in accordance with ASC 280 Segment Reporting. Prior to June the Company operated as three reportable segments. In June 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 as 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.
NOTE 13 – COMMITMENTS AND CONTINGENCIES
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 ultimate outcome of this 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 future results of operations. Legal expenses incurred in connection with the arbitration from August 2019 are covered by our professional indemnity insurance policy.
There have been no other material changes in our commitments and contingencies and risks and uncertainties as of September 30, 20202021 from that previously disclosed in our annual report on Form 10-K for the year ended December 31, 2019.2020.
NOTE 14 - SUBSEQUENT EVENTS
There were no subsequent events or transactions requiring recognition or disclosure in the consolidated financial statements, and the notes thereto, through the date the financial statements were issued.
| 20 |
ITEM 2. 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 consolidated financial statements and the notes to those statements included in Part I, Item I of this Quarterly Report on Form 10-Q and in conjunction with the audited consolidated financial statements contained in our annual report on Form 10-K for the year ended December 31, 2019.2020.
Introduction
The Company started to see signs of an economic recovery from the COVID-19 Impact
In March 2020,pandemic in the World Health Organization declaredthird quarter of 2021, specifically in our RF Components (“RFC”) product group. However, the outbreak of COVID-19 a pandemic, whichCompany continues to spread throughoutdeal with major global disruptions caused by the U.S.pandemic including global supply chain shortages of key components and a difficult labor market especially for roles requiring technical expertise. We are also assessing President Biden’s executive order on vaccine mandates and the worldpossible impact on us as a supplier to large global defense subcontractors. We have adopted flexible work arrangements in our locations for those employees that can work remotely and has resultedcontinue to implement safety precautions in authorities implementing numerous measuresour facilities.
Our third quarter 2021 consolidated revenue increased 18% from the prior year period reflecting increases in all three of our product groups. The largest increase was in our RFCproduct group due to containa recovery in carrier spending from the virus, including travel bansprior year. Our consolidated gross margin exceeded 50% as improving margins at the RFC and restrictions, quarantines, shelter-in-place orders,Test and business limitationsmeasurement (“T&M”) product groups were offset by lower margins at our Radio, baseband and shutdowns. software product group (“RBS”) due to a higher mix of lower margin hardware and services sales in the quarter. Due to the better than expected performance of our Holzworth brand we recorded a $1.0 million loss on contingent consideration in the quarter which represents the estimated earnout payment for financial performance in fiscal 2021. This earnout will be payable in four equal installments in fiscal 2022.
RESULTS OF OPERATIONS
Three Months Ended September 30, 2021 Compared with Three Months Ended September 30, 2020
Net Revenues (in thousands)
| Three months ended September 30, | ||||||||||||||||||||||||
| Revenue | % of Revenue | Change | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | Amount | Pct. | |||||||||||||||||||
| RF components | $ | 5,448 | $ | 4,418 | 42.5 | % | 40.7 | % | $ | 1,030 | 23.3 | % | ||||||||||||
| Test and measurement | 5,931 | 5,797 | 46.2 | % | 53.3 | % | 134 | 2.3 | % | |||||||||||||||
| Radio, baseband, software | 1,445 | 653 | 11.3 | % | 6.0 | % | 792 | 121.3 | % | |||||||||||||||
| Total net revenues | $ | 12,824 | $ | 10,868 | 100.0 | % | 100.0 | % | $ | 1,956 | 18.0 | % | ||||||||||||
Net consolidated revenue increased 18.0% from the prior year period due primarily to increased sales at the RFC product group due to increased carrier spending specifically on large projects. Also contributing to the increase were higher sales of our digital signal processing cards at the RBS product group.
| 21 |
Gross Profit (in thousands)
| Three months ended September 30, | ||||||||||||||||||||||||
| Gross Profit | Gross Profit % | Change | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | Amount | Pct. | |||||||||||||||||||
| RF components | $ | 2,497 | $ | 1,927 | 45.8 | % | 43.6 | % | $ | 570 | 29.6 | % | ||||||||||||
| Test and measurement | 3,367 | 3,182 | 56.8 | % | 54.9 | % | 185 | 5.8 | % | |||||||||||||||
| Radio, baseband, software | 676 | 545 | 46.8 | % | 83.5 | % | 131 | 24.0 | % | |||||||||||||||
| Total gross profit | $ | 6,540 | $ | 5,654 | 51.0 | % | 52.0 | % | $ | 886 | 15.7 | % | ||||||||||||
Consolidated gross profit increased 15.7% due to higher revenues at all three product groups. Gross profit margin increased at the RFC product group due to higher absorption of fixed manufacturing and overhead costs and at the T&M product group due to a purchase accounting adjustment recorded in the prior year period in the amount of $258,000. Excluding the purchase accounting adjustment, gross margins at the T&M product group declined due to product mix. Gross profit margin at the RBS product group declined due to a higher mix of lower margin hardware and services revenues as compared to the prior year period.
Operating Expenses (in thousands)
| Three months ended September 30, | ||||||||||||||||||||||||
| Operating Expenses | % of Revenue | Change | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | Amount | Pct. | |||||||||||||||||||
| Research and development | $ | 1,435 | $ | 1,826 | 11.2 | % | 16.8 | % | $ | (391 | ) | -21.4 | % | |||||||||||
| Sales and marketing | 1,854 | 1,732 | 14.5 | % | 15.9 | % | 122 | 7.0 | % | |||||||||||||||
| General and administrative | 2,800 | 2,444 | 21.8 | % | 22.5 | % | 357 | 14.6 | % | |||||||||||||||
| Loss on change in fair value of contingent consideration | 1,000 | - | 7.8 | % | - | 1,000 | - | |||||||||||||||||
| Total operating expenses | $ | 7,089 | $ | 6,002 | 55.3 | % | 55.2 | % | $ | 1,088 | 18.1 | % | ||||||||||||
Research and development expenses decreased 21.4% from the prior year due primarily to lower third party research and development costs, the majority of which is in connection with our T&M product group. The mix of third party research and development expenses to internal expenses varies by project. We expect to continue third party investments in research and development dependent upon project deadlines, new product development opportunities and longer term product roadmap dependencies which, in turn, may create increases and decreases to research and development expenses as a percentage of revenue. The decline in third party expenses was offset somewhat by unfavorable foreign exchange impact, specifically the increase in the pound sterling which increased approximately 6.9% year over year resulting in an increase in research and development expenses of $61,000.
Sales and marketing expenses increased $122,000 due to increases in internal commissions, marketing expenses and headcount expenses. The aforementioned unfavorable foreign exchange impact on sales and marketing expenses was approximately $13,000.
General and administrative expenses increased 14.6% from the prior year period primarily due to an increase in headcount related expenses and legal expenses associated with our debt amendments. The aforementioned unfavorable foreign exchange impact on general and administrative expenses was approximately $29,000.
Loss on Contingent Consideration
The Company is consideredrecorded a $1.0 million loss on contingent consideration in the three months ended September 30, 2021 due to an “essential business”increase in the estimated Holzworth year 2 earnout.
Other Income/(Expense)
Other income increased $63,000 from the prior year period due primarily to higher foreign exchange gains as compared to the prior year period.
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Interest Expense
Consolidated interest expense increased $109,000 from the prior year due to the industries and customers we serve, including critical telecommunications infrastructure, the U.S. government and numerous U.S. defense subcontractors. Accordingly, we have continued operations throughout the pandemic including atpremium associated with our manufacturing facilitiesterm debt prepayment in Parsippany, New Jersey and Boulder, Colorado.
To support the health and well-beingSeptember of our 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 our facilities we have instituted mediation measures including flexible work arrangements, increased distancing of workstations, and other safety precautions. As of the date of the filing of this Form 10-Q, approximately two-thirds of our employees are working remotely. In October the Company 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$74,000 as well as medical professionals. Undera higher interest rate on our term debt as compared to the prior year.
Taxes
The Company recorded a tax benefit in the current plans,year period as compared to a tax provision in the prior year period due to estimated taxable losses in the current year due primarily to anticipated research and development deductions in the U.K. In the prior year period the Company expectsestimated that qualified PPP loan expenses were not deductible which resulted in a tax provision.
Net Income/Loss
Net loss decreased $588,000 due to continueincreased sales and gross margin in the current year and the recognition of a tax benefit offset by the recognition of the loss on contingent consideration and higher interest expense.
Nine Months Ended September 30, 2021 Compared with Nine Months Ended September 30, 2020
Net Revenues (in thousands)
| Nine months ended September 30, | ||||||||||||||||||||||||
| Revenue | % of Revenue | Change | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | Amount | Pct. | |||||||||||||||||||
| RF components | $ | 12,820 | $ | 14,555 | 35.4 | % | 46.4 | % | $ | (1,735 | ) | -11.9 | % | |||||||||||
| Test and measurement | 16,779 | 14,013 | 46.4 | % | 44.6 | % | 2,766 | 19.7 | % | |||||||||||||||
| Radio, baseband, software | 6,569 | 2,836 | 18.2 | % | 9.0 | % | 3,733 | 131.6 | % | |||||||||||||||
| Total net revenues | $ | 36,168 | $ | 31,404 | 100.0 | % | 100.0 | % | $ | 4,764 | 15.2 | % | ||||||||||||
Net consolidated revenue increased 15.2% from the prior year period due primarily to have some portionthe RBS product group due to higher revenue associated with new software and service contracts and higher sales of our workforce working remotely until January 4, 2021. However, this timeline may be adjusted based ondigital signal processing cards as compared to the facts and circumstancesprior year period. Also contributing to the overall revenue increase was an increase in T&M revenue due to a full year contribution of each jurisdictionHolzworth in which we operate.
We believefiscal 2021, as well as increased revenue from our financial resultslegacy T&M brands. This was offset by lower revenue at our RFC product group as wireless carrier spend in the first nine monthshalf of 2020 were adversely2021 was impacted by the on-going impact of the COVID-19 pandemic as we experienced a decrease in orders relatedpandemic.
Gross Profit (in thousands)
| Nine months ended September 30, | ||||||||||||||||||||||||
| Gross Profit | Gross Profit % | Change | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | Amount | Pct. | |||||||||||||||||||
| RF components | $ | 5,345 | $ | 6,576 | 41.7 | % | 45.2 | % | $ | (1,231 | ) | -18.7 | % | |||||||||||
| Test and measurement | 9,690 | 7,451 | 57.8 | % | 53.2 | % | 2,239 | 30.0 | % | |||||||||||||||
| Radio, baseband, software | 3,584 | 1,722 | 54.6 | % | 60.7 | % | 1,862 | 108.1 | % | |||||||||||||||
| Total gross profit | $ | 18,619 | $ | 15,749 | 51.5 | % | 50.1 | % | $ | 2,870 | 18.2 | % | ||||||||||||
Consolidated gross profit increased 18.2% due to our Boontonhigher revenues at the T&M and Noisecom brands as customers closed facilities, slowed ordersRBS product groups and instituted capital expenditure freezeswas only partially offset by lower revenues at the RFC product group. Gross profit margin increased due to the pandemic. We also saw a decline in Microlab orderscontribution of higher margin software and services sales at the RBS product group and the prior year purchase accounting adjustment of $448,000 at the T&M product group. Excluding the purchase accounting adjustment, gross margin at the T&M product group increased on higher absorption of fixed manufacturing costs.
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Operating Expenses (in thousands)
| Nine months ended September 30, | ||||||||||||||||||||||||
| Operating Expenses | % of Revenue | Change | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | Amount | Pct. | |||||||||||||||||||
| Research and development | $ | 4,281 | $ | 5,080 | 11.8 | % | 16.2 | % | $ | (799 | ) | -15.7 | % | |||||||||||
| Sales and marketing | 5,266 | 5,111 | 14.6 | % | 16.3 | % | 155 | 3.0 | % | |||||||||||||||
| General and administrative | 8,469 | 7,322 | 23.4 | % | 23.3 | % | 1,147 | 15.7 | % | |||||||||||||||
| Loss on change in fair value of contingent consideration | 1,000 | - | 2.8 | % | - | 1,000 | - | |||||||||||||||||
| Total operating expenses | $ | 19,016 | $ | 17,513 | 52.6 | % | 55.8 | % | $ | 1,503 | 8.6 | % | ||||||||||||
Research and development expenses decreased 15.7% from the prior year due primarily to large venuelower third party research and development costs, the majority of which is in connection with our third party 5G collaboration agreement and our T&M product group. The mix of third party research and development expenses to internal expenses varies by project. We expect to continue third part investments in research and development dependent upon project delaysdeadlines, new product development opportunities and cancellations. We believe thislonger term product roadmap dependencies which, in turn, may create increases and decreases to research and development expenses as a percentage of revenue. The decline in third party expenses was causedoffset somewhat by unfavorable foreign exchange impact, specifically 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.
There 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 ordersincrease in the fourth quarterpound sterling which increased approximately 8.1% year over year resulting in an increase in research and development expenses of $225,000.
Sales and marketing expenses increased 3.0% from the fiscal year. These uncertainties includeprior year due primarily to higher internal commissions expense and marketing expenses. The aforementioned unfavorable foreign exchange impact on sales and marketing expenses was approximately $50,000.
General and administrative expenses increased 15.7% from the duration and severityprior year period due primarily to higher headcount related expenses 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.
We are continuing to monitor developments$844,000 related to the pandemicaddition of our Chief Revenue Officer in August of 2020, merit and bonus increases and the reinstatement of other benefits that were previously eliminated in the first half of 2020 during the COVID-19 pandemic. Also contributing to the increase are higher legal expenses of $169,000 primarily related to amendments to the Company’s debt agreements and Holzworth Stock Purchase Agreement, higher insurance expenses of $122,000 only partially offset by lower merger and acquisition expenses, and severance and stock compensation expense which decreased $278,000 in total from the prior year period. The aforementioned unfavorable foreign exchange impact on general and administrative expenses was approximately $111,000.
Loss on Contingent Consideration
The Company recorded a $1.0 million loss on contingent consideration in the nine months ended September 30, 2021 due to an increase in the estimated Holzworth year 2 earnout.
Gain on Extinguishment of Debt
The Company recorded a $2.0 million gain on extinguishment of debt in the nine month period ended September 30, 2021, as we received notice from the SBA that our PPP loan was fully forgiven.
Other Income/(Expense)
Other income decreased $223,000 from the prior year period due primarily to lower foreign exchange gains and lower gains on sales of assets.
Interest Expense
Consolidated interest expense increased $220,000 due primarily to increased interest on our own operationsTerm Loan Facility as well as on our suppliers, contract manufacturers and customers. We intend to adaptcompared to the changing environment while actingprior year.
Taxes
The Company recorded a tax benefit in the current year period as compared to ensurea tax provision in the healthprior year period due to estimated taxable losses in the current year due primarily to anticipated research and safetydevelopment deductions in the U.K. In the prior year period the Company estimated that qualified PPP loan expenses were not deductible which resulted in a tax provision.
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Net Income/Loss
The Company recorded net income of our employees.$1.1 million in the nine months ended September 30, 2021 as compared to a net loss of $2.6 million in the prior year period due to higher sales and gross margin, the recognition of the gain on extinguishment of the PPP Loan and the recognition of a tax benefit offset by higher operating expenses due to the recognition of a loss on contingent consideration and higher interest expense.
On
LIQUIDITY AND CAPITAL RESOURCES
The Company has three credit facilities – an asset based revolving loan which is subject to a borrowing base calculation (as defined) with Bank of America, N.A. (the “Credit Facility” or the “Revolver”), a term loan facility with Muzinich BDC Inc. (“Muzinich”) in the amount of $8.4 million (the “Term Loan Facility”) which was used to finance the Holzworth acquisition in February of 2020, and the Coronavirus Business Interruption Loan Agreement (“CIBLS Loan”) with Lloyds Bank PLC (“Lloyds”). Additionally, on May 4, 2020 the Company received $2.0 million pursuant to a PPP loan, under the Paycheck Protection Program (“PPP”) of the 2020 Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) administeredwhich was fully forgiven by the Small Business Association (seeSBA in June 2021. See Note 4 above and our Annual Report on Form 10-K for the year ended December 31, 2020 for a more detailed 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, Noisecomcredit facilities.
Sources and Holzworth brands. The RF Components (“RFC”) product group is comprisedUses 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.Cash
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, 2020 Compared with Three Months Ended September 30, 2019
Net Revenues (in thousands)
| Three months ended September 30, | ||||||||||||||||||||||||
| Revenue | % of Revenue | Change | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | Amount | Pct. | |||||||||||||||||||
| RF components | $ | 4,418 | $ | 5,185 | 40.7 | % | 48.0 | % | $ | (767 | ) | -14.8 | % | |||||||||||
| Test and measurement | 5,797 | 2,996 | 53.3 | % | 27.7 | % | 2,801 | 93.5 | % | |||||||||||||||
| Radio, baseband, software | 653 | 2,631 | 6.0 | % | 24.3 | % | (1,978 | ) | -75.2 | % | ||||||||||||||
| Total net revenues | $ | 10,868 | $ | 10,812 | 100.0 | % | 100.0 | % | $ | 56 | 0.5 | % | ||||||||||||
Net consolidated revenue 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 uncertainty caused by the Covid 19 pandemic. These declines were offset by increased revenue in our T&M product group due to the Holzworth acquisition which contributed $2.8 million in revenue in the third quarter of 2020.
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 revenue contribution of Holzworth to the T&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 year.
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 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 development expenses of $166,000 in the current year.
Sales and marketing expenses were flat with the prior year period as the inclusion of Holzworth sales and marketing expenses of $400,000 in the current year period were offset by decreases in sales and marketing expenses due to expense reductions. These expense reductions included reductions in salaries and benefits of $265,000 due to headcount reductions as well as reductions in travel expenses and commissions.
General 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 prior year period due primarily to foreign exchange losses recognized on monetary assets and liabilities denominated in currencies other than our functional currencies.
Interest Expense
Consolidated interest expense increased $196,000 due primarily to interest on the new 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 Income/Loss
Consolidated net loss for the third quarter 2020 increased $314,000 from the prior year period due primarily to higher research and development expenses, higher foreign exchange losses and higher interest expense offset by greater gross profit margin contribution.
Nine Months Ended September 30, 2020 Compared with Nine Months Ended September 30, 2019
Net Revenues (in thousands)
| 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 revenue 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 our digital signal processing cards was expected to significantly decline in 2020 as compared to 2019. This decrease of signal processing card revenue in the RBS product group was offset by an increase of $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 declines in RBS and RFC were offset by a $4.8 million increase in revenue at the T&M product group primarily due to the inclusion of Holzworth revenues of $5.7 million from the date 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 were 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 the impact of cost savings activities initiated by the Company at the beginning of the year.
Operating 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 prior year period due to an increase in third party research and development 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 prior year period.
Interest Expense
Consolidated interest expense increased $479,000 primarily related to interest on the new Term Loan Facility.
Taxes
The Company recorded a tax provision inDuring the nine months ended September 30, 2020 of $352,000 as compared2021, the Company’s consolidated cash balance decreased approximately $3.6 million due primarily to a tax benefitpaydown of $256,000 in$4.2 million of our Term Loan Facility which includes a $3.7 million prepayment on September 28, 2021, the prior year period. The tax provision inpayment of contingent consideration and deferred purchase price related to the Holzworth acquisition of $460,000, payment of the final holdback amount of the Holzworth purchase price of $200,000, and capital expenditures of $417,000. These payments were offset by cash provided by operations due primarily to operating income generated during the nine months ended September 30, 2020 includes2021.
Operating Activities
Cash provided by operations was $535,000 for the accounting for non-deductible qualified expenses relatednine months ended September 30, 2021 as compared to the PPP loan for which the Company intends to file for forgiveness before the endcash used by operations of November.
Net Income/Loss
Net loss increased from $649,000$852,000 in the prior year periodperiod. This was due to $2.6 million due primarily tohigher operating income and lower gross profit caused by lower revenues, increased interest expense and increased tax expense.
LIQUIDITY AND CAPITAL RESOURCES
As disclosed in Note 4cash used for working capital as compared to the Consolidated Financial Statements,prior year.
Investing Activities
Cash used by investing activities decreased from $7.4 million to $617,000 as the prior year period included $7.2 million in cash paid for the Holzworth acquisition. Capital expenditures increased from $228,000 in the prior year to $417,000 in the current year period as capital expenditures for infrastructure to support our research and development roadmaps have increased.
Financing Activities
Cash from financing activities decreased from cash provided of $6.4 million to cash used of $3.5 million as the current year includes term debt paydowns of $4.2 million including a $3.7 million prepayment on February 7, 2020September 28th, 2021, and $460,000 related to the Company entered intopayment of contingent consideration and deferred purchase price payment related to the Holzworth acquisition. These uses of cash were offset by the net proceeds of the Company’s at the market equity offering of $565,000, proceeds from the exercise of stock options of $209,000 and proceeds from the CIBLS loan of $345,000. The prior year cash provided from financing includes the receipt of the Term Loan Facility with Muzinich in the principal amount of $8.4 millionproceeds to fund the cash portion of the purchase price forfinance 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, 2020,2021, the Company hadCompany’s consolidated cash of $2.2balance was $1.3 million, $45,000 was drawn on our Revolver and we had availability under our asset-based Credit Facility of $6.5 million and$5.1 million. Our 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. Asbalance 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.2021 was $4.5 million.
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 will be sufficient to meet our liquidity needs for 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, including the Covid-19impact the evolving 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 decisionshas had 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,including 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.
chain.
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Operating Activities
Cash used by operating activities was $852,000 for the nine months ended September 30, 2020 as comparedThe Company expects to $1.6 millionrealize tax benefits in the prior year period. The decrease in cash used from operating activities wasfuture periods due to the CommAgility contingent consideration paymentavailable net operating loss carryforwards resulting from the disposition of a former wholly owned subsidiary in the prior year period and favorable impact of working capital in the current year period.
Investing Activities
Cash used by investing activities was $7.4 million for the nine months ended September 30, 2020 which was higher than the prior year period cash used of $765,000 due2010. Accordingly, future taxable income is expected to the purchase of Holzworth.
Financing Activities
Cash provided by financing activities was $6.4 million for the nine months ended September 30, 2020 as compared to $179,000 for the prior year period. The increase was due to the term loan financing used for the cash portion of the Holzworth purchase pricebe offset by debt issuance fees as well as the receiptutilization of the PPP loan offset by a reduced revolver balance.
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 costsoperating loss carryforwards and, as a result, of such activities and such activities may affectshould increase the Company’s liquidity as cash needed to pay federal and New Jersey state income taxes should be substantially reduced. Additionally, CommAgility benefits from a research and development deduction which significantly reduces the cash needed to pay taxes 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 on terms favorable to the Company or at all.U.K.
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 permitOn July 21, 2021, the Company entered into the Sales Agreement with the Agent to issue and sell from time to time,through the Agent, shares having an aggregate offering price of up to $40 million$12,000,000, as described in aggregate valueNote 5 – Equity above. The Agent was not required to sell any specific number 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 stockShares. Shares sold under the shelf registration statement.Sales Agreement were issued and sold pursuant to the aforementioned Form S-3. A prospectus supplement relating to the offering of the Shares was filed with the Commission on July 21, 2021.
The terms of any offeringFrom July 21, 2021 through August 6, 2021 the Agent sold 264,701 shares of the Company’s common stock andfor net proceeds of $739,000 after deducting sales commissions paid to the intended useAgent in accordance with the terms of the net proceeds resulting therefrom, will be established at the times of the offeringsSales Agreement and will be described in prospectus supplements filed$565,000 after deducting direct legal and accounting fees associated with the SEC at the times of the offerings. offering.
The shelf registration statement is intended to provide financial flexibility to access capital in a competitive and expeditious manner when market conditions are appropriate. The shelf registration statement expiresexpired on September 17, 2021.2021 and was not renewed by the Company.
Off-Balance Sheet Arrangements
TheOther than contractual obligations incurred in the normal course of business, the Company does not have any off-balance sheet arrangements.
Effects of Inflation and Changing Prices
The Company does not anticipate that inflation or other expected changes in prices will significantly impact its business.
Critical Accounting Policies
There have been no changes in our critical accounting policies or significant accounting estimates as disclosed in our 20192020 Form 10-K.
Forward 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 about our expectations 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,that our existing cash balance, and cash generated by operations, and availability under our Credit Facility will be sufficient to meet our liquidity needs for the next twelve months; our expectations with respectexpectation to deferred purchase pricerealize tax benefits in future periods; our expectation that investments in third party research and earn out payments;development may create increases and decreases to research and development expenses as a percentage of revenue and our expectation that uncertainties around the impact of the ongoing Covid-19and evolving COVID-19 pandemic might extendmay impact our ability to meet our business in the fourth quarter and beyond, as sales, deliveries, cash collections, our supply chain and our business partners could be adversely affected.requirements. 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-19evolving COVID-19 pandemic will have on our business, our supply chain and the economy in the future, our ability to hire and retain key personnel with appropriate technical abilities, our dependency on capital spending on data and communication networks by our customers and end users, 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, our ability to successfully integrate the Holzworth acquisition, the impact of competitive products and pricing, our abilities to protect our intellectual property rights, our ability to manage risks related to our information technology and cyber security, among others. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. These risks and uncertainties are disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019 and elsewhere in this Quarterly Report on Form 10-Q.2020. 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.
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ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
Not applicable.
ITEM 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, as of the end of the period covered by this report, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended. Our disclosure controls and procedures are designed to ensure that the information required to be included in our Securities and Exchange Commission (“SEC”) reports is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that the information relating to Wireless Telecom Group, Inc., including our consolidated subsidiaries, is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. Based on this evaluation, our principal executive officer and principal financial officer concluded that, as of the period covered by this report, our disclosure controls and procedures are effective.
(b) Changes in Internal Control over Financial Reporting
We acquired Holzworth on February 7, 2020. We have begun the process to integrate the operations of Holzworth 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 and nine months ended September 30, 20202021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, as described in our 20192020 Annual Report on Form 10-K.
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PART II – OTHER INFORMATION
No material changes in the quarter.
Item 1A. Risk Factors
The ongoing COVID-19 pandemic has caused and is expected tomay continue to cause significant uncertainty in the U.S. and global economies as well as the markets we serveserve. It has affected, and has and is expected tocould continue to adversely affect our business, results of operations and financial condition.
The Covid-19COVID-19 pandemic continues to spread throughout the U.S. and in various parts of the world and has resulted in and is expected tocould continue to result in authorities implementing numerous measures to containadversely affect broader economies, financial markets, and the virus, including travel bans and restrictions, quarantines, shelter-in-place orders, and business limitations and shutdowns. environment worldwide. We have been and continue to be unable to accurately predict the full impact that Covid-19COVID-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 orand rollout of vaccines, along with the effectiveness of our response. Our compliance with containment and mitigation measures
The COVID-19 pandemic has impacted our day-to-day operations and is expected to continue to disrupt our business and operations, as well as thatworkforce, the workforce of our key customers,customer, suppliers (includingand contract manufacturers)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 product 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 affectreduced demand for our products and services in fiscal 2020 and impactthe first half of fiscal 2021 which negatively impacted our financial results and financial condition even afterfor those periods. Although we have started to experience a recovery in the third quarter of 2021, if the pandemic continues, recurs, or worsens, we may experience additional adverse impacts on our operational and commercial activities, including rising costs, volatility in customer orders, supply chain constraints, labor shortages and purchases and declines in our collections of accounts receivable. Due to the speed with which the situation is containeddeveloping, the breadth of its spread and the shelter-in-place orders are lifted. For example, we mayrange of governmental and community reactions thereto, there is uncertainty around its duration, ultimate impact and the timing of recovery. Therefore, the pandemic could lead to an extended disruption of economic activity and the impact on our stock price, access to capital, consolidated results of operations, financial position and cash flows could be unable to collect receivables from those customers significantly impacted by COVID-19. Decreasematerial.
There have been no other material changes in ordersour risk factors as previously disclosed 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 effectPart I, Item 1A of heightening many of the other risks described in “Risk Factors” in our Annual Report on Form 10-KForm10-K for the fiscal year ended December 31, 2019, especially those risks associated with our customers and supply chain.2020.
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:
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 Proceeds
None.
Item 3. Defaults upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
None.
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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. | ||
| Dated: November | ||
| By: | /s/ Timothy Whelan | |
| Timothy Whelan | ||
| Chief Executive Officer | ||
| Dated: November | ||
| By: | /s/ Michael Kandell | |
| Michael Kandell | ||
| Chief Financial Officer | ||
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