Company Quick10K Filing
Wireless Telecom Group
Price1.43 EPS-0
Shares21 P/E-22
MCap30 P/FCF-19
Net Debt0 EBIT-1
TEV31 TEV/EBIT-25
TTM 2019-09-30, in MM, except price, ratios
10-Q 2020-03-31 Filed 2020-05-13
10-K 2019-12-31 Filed 2020-03-19
10-Q 2019-09-30 Filed 2019-11-14
10-Q 2019-06-30 Filed 2019-08-13
10-Q 2019-03-31 Filed 2019-05-08
10-K 2018-12-31 Filed 2019-03-12
10-Q 2018-09-30 Filed 2018-11-08
10-Q 2018-06-30 Filed 2018-08-09
10-Q 2018-03-31 Filed 2018-05-09
10-K 2017-12-31 Filed 2018-03-12
10-Q 2017-09-30 Filed 2017-11-09
10-Q 2017-06-30 Filed 2017-08-09
10-Q 2017-03-31 Filed 2017-05-15
10-K 2016-12-31 Filed 2017-03-20
10-Q 2016-09-30 Filed 2016-11-03
10-Q 2016-06-30 Filed 2016-08-04
10-Q 2016-03-31 Filed 2016-05-16
10-K 2015-12-31 Filed 2016-03-29
10-Q 2015-09-30 Filed 2015-11-16
10-Q 2015-06-30 Filed 2015-08-12
10-Q 2015-03-31 Filed 2015-05-13
10-K 2014-12-31 Filed 2015-03-31
10-Q 2014-09-30 Filed 2014-11-13
10-Q 2014-06-30 Filed 2014-08-14
10-Q 2014-03-31 Filed 2014-05-15
10-K 2013-12-31 Filed 2014-03-31
10-Q 2013-09-30 Filed 2013-11-14
10-Q 2013-06-30 Filed 2013-08-14
10-Q 2013-03-31 Filed 2013-05-15
10-K 2012-12-31 Filed 2013-04-01
10-Q 2012-09-30 Filed 2012-11-14
10-Q 2012-06-30 Filed 2012-08-13
10-Q 2012-03-31 Filed 2012-05-15
10-Q 2011-09-30 Filed 2011-11-14
10-Q 2011-06-30 Filed 2011-08-15
10-Q 2011-03-31 Filed 2011-05-16
10-K 2010-12-31 Filed 2011-03-30
10-Q 2010-09-30 Filed 2010-11-15
10-Q 2010-06-30 Filed 2010-08-12
10-Q 2010-03-31 Filed 2010-05-17
10-K 2009-12-31 Filed 2010-04-15
8-K 2020-06-04
8-K 2020-06-04
8-K 2020-05-13
8-K 2020-05-04
8-K 2020-04-07
8-K 2020-03-19
8-K 2020-02-07
8-K 2020-01-31
8-K 2019-12-10
8-K 2019-11-14
8-K 2019-11-13
8-K 2019-11-13
8-K 2019-11-08
8-K 2019-08-13
8-K 2019-06-27
8-K 2019-05-30
8-K 2019-05-22
8-K 2019-05-15
8-K 2019-05-08
8-K 2019-03-12
8-K 2019-03-12
8-K 2019-03-06
8-K 2019-02-27
8-K 2018-11-20
8-K 2018-08-27
8-K 2018-06-05
8-K 2018-05-09
8-K 2018-03-12

WTT 10Q Quarterly Report

Part I - Financial Information
Item 1. Financial Statements
Note 1 - Summary of Significant Accounting Principles and Policies
Note 2 - Accounting Pronouncements
Note 3 - Acquisition of Holzworth
Note 4 - Debt
Note 5 - Leases
Note 6 - Disaggregated Revenue
Note 7 - Income Taxes
Note 8 - Earnings (Loss) per Share
Note 9 - Inventories
Note 10 - Accounting for Stock Based Compensation
Note 11 - Segment Information
Note 12 - Commitments and Contingencies
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures.
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-3.2 ex3-2.htm
EX-31.1 ex31-1.htm
EX-31.2 ex31-2.htm
EX-32.1 ex32-1.htm
EX-32.2 ex32-2.htm

Wireless Telecom Group Earnings 2020-03-31

Balance SheetIncome StatementCash Flow
554433221102012201420172020
Assets, Equity
1511740-22012201420172020
Rev, G Profit, Net Income
3.40.7-2.0-4.6-7.3-10.02012201420172020
Ops, Inv, Fin

10-Q 1 form10-q.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

 

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

 

For the quarterly period ended March 31, 2020

 

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 [X] 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 [X] No [  ]

 

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

 

Large accelerated filer [  ]   Accelerated filer [  ]
         
Non-accelerated filer [  ]   Smaller reporting company [X]
         
      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 [X]

 

Number of shares of Common Stock outstanding as of May 1, 2020: 21,647,571

 

 

 

 

 

 

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

 

Item 1. Financial Statements

 

   (Unaudited)     
   March 31
2020
   December 31
2019
 
CURRENT ASSETS          
Cash & Cash Equivalents  $3,205   $4,245 
Accounts Receivable - net of reserves of $64 and $69, respectively   6,548    6,152 
Inventories - net of reserves of $978 and $969, respectively   8,600    7,325 
Prepaid Expenses and Other Current Assets   1,981    1,871 
TOTAL CURRENT ASSETS   20,334    19,593 
           
PROPERTY PLANT AND EQUIPMENT - NET   2,100    2,147 
           
OTHER ASSETS          
Goodwill   13,550    10,069 
Acquired Intangible Assets, net   6,297    2,219 
Deferred Income Taxes   6,045    6,013 
Right Of Use Assets   2,096    1,436 
Other   820    874 
TOTAL OTHER ASSETS   28,808    20,611 
           
TOTAL ASSETS  $51,242   $42,351 
           
CURRENT LIABILITIES          
Short Term Debt  $2,040   $2,696 
Accounts Payable   2,550    2,227 
Short Term Leases   533    440 
Accrued Expenses and Other Current Liabilities   5,251    2,657 
Deferred Revenue   60    42 
TOTAL CURRENT LIABILITIES   10,434    8,062 
           
LONG TERM LIABILITIES          
Long Term Debt   7,347    - 
Long Term Leases   1,606    1,018 
Other Long Term Liabilities   103    77 
Deferred Tax Liability   472    503 
TOTAL LONG TERM LIABILITIES   9,528    1,598 
           
COMMITMENTS AND CONTINGENCIES          
           
SHAREHOLDERS’ EQUITY          
Preferred Stock, $.01 par value, 2,000,000 shares authorized, none issued   -    - 
Common Stock, $.01 par value, 75,000,000 shares authorized
34,835,571 and 34,488,252 shares issued, 21,647,571 and 21,300,252 shares outstanding
   348    345 
Additional Paid in Capital   49,756    49,062 
Retained Earnings   5,995    7,142 
Treasury Stock at Cost, 13,188,000 shares   (24,535)   (24,509)
Accumulated Other Comprehensive Income   (284)   651 
TOTAL SHAREHOLDERS’ EQUITY   31,280    32,691 
           
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY  $51,242   $42,351 

 

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 
   March 31 
   2020   2019 
NET REVENUES  $9,429   $13,032 
           
COST OF REVENUES   5,001    7,305 
           
GROSS PROFIT   4,428    5,727 
           
Operating Expenses          
Research and Development   1,578    1,714 
Sales and Marketing   1,717    1,937 
General and Administrative   2,487    2,474 
Total Operating Expenses   5,782    6,125 
           
Operating Loss   (1,354)   (398)
           
Other Income   239    31 
Interest Expense   (225)   (115)
           
Loss Before Taxes   (1,340)   (482)
           
Tax Benefit   (193)   (138)
           
Net Loss  $(1,147)  $(344)
           
Other Comprehensive Income/(Loss):          
Foreign Currency Translation Adjustments   (935)   305 
Comprehensive Loss  $(2,082)  $(39)
           
           
Loss Per Share:          
Basic  $(0.05)  $(0.02)
Diluted  $(0.05)  $(0.02)
           
Weighted Average Shares Outstanding:          
Basic   21,398    20,973 
Diluted   21,398    20,973 

 

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 Three Months 
   Ended March 31 
   2020   2019 
CASH FLOWS USED BY OPERATING ACTIVITIES          
Net Loss  $(1,147)  $(344)
Adjustments to reconcile net loss to net cash used by operating activities:          
Depreciation and Amortization   524    549 
Amortization of Debt Issuance Fees   63    16 
Share-based Compensation Expense   81    209 
Deferred Rent   (7)   (6)
Deferred Income Taxes   (32)   (159)
Provision for Doubtful Accounts   (5)   18 
Inventory Reserves   21    47 
Changes in Assets and Liabilities, Net of Acquisition:          
Accounts Receivable   58    (3,456)
Inventories   (127)   (916)
Prepaid Expenses and Other Assets   355    792 
Accounts Payable   230    1,888 
Payment of Contingent Consideration   -    (772)
Accrued Expenses and Other Liabilities   (143)   (1,235)
Net Cash Used by Operating Activities   (129)   (3,369)
           
CASH FLOWS USED BY INVESTING ACTIVITIES          
Capital Expenditures   (51)   (128)
Acquisition of Business, Net of Cash Acquired   (7,189)   (426)
Net Cash Used by Investing Activities   (7,240)   (554)
           
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES          
Revolver Borrowings   8,073    9,788 
Revolver Repayments   (8,471)   (7,715)
Term Loan Borrowings   8,400    - 
Term Loan Repayments   (363)   (38)
Debt Issuance Fees   (1,056)   - 
Payment of Contingent Consideration   -    (782)
Shares Withheld for Employee Taxes   (26)   - 
Net Cash Provided by Financing Activities   6,557    1,253 
           
Effect of Exchange Rate Changes on Cash and Cash Equivalents   (228)   112 
NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS   (1,040)   (2,558)
           
Cash and Cash Equivalents, at Beginning of Period   4,245    5,015 
           
CASH AND CASH EQUIVALENTS, AT END OF PERIOD  $3,205   $2,457 
           
SUPPLEMENTAL INFORMATION:          
Cash Paid During the Period for Interest  $146   $41 
Cash Paid During the Period for Income Taxes  $28   $26 

 

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 December 31, 2018   34,393,252   $344   $48,479   $7,556   $(24,509)  $112   $31,982 
                                    
Net Income/(Loss)   -    -    -    (344)   -    -    (344)
Issuance of Restricted Stock   95,000    1    (1)   -    -    -    - 
Share-based Compensation Expense   -    -    209    -    -    -    209 
Cumulative Translation Adjustment   -    -    -    -    -    305    305 
Balances at March 31, 2019   34,488,252   $345   $48,687   $7,212   $(24,509)  $417   $32,152 

 

   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 

 

See accompanying Notes to Consolidated Financial Statements.

 

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 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 – organized into three reporting segments – Network Solutions, Test and Measurement and Embedded Solutions. Since our acquisition of Holzworth Instrumentation, Inc. (“Holzworth”) in February of 2020 (see Note 3), we are also offering the Holzworth brand in our Test and Measurement segment.

 

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

 

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

 

The consolidated balance sheet as of March 31, 2020, the consolidated statements of operations and comprehensive income/(loss) for the three months ended March 31, 2020 and 2019, the consolidated statements of cash flows for the three months ended March 31, 2020 and 2019 and the consolidated statement of shareholders’ equity for the three months ended March 31, 2020 and 2019 have been prepared by the Company without audit. The 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”). All intercompany transactions and balances have been eliminated in consolidation.

 

The Company presents its operations in three reportable segments: (1) Network Solutions, (2) Test and Measurement and (3) Embedded Solutions. The Network Solutions segment is comprised of the operations of Microlab. The Test and Measurement segment is comprised of the operations of Boonton, Noisecom and Holzworth. The Embedded Solutions segment is comprised of the operations of CommAgility.

 

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 “first quarter(s)” or “three months” indicate the Company’s fiscal periods ending March 31, 2020 and March 31, 2019, and references to “year-end” indicate the fiscal year ended December 31, 2019.

 

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. Specific reference is made to that report since certain information and footnote disclosures normally included in financial statements in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) have been reduced for interim periods in accordance with SEC rules.

 

The results of operations for the three months ended March 31, 2020 are not necessarily indicative of the results to be expected for the full year ending December 31, 2020.

 

7

 

 

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. As least quarterly, we evaluate our assumptions, judgments and estimates, and make changes as deemed necessary.

 

Due to the COVID-19 pandemic, there has been uncertainty and disruption in the global economy and financial markets. 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 May 13, 2020, the date of issuance of this Quarterly Report on Form 10-Q.

 

Although disruptions related to the Covid-19 pandemic did not have a material adverse impact on our financial results for the first quarter of fiscal 2020, there is significant uncertainty around sales, cash collections, costs related to our mediation efforts and costs and timing related to anticipated easing of shelter-in-place and shut-down orders in the second quarter and going forward into the remainder of the fiscal year. These uncertainties include the duration and severity of the pandemic and containment measures and how our compliance with these measures will impact our day-to-day operations as well as that of our key customers, suppliers (including contract manufacturers) and other counterparties. 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.

 

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 March 31, 2020 and 2019, one customer accounted for approximately 13% and 31% of the Company’s consolidated revenues, respectively. At March 31, 2020, no one customer exceeded 10% of consolidated accounts receivable. At December 31, 2019, one customer exceeded 10% of consolidated gross accounts receivable at 13%.

 

Contingent Consideration

 

Under the terms of the Holzworth Share Purchase Agreement (See Note 3) the Company may be required to pay additional purchase price in the form of deferred purchase price payment and an earn-out if certain financial targets are achieved for the years ending December 31, 2020 and December 31, 2021. As of March 31, 2020, the Company estimated the fair value of the deferred purchase price and earn-out remaining to be paid based on the 2020 and 2021 financial results to be $1.1 million. The Company is required to reassess the fair value of the contingent consideration at each reporting period.

 

The significant inputs used in this fair value estimate include gross revenues and Adjusted EBITDA, as defined in the Holzworth Share Purchase Agreement, and scenarios for the earn-out 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.

 

8

 

 

Subsequent Events

 

On May 4, 2020 the Company received $2.0 million pursuant to a loan from Bank of America N.A. under the Paycheck Protection Program (“PPP”) of the 2020 Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) administered by the Small Business Association (“SBA”). The loan has an interest rate of 1% and a term of 24 months. No payments are due for the first 6 months, although interest accrues, and monthly payments are due over the next 24 months to retire the loan plus accrued interest. Funds from the loan may only be used for certain purposes, including payroll, benefits, rent and utilities. The CARES Act and the PPP provide a mechanism for forgiveness of up to the full amount of the loan upon application to the SBA for forgiveness by the Company. The Company can provide no assurance that the loan will be forgiven in whole or in part. 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 also entered into Amendment No. 6 to the Credit Facility with Bank of America N.A. and Amendment No. 1 to the Term Loan facility with Muzinich. The amendments allowed the Company to accept the PPP loan and provide that the PPP loan shall not be deemed to constitute “Debt” or “Indebtedness”, as defined, under the Credit Facility and the Term Loan Facility, respectively, as long as the proceeds of the PPP loan are used for allowable purposes under the provisions of the CARES Act and the PPP in order to permit the Company to obtain forgiveness of substantially all of the PPP loan. The amendments to the Credit Facility and Term Loan Facility also contain certain representations and warranties of the Company.

 

There were no other 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.

 

NOTE 2 – Accounting Pronouncements

 

Recently Adopted Accounting Standards

 

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

 

Recent Accounting Pronouncements Not Yet Adopted

 

In 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 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 2023 calendar year, with early adoption permitted. The Company is in the process of evaluating the impact of ASU 2018-15 on its 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 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 Test and Measurement segment with a common customer base and channel partners. For the three months ended March 31, 2020, net revenues of $1.0 million and operating income of $0.1 million, 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. The financial results of Holzworth are included in our Test and Measurement segment. For the three months ended March 31, 2020, the Company recorded $0.2 million 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).

 

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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 $0.5 million 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 $0.8 million 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. The Company did not make the first quarterly payment of $250,000 that was due on March 31, 2020 as the Company estimates it is owed approximately $300,000 in final purchase price adjustments, primarily as a result of the working capital adjustment. 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 were 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.

 

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The acquisition has been accounted for under the acquisition method of accounting in accordance with ASC 805, “Business Combinations”. Accounting for acquisitions requires us to recognize separately from goodwill the assets acquired and the liabilities assumed at their acquisition date fair values. Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net of the acquisition date fair values of the assets acquired and the liabilities assumed. While we use our best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date 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.

 

The following amounts represent the preliminary determination of the fair value of identifiable assets acquired and liabilities assumed from the Acquisition. The final determination of the fair value of certain assets and liabilities will be completed within the one-year measurement period from the date of acquisition as required by ASC Topic 805. As of March 31, 2020, the valuation studies necessary to determine the fair market value of the assets acquired and liabilities assumed are preliminary, including the validation of the underlying cash flows used to determine the fair value of the identified intangible assets. There have been no changes in the estimated fair values of assets acquired and liabilities assumed from date of acquisition through March 31, 2020. The estimated fair values may change as the Company completes its valuation analyses of the assets acquired and liabilities assumed. Any potential adjustments could be material in relation to the preliminary values presented below (in thousands):

 

   Amounts Recognized as of Acquisition Date 
Cash at Close  $7,219 
Equity Issued at Close   465 
Purchase Price Holdback   800 
Working Capital Adjustment   (295)
Deferred Purchase Price   1,300 
Contingent Consideration   555 
Total Purchase Price   10,044 

 

Cash   30 
Accounts Receivable   485 
Inventory   1,218 
Intangible Assets   4,500 
Other Assets   960 
Fixed Assets   144 
Accounts Payable   (129)
Accrued Expenses   (425)
Deferred Revenue   (13)
Other Long Term Liabilities   (740)
Net Assets Acquired   6,030 
Goodwill  $4,014 

 

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):

 

   Test and Measurement   Network Solutions   Embedded
Solutions
   Total 
Balance as of December 31, 2019  $-   $1,351   $8,718   $10,069 
Holzworth Acquisition   4,014    -    -    4,014 
Foreign Currency Translation   -    -    (533)   (533)
Balance as of March 31, 2020  $4,014   $1,351   $8,185   $13,550 

 

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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.

 

The following table presents the unaudited pro forma consolidated results of operations for the Company for the three months ended March 31, 2020 and 2019 as though the Acquisition had been completed as of January 1, 2019 (in thousands, except per share amounts):

 

   Q1 2020 WTG Pro-forma   Q1 2019 WTG Pro Forma 
Net Revenues  $9,526   $13,899 
Net Loss  $(1,272)  $(1,276)
Earnings per Diluted Share  $(0.06)  $(0.06)

 

NOTE 4 – Debt

 

Debt consists of the following (in thousands):

 

   March 31, 2020 
Revolver at LIBOR Plus Margin  $1,956 
Term Loan at LIBOR Plus Margin   8,379 
Less: Debt Issuance Costs, Net of Amortization   (802)
Less: Fair Value of Warrants, Net of Amortization   (146)
Total Debt   9,387 
Less: Debt Maturing Within One Year   (2,040)
Non-current Portion of Long Term Debt  $7,347 

 

Term Loan Payments by Period (in thousands):

 

Remainder of 2020  $63 
2021   84 
2022   84 
2023   84 
2024   84 
Thereafter   7,980 
Total  $8,379 

 

In connection with the Holzworth Acquisition, on February 7, 2020, the Company, as borrower, and its subsidiaries, as guarantors, and Muzinich BDC, Inc., as lender (“Muzinich”), entered into a Term Loan Facility, which provides for a term loan in the principal amount of $8.4 million (the “Initial Term Loan”). All proceeds of the Initial Term Loan were used to fund the cash portion of the purchase price for the Holzworth acquisition. Principal payments on the Initial Term Loan are $21,000 per quarter with a balloon payment at maturity which is February 7, 2025. The term loan bears interest at LIBOR (subject to a floor of 1.0%) plus a margin of 7.25%. The Term Loan Facility includes an upfront fee of 2.50% of the aggregate principal amount of the Initial Term Loan. In connection with the Term Loan Facility the Company incurred costs of $830,000, including the aforementioned 2.5% upfront fee to Muzinich, which were recorded as a reduction of the carrying amount of the debt and are being amortized over the term of the loan.

 

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

 

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

 

The Term Loan Facility is secured by liens on substantially all of the Company’s and its subsidiaries’ assets including a pledge of the equity interests in the Company’s subsidiaries. The Term Loan Facility contains customary affirmative and negative covenants for a transaction of this type, including, among others, the provision of annual, quarterly and monthly financial statements and compliance certificates, maintenance of property, insurance, compliance with laws and environmental matters, restrictions on incurrence of indebtedness, granting of liens, making investments and acquisitions, paying dividends, entering into affiliate transactions and asset sales. In addition, the Company must maintain certain financial covenants typical for this type of arrangement, including a consolidated leverage ratio, a consolidated fixed charge coverage ratio and minimum liquidity of its foreign subsidiaries. The consolidated leverage ratio is defined as the ratio of total consolidated indebtedness, as defined, to consolidated EBITDA, as defined. The required leverage ratio starts at 4.75 to 1.0 for the twelve month periods ended March 31, 2020 and June 30, 2020, and decrease in various increments to 3.75 to 1.0 for the twelve months ended December 31, 2020, 2.75 to 1.0 for the twelve months ended December 31, 2021 and 2.0 to 1.0 for the twelve months ended December 31, 2022 and thereafter. The consolidated fixed charge coverage ratio is the ratio of consolidated EBITDA, as defined, less consolidated capital expenditures and cash income taxes paid to consolidated fixed charges, as defined, calculated on a twelve-month basis. The consolidated fixed charge coverage ratio for the twelve month periods ended March 31, 2020, June 30 2020 and September 30, 2020 must be 1.35 to 1 and increases in various increments on a quarterly basis to 1.5 to 1.0 for the twelve month period ended December 31, 2020 and 2021, and to 1.75 to 1.0 for the 12 months ending December 31, 2022 and thereafter. Lastly, the Company must maintain minimum liquidity, defined as cash and availability under the UK borrowing base, as defined, of $1.0 million over any trailing four-week period until such time as the foreign subsidiary has positive EBITDA, as defined, for three consecutive quarters and the Holzworth deferred purchase price has been paid in full. The Term Loan Facility also provides for a number of events of default, including, among others, nonpayment, bankruptcy, inaccuracy of representations and warranties, breach of covenant, change in control, entry of final judgement or order, breach of material contracts, and as long as the Company’s consolidated leverage ratio is greater than 1.0 to 1.0 (as calculated in accordance with the terms of the Term Loan Facility), the cessation of service of any two of Tim Whelan, Michael Kandell or Daniel Monopoli as Chief Executive Officer, Chief Financial Officer or Chief Technology Officer, respectively, of the Borrower without a satisfactory replacement within 60 days. Any exercise of remedies by Muzinich is subject to compliance with the intercreditor agreement entered into at the closing of the Term Loan Facility among the Company, Muzinich and Bank of America, N.A., as lender under the Credit Facility referenced below.

 

The Company entered into a Credit Facility with Bank of America, N.A. (the “Lender”) on February 16, 2017 (the “Credit Facility”), which provided for a term loan in the aggregate principal amount of $0.8 million (the “Term Loan”) and an asset based revolving loan (the “Revolver”), which is subject to a Borrowing Base Calculation (as defined in the Credit Facility) of up to a maximum availability of $9.0 million (“Revolver Commitment Amount”). The borrowing base is calculated as percentage of eligible accounts receivable and inventory, as defined, subject to certain caps and limits. The borrowing base is calculated on a monthly basis and interest is calculated at LIBOR plus a margin. The proceeds of the Term Loan and Revolver were used to finance the acquisition of CommAgility in 2017.

 

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

 

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

 

Effectiveness of the Amendment was conditioned upon, among other things, the prepayment of the remaining principal balance (approximately $0.3 million) of the $0.8 million term loan made available under the Credit Facility and the payment of a closing fee in the amount of $25,000. The Borrowers satisfied all such conditions on February 7, 2020. In connection with the Amendment the Company incurred costs of $230,000 which are capitalized as other current and non-current assets in the Consolidated Balance Sheets and are being amortized over the term of the revolver.

 

As of March 31, 2020, the interest rate on the Term Loan Facility was 8.99% and the interest rate on the Revolver was 3.63%. As of March 31, 2020, and the date hereof the Company is in compliance with all covenants of Credit Facility and Term Loan Facility.

 

Issuance of Stock Warrants

 

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

 

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

 

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

 

NOTE 5 – Leases

 

The following table presents information about the amount and timing of cash flows arising from the Company’s leases as of March 31, 2020:

 

(in thousands)  March 31, 2020 
Maturity of Lease Liabilities     
Remainder of 2020  $488 
2021   619 
2022   637 
2023   276 
2024   158 
Thereafter   231 
Total Undiscounted operating lease payments   2,409 
Less: imputed interest   (269)
Present Value of operating lease liabilities  $2,140 
      
Balance Sheet Classification     
Current lease liabilities  $533 
Long-term lease liabilities   1,606 
Total operating lease liabilities  $2,140 
      
Other information     
Weighted-average remaining term (months) for operating leases   50 
Weighted-average discount rate for operating leases   5.83%

 

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NOTE 6 – Disaggregated Revenue

 

We disaggregate our revenue from contracts with customers by product family and geographic location for each of our segments as we believe it best depicts how the nature, timing and uncertainty of our revenue and cash flows are affected by economic factors. For the three months ended March 31, 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 March 31, 2020 
   Network
Solutions
   Test and
Measurement
   Embedded
Solutions
   Total 
Total Net Revenues by Revenue Type                    
Passive and Active RF Components  $4,268   $-   $-   $4,268 
Signal Generators and Components   -    1,820    -    1,820 
Signal Analyzers and Power Meters   -    1,565    -    1,565 
Signal Processing Hardware   -    -    1,199    1,199 
Software Licenses   -    -    108    108 
Services   8    360    101    469 
Total Net Revenue  $4,276   $3,745   $1,408   $9,429 
                     
Total Net Revenues by Geographic Areas                    
Americas  $3,639   $2,578   $29   $6,246 
EMEA   580    258    1,207    2,045 
APAC   57    909    172    1,138 
Total Net Revenue  $4,276   $3,745   $1,408   $9,429 

 

   Three Months Ended March 31, 2019 
   Network
Solutions
   Test and
Measurement
   Embedded
Solutions
   Total 
Total Net Revenues by Revenue Type                    
Passive and Active RF Components  $5,758   $-   $-   $5,758 
Signal Generators and Components   -    1,446    -    1,446 
Signal Analyzers and Power Meters   -    1,308    -    1,308 
Signal Processing Hardware   -    -    4,058    4,058 
Software Licenses   -    -    3    3 
Services   -    276    183    459 
Total Net Revenue  $5,758   $3,030   $4,244   $13,032 
                     
Total Net Revenues by Geographic Areas                    
Americas  $5,203   $1,804   $175   $7,182 
EMEA   501    549    4,061    5,111 
APAC   54    677    8    739 
Total Net Revenue  $5,758   $3,030   $4,244   $13,032 

 

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NOTE 7 – 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 amount of deferred tax assets considered realizable is subject to adjustment in future periods if estimates of future taxable income are changed.

 

As of March 31, 2020 the Company’s net deferred tax asset of $5.5 million is net of a valuation allowance of $6.7 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 effective rate of income tax benefit of 12.9% for the three months ended March 31, 2020 was lower than the statutory rates in the United States and United Kingdom primarily due to the impact of research and development deductions in the UK.

 

The effective rate of income tax benefit of 28.6% for the three months ended March 31, 2019 was higher than the statutory rates in the United States and United Kingdom primarily due to the impact of global intangible low-taxed income or “GILTI” related to our controlled foreign corporation offset by research and development deductions in the UK. Due to the Company’s federal and state net operating loss carryforwards the impact of GILTI did not result in a cash tax charge.

 

NOTE 8 – 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 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.

 

   For the Three Months 
   Ended March 31, 
   2020   2019 
         
Weighted average common shares outstanding   21,397,919    20,972,612 
Potentially dilutive equity awards   388,668    708,736 
Weighted average common shares outstanding, assuming dilution   21,786,587    21,681,348 

 

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 in 2020 was 2,192,945. The weighted average number of options to purchase common stock not included in diluted loss per share in 2019, because the effects are anti-dilutive or the performance condition was not met, was 1,455,000.

 

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NOTE 9 – Inventories

 

Inventory carrying value is net of inventory reserves of $1.0 million at both March 31, 2020 and December 31, 2019.

 

Inventories consist of (in thousands):        
   March 31,
2020
   December 31,
2019
 
Raw materials  $4,444   $4,024 
Work-in-process   573    406 
Finished goods   3,583    2,895 
   $8,600   $7,325 

 

NOTE 10 - Accounting for Stock Based Compensation

 

The Company’s results for the three-month periods ended March 31, 2020 and 2019 include $0.1 million and $0.2 million, respectively, related to stock based compensation expense. Such amounts have been included in the consolidated statement of operations and 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 1.6 million shares of the Company’s common stock to be available for future grants under the 2012 Plan. The 2012 Plan provides that if awards are forfeited, expire or otherwise terminate without issuance of the shares underlying the awards, or if the award does not result in issuance of all or part of the shares underlying the award, the unissued shares are again available for awards under the 2012 Plan. As a result of certain award forfeitures and cancellations, as of March 31, 2020, there are approximately 1.7 million 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 by the Company’s compensation committee of the Board of Directors. Under the 2012 Plan, options may be granted to purchase shares of the Company’s common stock exercisable only at prices equal to or above the fair market value on the date of the grant.

 

Outstanding Stock Options and Unvested Restricted Awards

 

As of March 31, 2020, there were 1,950,000 service based stock options outstanding and 105,000 performance based stock options outstanding. The range of exercise prices of outstanding stock options is $0.78 to $1.92. The number of potentially dilutive common shares from stock options (options with exercise prices that are lower than the average market value of common shares for the three months ended March 31, 2020) is 7,317 and have an exercise price of .78 per share.

 

Additionally, as of March 31, 2020, there were 213,687 unvested restricted shares, 147,917 unvested restricted stock units and 125,000 vested restricted stock units outstanding.

 

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NOTE 11 – SEGMENT INFORMATION

 

The operating businesses of the Company are segregated into three reportable segments: (1) Network Solutions, (2) Test and Measurement and (3) Embedded Solutions.

 

Network Solutions

 

The Network Solutions segment is comprised primarily of the operations of the Company’s subsidiary, Microlab. Network Solutions designs and manufactures a wide selection of RF passive components and integrated subsystems for signal conditioning and distribution in the wireless infrastructure markets, particularly for small cell deployments, distributed antenna systems (“DAS”), the in-building wireless solutions industry and radio base-station market. Network Solutions also offers active solution sets to assist in network timing for tunnels and in-building wireless signaling. Network Solutions customers include telecommunications service providers, systems integrators, neutral host operators and distributors.

 

Test and Measurement

 

In 2019, the Test and Measurement segment was comprised primarily of the Company’s operations of the Noisecom product line and the operations of its subsidiary, Boonton. Since our acquisition of Holzworth in February of 2020, the Test and Measurement segment also includes the Holzworth product line. Noisecom designs and produces noise generation equipment and instruments, calibrated noise sources, noise modules and diodes. Noise components and instruments are used as a method to provide wide band signals for sophisticated telecommunication and defense applications, and as a stable reference standard for instruments and systems, including radar and satellite communications. Boonton products are also used to test terrestrial and satellite communications, radar and telemetry. Certain power meter products are designed for measuring signals based on wideband modulation formats, allowing a variety of measurements to be made, including maximum power, peak power, average power and minimum power. Holzworth designs and manufactures specialty phased noise analyzers and signal generators for use primarily in research and automated test environments. Customers of the Test and Measurement segment include large defense contractors, semiconductor companies, network equipment providers and the U.S. and foreign governments.

 

Embedded Solutions

 

The Embedded Solutions segment is comprised of the operations of CommAgility. Embedded Solutions supplies signal processing technology for network validation systems supporting LTE and emerging 5G networks. Additionally, this segment licenses, implements and configures LTE PHY layer and stack software for private LTE networks supporting satellite communications, the military and aerospace industries. Customers include wireless communication test equipment companies, defense subcontractors and global technology and services companies.

 

The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies. The Company allocates resources and evaluates the performance of segments based on income or loss from operations, excluding interest, corporate expenses and other income (expenses).

 

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Financial information by reportable segment for the respective periods is set forth below (in thousands):

 

   For the Three Months 
   Ended March 31, 
   2020   2019 
Net sales by segment:          
Network Solutions  $4,276   $5,758 
Test and Measurement   3,745    3,030 
Embedded Solutions   1,408    4,244 
Total consolidated net sales of reportable segments   9,429    13,032 
           
Segment income (loss):          
Network Solutions   632    707 
Test and Measurement   502    235 
Embedded Solutions   (1,240)   (67)
Income (loss) from reportable segments   (106)   875 
           
Other unallocated amounts:          
Corporate expenses   (1,248)   (1,272)
Other (expenses) income - net   14    (85)
Consolidated income/(loss) before Income tax provision/(benefit)  $(1,340)  $(482)
           
Depreciation and amortization by segment:          
Network Solutions  $84   $123 
Test and Measurement   170    115 
Embedded Solutions   270    311 
Total depreciation and amortization for reportable segments   524    549 
           
Capital expenditures by segment:          
Network Solutions   2    28 
Test and Measurement   44    59 
Embedded Solutions   5    41 
Total consolidated capital expenditures by reportable segment  $51   $128 

 

    March 31,
2020
    December 31,
2019
 
Total assets by segment:          
Network Solutions  $9,296   $9,610 
Test and Measurement   18,809    7,380 
Embedded Solutions   12,744    14,330 
Total assets for reportable segments   40,849    31,320 
           
Corporate assets, principally cash and cash equivalents and deferred income taxes   10,393    11,031 
Total consolidated assets  $51,242   $42,351 

 

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NOTE 12 – 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. 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 is also seeking 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 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 March 31, 2020 from that previously disclosed in our annual report on Form 10-K for the year ended December 31, 2019.

 

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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.

 

COVID-19 Impact

 

In March 2020, the World Health Organization declared the outbreak of COVID-19 a pandemic, which continues to spread throughout the U.S. and the world and has resulted in authorities implementing numerous measures to contain the virus, including travel bans and restrictions, quarantines, shelter-in-place orders, and business limitations and shutdowns. The Company is considered an “essential business” 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 at our manufacturing facilities in Parsippany, New Jersey and Boulder, Colorado.

 

To support the health and well-being 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. At our manufacturing and shipping facility in New Jersey we have also implemented a staggered work force plan which lowers the number of people working on-site at one time. As of the date of the filing of this Form 10-Q, approximately two-thirds of our employees are working remotely. We expect to continue our mediation efforts including remote work arrangements for the foreseeable future.

 

Although such disruptions did not have a material adverse impact on our financial results for the first quarter of fiscal 2020, there is significant uncertainty around sales, cash collections, costs related to our mediation efforts and costs and timing related to anticipated easing of shelter-in-place and shut-down orders in the second quarter and going forward into the remainder of the fiscal year. These uncertainties include the duration and severity of the pandemic and containment measures and how our compliance with these measures will impact our day-to-day operations as well as that of our key customers, suppliers (including contract manufacturers) and other counterparties.

 

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

 

On May 4, 2020, the Company received $2.0 million pursuant to a loan under the Paycheck Protection Program (“PPP”) of the 2020 Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) administered by the Small Business Association (see description in Liquidity and Capital Resources below). The Company intends to use the funds from this loan only for those purposes included in the PPP, including payroll, employee benefits, rent and utilities.

 

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RESULTS OF OPERATIONS

 

Three Months Ended March 31, 2020 Compared with Three Months Ended March 31, 2019

 

Net Revenues (in thousands)

 

   Three months ended March 31, 
   Revenue   % of Revenue   Change 
   2020   2019   2020   2019   Amount   Pct. 
Network Solutions  $4,276   $5,758    45.4%   44.2%  $(1,482)   -25.7%
Test and Measurement   3,745    3,030    39.7%   23.3%   715    23.6%
Embedded Solutions   1,408    4,244    14.9%   32.5%   (2,836)   -66.8%
Total Net Revenues  $9,429   $13,032    100.0%   100.0%  $(3,603)   -27.6%

 

Net consolidated revenue decreased 27.6% primarily due to the Embedded Solutions segment where revenue decreased $2.8 million or 66.8%. As previously disclosed, demand for the Company’s signal processing hardware cards from our largest customer is expected to decline significantly as compared to fiscal year 2019. The decline in shipments of our hardware cards accounts for all of the decrease in net revenues in Embedded Solutions as compared to the prior year. Network Solutions revenue decreased 25.7% due partially to lower demand for RF passive components and partially to the Covid-19 pandemic which impacted our international supply chain. Test and Measurement revenue increased 23.6% due to the Holzworth acquisition which contributed $1.0 million in net revenue from the date of acquisition, February 7, 2020. This was only partially offset by declines in our customized noise source products and components as compared to last year which was due, in part, to the Covid-19 pandemic which negatively impacted the order flow from our international customers in this segment.

 

Gross Profit (in thousands)

   Three months ended March 31, 
   Gross Profit   Gross Profit %   Change 
   2020   2019   2020   2019   Amount   Pct. 
Network Solutions  $1,943   $2,389    45.4%   41.5%  $(446)   -18.7%
Test and Measurement   1,904    1,569    50.8%   51.8%   335    21.4%
Embedded Solutions   581    1,769    41.3%   41.7%   (1,188)   -67.2%
Total Gross Profit  $4,428   $5,727    47.0%   43.9%  $(1,299)   -22.7%

 

Consolidated gross profit margin for the three months ended March 31, 2020 of 47.0% was higher than the prior year period of 43.9% due to increased profit margin at Network Solutions driven primarily by more favorable product mix. Test and Measurement gross profit margin declined slightly from 51.8% to 50.8% primarily due to U.S. GAAP purchase accounting adjustments related to the fair value of acquired inventory of Holzworth which increased cost of revenues by $76,000 in the first quarter of 2020. Embedded Solutions gross profit margin was flat as compared to the prior year period.

 

Operating Expenses (in thousands)

 

   Three months ended March 31, 
   Operating Expenses   % of Revenue   Change 
   2020   2019   2020   2019   Amount   Pct. 
Research and Development  $1,578   $1,714    16.7%   13.2%  $(136)   -7.9%
Sales and Marketing   1,717    1,937    18.2%   14.9%   (220)   -11.4%
General and Administrative   2,487    2,474    26.4%   19.0%   13    0.5%
Total Operating Expenses  $5,782   $6,125    61.3%   47.0%  $(343)   -5.6%

  

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Research and development expenses decreased 8% on lower headcount primarily at Network Solutions and Test and Measurement due to cost reduction actions implemented in early 2020. This was only partially offset by higher third party costs related to our 5G product initiative and the addition of Holzworth research and development expense for the period of ownership in the first quarter 2020.

 

Sales and marketing expenses decreased 11% due to lower headcount particularly in Network Solutions and marketing expenses due to cost reduction actions partially offset by the addition of Holzworth sales and marketing expenses for the period of ownership in the first quarter 2020.

 

General and administrative expenses were flat with the year ago period as reductions in various general and administrative expenses at Test and Measurement and Network Solutions in the amount of approximately $300,000 were offset by the addition of Holzworth expenses of approximately $100,000 for the two month period of ownership and non-recurring acquisition expenses in the amount of approximately $200,000.

 

Other Income/(Expense)

 

Other income increased $0.2 million due to an increase in foreign exchange gains recognized on monetary assets and liabilities denominated in currencies other than our functional currencies as compared to the prior year period.

 

Interest Expense

 

Consolidated interest expense increased $0.1 million primarily related to interest on the new Term Loan Facility and accretion expense recorded on the Holzworth contingent consideration liability.

 

Taxes

 

For the three months ended March 31, 2020 the Company recorded a tax benefit of $0.2 million as compared to $0.1 million in the prior year period. The effective tax rate decreased from 28.5% in the prior year period to 14.4% in the current year period due to differences in estimates of taxable income year over year.

 

Net Income/Loss

 

For the three months ended March 31, 2020 the Company recorded a net loss of $1.1 million or basic and diluted loss per share of $.05 as compared to a net loss of $0.3 million or basic and diluted loss per share of $.02 in the prior year period due primarily to lower consolidated gross profit margins and higher consolidated interest expense which were only partially offset by higher other income from foreign exchange gains.

 

LIQUIDITY AND CAPITAL RESOURCES

 

As disclosed in Note 4 to the Consolidated Financial Statements, on February 7, 2020 the Company entered into the Term Loan Facility with Muzinich in the principal amount of $8.4 million to fund the cash portion of the purchase price for the Holzworth acquisition. Additionally, on February 7, 2020 the Company and certain of its subsidiaries entered into Amendment No. 5 to the Credit Facility with Bank of America N.A. By entering into the Amendment, Holzworth, and CommAgility Limited, became borrowers under the Credit Facility. Effectiveness of Amendment No. 5 was conditioned upon, among other things, the prepayment of the remaining principal balance (approximately $0.3 million) of the $0.8 million term loan made available under the Credit Facility.

 

As of March 31, 2020, the Company had consolidated cash of $3.2 million and gross debt of $10.3 million as compared to consolidated cash of $4.2 million and gross debt of $2.7 million as of December 31, 2019. The increase in our net debt position is attributable to the term loan used to finance the Holzworth acquisition offset partially by a reduction in our Revolver balance. As of March 31, 2020, substantially all of our cash and cash equivalents are held outside the United States. As of March 31, 2020, $2.0 million was outstanding on our asset based Revolver and $8.4 million was outstanding on our Term Loan. As of March 31, 2020, and the date hereof, the Company is in compliance with the covenants of the Credit Facility and the Term Loan Facility. 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.

 

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. No payments are due for the first 6 months, although interest accrues, and monthly payments are due over the next 24 months to retire the loan plus accrued interest. 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.

 

23

 

 

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 will 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

 

The Company will carefully monitor all qualifying expenses and other requirements necessary to properly maximize loan forgiveness; however, no assurance can be provided that the Company will obtain forgiveness of the PPP loan in whole or in part.

 

We expect borrowings from the PPP loan, 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. The Company expects the cash flow of Holzworth to fund the deferred purchase price related to the Holzworth Acquisition. 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-19 pandemic. There is significant uncertainty surrounding the impact of the ongoing Covid-19 pandemic on the U.S. and global economy. We expect these uncertainties to extend to our business in the second quarter and full year, as sales, deliveries, cash collections, our supply chain and our business partners could be adversely affected. The disruptions caused by Covid-19 could thereby have an impact on our ability to comply with our financial debt covenants.

 

Operating Activities

 

Cash used by operating activities was $0.1 million for the three months ended March 31, 2020 which compares to cash used of $3.0 million in the prior year period. The decrease in cash used from operating activities was due to increased cash flow from working capital in the first quarter of 2020 as compared to the prior year period.

 

Investing Activities

 

Cash used by investing activities was $7.2 million for the three months ended March 31, 2020 which was higher than the prior year period cash used of $0.6 million due to the purchase of the Holzworth.

 

Financing Activities

 

Cash provided by financing activities was $6.6 million for the three months ended March 31, 2020 as compared to $1.3 million for the prior year period. The increase was due to the term loan financing used for the cash portion of the Holzworth purchase price offset by debt issuance fees.

 

The Company may pursue strategic opportunities, including potential acquisitions, mergers, divestitures or other activities, which may require significant use of the Company’s capital resources. The Company may incur costs as a result of such activities and such activities may affect the Company’s liquidity in future periods. In order to fund such activities, the Company may need to incur additional debt or issue additional securities if market conditions are favorable. However, there can be no certainty that such funding will be available in needed quantities on terms favorable to the Company or at all.

 

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

 

24

 

 

The terms of any offering of the Company’s common stock, and the intended use of the net proceeds resulting therefrom, will be established at the times of the offerings and will be described in prospectus supplements filed with the SEC at the times of the offerings. The shelf registration statement is intended to provide financial flexibility to access capital in a competitive and expeditious manner when market conditions are appropriate.

 

Off-Balance Sheet Arrangements

 

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 2019 Form 10-K.

 

25

 

 

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 expectation that borrowings available to us under the PPP Loan, the Term Loan Facility, the 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 expectation that the cash flow of Holzworth will be sufficient to fund the deferred purchase price payments related to the Holzworth Acquisition; and our expectation that uncertainties around the impact of the ongoing Covid-19 pandemic might extend to our business in the second quarter and full year, as sales, deliveries, cash collections, our supply chain and our business partners could be adversely affected. These statements involve risks and uncertainties. These statements are based on the Company’s current expectations of future events and are subject to a number of risks and uncertainties that may cause the Company’s actual results to differ materially from those described in the forward-looking statements. These risks and uncertainties include, but are not limited to, the impact that the Covid-19 pandemic will have on our business and the economy in the future, our dependency on the deployment of 4G LTE and 5G NR private networks and related services to grow our business, the impact of the loss of any significant customers, the ability of our management to successfully implement our business plan and strategy, our ability to raise additional capital to fund our operations given our degree of leverage, product demand and development of competitive technologies in our market sector, 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. The Company’s forward-looking statements speak only as of the date of this Quarterly Report. The Company undertakes no obligation to publicly update or review any forward-looking statements whether as a result of new information, future developments or otherwise.

 

ITEM 3. Quantitative and Qualitative Disclosures about Market 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.

 

There were no changes in our internal control over financial reporting during the three months ended March 31, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, as described in our 2019 Annual Report on Form 10-K.

 

26

 

 

PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

 

No material changes in the quarter.

 

Item 1A. Risk Factors

 

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

 

In March 2020, the World Health Organization declared the outbreak of COVID-19 a pandemic, which continues to spread throughout the U.S. and the world and has resulted in authorities implementing numerous measures to contain the virus, including travel bans and restrictions, quarantines, shelter-in-place orders, and business limitations and shutdowns. While we are unable to accurately predict the full impact that COVID-19 will have on our results from operations, financial condition, liquidity and cash flows due to numerous uncertainties, including the duration and severity of the pandemic and containment measures, our compliance with these measures has impacted our day-to-day operations and could disrupt our business and operations, as well as that of our key customers, suppliers (including contract manufacturers) and other counterparties, for an indefinite period of time.

 

To support the health and well-being of our employees, customers, partners and communities, since approximately March 16, 2020, all of our non-essential employees have been working remotely. This represents approximately two thirds of our workforce. 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 may 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. Although such disruptions did not have a material adverse impact on our financial results for the first quarter of fiscal 2020, there is significant uncertainty around sales, cash collections, costs related to our mediation efforts and costs and timing related to anticipated easing of shelter-in-place and shut-down orders in the second quarter and going forward into the remainder of the fiscal year.

 

More generally, the pandemic raises the possibility of an extended global economic downturn and has caused volatility in financial markets, which could affect demand for our products and services and impact our results and financial condition even after the pandemic is contained and the shelter-in-place orders are lifted. For example, we may be unable to collect receivables from those customers significantly impacted by COVID-19. Also, a decrease in orders in a given period could negatively affect our revenues in future periods, particularly if experienced on a sustained basis. The pandemic may also have the effect of heightening many of the other risks described in “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 including risks associated with our customers and supply chain.

 

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

 

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

 

Our degree of leverage could have consequences, including:

 

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

 

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

 

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Restrictive covenants in the agreements governing our credit facility and term loan facility could restrict our ability to pursue business strategies.

 

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. If the impact of those uncertainties results in a material adverse downturn in our business, compliance with these financial covenants may be challenging. 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

 

A portion of the purchase price of for the acquisition of Holzworth on February 7, 2020 was paid to the sellers through the issuance of 347,319 shares of the Company’s common stock, valued at approximately $0.5 million based upon the 90 day volume weighted average price for the Company’s stock. In addition, in connection with the financing of the Holzworth acquisition, the Company entered into a Term Loan Facility pursuant to which the Company issued to the lender a warrant to purchase 266,167 shares of the Company’s common stock at a per share exercise price of $1.3923. In connection with both the issuance of the shares to the Holzworth sellers and the issuance of the warrant to the lender, the Company relied on an exemption from registration under the Securities Act, as set forth in Section 4(a)(2) of the Securities Act and Rule 506 of Regulation D promulgated thereunder. The basis of this reliance by the Company was (a) the lender’s and each seller’s representation that it is an “accredited investor” within the meaning of Rule 501 under the Securities Act (b) that the warrant (and shares underlying the warrant) issued to the lender and the shares received by each seller were acquired for such person’s own account, and not with a view to any distribution thereof, (c) appropriate legends were affixed to the securities, and (d) because neither transaction involved any public offering.

 

Item 3. Defaults upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

None.

 

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Item 6. Exhibits

 

Exhibit  
Number Exhibit Description
   
3.1 Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to our Annual Report on Form 10-K/A filed with the SEC on April 22, 2005, Commission File No. 001-11916)
   
3.2 Amended and Restated By-laws, as amended on April 7, 2020
   
10.1 Promissory Note to Bank of America NA in the amount of $2,043,000 (“PPP loan”) (incorporate by reference to Exhibit 10.1 to our Current Report on Form 8-K filed with the SEC on May 7, 2020, Commission File No. 001-11916)
   
10.2 Amendment No. 6 to Loan and Security Agreement by and among Wireless Telecom Group, Inc., Boonton Electronics Corporation, Microlab/FXR, Holzworth Instrumentation, Inc., CommAgility Limited and Bank of America, NA (incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K filed with the SEC on May 7, 2020, Commission File No. 001-11916)
   
10.3 First Amendment to the Credit Agreement by and among Wireless Telecom Group, Inc. and subsidiaries and Muzinich BDC, Inc. (incorporated by reference to our Current Report on Form 8-K filed with the SEC on May 7,2020, Commission File No. 001-11916)
   
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
32.1 Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   
32.2 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   
101** The following financial information from Wireless Telecom Group, Inc.’s Quarterly Report on Form 10-Q for the three months ended March 31, 2020, filed on May 13, 2020, formatted in Extensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations and Comprehensive Income/(Loss), (iii) Consolidated Statements of Cash Flows, (iv) Consolidated Statements of Shareholders’ Equity, and (v) the Notes to the Consolidated Financial Statements.
   
101.INS** XBRL INSTANCE DOCUMENT
   
101.SCH** XBRL TAXONOMY EXTENSION SCHEMA DOCUMENT
   
101.CAL** XBRL TAXONOMY EXTENSION CALCULATION LINKBASE DOCUMENT
   
101.DEF** XBRL TAXONOMY EXTENSION DEFINITION LINKBASE DOCUMENT
   
101.LAB** XBRL TAXONOMY EXTENSION LABEL LINKBASE DOCUMENT
   
101.PRE** XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE DOCUMENT

 

** Furnished herewith.

 

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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: May 13, 2020    
     
  By: /s/ Timothy Whelan
    Timothy Whelan
    Chief Executive Officer
     
Dated: May 13, 2020    
     
  By: /s/ Michael Kandell
    Michael Kandell
    Chief Financial Officer

 

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