NOTE
1 - Summary of Significant Accounting Principles and Policies
Basis
of Presentation and Preparation
Wireless
Telecom Group, Inc., a New Jersey corporation, together with its subsidiaries (“we”, “us”, “our”
or the “Company”), specializes in the design and manufacture of advanced radio frequency (“RF”) and microwave
devices which enable the development, testing and deployment of wireless technology. The Company provides unique, highly customized and
configured solutions which drive innovation across a wide range of traditional and emerging wireless technologies.
Oura
customers include wireless carriers, aerospace companies, defense contractors, military and government agencies, satellite communication
companies, network equipment manufacturers, tower companies, semiconductor device manufacturers, system integrators, neutral host providers
and medical device manufacturers.
Our
products include components, modules, instruments, systems and software used across the lifecycle of wireless connectivity and communication
development, deployment and testing. Our customers use these products in relation to commercial infrastructure development, the expansion
and upgrade of distributed antenna systems, deployment of small cell technology, use of medical devices and private long-term evolution
(“LTE”) and 5G networks. In addition, the Company’s products are used in the development and testing of satellite communication
systems, radar systems, semiconductor devices, automotive electronics and avionics.
The
accompanying consolidated financial statements include the accounts of Wireless Telecom Group, Inc., doing business as and operating
under the trade name, Noisecom, and its wholly owned subsidiaries including Boonton Electronics Corporation (“Boonton”),
Microlab/FXR LLC (“Microlab”), Holzworth Instrumentation, Inc. (“Holzworth”), Wireless Telecommunications Ltd.
and CommAgility Limited (“CommAgility”). They have been prepared using accounting principles generally accepted in the United
States (“U.S. GAAP”). All intercompany transactions and balances have been eliminated in consolidation.
It
is suggested that these interim consolidated financial statements be read in conjunction with the audited consolidated financial statements,
and the notes thereto, included in the Company’s latest annual report (Form 10-K).
The
Company’s fiscal periods are based on the calendar year. Except as otherwise specified, references to “third quarter(s)”
or “three months” indicate the Company’s three month period ended September 30, 2021 and September 30, 2020, and references
to “year-end” indicate the fiscal year ended December 31, 2020.
Consolidated
Financial Statements
In
the opinion of management, the accompanying consolidated financial statements referred to above contain all necessary adjustments, consisting
of normal accruals and recurring entries, which are necessary to fairly present the Company’s results for the interim periods being
presented.
The
accounting policies followed by the Company are set forth in Note 1 to the Company’s consolidated financial statements included
in its annual report on Form 10-K for the year ended December 31, 2020. Specific reference is made to that report since certain information
and footnote disclosures normally included in financial statements in accordance with US GAAP have been reduced for interim periods in
accordance with SEC rules.
The
results of operations for the three and nine months ended September 30, 2021 are not necessarily indicative of the results to be expected
for the full year ending December 31, 2021.
Critical
Accounting Estimates
The
preparation of our consolidated financial statements requires the Company to make estimates and judgments that affect the reported amount
of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amount of
revenues and expenses for each period. We base our assumptions, judgements and estimates on historical experience and various other factors
that we believe to be reasonable under the circumstances. At least quarterly, we evaluate our assumptions, judgments and estimates, and
make changes as deemed necessary.
The
COVID-19 pandemic has negatively impacted regional and global economies, disrupted global supply chains and created significant volatility
and disruption of financial markets. Although disruptions related to the COVID-19 pandemic did not impact our estimates and judgements
as of the date of this report, it is reasonably possible that 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, 2020.
Concentration
Risk
Financial
instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents and
trade accounts receivable.
Credit
evaluations are performed on customers requiring credit over a certain amount. Credit risk is mitigated to a lesser extent through collateral
such as letters of credit, bank guarantees or payment terms like cash in advance.
For
the three months ended September 30, 2021 no one customer accounted for greater than 10% of consolidated revenue. For the nine months
ended September 30, 2021 one customer accounted for 10.32% of consolidated revenue. For the three months ended September 30, 2020, one
customer accounted for 12.5% of the Company’s consolidated revenues. For the nine months ended September 30, 2020 no one customer
accounted for greater than 10% of the Company’s consolidated revenues.
One
customer accounted for 12.2% of consolidated accounts receivable as of September 30, 2021. At December 31, 2020, one customer accounted
for 12.7% of consolidated accounts receivable.
Fair
Value of Financial Instruments
Fair
value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction
between market participants at the reporting date. The accounting guidance establishes a three-tiered hierarchy, which prioritizes the
inputs used in the valuation methodologies in measuring fair value:
Level
1 - Quoted prices in active markets for identical assets or liabilities.
Level
2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in markets that are not active;
or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or
liabilities.
Level
3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or
liabilities.
The
categorization of a financial instrument within the valuation hierarchy is based on the lowest level of input that is significant to
the fair value measurement.
The
carrying amounts of the Company’s financial instruments, including cash, accounts receivable, accounts payable and accrued liabilities,
approximate fair value due to their relatively short maturities. The Company’s term loan and revolving credit facility bear interest
at a variable interest rate plus an applicable margin and, therefore, carrying amount approximates fair value.
Contingent
Consideration
Under
the terms of the Holzworth Share Purchase Agreement, the Company is required to pay additional purchase price in the form of deferred
purchase price payments and an earnout based on Holzworth’s financial results for the years ended December 31, 2020 and 2021.
The
significant inputs used in this fair value estimate include estimated gross revenues and Adjusted EBITDA, as defined in the Holzworth
Share Purchase Agreement, and scenarios for the earnout periods for which probabilities are assigned to each scenario to arrive at a
single estimated outcome. The estimated outcome is then discounted based on the individual risk analysis of the liability. The contingent
consideration liabilities are considered a Level 3 fair value measurement.
The
Company accounts for business acquisitions in accordance with ASC 805, Business Combinations. Under ASC 805 the Company is required
to reassess contingent consideration liabilities as of each reporting date. Additionally, adjustments to contingent consideration liabilities
that occur after the measurement period, which is typically one year, are recorded as a component of operating income in the Consolidated
Statement of Operations and Comprehensive Income/(Loss). Due
to the anticipated better than expected financial performance of the Holzworth reporting unit for fiscal year 2021, the Company recorded
an increase to the contingent consideration liabilities in the amount of $1.0 million in the three months ended September 30, 2021, which
represents the Company’s best estimate of the earnout payable based on the expected financial results for the year ending December
31, 2021. This earnout will be payable in four equal installments in fiscal 2022. The adjustment
was recorded as a loss on change in contingent consideration in the Consolidated Statement of Operations and Comprehensive Income/(Loss).
As
of September 30, 2021, amounts due for the Holzworth deferred purchase price and earnout were $500,000 and $4.1 million, respectively.
NOTE
2 – Accounting Pronouncements
Recently
Adopted Accounting Standards
There
have been no changes to our significant accounting policies as described in the 2020 Form 10-K that had a material impact on our consolidated
financial statements and related notes.
In
December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU
2019-12”), which simplifies the accounting for income taxes by removing certain exceptions related to the approach for intra-period
tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for
outside basis differences. The new ASU also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws
or rates. These changes aim to improve the overall usefulness of disclosures to financial statement users and reduce unnecessary costs
to companies when preparing the disclosures. The guidance was effective for the Company beginning on January 1, 2021 and prescribes different
transition methods for the various provisions. The adoption of this standard had no material impact on the Company’s financial
statements or related disclosures.
Recent
Accounting Pronouncements Not Yet Adopted
In
June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326). ASU 2016-13 changes the impairment
model for most financial assets and will require the use of an “expected loss” model for instruments measured as amortized
cost. This pronouncement is effective for small reporting companies for fiscal years, and for interim periods within those fiscal years,
beginning after December 15, 2022. The Company plans to adopt the standard effective January 1, 2023. We do not expect the adoption of
this standard to have a material impact on our consolidated financial statements.
In
March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on
Financial Reporting. The amendments provide optional expedients and exceptions for applying generally accepted accounting principles
to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments
are intended to ease the potential burden in accounting for, or recognizing the effects of, reference rate reform on financial reporting.
The new standard is effective March 12, 2020 through December 31, 2022, with the adoption date being dependent upon the Company’s
election. We do not expect the adoption of this standard to have a material impact on our consolidated financial statements.
NOTE
3 – Acquisition of Holzworth
On
February 7, 2020 the Company completed the acquisition of all of the outstanding shares of Holzworth. Holzworth instruments which include
signal generators and phased noise analyzers are used by government labs, the semiconductor industry, and network equipment providers,
among others, in research and automated test environments. Holzworth is a complimentary business for our Boonton and Noisecom brands
with a common customer base and channel partners.
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.
At
closing, a portion of the purchase price was paid to the Sellers through the issuance of 347,319 shares of the Company’s common
stock, valued at approximately $500,000 based upon a 90-day volume weighted average price for shares of stock of the Company. The shares
issued to the Sellers are subject to Lock-up and Voting Agreements.
During
2020, the Company paid $8.3 million in net cash to the Sellers consisting of $7.2 million in cash at close, $600,000 in indemnification
holdback payments and $750,000 in deferred purchase price reduced by $292,000 of a working capital adjustment that was owed to the Company
by the Sellers. The final indemnification holdback payment of $200,000 was paid on March 31, 2021.
The
Sellers earned a second deferred purchase price payment of $750,000 when Holzworth exceeded $1.25 million in EBITDA (as defined in the
Share Purchase Agreement) for the twelve months ended December 31, 2020. Additionally, the Sellers earned $3.4 million in additional
purchase price in the form of an earnout (“Year 1 Earnout”) which was also based on Holzworth’s EBITDA for the twelve
months ended December 31, 2020.
On
February 19, 2021, the Company entered into the Second Amendment to Share Purchase Agreement (the “Second Amendment”) with
Holzworth. The Second Amendment, among other things, converted the second deferred purchase price of $750,000 into unsecured seller notes
with interest at an annual rate of 6.5% starting from April 1, 2021 until final payment. The payment date has been changed from March
31, 2021 to three equal installments of $250,000, plus accrued interest, due on July 1, 2021, October 1, 2021 and January 1, 2022.
Additionally,
the parties amended the payment dates of the earnout consideration. The payment date of the Year 1 Earnout has been amended from March
31, 2021 to (i) six (6) equal quarterly installments of 10% of the Year 1 Earnout payable on the last business day of each calendar quarter
between June 30, 2021 and September 30, 2022 and (ii) one (1) installment payment equal to 40% of the Year 1 Earnout on December 31,
2022. The Year 1 Earnout is payable in cash or shares of the Company’s common stock, at the Company’s option, based on the
90 trading day volume weighted average price immediately preceding final determination of the Year 1 Earnout or $2.19 per share. The
payment for the Year 1 Earnout is $3.4 million, of which $210,000 was paid in cash and $73,000 was issued in common stock as of September
30, 2021.
The
Company may also be required to pay additional amounts in cash and stock as earnout consideration based on Holzworth’s EBITDA for
the fiscal year ending December 31, 2021 (“Year 2 Earnout”). The Year 2 Earnout will be equal to two times the amount, if
any, by which Holzworth’s EBITDA for fiscal year December 31, 2021 exceeds Holzworth’s EBITDA for fiscal year 2020. Pursuant
to the Second Amendment, the Year 2 Earnout is payable in four equal quarterly installments payable on the last business day of each
calendar quarter between March 31, 2022 and December 31, 2022. The aggregate payments of the Year 1 Earnout and Year 2 Earnout cannot
exceed $7.0 million and the aggregate purchase price cannot exceed $17.0 million.
Due
to the anticipated better than expected financial performance of the Holzworth reporting unit for fiscal year 2021, the Company recorded
an increase to the contingent consideration liabilities in the amount of $1.0 million in the three months ended September 30, 2021 which
represents the Company’s best estimate of the Year 2 Earnout. The adjustment was recorded as a loss on change in contingent consideration
in the Consolidated Statement of Operations and Comprehensive Income/(Loss).
The
following table summarizes the components of the purchase price and the allocation of the purchase price at fair value at the acquisition
date (in thousands):
Schedule of Business Consideration
|
|
|
Amounts Recognized as of Acquisition Date
|
|
|
Cash at close
|
|
$
|
7,219
|
|
|
Equity issued at close
|
|
|
465
|
|
|
Purchase price holdback
|
|
|
800
|
|
|
Working capital adjustment
|
|
|
(292
|
)
|
|
Deferred purchase price
|
|
|
1,410
|
|
|
Contingent consideration
|
|
|
2,440
|
|
|
|
|
|
|
|
|
Total purchase price
|
|
|
12,042
|
|
|
|
|
|
|
|
|
Cash
|
|
|
30
|
|
|
Accounts receivable
|
|
|
514
|
|
|
Inventory
|
|
|
1,438
|
|
|
Intangible assets
|
|
|
4,260
|
|
|
Other assets
|
|
|
967
|
|
|
Fixed assets
|
|
|
144
|
|
|
Accounts payable
|
|
|
(129
|
)
|
|
Accrued expenses
|
|
|
(429
|
)
|
|
Deferred revenue
|
|
|
(13
|
)
|
|
Other long term liabilities
|
|
|
(740
|
)
|
|
|
|
|
|
|
|
Net assets acquired
|
|
|
6,042
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
6,000
|
|
Goodwill
is calculated as the excess of consideration paid over the net assets acquired and represents synergies, assembled workforce, organic
growth and other benefits that are expected to arise from integrating Holzworth into our operations. The goodwill recorded in this transaction
is expected to be tax deductible.
The
Company’s post acquisition consolidated goodwill is shown below (in thousands):
Schedule of Post Acquisition Consolidated Goodwill
|
|
|
Holzworth
|
|
|
Microlab
|
|
|
CommAgility
|
|
|
Total
|
|
|
Balance as of January 1, 2020
|
|
$
|
-
|
|
|
$
|
1,351
|
|
|
$
|
8,718
|
|
|
$
|
10,069
|
|
|
Holzworth acquisition
|
|
|
6,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,000
|
|
|
Goodwill Impairment
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,742
|
)
|
|
|
(4,742
|
)
|
|
Foreign currency translation
|
|
|
-
|
|
|
|
-
|
|
|
|
185
|
|
|
|
185
|
|
|
Balance as of December 31, 2020
|
|
$
|
6,000
|
|
|
$
|
1,351
|
|
|
$
|
4,161
|
|
|
$
|
11,512
|
|
|
Foreign currency translation
|
|
|
-
|
|
|
|
-
|
|
|
|
45
|
|
|
|
45
|
|
|
Balance as of March 31, 2021
|
|
$
|
6,000
|
|
|
$
|
1,351
|
|
|
$
|
4,206
|
|
|
$
|
11,557
|
|
|
Foreign currency translation
|
|
|
-
|
|
|
|
-
|
|
|
|
7
|
|
|
|
7
|
|
|
Balance as of June 30, 2021
|
|
$
|
6,000
|
|
|
$
|
1,351
|
|
|
$
|
4,213
|
|
|
$
|
11,564
|
|
|
Beginning balance
|
|
$
|
6,000
|
|
|
$
|
1,351
|
|
|
$
|
4,213
|
|
|
$
|
11,564
|
|
|
Foreign currency translation
|
|
|
-
|
|
|
|
-
|
|
|
|
(103
|
)
|
|
|
(103
|
)
|
|
Balance as of September 30, 2021
|
|
$
|
6,000
|
|
|
$
|
1,351
|
|
|
$
|
4,110
|
|
|
$
|
11,461
|
|
|
Closing balance
|
|
$
|
6,000
|
|
|
$
|
1,351
|
|
|
$
|
4,110
|
|
|
$
|
11,461
|
|
NOTE
4 – Debt
Debt
consists of the following (in thousands):
Schedule of Debt
|
|
|
September 30, 2021
|
|
|
Revolver at LIBOR plus margin
|
|
$
|
45
|
|
|
Term loan at LIBOR plus margin
|
|
|
4,125
|
|
|
Less: Debt issuance costs, net of amortization
|
|
|
(678
|
)
|
|
Less: Fair value of warrants, net of amortization
|
|
|
(101
|
)
|
|
CIBLS Loan at Bank of England plus margin
|
|
|
337
|
|
|
Total Debt
|
|
|
3,728
|
|
|
Less: Debt maturing within one year
|
|
|
(150
|
)
|
|
Non-current portion of long term debt
|
|
$
|
3,578
|
|
Term
loan payments by period (in thousands):
Schedule of Term Loan Payments
|
|
|
|
|
|
|
Remainder of 2021
|
|
$
|
21
|
|
|
2022
|
|
|
126
|
|
|
2023
|
|
|
168
|
|
|
2024
|
|
|
168
|
|
|
2025
|
|
|
3,936
|
|
|
Thereafter
|
|
|
43
|
|
|
Total
|
|
$
|
4,462
|
|
Muzinich
Term Loan Facility
In
connection with the Holzworth Acquisition, on February 7, 2020, the Company, as borrower, and its subsidiaries, as guarantors, and Muzinich
BDC, Inc., as lender (“Muzinich”), entered into a Term Loan Facility, which provides for a term loan in the principal amount
of $8.4 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 Facility included an upfront fee of 2.50% of the aggregate principal amount of the
Initial Term Loan. In connection with the Term Loan Facility, the Company incurred costs of $1.0 million, including the aforementioned
2.50% upfront fee to Muzinich, which were recorded as a reduction of the carrying amount of the debt and are being amortized over the
term of the loan.
On
May 4, 2020, the Company entered into the First Amendment to the Term Loan Facility which, among other things, amended the definition
of “Indebtedness” to include the PPP (as defined below) loan as long as the proceeds are used for allowable purposes under
the CARES Act, the receipt of the loan does not violate the Credit Facility and the Company submits an application for forgiveness and
substantially all of the loan is forgiven. The Company received notice in June 2021 that the loan and accrued interest were fully forgiven,
as described below.
On
February 25, 2021, the Company and its subsidiaries entered into the Second Amendment to the Credit Agreement and Limited Waiver (“Amendment
2”) with Muzinich, in which Muzinich agreed to waive the Company’s obligation to comply with the consolidated leverage ratio
and fixed charge coverage ratio financial covenants in the Term Loan Facility for the fiscal quarter ending December 31, 2020. We were
not in compliance with such covenants primarily as a result of the impact the COVID-19 pandemic had on our consolidated financial results.
Amendment 2, among other things, amended the definition of consolidated EBITDA to include certain cash tax benefits related to our U.K.
tax jurisdiction and reduced our consolidated leverage ratio for the twelve month periods ended September 30, 2021 from 3.00 to 2.75,
December 31, 2021 from 2.75 to 2.25, March 31, 2022 from 2.50 to 2.00 and June 30, 2022 from 2.25 to 2.00. Additionally, the interest
rate margin was increased from 7.25% to 9.25% effective January 1, 2021 and will step down to 8.50% and 7.25% upon the Company achieving
consolidated EBITDA on a trailing twelve-month basis of $4.0 million and $6.3 million, respectively. Muzinich and the Company also agreed
on an excess cash flow payment of $428,000 which was made in March 2021 and Muzinich provided consent for the Company to change the deferred
purchase price payments to and enter into notes with the Holzworth sellers in the amount of $750,000, as described above in Note 3.
On
May 27, 2021, the Company and its subsidiaries entered into the Third Amendment to the Credit Agreement and Limited Waiver (“Amendment
3)” with Muzinich in which Muzinich, among other things, permitted CommAgility to enter into the CIBLS Loan Agreement with Lloyds
Bank Plc. See description below.
On
September 28, 2021, the Company and its subsidiaries entered into the Fourth Amendment to Credit Agreement and Limited Waiver (“Amendment
4”) with Muzinich. Amendment 4 was executed in connection with a prepayment of the principal balance of the Muzinich term loan
in the amount of $3.7 million and accrued interest thereon of $95,000 on September 28, 2021. Additionally, the Company paid a prepayment
premium of 2% of the prepayment amount or $74,000.
Under
the terms of Amendment 4, the interest rate margin was decreased from 9.25% to 8.75% when trailing twelve month Consolidated EBITDA,
as defined, excluding the US R&D tax credit, is less than or equal to $4.0 million and decreased from 8.50% to 8.00% when trailing
twelve month Consolidated EBITDA, as defined, excluding the US R&D tax credit, is greater than $4.0 million but equal to or less
than $6.3 million. Muzinich also agreed to waive compliance with the financial covenant set forth in Section 7.11(c) of the Credit Agreement
from September 28, 2021 until March 31, 2022. Section 7.11(c) requires the trailing four week average liquidity, as defined, of the Company’s
CommAgility subsidiary to be no less than $1.0 million. The waiver of this covenant may be extended upon the consent of Muzinich. Additionally,
under Amendment 4, the definition of Consolidated Interest Charges was amended to treat the aforementioned principal prepayment of $3.7
million as being made on October 1, 2020.
Credit
Facility with Bank of America, N.A.
The
Company entered into a Credit Facility with Bank of America, N.A. (“Bank of America”) on February 16, 2017 (the “Credit
Facility”), which provided for a term loan in the aggregate principal amount of $760,000 (the “Term Loan”) and an asset
based revolving loan (the “Revolver”), which is subject to a Borrowing Base Calculation (as defined in the Credit Facility)
of up to a maximum availability of $9.0 million (“Revolver Commitment Amount”). The borrowing base is calculated as a percentage
of eligible accounts receivable and inventory, as defined, subject to certain caps and limits. The borrowing base is calculated on a
monthly basis and interest is calculated at LIBOR plus a margin. The proceeds of the Term Loan and Revolver were used to finance the
acquisition of CommAgility in 2017.
In
connection with the Acquisition, on February 7, 2020, the Company and certain of its subsidiaries (the “Borrowers”), and
Bank of America entered into Amendment No. 5 to the Credit Facility (“BOA Amendment 5”). By entering into BOA Amendment 5,
Holzworth, together with CommAgility Limited, became borrowers under the Credit Facility. The obligations of the Borrowers under the
Credit Facility are guaranteed by Wireless Telecom Group, Ltd. CommAgility Limited and Wireless Telecom Group, Ltd. are both wholly owned
subsidiaries of the Company. Additionally, the Company prepaid the remaining principal balance of the BOA Term Loan in the amount of
$304,000.
On
May 4, 2020, the Company, its subsidiaries and Bank of America entered into Amendment No. 6 which, among other things, amended the definition
of “Debt” to include the PPP loan as long as the proceeds are used for allowable purposes under the CARES Act and the Company
promptly submits an application for forgiveness and substantially all of the loan is forgiven. The Company received notice in June 2021
that the loan and accrued interest were fully forgiven, as described below.
On
February 25, 2021, the Company, its subsidiaries and Bank of America entered into Amendment No. 7 which revised the Credit Facility to
accommodate the changes to the deferred purchase price payments to and notes with the Holzworth sellers, as described above, and provided
Bank of America’s consent to the Company entering into the Muzinich Second Amendment, as described above.
On
September 28, 2021, the Company and its subsidiaries entered into Amendment No. 8 (“BOA Amendment 8”) in which Bank of America
consented to the aforementioned principal prepayment of the Muzinich term loan and amended the definition of Fixed Charge Coverage Ratio
to treat the Muzinich principal prepayment as being made on October 1, 2020. Additionally, Bank of America and the Company agreed that,
in accordance with the Credit Facility, the LIBOR should be replaced with a successor rate in accordance with the provisions of BOA Amendment
5. Accordingly, BOA Amendment 8 defines the LIBOR successor rate for loans denominated in U.S. dollars to be the Bloomberg Short-Term
Bank Yield Index rate (“BSBY”), loans denominated in Sterling to be the Sterling Overnight Index Average Reference Rate (“SONIA”)
and loans denominated in Euros to be the Euro Interbank Offered Rate (“EURIBOR”). Loans drawn after the effective date of
BOA Amendment 8 will bear interest as the successor rates named above plus the applicable margin, as defined.
As
of September 30, 2021, the interest rate on the Term Loan Facility was 9.75% and the interest rate on the Revolver was 2.13%. The Company
had $45,000 drawn on the asset-based revolver as of September 30, 2021. As of September 30, 2021, and the date hereof the Company is
in compliance with all covenants of the Credit Facility and the Term Loan Facility.
PPP
Loan
On
May 4, 2020, the Company received $2.0 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 had an interest rate of 1% and a term of 24 months. A repayment schedule was not provided by Bank of America.
Accordingly, as of December 31, 2020 the full amount of the term loan was shown as due in May 2022. Funds from the loan were used only
for certain permitted purposes, including payroll, benefits, rent and utilities. The CARES Act and the PPP provided 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 applied for forgiveness
of the loan and received notice that the loan and accrued interest were fully forgiven, and that the SBA remitted payment in full to
Bank of America N.A. on June 5, 2021. The Company elected to account for the loan in accordance with Accounting Standard Codification
470 Debt. Accordingly, the Company recorded a gain on extinguishment of debt on the Consolidated Statement of Operations and Comprehensive
Income/(Loss) in the nine months ended September 30, 2021.
CIBLS
Loan
On
May 27, 2021, CommAgility entered into the Coronavirus Business Interruption Loan Agreement (“CIBLS Loan”) with Lloyds Bank
PLC (“Lloyds”). Under the terms of the CIBLS Loan CommAgility can draw up to a maximum of £250,000 for purposes of
supporting daily business cash flow. The CIBLS Loan is repayable in 48 consecutive equal monthly installments beginning in month 13 after
the initial loan drawdown (12 month principal repayment holiday). Interest is payable monthly at the official bank rate of the Bank of
England plus an interest margin of 2.35% per annum. Interest payments are due monthly beginning in month 13 after the initial loan drawdown.
The first twelve months of interest payments are paid by the U.K. government. The CIBLS Loan is secured by the assets of CommAgility
subject to a Deed of Priority between Muzinich, Bank of America and Lloyds. The CIBLS Loan ranks subordinate to both the Muzinich Term
Loan and Bank of America Credit Facility.
On
July 1, 2021 CommAgility executed a draw down of the maximum amount of £250,000. As of September 30, 2021, $21,000 is included
in short term debt and $316,000 is included long term debt on the Consolidated Balance Sheet.
NOTE
5 – Equity
On
July 21, 2021, the Company entered into an At Market Issuance Sales Agreement (the “Sales Agreement”) with B. Riley Securities,
Inc. (the “Agent”), to issue and sell through the Agent, shares of the Company’s common stock, par value $0.01 per
share, having an aggregate offering price of up to $12,000,000 (the “Shares”). The Agent was not required to sell any specific
number of Shares. Shares sold under the Sales Agreement were issued and sold pursuant to the Company’s previously filed registration
statement on Form S-3 (File No. 333-227051) filed with the Securities and Exchange Commission (the “Commission”) on August
27, 2018 and declared effective on September 17, 2018. A prospectus supplement relating to the offering of the Shares was filed with
the Commission on July 21, 2021.
From
July 21, 2021 through August 6, 2021 the Agent sold 264,701 shares of the Company’s common stock for net proceeds of $738,827,
after deducting sales commissions paid to the Agent in accordance with the terms of the Sales Agreement.
The
registration statement pursuant to which the shares were sold expired on September 17, 2021 and was not renewed.
NOTE
6 – Leases
The
Company’s lease agreements consist of building leases for its operating locations and office equipment leases for printers and
copiers with lease terms that range from less than 12 months to 8 years. At inception, the Company determines if an arrangement contains
a lease and whether that lease meets the classification criteria of a finance or operating lease. The Company’s leases for office
equipment such as printers and copiers contain lease and non-lease components (i.e., maintenance). The Company accounts for lease and
non-lease components of office equipment as a single lease component.
All
of the Company’s leases are operating leases and are presented as right of use lease asset, short term lease liability and long
term lease liability on the consolidated balance sheets as of September 30, 2021 and December 31, 2020. These assets and liabilities
are recognized at the commencement date based on the present value of remaining lease payments over the lease term using the Company’s
incremental borrowing rate. Short-term leases, which have an initial term of 12 months or less, are not recorded on the balance sheet.
Lease
expense is recognized on a straight-line basis over the lease term and is included in cost of revenues and general and administrative
expenses on the Consolidated Statement of Operations and Comprehensive Income/(Loss).
An
initial right-of-use asset of $1.9 million was recognized as a non-cash asset addition with the adoption of the new lease accounting
standard on January 1, 2019. With our acquisition of Holzworth on February 7, 2020, we acquired a right-of-use asset of $789,000. There
have been no other right-of-use assets recognized since the date of adoption of the new lease standard. Cash paid for amounts included
in the present value of operating lease liabilities was $168,000 and $500,000 for the three and nine months ended September 30, 2021,
respectively, and was included in operating cash flows. Cash paid for amounts included in the present value of operating lease liabilities
for the three and nine months ended September 30, 2020 was $167,000 and $483,000, respectively.
Operating
lease costs for the three and nine months ended September 30, 2021 were $258,000 and $825,000, respectively. Operating lease costs for
the three and nine months ended September 30, 2020 were $269,000 and $791,000, respectively.
The
following table presents information about the amount and timing of cash flows arising from the Company’s leases as of September
30, 2021:
Schedule
of Maturity of Operating Lease Liabilities
|
(in thousands)
|
|
September 30, 2021
|
|
|
Maturity of Lease Liabilities
|
|
|
|
|
|
Remainder of 2021
|
|
$
|
156
|
|
|
2022
|
|
|
637
|
|
|
2023
|
|
|
276
|
|
|
2024
|
|
|
158
|
|
|
2025
|
|
|
163
|
|
|
Thereafter
|
|
|
69
|
|
|
Total Undiscounted operating lease payments
|
|
|
1,459
|
|
|
Less: imputed interest
|
|
|
(121
|
)
|
|
Present value of operating lease liabilities
|
|
$
|
1,338
|
|
|
|
|
|
|
|
|
Balance sheet classification
|
|
|
|
|
|
Current lease liabilities
|
|
$
|
572
|
|
|
Long-term lease liabilities
|
|
|
766
|
|
|
Total operating lease liabilities
|
|
$
|
1,338
|
|
|
|
|
|
|
|
|
Other information
|
|
|
|
|
|
Weighted-average remaining term (months) for operating leases
|
|
|
37
|
|
|
Weighted-average discount rate for operating leases
|
|
|
5.88
|
%
|
NOTE
7 – Revenue
Revenue
is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration to
which the Company expects to be entitled in exchange for promised goods or services. The Company’s performance obligations are
satisfied either over time or at a point in time. Revenue from performance obligations that transferred at a point in time accounted
for approximately 97% and 100% of the Company’s consolidated revenue for each of the three and nine months ended September 30,
2021 and 2020, respectively.
Nature
of Products and Services
Hardware
The
Company generally has one performance obligation in its arrangements involving the sales of radio frequency solutions, digital signal
processing hardware, power meters, analyzers, noise/signal generators, phase noise analyzers and other components. When the terms of
a contract include the transfer of multiple products, each distinct product is identified as a separate performance obligation. Generally,
satisfaction occurs when control of the promised goods is transferred to the customer in exchange for consideration in an amount for
which we expect to be entitled. Generally, control is transferred when legal title of the asset moves from the Company to the customer.
We sell our products to a customer based on a purchase order, and the shipping terms per each individual order are primarily used to
satisfy the single performance obligation. However, in order to determine when control has transferred to the customer, the Company also
considers:
|
|
●
|
when
the Company has a present right to payment for the asset;
|
|
|
●
|
when
the Company has transferred physical possession of the asset to the customer;
|
|
|
●
|
when
the customer has the significant risks and rewards of ownership of the asset; and
|
|
|
●
|
when
the customer has accepted the asset.
|
Software
Arrangements
involving licenses of software in the CommAgility brand may involve multiple performance obligations, most notably subsequent releases
of the software. The Company has concluded that each software release in a multiple deliverable arrangement involving CommAgility software
licenses is a distinct performance obligation and, accordingly, transaction price is allocated to each release when the customer obtains
control of the software.
Performance
obligations that are not distinct at contract inception are combined. Specifically, with the Company’s sales of software, contracts
that include customization may result in the combination of the customization services with the license as one distinct performance obligation
and recognized over time. The duration of these performance obligations are typically one year or less.
Services
Arrangements
involving calibration and repair services of the Company’s products are generally considered a single performance obligation and
are recognized as the services are rendered.
Shipping
and Handling
Shipping
and handling activities performed after the customer obtains control are accounted for as fulfillment activities and recognized as cost
of revenues.
Significant
Judgments
For
the Company’s more complex software and services arrangements, significant judgment is required in determining whether licenses
and services are distinct performance obligations that should be accounted for separately or are not distinct and thus accounted for
together. Further, in cases where we determine that performance obligations should be accounted for separately, judgment is required
to determine the standalone selling price for each distinct performance obligation.
Certain
of the Company shipments include a limited return right. In accordance with Topic 606, the Company recognizes revenue net of expected
returns.
Contract
Balances
The
timing of revenue recognition may differ from the timing of invoicing to customers and these timing differences result in contract assets
(unbilled revenue) or contract liabilities (deferred revenue) on the Company’s consolidated balance sheet. The Company records
unbilled revenue when revenue is recognized prior to invoicing, or deferred revenue when revenue is recognized subsequent to invoicing.
Unbilled revenue was $179,000 and $260,000 as of September 30, 2021 and December 31, 2020, respectively, and recorded in prepaid expenses
and other current assets. Deferred revenue was $691,000 and $924,000 as of September 30, 2021 and December 31, 2020, respectively. The
decrease in deferred revenue from December 31, 2020 is primarily due to recognition of revenue for certain CommAgility projects involving
multiple performance obligations, offset by billing in advance of revenue recognition for new projects with multiple performance obligations.
Disaggregated
Revenue
We
disaggregate our revenue from contracts with customers by product family and geographic location as we believe it best depicts how the
nature, timing and uncertainty of our revenue and cash flows are affected by economic factors. See details in the tables below (in thousands).
Schedule of Disaggregated Revenue
|
|
|
Three Months
Ended
September 30, 2021
|
|
|
Three Months Ended
September 30, 2020
|
|
|
Nine Months
Ended
September 30, 2021
|
|
|
Nine Months Ended
September 30, 2020
|
|
|
Total net revenues by revenue type
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Passive and active RF components
|
|
$
|
5,444
|
|
|
$
|
4,407
|
|
|
$
|
12,809
|
|
|
$
|
14,527
|
|
|
Signal generators and components
|
|
|
3,485
|
|
|
|
3,970
|
|
|
|
10,003
|
|
|
|
8,598
|
|
|
Signal analyzers and power meters
|
|
|
1,996
|
|
|
|
1,451
|
|
|
|
5,392
|
|
|
|
4,297
|
|
|
Signal processing hardware
|
|
|
813
|
|
|
|
106
|
|
|
|
3,825
|
|
|
|
1,471
|
|
|
Software licenses
|
|
|
178
|
|
|
|
443
|
|
|
|
1,509
|
|
|
|
1,157
|
|
|
Services
|
|
|
908
|
|
|
|
491
|
|
|
|
2,630
|
|
|
|
1,354
|
|
|
Total net revenue
|
|
$
|
12,824
|
|
|
$
|
10,868
|
|
|
$
|
36,168
|
|
|
$
|
31,404
|
|
|
Total net revenues by geographic areas
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
$
|
9,547
|
|
|
$
|
8,958
|
|
|
$
|
26,018
|
|
|
$
|
23,598
|
|
|
EMEA
|
|
|
1,815
|
|
|
|
1,145
|
|
|
|
5,390
|
|
|
|
4,793
|
|
|
APAC
|
|
|
1,462
|
|
|
|
765
|
|
|
|
4,760
|
|
|
|
3,013
|
|
|
Total net revenue
|
|
$
|
12,824
|
|
|
$
|
10,868
|
|
|
$
|
36,168
|
|
|
$
|
31,404
|
|
NOTE
8 – Income Taxes
The
Company records deferred taxes in accordance with ASC 740, “Accounting for Income Taxes.” ASC 740 requires recognition
of deferred tax assets and liabilities for temporary differences between tax basis of assets and liabilities and the amounts at which
they are carried in the financial statements, based upon the enacted rates in effect for the year in which the differences are expected
to reverse. The Company establishes a valuation allowance when necessary to reduce deferred tax assets to the amount expected to be realized.
The Company periodically assesses the value of its deferred tax assets and determines the necessity for a valuation allowance.
Realization
of the Company’s deferred tax assets is dependent upon the Company generating sufficient taxable income in the appropriate tax
jurisdictions in future years to obtain benefit from the reversal of net deductible temporary differences and from utilization of net
operating losses. The Company’s major tax jurisdictions are New Jersey, Colorado and the United Kingdom (“U.K.”). The
amount of deferred tax assets considered realizable is subject to adjustment in future periods if estimates of future taxable income
are changed.
As
of September 30, 2021, the Company’s net deferred tax asset of approximately $6.2 million is net of a valuation allowance of approximately
$7.7 million which is associated with the Company’s foreign net operating loss carryforward from an inactive foreign entity, state
net operating loss carryforward and a state research and development credit.
The
Company recorded a tax benefit of $386,000 for the nine months ended September 30, 2021 due to estimated taxable losses primarily as
a result of anticipated research and development deductions in the U.K. This was partially offset by the recognition of tax provisions
due to the impact of an increase of the deferred tax liability for the Company’s U.K. jurisdiction due to an increase in the enacted
U.K. tax rate in the nine months ended September 30, 2021.
The
Company recorded a tax provision of $352,000 for the nine months ended September 30, 2020 due to estimated taxable income in the U.S.
because qualified expenses under the PPP loan were not expected to be deductible for tax purposes. In recording the tax provision for
the nine months ended September 30, 2020, the Company had assumed that the PPP loan would be forgiven and, therefore, all PPP qualified
expenses were treated as non-deductible. This was offset somewhat by estimated losses as well as research and development deductions
in the UK.
NOTE
9 – Earnings (Loss) Per Share
Basic
earnings (loss) per share is calculated by dividing net income (loss) available to common shareholders by the weighted-average number
of shares of common stock outstanding during the period. Diluted earnings (loss) per share is calculated by dividing net income (loss)
available to common shareholders by the weighted-average number of common shares outstanding for the period and, when dilutive, potential
shares from stock options using the treasury stock method, the weighted average number of unvested restricted shares, the weighted-average
number of restricted stock units, the number of shares issuable under the terms of the Holzworth earnout and the weighted average number
of warrants to purchase common stock outstanding for the period. Shares from stock options are included in the diluted earnings per share
calculation only when options exercise prices are lower than the average market value of the common shares for the period presented.
In periods with a net loss, the basic loss per share equals the diluted loss per share as all common stock equivalents are excluded from
the per share calculation because they are anti-dilutive. In accordance with ASC 260, “Earnings Per Share”, the following
table reconciles basic shares outstanding to fully diluted shares outstanding.
Schedule of Weighted Average Common Shares Outstanding
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
|
|
For the Three Months
|
|
|
For the Nine Months
|
|
|
|
|
Ended September 30,
|
|
|
Ended September 30,
|
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
22,233,876
|
|
|
|
21,703,268
|
|
|
|
21,899,799
|
|
|
|
21,642,955
|
|
|
Potentially dilutive equity awards
|
|
|
2,449,930
|
|
|
|
388,366
|
|
|
|
2,319,127
|
|
|
|
295,186
|
|
|
Weighted average common shares outstanding, assuming dilution
|
|
|
24,683,806
|
|
|
|
22,091,634
|
|
|
|
24,218,926
|
|
|
|
21,938,141
|
|
For
the three and nine months ended September 30, 2021, the weighted average number of options to purchase common stock not included in potentially
dilutive equity awards because the performance condition was not met was 1,205,000. The number of shares issuable under the terms of
the Holzworth earnout, if all paid in shares of common stock, is 1,430,889 and is included in potentially dilutive equity awards in the
chart above.
For
the three and nine months ended September 30, 2020, the weighted average number of options and warrants to purchase common stock not
included in diluted loss per share because the effects are anti-dilutive, or the performance condition was not met, was 3,246,167 and
2,924,650, respectively.
NOTE
10 – Inventories
Inventory
carrying value is net of inventory reserves of $1.2 million at September 30, 2021 and $1.1 million at December 31, 2020.
Inventories
consist of (in thousands):
Schedule of Inventory
|
|
|
September 30, 2021
|
|
|
December 31, 2020
|
|
|
Raw materials
|
|
$
|
6,067
|
|
|
$
|
4,644
|
|
|
Work-in-process
|
|
|
787
|
|
|
|
618
|
|
|
Finished goods
|
|
|
2,801
|
|
|
|
3,534
|
|
|
Total Inventory
|
|
$
|
9,655
|
|
|
$
|
8,796
|
|
NOTE
11 – Accrued Expenses and Other Current Liabilities
As
of September 30, 2021, and December 31, 2020 accrued expenses and other current liabilities consisted of the following (in thousands):
Schedule of Accrued Expenses and Other Current Liabilities
|
|
|
September 30, 2021
|
|
|
December 31, 2020
|
|
|
Holzworth earnout – short term
|
|
$
|
2,521
|
|
|
$
|
3,423
|
|
|
Payroll and related benefits
|
|
|
1,141
|
|
|
|
864
|
|
|
Goods received not invoiced
|
|
|
1,085
|
|
|
|
458
|
|
|
Holzworth deferred purchase price
|
|
|
500
|
|
|
|
950
|
|
|
Professional fees
|
|
|
481
|
|
|
|
331
|
|
|
Commissions
|
|
|
462
|
|
|
|
605
|
|
|
Bonus
|
|
|
446
|
|
|
|
123
|
|
|
Returns reserve
|
|
|
248
|
|
|
|
212
|
|
|
Sales and use and VAT tax
|
|
|
216
|
|
|
|
315
|
|
|
Warranty reserve
|
|
|
140
|
|
|
|
140
|
|
|
Harris arbitration liability
|
|
|
-
|
|
|
|
116
|
|
|
Other
|
|
|
416
|
|
|
|
460
|
|
|
Total
|
|
$
|
7,656
|
|
|
$
|
7,997
|
|
NOTE
12 - Accounting for Stock Based Compensation
The
Company’s results for the three months ended September 30, 2021 and 2020 include $98,000 and $151,000, respectively, related to
stock based compensation expense. The Company’s results for the nine months ended September 30, 2021 and 2020 include $301,000
and $360,000, 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. As of September 30, 2021, there are no awards available for grant under the 2012 Plan.
In
the second quarter of 2021, the Company’s Board of Directors and shareholders approved the 2021 Long Term Incentive Plan (the “2021
Incentive Plan”), which provides for the grant of equity-based and cash incentives, including stock awards, stock unit awards,
performance unit awards, non-qualified stock options, incentive stock options and cash awards, including dividend equivalent rights to
employees, officers, directors or other service providers of the Company who are expected to contribute to the Company’s future
growth and success. The 2021 Incentive Plan provides for the grant of awards relating to 1.5 million shares of common stock.
On
August 2, 2021 the Company granted 25,000 Restricted Stock Units (“RSU”) to each of our six independent Board members under
the 2021 Incentive Plan. Each RSU represents the Company’s obligation to issue one share of the Company’s common stock subject
to the RSU award agreement and 2021 Incentive Plan. The grant date fair value was $2.70 per share and the RSUs vest on the day before
the first anniversary of the grant date or, if earlier, the effective date of a separation of service due to death or disability, provided
the Board member has rendered continuous service to the Company as a member of the Board of Directors from grant date to vesting date.
Once vested the RSU will be settled by delivery of shares to the Board member no later than 30 days following: 1) the third anniversary
of the grant date, 2) separation from service following, or coincident with, a vesting date, or 3) a change in control.
NOTE 13 – COMMITMENTS AND CONTINGENCIES
There
have been no material changes in our commitments and contingencies and risks and uncertainties as of September 30, 2021 from that previously
disclosed in our annual report on Form 10-K for the year ended December 31, 2020.
NOTE
14 - SUBSEQUENT EVENTS
There
were no subsequent events or transactions requiring recognition or disclosure in the consolidated financial statements, and the notes
thereto, through the date the financial statements were issued.