NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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”), is a global designer and manufacturer of advanced radio frequency (“RF”) and microwave
components, modules, systems and instruments and currently markets its products and services worldwide under the Boonton, Microlab,
Noisecom and CommAgility brands. Serving the wireless, telecommunication, satellite, military, aerospace, and semiconductor industries,
Wireless Telecom Group products enable innovation across a wide range of traditional and emerging wireless technologies. With
a unique set of high-performance products including peak power meters, signal analyzers, signal processing modules, long-term
evolution (“LTE”) physical layer (“PHY”) and stack software, power splitters and combiners, global positioning
system (“GPS”) splitters and repeaters, public safety monitors, noise sources, and programmable noise generators,
Wireless Telecom Group supports the development, testing, and deployment of wireless technologies around the globe.
The
consolidated balance sheet as of June 30, 2019, the consolidated statements of operations and comprehensive income/(loss) for
the three and six months ended June 30, 2019 and 2018, the consolidated statements of cash flows for the six months ended June
30, 2019 and 2018 and the consolidated statement of shareholders’ equity for the three and six months ended June 30, 2019
and 2018 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”), 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 and Noisecom. 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 “second quarter(s)”
or “three months” indicate the Company’s fiscal periods ending June 30, 2019 and June 30, 2018, and references
to “year-end” indicate the fiscal year ended December 31, 2018.
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, 2018. 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 and six months ended June 30, 2019 are not necessarily indicative of the results to be expected
for the full year ending December 31, 2019.
Reclassification
Certain
prior period amounts have been reclassified to conform with the current period presentation.
WIRELESS
TELECOM GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 and six months ended June 30, 2019 , one customer accounted for approximately 34% and 33% of the Company’s consolidated
revenues, respectively. For the three and six months ended June 30, 2018, one customer accounted for approximately 25% and 21%
of the Company’s consolidated revenues, respectively. At June 30, 2019 and December 31, 2018, one customer accounted for
34% and 32% of consolidated gross accounts receivable, respectively.
Subsequent
Events
Management
has evaluated subsequent events and determined that 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.
NOTE
2 – Accounting Pronouncements
Recently
Adopted Accounting Standards
In
February 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-02,
Leases (Topic 842)
, which created
new accounting and reporting guidelines for leasing arrangements. The new guidance requires organizations that lease assets to
recognize assets and liabilities on the balance sheet related to the rights and obligations created by those leases, regardless
of whether they are classified as finance or operating leases. Consistent with current guidance, the recognition, measurement,
and presentation of expenses and cash flows arising from a lease primarily will depend on its classification as a finance or operating
lease. The guidance also requires new disclosures to help financial statement users better understand the amount, timing, and
uncertainty of cash flows arising from leases.
The
Company adopted the requirements of the new standard effective January 1, 2019 using the modified retrospective transition method,
which applies the provisions of the standard at the effective date without adjustment to the comparative periods presented. The
Company adopted the following practical expedients and elected the following accounting policies related to this standard:
|
●
|
Carry
forward of historical lease classifications and accounting treatment;
|
|
●
|
Short-term
lease accounting policy election allowing lessees to not recognize right-of-use assets and liabilities for leases with a term
of 12 months or less; and
|
|
●
|
The
option to not separate lease and non-lease components for certain equipment lease categories such as office printers and copiers.
|
Adoption
of this standard resulted in the recognition of operating lease right-of-use assets and corresponding lease liabilities of $1.9
million on the consolidated balance sheet as of January 1, 2019. The standard did not materially impact operating results or liquidity.
Disclosures related to the amount, timing and uncertainty of cash flows arising from leases are included in Note 3.
On
June 20, 2018, the FASB issued ASU 2018-07,
Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based
Payment Accounting.
ASU 2018-07 is intended to reduce cost and complexity and to improve financial reporting for share-based
payments issued to nonemployees. This ASU expands the scope of ASC Topic 718,
Compensation - Stock Compensation
, which
currently only includes share-based payments issued to employees, to also include share-based payments issued to nonemployees
for goods and services. Consequently, the accounting for share-based payments to nonemployees and employees will be substantially
aligned. ASU 2018-07 supersedes ASC
Subtopic 505-50, Equity - Equity-Based Payments to Non-Employees
. The amendments in
this ASU are effective for public companies for fiscal years beginning after December 15, 2018, including interim periods within
that fiscal year. The Company adopted this standard on January 1, 2019 and it did not have a material impact on our financial
statements.
WIRELESS
TELECOM GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Except
for the change in accounting policies for leases as a result of adopting Topic 842, there have been no other changes to our significant
accounting policies as described in the 2018 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 fiscal years, and for interim periods within those fiscal years, beginning
after December 15, 2019. The Company plans to adopt the standard effective January 1, 2020. We are currently in the process of
evaluating the effects of this pronouncement on our consolidated financial statements.
In
August 2018, the FASB issued ASU 2018-13,
Fair Value Measurement, Disclosure Framework – Changes to the Disclosure Requirements
for Fair Value Measurement (Topic 820)
. ASU 2018-13 eliminates, modifies and adds disclosure requirements for fair value measurements.
This pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December
15, 2019, with early adoption permitted. We are currently in the process of evaluating the effects of this pronouncement on our
consolidated financial statements.
NOTE
3 – 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 sheet as of June 30, 2019. These assets and liabilities are recognized at
the commencement date based on the present value of remaining lease payments over the lease term using the Company’s incremental
borrowing rate. Short-term leases, which have an initial term of 12 months or less, are not recorded on the balance sheet.
Lease
expense is recognized on a straight-line basis over the lease term and is included in cost of revenues and general and administrative
expenses on the consolidated statement of operations and comprehensive income/(loss).
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. Subsequent to adoption of the new standard there were no new right-of-use assets recognized during the six months ended
June 30, 2019. Cash paid for amounts included in the present value of operating lease liabilities was $0.3 million during the
six months ended June 30, 2019 and is included in operating cash flows.
Operating
lease costs were $0.2 million and $0.4 million during the three and six months ended June 2019, respectively.
WIRELESS
TELECOM GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The
following table presents information about the amount and timing of cash flows arising from the Company’s operating leases
as of June 30, 2019.
(in
thousands)
|
|
June
30, 2019
|
|
Maturity
of Lease Liabilities
|
|
|
|
|
2019
(remaining)
|
|
$
|
256
|
|
2020
|
|
|
511
|
|
2021
|
|
|
474
|
|
2022
|
|
|
488
|
|
2023
|
|
|
123
|
|
Thereafter
|
|
|
-
|
|
Total
Undiscounted operating lease payments
|
|
|
1,852
|
|
|
|
|
|
|
Less:
imputed interest
|
|
|
(182
|
)
|
Present
Value of Operating Lease Liabilities
|
|
$
|
1,670
|
|
|
|
|
|
|
Other
information
|
|
|
|
|
Weighted-average
remaining lease term for operating leases (in months)
|
|
|
44
|
|
Weighted-average
discount rate for operating leases
|
|
|
5.72
|
%
|
NOTE
4 – 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 99% of the Company’s total revenue for the three and six months ended June 30, 2019. Revenue
from performance obligations that transferred at a point in time accounted for approximately 95% of the Company’s total
revenue for both the three and six months ended June 30, 2018.
Nature
of Products and Services
Hardware
The
Company generally has one performance obligation in its arrangements involving the sales of radio frequency solutions in the Network
Solutions segment, digital signal processing hardware in the Embedded Solutions segment and noise generators and components and
power meter and analyzers in the Test and Measurement segment. When the terms of a contract include the transfer of multiple products,
each distinct product is identified as a separate performance obligation. Generally, satisfaction occurs when control of the promised
goods is transferred to the customer in exchange for consideration in an amount for which we expect to be entitled. Generally,
control is transferred when legal title of the asset moves from the Company to the customer. We sell our products to a customer
based on a purchase order, and the shipping terms per each individual order are primarily used to satisfy the single performance
obligation. However, in order to determine control has transferred to the customer, the Company also considers:
|
●
|
when
the Company has a present right to payment for the asset
|
|
●
|
when
the Company has transferred physical possession of the asset to the customer
|
|
●
|
when
the customer has the significant risks and rewards of ownership of the asset
|
|
●
|
when
the customer has accepted the asset
|
WIRELESS
TELECOM GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Software
Arrangements
involving licenses of software in the Embedded Solutions segment may involve multiple performance obligations, most notably subsequent
releases of the software. The Company has concluded that each software release in a multiple deliverable arrangement in the Embedded
Solutions segment 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 in the Company’s Test and Measurement segment are generally considered a single
performance obligation and are recognized as the services are rendered.
Shipping
and Handling
Shipping
and handling activities performed after the customer obtains control are accounted for as fulfillment activities and recognized
as cost of 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’s shipments include a limited return right. In those cases 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 or contract liabilities (deferred revenue) on the Company’s consolidated balance sheet. The Company records a contract
asset when revenue is recognized prior to invoicing, or deferred revenue when revenue is recognized subsequent to invoicing. Contract
assets are recorded in prepaid expenses and other current assets and were $0.1 million as of June 30, 2019 and $0.3 million as
of December 31, 2018. Deferred revenue is $0.3 million and $0.1 million as of June 30, 2019 and December 31, 2018, respectively.
Disaggregated
Revenue
We
disaggregate our revenue from contracts with customers by product family and geographic location for each of our segments as we
believe it best depicts how the nature, timing and uncertainty of our revenue and cash flows are affected by economic factors.
See details in the tables below (in thousands).
WIRELESS
TELECOM GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
|
Three
Months Ended June 30, 2019
|
|
|
Six
Months Ended June 30, 2019
|
|
|
|
Network
Solutions
|
|
|
Test
&
Measurement
|
|
|
Embedded
Solutions
|
|
|
Total
|
|
|
Network
Solutions
|
|
|
Test
&
Measurement
|
|
|
Embedded
Solutions
|
|
|
Total
|
|
Net Revenues by Revenue Type
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Passive
RF Components
|
|
$
|
5,575
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
5,575
|
|
|
$
|
11,333
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
11,333
|
|
Noise
Generators and Components
|
|
|
-
|
|
|
|
1,579
|
|
|
|
-
|
|
|
|
1,579
|
|
|
|
-
|
|
|
|
3,025
|
|
|
|
-
|
|
|
|
3,025
|
|
Power
Meters and Analyzers
|
|
|
-
|
|
|
|
1,314
|
|
|
|
-
|
|
|
|
1,314
|
|
|
|
-
|
|
|
|
2,622
|
|
|
|
-
|
|
|
|
2,622
|
|
Signal
Processing Hardware
|
|
|
-
|
|
|
|
-
|
|
|
|
4,590
|
|
|
|
4,590
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8,648
|
|
|
|
8,648
|
|
Software
Licenses
|
|
|
-
|
|
|
|
-
|
|
|
|
3
|
|
|
|
3
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6
|
|
|
|
6
|
|
Services
|
|
|
-
|
|
|
|
299
|
|
|
|
148
|
|
|
|
447
|
|
|
|
-
|
|
|
|
575
|
|
|
|
331
|
|
|
|
906
|
|
Total
Net Revenue
|
|
$
|
5,575
|
|
|
$
|
3,192
|
|
|
$
|
4,741
|
|
|
$
|
13,508
|
|
|
$
|
11,333
|
|
|
$
|
6,222
|
|
|
$
|
8,985
|
|
|
$
|
26,540
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues by Geographic Areas
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
$
|
4,853
|
|
|
$
|
2,262
|
|
|
$
|
148
|
|
|
$
|
7,263
|
|
|
$
|
10,056
|
|
|
$
|
4,066
|
|
|
$
|
323
|
|
|
$
|
14,445
|
|
EMEA
|
|
|
672
|
|
|
|
556
|
|
|
|
4,580
|
|
|
|
5,808
|
|
|
|
1,173
|
|
|
|
1,105
|
|
|
|
8,641
|
|
|
|
10,919
|
|
APAC
|
|
|
50
|
|
|
|
374
|
|
|
|
13
|
|
|
|
437
|
|
|
|
104
|
|
|
|
1,051
|
|
|
|
21
|
|
|
|
1,176
|
|
Total
Net Revenue
|
|
$
|
5,575
|
|
|
$
|
3,192
|
|
|
$
|
4,741
|
|
|
$
|
13,508
|
|
|
$
|
11,333
|
|
|
$
|
6,222
|
|
|
$
|
8,985
|
|
|
$
|
26,540
|
|
|
|
Three
Months Ended June 30, 2018
|
|
|
Six
Months Ended June 30, 2018
|
|
|
|
Network
Solutions
|
|
|
Test
&
Measurement
|
|
|
Embedded
Solutions
|
|
|
Total
|
|
|
Network
Solutions
|
|
|
Test
&
Measurement
|
|
|
Embedded
Solutions
|
|
|
Total
|
|
Net Revenues by Revenue Type
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Passive
RF Components
|
|
$
|
5,636
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
5,636
|
|
|
$
|
11,147
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
11,147
|
|
Noise
Generators and Components
|
|
|
-
|
|
|
|
1,588
|
|
|
|
-
|
|
|
|
1,588
|
|
|
|
-
|
|
|
|
3,087
|
|
|
|
-
|
|
|
|
3,087
|
|
Power
Meters and Analyzers
|
|
|
-
|
|
|
|
1,574
|
|
|
|
-
|
|
|
|
1,574
|
|
|
|
-
|
|
|
|
3,554
|
|
|
|
-
|
|
|
|
3,554
|
|
Signal
Processing Hardware
|
|
|
-
|
|
|
|
-
|
|
|
|
3,555
|
|
|
|
3,555
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,461
|
|
|
|
6,461
|
|
Software
Licenses
|
|
|
-
|
|
|
|
-
|
|
|
|
28
|
|
|
|
28
|
|
|
|
-
|
|
|
|
-
|
|
|
|
511
|
|
|
|
511
|
|
Services
|
|
|
-
|
|
|
|
372
|
|
|
|
661
|
|
|
|
1,033
|
|
|
|
-
|
|
|
|
656
|
|
|
|
1,262
|
|
|
|
1,918
|
|
Total
Net Revenue
|
|
$
|
5,636
|
|
|
$
|
3,534
|
|
|
$
|
4,244
|
|
|
$
|
13,414
|
|
|
$
|
11,147
|
|
|
$
|
7,297
|
|
|
$
|
8,234
|
|
|
$
|
26,678
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues by Geographic Areas
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
$
|
4,978
|
|
|
$
|
2,242
|
|
|
$
|
762
|
|
|
$
|
7,982
|
|
|
$
|
9,137
|
|
|
$
|
4,757
|
|
|
$
|
2,185
|
|
|
$
|
16,079
|
|
EMEA
|
|
|
491
|
|
|
|
514
|
|
|
|
3,480
|
|
|
|
4,485
|
|
|
|
1,432
|
|
|
|
963
|
|
|
|
5,850
|
|
|
|
8,245
|
|
APAC
|
|
|
167
|
|
|
|
778
|
|
|
|
2
|
|
|
|
947
|
|
|
|
578
|
|
|
|
1,577
|
|
|
|
199
|
|
|
|
2,354
|
|
Total
Net Revenue
|
|
$
|
5,636
|
|
|
$
|
3,534
|
|
|
$
|
4,244
|
|
|
$
|
13,414
|
|
|
$
|
11,147
|
|
|
$
|
7,297
|
|
|
$
|
8,234
|
|
|
$
|
26,678
|
|
WIRELESS
TELECOM GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
5 – Acquisition of CommAgility
On
February 17, 2017, Wireless Telecommunications, Ltd. (the “Acquisition Subsidiary”), a company incorporated in England
and Wales which is a wholly owned subsidiary of Wireless Telecom Group, Inc., completed the acquisition of all the issued shares
in CommAgility from CommAgility’s founders. The Acquisition was completed pursuant to the terms of a Share Purchase Agreement,
dated February 17, 2017, and entered into by and among the Company, the Acquisition Subsidiary and the founders. The Company paid
$11.3 million in cash on acquisition date and issued 3,487,528 shares of newly issued Company common stock (“Consideration
Shares”) with an acquisition date fair value of $6.0 million. In addition to the acquisition date cash purchase price, the
sellers were paid an additional $2.5 million in the form of deferred purchase price installments beginning in March 2017 through
January 2019 and were paid an additional purchase price adjustment based on working capital and cash levels of $1.4 million. Lastly,
the sellers earned $1.5 million in contingent consideration as a result of meeting certain financial targets for the year ended
December 31, 2018. The contingent consideration was paid in March 2019. Approximately $0.7 million of the contingent consideration
payment is classified as cash used by operating activities in the consolidated statement of cash flows for the six months ended
June 2019 and approximately $0.8 million is classified as cash used for financing activities in the consolidated statement of
cash flows for the six months ended June 2019 in accordance with ASU 2016-15
Classification of Certain Cash Receipts and Cash
Payments
(“ASU 2016-15”). Under ASU 2016-15 the portion of the cash payment up to the acquisition date fair value
of the contingent consideration liability (including measurement period adjustments) is classified as a financing outflow, and
the amounts paid in excess of the acquisition date fair value of that liability will be classified as operating outflows.
Pursuant
to the Share Purchase Agreement, 2,092,516 of the Consideration Shares were subject to forfeiture and return to the Company if
(a) 2017 Adjusted EBITDA, as defined, generated by CommAgility was less than £2.4 million; or (b) 2018 Adjusted EBITDA,
as defined, generated by CommAgility was less than £2.4 million (in each case as determined by an audit of CommAgility conducted
by the accountants of the Acquisition Subsidiary in accordance with the terms of the Share Purchase Agreement). In March 2018
all consideration shares, which are valued at $3.6 million, were forfeited as the 2017 EBITDA threshold was not achieved. The
forfeited shares are recorded as treasury stock in the consolidated statement of shareholders’ equity as of June 30, 2019
and December 31, 2018.
The
total purchase price for the CommAgility acquisition, including the final contingent consideration payment, is $14.6 million which
is net of cash acquired. There are no further purchase price obligations under the Stock Purchase Agreement as of June 30, 2019.
NOTE
6 – 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 June 30, 2019 the Company’s net deferred tax asset of $5.1 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 31.5% for the six months ended June 30, 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.
The
effective rate of income tax provision of 45.2% for the six months ended June 30, 2018 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 and non-qualified stock
option deductions in the U.S. 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
7 – 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, unvested restricted shares and the weighted-average
number of restricted stock units 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.
WIRELESS
TELECOM GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
|
For
the Three Months
|
|
|
For
the Six Months
|
|
|
|
Ended
June 30,
|
|
|
Ended
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding
|
|
|
20,973,134
|
|
|
|
20,864,428
|
|
|
|
20,972,875
|
|
|
|
20,755,027
|
|
Potentially
dilutive equity awards
|
|
|
619,741
|
|
|
|
736,469
|
|
|
|
659,470
|
|
|
|
755,512
|
|
Weighted
average common shares outstanding,
assuming dilution
|
|
|
21,592,875
|
|
|
|
21,600,897
|
|
|
|
21,632,345
|
|
|
|
21,510,539
|
|
For
the three and six months ended June 30, 2019 the weighted-average number of options to purchase common stock not included in diluted
loss per share because the effects are anti-dilutive or the performance condition was not met was 1,311,813 and 490,000, respectively.
NOTE
8 – Inventories
Inventory
carrying value is net of inventory reserves of $1.9 million and $1.9 million at June 30, 2019 and December 31, 2018, respectively.
Inventories
consist of (in thousands):
|
|
June
30, 2019
|
|
|
December
31, 2018
|
|
Raw
materials
|
|
$
|
4,644
|
|
|
$
|
3,248
|
|
Work-in-process
|
|
|
714
|
|
|
|
557
|
|
Finished
goods
|
|
|
3,132
|
|
|
|
3,079
|
|
|
|
$
|
8,490
|
|
|
$
|
6,884
|
|
NOTE
9 – Debt
Debt
consists of the following (in thousands):
|
|
June
30, 2019
|
|
Revolver
at LIBOR Plus Margin
|
|
$
|
2,474
|
|
Term
Loan at LIBOR Plus Margin
|
|
|
418
|
|
Total
Debt
|
|
|
2,892
|
|
Debt
Maturing within one year
|
|
|
(2,892
|
)
|
Non-current
portion of long term debt
|
|
$
|
-
|
|
In
connection with the acquisition of CommAgility, the Company entered into a Credit Agreement with Bank of America, N.A. (the “Lender”)
on February 16, 2017 (the “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 85% of eligible accounts receivable and inventory, as defined,
subject to certain caps and limits. The borrowing base is calculated on a monthly basis. The proceeds of the term loan and revolver
were used to finance the acquisition of CommAgility.
WIRELESS
TELECOM GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In
connection with the issuance of the Credit Facility, the Company paid lender and legal fees of $0.2 million which were primarily
related to the Revolver and are capitalized and presented as other current and non-current assets in the consolidated balance
sheets. These costs are recognized as additional interest expense over the term of the related debt instrument using the straight
line method which approximates the effective interest method.
The
Company must repay the Term Loan in installments of $38,000 per quarter due on the first day of each fiscal quarter beginning
April 1, 2017 and continuing until the term loan maturity date, on which the remaining balance is due in a final installment.
The Term Loan and Revolver were both scheduled to mature on November 16, 2019. On February 26, 2019, the Company entered into
Amendment No. 3 to the Credit Facility which extends the termination date of the Revolver from November 16, 2019 to March 31,
2020.
The
Term and Revolver Loans bear interest at the LIBOR rate plus a margin. The margin on the outstanding balance of the Company’s
Term Loans and Revolver Loans were fixed at 3.50% and 3.00% per annum, respectively, through September 30, 2017. Thereafter, the
margins were subject to increase or decrease by Lender on the first day of each of the Borrowers’ fiscal quarters based
upon the Fixed Charge Coverage Ratio (as defined in the Credit Facility) as of the most recently ended fiscal quarter falling
into one of three levels. If the Company’s Fixed Charge Coverage Ratio is greater than or equal to 1.25 to 1.00, a margin
of 3.25% and 2.75%, respectively, is added to LIBOR rate with a step up to 3.50% and 3.00%, respectively, if the ratio is greater
than or equal 1.00 to 1.00 but less than 1.25 to 1.00 and another step up to 3.75% and 3.25%, respectively, if the ratio is less
than 1.00 to 1.00. The Company is also required to pay a commitment fee on the unused commitments under the Revolver at a rate
equal to 0.50% per annum and early termination fee of (a) 2% of the Revolver Commitment Amount and Term Loan if termination occurs
before the first anniversary of the Credit Facility or (b) 1% of the Revolver Commitment Amount and Term Loan if termination occurs
after the first anniversary of the Credit Facility but before the second anniversary of the Credit Facility. The Company’s
interest rate plus margin as of June 30, 2019 on the Credit Facility was 5.25% and 5.75% for the Revolver and Term Loan, respectively.
The Company’s interest rate plus margin as of December 31, 2018 on the Credit Facility was 5.38% and 5.88% for the Revolver
and Term Loan, respectively.
The
Credit Facility is secured by liens on substantially all of the Company’s and its domestic subsidiaries’ assets including
a pledge of 66 1/3% of the equity interests in the Company’s Foreign Subsidiaries (as defined in the Credit Facility). The
Credit Facility contains customary affirmative and negative covenants for a transaction of this type, including, among others,
the provision of annual, quarterly and monthly financial statements and compliance certificates, maintenance of property, insurance,
compliance with laws and environmental matters, restrictions on incurrence of indebtedness, granting of liens, making investments
and acquisitions, paying dividends, entering into affiliate transactions and asset sales. Events of default under the Credit Facility
include but are not limited to: failure to pay obligations when due, breach or failure of any covenant, insolvency or bankruptcy,
materially misleading representations or warranties, occurrence of a Change in Control (as defined in the Credit Facility) or
occurrence of conditions that have a Material Adverse Effect (as defined in the Credit Facility).
As
of June 30, 2019, and the date hereof, the Company is in compliance with the covenants of the Credit Facility.
NOTE
10 - Accounting for Stock Based Compensation
The
Company’s results for the three and six month period ended June 30, 2019 includes $0.2 million and $0.4 million related
to stock based compensation expense, respectively. 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 June 30, 2019, there are approximately 1.5 million shares available for
issuance under the 2012 Plan.
WIRELESS
TELECOM GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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.
Restricted
Common Stock Awards
On
January 11, 2019 the Company granted 95,000 restricted stock awards to employees under the 2012 Plan. The awards vest in equal
annual installments over a three year period or upon a change in control, as defined in the 2012 Plan, as long as the grantee
continues to provide service to the Company until the applicable vesting date. The grant date fair value of the restricted stock
awards was $1.56 per share.
Service-Based
Stock Option Awards
On
January 11, 2019 the Company granted 15,000 incentive stock options. The stock options vest in equal annual installments over
a three year period or upon a change in control, as defined in the 2012 Plan, as long as the grantee continues to provide service
to the Company until the applicable vesting date. The following table presents the assumptions used to estimate the fair value
of the stock option award granted in the first quarter of 2019 under the Black Scholes model:
|
|
Number of
Options
|
|
|
Option
Term
(in years)
|
|
|
Exercise
Price
|
|
|
Risk
Free Interest Rate
|
|
|
Expected
Volatility
|
|
|
Fair
Value at Grant Date
|
|
|
Expected
Dividend Yield
|
|
January
11, 2019 - Service
|
|
|
15,000
|
|
|
|
3
|
|
|
$
|
1.56
|
|
|
|
2.52
|
%
|
|
|
49.80
|
%
|
|
$
|
0.56
|
|
|
$
|
0.00
|
|
Restricted
Stock Units
On
May 30, 2019 the Company granted 25,000 Restricted Stock Units (“RSU”) to each of our five independent board members
under the 2012 Plan. Each RSU represents the Company’s obligation to issue one share of the Company’s common stock
subject to the RSU award agreement and 2012 Plan. The grant date fair value was $1.55 per share and the RSU’s vest on the
day before the first anniversary of the grant date or, if earlier, the effective date of a separation of service due to death
or disability, provided the board member has rendered continuous service to the Company as a member of the board of directors
from grant date to vesting date. Once vested the RSU will be settled by delivery of shares to the board member no later than 30
days following: 1) the third anniversary of the grant date, 2) separation from service following, or coincident with, a vesting
date, or 3) a change in control.
Outstanding
Stock Options and Unvested Restricted Awards
As
of June 30, 2019 there were 1,950,000 service based stock options outstanding and 305,000 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 six months
ended June 30, 2019) is 190,934 and have an average exercise price of 1.46 per share.
Additionally,
as of June 30, 2019, there were 326,081 unvested restricted shares, 125,000 unvested restricted stock units and 125,000 vested
restricted stock units outstanding.
WIRELESS
TELECOM GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
12 – 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
The
Test and Measurement segment is comprised primarily of the Company’s operations of the Noisecom product line and the operations
of its subsidiary, Boonton. Noisecom designs and produces noise generation equipment and instruments, calibrated noise sources,
noise modules and diodes. Noise components and instruments are used as a method to provide wide band signals for sophisticated
telecommunication and defense applications, and as a stable reference standard for instruments and systems, including radar and
satellite communications. Boonton products are also used to test terrestrial and satellite communications, radar and telemetry.
Certain power meter products are designed for measuring signals based on wideband modulation formats, allowing a variety of measurements
to be made, including maximum power, peak power, average power and minimum power. Customers of the Test and Measurement segment
include large defense contractors and the U.S. and foreign governments.
Embedded
Solutions
The
Embedded 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).
WIRELESS
TELECOM GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Financial
information by reportable segment for the respective periods is set forth below (in thousands):
|
|
For
the Three Months
|
|
|
For
the Six Months
|
|
|
|
Ended
June 30,
|
|
|
Ended
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Net
sales by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Network
Solutions
|
|
$
|
5,575
|
|
|
$
|
5,636
|
|
|
$
|
11,333
|
|
|
$
|
11,147
|
|
Test
and Measurement
|
|
|
3,192
|
|
|
|
3,534
|
|
|
|
6,222
|
|
|
|
7,297
|
|
Embedded
Solutions
|
|
|
4,741
|
|
|
|
4,244
|
|
|
|
8,985
|
|
|
|
8,234
|
|
Total
consolidated net sales of reportable segments
|
|
|
13,508
|
|
|
|
13,414
|
|
|
|
26,540
|
|
|
|
26,678
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Network
Solutions
|
|
|
840
|
|
|
|
758
|
|
|
|
1,547
|
|
|
|
1,571
|
|
Test
and Measurement
|
|
|
377
|
|
|
|
416
|
|
|
|
612
|
|
|
|
926
|
|
Embedded
Solutions
|
|
|
64
|
|
|
|
273
|
|
|
|
(3
|
)
|
|
|
883
|
|
Income
(loss) from reportable segments
|
|
|
1,281
|
|
|
|
1,447
|
|
|
|
2,156
|
|
|
|
3,380
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
unallocated amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
expenses
|
|
|
(1,135
|
)
|
|
|
(1,414
|
)
|
|
|
(2,407
|
)
|
|
|
(2,778
|
)
|
Other
(expenses) income - net
|
|
|
62
|
|
|
|
(108
|
)
|
|
|
(23
|
)
|
|
|
(247
|
)
|
Consolidated
income/(loss) before Income tax provision/(benefit)
|
|
$
|
208
|
|
|
$
|
(75
|
)
|
|
$
|
(274
|
)
|
|
$
|
355
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Network
Solutions
|
|
$
|
90
|
|
|
$
|
172
|
|
|
$
|
213
|
|
|
$
|
309
|
|
Test
and Measurement
|
|
|
248
|
|
|
|
123
|
|
|
|
363
|
|
|
|
297
|
|
Embedded
Solutions
|
|
|
309
|
|
|
|
316
|
|
|
|
620
|
|
|
|
631
|
|
Total
depreciation and amortization for reportable segments
|
|
$
|
647
|
|
|
$
|
611
|
|
|
$
|
1,196
|
|
|
$
|
1,237
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Network
Solutions
|
|
$
|
34
|
|
|
$
|
204
|
|
|
$
|
63
|
|
|
$
|
282
|
|
Test
and Measurement
|
|
|
35
|
|
|
|
27
|
|
|
|
94
|
|
|
|
129
|
|
Embedded
Solutions
|
|
|
63
|
|
|
|
152
|
|
|
|
104
|
|
|
|
172
|
|
Total
consolidated capital expenditures by reportable segment
|
|
$
|
132
|
|
|
$
|
383
|
|
|
$
|
261
|
|
|
$
|
583
|
|
|
|
June 30, 2019
|
|
|
December 31, 2018
|
|
Total assets by segment:
|
|
|
|
|
|
|
|
|
Network Solutions
|
|
$
|
10,147
|
|
|
$
|
10,088
|
|
Test and Measurement
|
|
|
7,464
|
|
|
|
5,943
|
|
Embedded Solutions
|
|
|
17,723
|
|
|
|
16,804
|
|
Total assets for reportable segments
|
|
|
35,334
|
|
|
|
32,835
|
|
|
|
|
|
|
|
|
|
|
Corporate assets, principally cash and cash equivalents and deferred income taxes
|
|
|
10,901
|
|
|
|
11,332
|
|
Total consolidated assets
|
|
$
|
46,235
|
|
|
$
|
44,167
|
|
NOTE
13 – COMMITMENTS AND CONTINGENCIES
Legal
Proceeding
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 by offering for sale, marketing, and promoting
techniques, capabilities, products and services that incorporate Work Product, as defined in the Agreements, 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. The Company expects a portion of the
legal expenses and monetary damages, if any, to be 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 June 30, 2019 from
that previously disclosed in our annual report on Form 10-K for the year ended December 31, 2018.