WTT Wireless Telecom

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 pursuing strategic alternatives to accelerate the realization of value for our shareholders. On January 1, 2022, the Company was comprised of Wireless Telecom Group, Inc., doing business as, and operating under the trade name NoiseCom, Inc., and its wholly owned subsidiaries including Boonton Electronics Corporation, Microlab/FXR, Wireless Telecommunications Group Ltd., CommAgility Limited and Holzworth Instrumentation, Inc. (NoiseCom, Inc., Boonton Electronics Corporation, Microlab/FXR LLC, CommAgility Limited Ltd., and Holzworth Instrumentation, Inc. are hereinafter referred to as “Noisecom”, “Boonton”, “Microlab”, “CommAgility” and “Holzworth”, respectively). Our product groups were organized as follows: Radio Frequency Components (“RFC”) was comprised of our Microlab brand; Radio, Baseband, Software (“RBS”) was comprised of our CommAgility brand; and Test and Measurement (“T&M”) was comprised of our Boonton, Noisecom and Holzworth brands.

As more fully described in Note 3 below, on March 1, 2022, the Company completed the sale of Microlab to RF Industries, Ltd and on December 30, 2022 completed the sale of CommAgility to E-Space Acquisitions, LLC. Subsequent to the divestitures of Microlab and CommAgility, the Company is comprised of the T&M business which is made up of our Boonton, Noisecom and Holzworth brands. The T&M business provides radio frequency (“RF”) and microwave test equipment and low phase noise RF synthesizers to equipment manufacturers, aerospace and defense companies, military and government agencies, satellite communication companies, semiconductor companies and other global technology companies.

Our consolidated financial statements as of and for the three months ended March 31, 2023 include the accounts of Noiscom, Boonton and Holzworth and have been prepared using accounting principles generally accepted in the United States (“U.S. GAAP”). In accordance with applicable accounting guidance, the results of Microlab and CommAgility are presented as discontinued operations in the consolidated financial statements for the three months ended March 31, 2022. 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 “first quarter(s)” or “three months” indicate the Company’s fiscal periods ended March 31, 2023 and March 31, 2022, and references to “year-end” indicate the fiscal year ended December 31, 2022.

Consolidated Financial Statements

In the opinion of management, the accompanying consolidated financial statements referred to above contain allnecessary 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, 2022. 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 months ended March 31, 2023 are not necessarily indicative of the results to be expected for the full year ending December 31, 2023.

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.

Recent inflationary pressures and the conflict between Russia and Ukraine have negatively impacted regional and global economies, disrupted global supply chains and created significant volatility and disruption of financial markets. Although these disruptions 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, 2022.

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.

One customer accounted for 19.0% and 14.1% of consolidated revenue for the three months ended March 31, 2023 and 2022, respectively.

One customer accounted for 15.4% and 16.5% of consolidated accounts receivable as of March 31, 2023 and December 31, 2022, respectively.

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.

Accounts Receivable

Accounts receivable are recorded and carried at the original invoiced amount less allowances for credits and for any potential uncollectible amounts due to credit losses in accordance with ASU 2016-13 Financial Instruments – Credit Losses (Topic 326). We make estimates of the expected credit and collectability trends for the allowance for credit losses based on our assessment of various factors, including historical experience, the age of the accounts receivable balances, credit quality of our customers, current economic conditions, and other factors that may affect our ability to collect from our customers. Expected credit losses are recorded as general and administrative expenses on our condensed consolidated statements of operations. As of March 31, 2023 and December 31, 2022, the allowance for credit losses was $100,000.

Segments

The Company evaluates its financial reporting in accordance with ASC 280 Segment Reporting. As a result of the Microlab and CommAgility divestitures and the reclassification of their results of operations to discontinued operations in accordance with ASC 205-20, the Company’s results from continuing operations are considered one segment.

NOTE 2 – Accounting Pronouncements

Recently Adopted Accounting Standards

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 at 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 adoption of the standard on January 1, 2023 did not have a material impact on our consolidated financial statements.

NOTE 3 – Discontinued Operations

Microlab

On December 16, 2021, the Company and its wholly owned subsidiary Microlab entered into a Membership Interest Purchase Agreement (the “Microlab Purchase Agreement”) with RF Industries, Ltd., a Nevada corporation (the “RF Industries”) whereby RF Industries agreed to purchase 100% of the membership interests in Microlab for a purchase price of $24,250,000, subject to certain adjustments as set forth in the Microlab Purchase Agreement. The board of directors of each of the Company and the Buyer unanimously approved the Microlab Purchase Agreement and the transactions contemplated thereby (collectively, the “Microlab Transaction”). On February 25, 2022, the shareholders of the Company approved the transaction at a Special Meeting of Shareholders held virtually via live webcast and on March 1, 2022, the Microlab Transaction closed.

At closing the Company received approximately $22.8 million in proceeds net of indemnification and purchase price adjustment holdbacks of $150,000 and $100,000, respectively, and direct expenses of approximately $1.1 million including fees to our advisors. In July 2022, the Company received $225,000 in final purchase price adjustment primarily related to the working capital adjustment and on March 1, 2023 the Company received the indemnification holdback amount of $150,000. In total, the Company received net proceeds of approximately $23.1 million related to the Microlab Transaction. In 2022 the Company used $4.2 million of the Microlab Transaction proceeds to repay in full our outstanding term loan with Muzinich BDC and approximately $600,000 was used to repay in full our outstanding revolver balance related to the Bank of America credit agreement. The Company terminated both the Muzinich term loan and Bank of America credit facility as of the Microlab Transaction date. Additionally, concurrent with the closing, the Company entered into a sublease with RF Industries for approximately one-half of the square footage of our corporate headquarters in Parsippany, NJ.

The Transaction was treated as a sale of the assets and liabilities of Microlab to RF Industries for U.S. federal and applicable state income tax purposes.

In accordance with ASC 205-20 Discontinued Operations, the results of Microlab are presented as discontinued operations in the Consolidated Statements of Operations and Comprehensive Income/(Loss) for the three months ended March 31, 2022 and, as such, have been excluded from continuing operations.

The following table summarizes the significant items included in income from discontinued operations for Microlab, net of tax in the Consolidated Statement of Operations and Comprehensive Income/(Loss) for the three months ended March 31, 2022 (in thousands):

On December 4, 2022, the Company, and its wholly owned subsidiary, Wireless Telecommunications Group, LTD, a company organized under the laws of England and Wales (“Holdings”), which owns 100% of the outstanding securities of CommAgility, entered into a Securities Purchase Agreement (the “CommAgility Purchase Agreement”) with E-Space Acquisitions LLC, a Delaware limited liability company (“Buyer”), and eSpace Inc., a Delaware corporation, as guarantor. The CommAgility Purchase Agreement provided for the purchase by the Buyer of 100% of the issued and outstanding equity interests of Holdings (the “Securities”) from the Company. The board of directors or other governing body of each of the Company and the Buyer unanimously approved the CommAgility Purchase Agreement and the transactions contemplated thereby (collectively, the “CommAgility Transaction”). Under the terms of the CommAgility Purchase Agreement, the purchase price for the Securities was estimated to be approximately $14.5 million, inclusive of $13.8 million in cash consideration and a $750,000 note payable, subject to agreed-upon reductions of $650,000.

The CommAgility Transaction closed on December 30, 2022 and the Company received net proceeds of $12.2 million which is comprised of the cash consideration of $13.8 million less direct expenses of approximately $1.6 million. The note payable of $750,000 was offset by agreed-upon reductions of $650,000 for a net balance of approximately $100,000 which is due one year from the transaction close or upon a change in control as defined in the CommAgility Purchase Agreement. The note receivable balance of $100,000 was further offset by the 2023 UK transaction taxes of approximately $69,000 so the expected net proceeds of the note now is approximately $31,000.

In accordance with ASC 205-20 Discontinued Operations, the results of CommAgility are presented as discontinued operations in the Consolidated Statements of Operations and Comprehensive Income/(Loss) for the three months ended March 31, 2022 and, as such, have been excluded from continuing operations.

The following table summarizes the significant items included in income from discontinued operation for CommAgility, net of tax in the Consolidated Statement of Operations and Comprehensive Income/(Loss) for the three months ended March 31, 2022 (in thousands):

The cash flows related to discontinued operations have not been segregated and are included in the consolidated statements of cash flows for the three months ended March 31, 2022. Depreciation and amortization expense in the three months ended March 31, 2022 for Microlab was not material and for CommAgility was $154,000. Capital expenditures in the three months ended March 31, 2022 for Microlab was not material and for CommAgility was $108,000.

NOTE 4 – 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 March 31, 2023 and December 31, 2022. 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).

Cash paid for amounts included in the present value of operating lease liabilities was $169,000 and $156,000 during the three months ended March 31, 2023 and 2022, respectively, and was included in operating cash flows.

Operating lease costs for the three months ended March 31, 2023 and March 31, 2022 were $147,000.

The following table presents information about the amount and timing of cash flows arising from the Company’s leases as of March 31, 2023:

On March 31, 2023, the Company entered into the Sixth Amendment to the lease for our corporate headquarters and operating facility for our Boonton and Noisecom brands in Parsippany, New Jersey. The term of the lease was extended for a period of twelve months, commencing April 1, 2023 and expiring on March 31, 2024 for a fixed monthly rent of $60,933. Due to the short term nature of this extension the lease extension will not be recorded on the balance sheet.

On March 1, 2022, the Company entered into a sublease for approximately one-half of the corporate headquarters in Parsippany N.J. with RF Industries, Ltd. The sublease co-terminated with the master lease on March 31, 2023. The Company evaluated the sublease in accordance with ASC 842 Leases and determined that the sublease is an operating lease. Accordingly, sublease income is recognized on the Consolidated Statement of Operations as other income. On March 31, 2023 the sublease was extended for a period of four months at a fixed monthly rent of $31,075.

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 Company’s major tax jurisdictions are New Jersey, Colorado and California . The amount of deferred tax assets considered realizable is subject to adjustment in future periods if estimates of future taxable income are changed.

As of March 31, 2023, the Company’s net deferred tax asset of $3.1 million is net of a valuation allowance of approximately $3.1 million which is associated with the Company’s state net operating loss carryforward and a state research and development credit.

The Company recorded a tax benefit of $162,000 in the three months ended March 31, 2023 based on the estimated effective annual tax rate. In accordance with Accounting Standards Update (“ASU”) 2019-12 the Company recorded a tax provision of approximately $4.9 million related to income from discontinued operations and a tax benefit of approximately $856,000 related to loss from continuing operations for the three months ended March 31, 2022.

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, the weighted average number of unvested restricted shares, the weighted-average number of restricted stock units, and the weighted average number of warrants to purchase common stock outstanding for the period. Shares from stock options are included in the diluted earnings per share calculation only when options exercise prices are lower than the average market value of the common shares for the period presented. In periods with a net loss, the basic loss per share equals the diluted loss per share as all common stock equivalents are excluded from the per share calculation because they are anti-dilutive. In accordance with ASC 260, “Earnings Per Share”, the following table reconciles basic shares outstanding to fully diluted shares outstanding.

For the three months ended March 31, 2023, the weighted average number of option to purchase common stock not included in potentially dilutive equity awards because the effects are anti-dilutive, or the performance condition was not met was 895,000.

For the three months ended March 31, 2022, the weighted average number of options to purchase common stock not included in potentially dilutive equity awards because the effects are anti-dilutive, or the performance condition was not met was 1,320,000. The number of shares issuable under the terms of the Holzworth earnout, if all paid in shares of common stock, was 1,340,637 and was included in potentially dilutive equity awards in the chart above.

NOTE 9 – Accrued Expenses and Other Current Liabilities

As of March 31, 2023, and December 31, 2022 accrued expenses and other current liabilities consisted of the following (in thousands):

NOTE 10 – Accounting for Stock Based Compensation

The Company’s results for the three months ended March 31, 2023 and 2022 include $116,000 and $330,000, 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 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 restricted stock awards, restricted 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. As of March 31, 2023, there are 378,125 shares available for grant under the 2021 Incentive Plan.

All service-based (time vesting) options granted have ten-year terms from the date of grant and typically vest annually and become fully exercisable after a maximum of five years. However, vesting conditions are determined on a grant by grant basis.

NOTE 11 – COMMITMENTS AND CONTINGENCIES

There have been no material changes in our commitments and contingencies and risks and uncertainties as of March 31, 2023 from that previously disclosed in our annual report on Form 10-K for the year ended December 31, 2022.