NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Wireless
Telecom Group, Inc.
NOTE
1 - DESCRIPTION OF COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Organization
and Basis of Presentation
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 RF, microwave and millimeter wave 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”) 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 financial
statements include the accounts of Wireless Telecom Group, Inc., doing business as, and operating under the trade name, Noise
Com, Inc. (“Noisecom”), and its wholly owned subsidiaries including Boonton Electronics Corporation (“Boonton”),
Microlab/FXR (“Microlab”), Wireless Telecommunications Ltd. and CommAgility Limited (“CommAgility”).
The
accompanying Consolidated Financial Statements include the accounts of the Company and its wholly owned subsidiaries. The Consolidated
Financial Statements have been prepared using accounting principles generally accepted in the United States (“U.S. GAAP”).
All intercompany accounts and transactions 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.
Use
of Estimates
The
accompanying financial statements have been prepared in accordance with U.S. GAAP, which requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities
at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period.
Accordingly, actual results could differ from those estimates. The most significant estimates and assumptions include management’s
analysis in support of inventory valuation, accounts receivable valuation, valuation of deferred tax assets, returns reserves,
warranty accruals, intangible assets, estimated fair values of stock options and vesting periods of performance-based stock options
and restricted stock.
Concentrations
of Credit Risk, Purchases and Fair Value
Financial
instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and 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 years ended December 31, 2019 and 2018 one customer, from the Embedded Solutions segment, accounted for 24.8% and 22.0% of
the Company’s total consolidated revenues, respectively. At December 31, 2019, one customer exceeded 10% of consolidated
gross accounts receivable at 12.9%. At December 31, 2018 one customer exceeded 10% of consolidated gross accounts receivable at
32.1%.
For
the year ended December 31, 2019, three suppliers comprised or exceeded 10% of consolidated inventory purchases at 18%, 14%, and
10% respectively. For the year ended December 31, 2018 two suppliers comprised or exceeded 10% of consolidated inventory purchases
at 15% and 13%, respectively.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Wireless
Telecom Group, Inc.
Cash
and Cash Equivalents
The
Company considers all highly liquid investments purchased with maturities of three months or less at the date of purchase to be
cash equivalents. Cash and cash equivalents consist of operating accounts.
Accounts
Receivable and Allowance for Doubtful Accounts
Trade
accounts receivable are recorded at the invoiced amount and do not bear interest. The Company maintains allowances for doubtful
accounts for estimated losses resulting from the inability of its customers to make required payments. Estimated allowances for
doubtful accounts are reviewed periodically taking into account the customer’s recent payment history, the customer’s
current financial statements and other information regarding the customer’s credit worthiness. Account balances are charged
off against the allowance when it is determined the receivable will not be recovered.
Inventories
Inventories
are stated at the lower of cost (average cost) or net realizable value. Net realizable value is based upon an estimated average
selling price reduced by estimated costs of completion, disposal and transportation. Reductions in inventory valuation are included
in cost of revenues in the accompanying Consolidated Statements of Operations and Comprehensive Loss. Finished goods and work-in-process
include material, labor and overhead expenses.
The
Company reviews inventory for excess and obsolescence based on best estimates of future demand, product lifecycle status and product
development plans. The Company uses historical information along with these future estimates to reduce the inventory cost basis.
Subsequent changes in facts and circumstances do not result in the restoration or increase in that newly established cost basis.
Inventory
carrying value is net of inventory reserves of approximately $1.0 million as of December 31, 2019 and $1.9 million as of December
31, 2018.
Inventories
consist of (in thousands):
|
|
December
31, 2019
|
|
|
December
31, 2018
|
|
Raw
materials
|
|
$
|
4,023
|
|
|
$
|
3,248
|
|
Work-in-process
|
|
|
406
|
|
|
|
557
|
|
Finished
goods
|
|
|
2,896
|
|
|
|
3,079
|
|
|
|
$
|
7,325
|
|
|
$
|
6,884
|
|
Prepaid
Expenses and Other Current Assets
Prepaid
expenses and other current assets generally consist of income tax receivables, contract assets, prepaid insurance, prepaid maintenance
agreements and the short term portion of debt issuance costs. The income tax receivable balance included in prepaid and other
current assets was $1.1 million as of December 31, 2019 as compared to a balance of $0.8 million as of December 31, 2018.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Wireless
Telecom Group, Inc.
Property,
Plant and Equipment
Property,
plant and equipment are reflected at cost, less accumulated depreciation. Depreciation and amortization are provided on a straight-line
basis over the estimated useful lives of the assets. The estimated useful lives for the property, plant and equipment are:
Machinery
and computer equipment
|
|
3-8
years
|
Furniture
and fixtures
|
|
5-7
years
|
Transportation
equipment
|
|
4
years
|
Leasehold
improvements are amortized over the shorter of the remaining term of the lease or the estimated economic life of the improvement.
Repairs and maintenance are charged to operations as incurred; renewals and betterments are capitalized.
Goodwill
Goodwill
represents the excess of the aggregate purchase price over the fair value of the net assets acquired in a purchase business combination.
Goodwill is evaluated for impairment annually by first performing a qualitative evaluation of events and circumstances impacting
the reporting unit to determine the likelihood of goodwill impairment. Based on that qualitative evaluation, if we determine it
is more likely than not that the fair value of a reporting unit exceeds its carrying amount, no further evaluation is necessary.
Otherwise we perform a quantitative impairment test.
As
of December 31, 2019 the Company’s consolidated goodwill balance of $10.1 million is comprised of $1.4 million related to
the Microlab reporting unit and $8.7 million related to the CommAgility reporting unit. The Company performed a qualitative assessment
in the fourth quarter of 2019 of each reporting unit. The qualitative assessment of Microlab did not indicate any impairment of
goodwill. As a result of declining future demand of the CommAgility’s signal processing hardware and the uncertainty associated
with new product revenues to offset the signal processing hardware sale decline, the Company performed a quantitative impairment
test of the goodwill of the CommAgility reporting unit.
For
goodwill impairment testing using the quantitative approach, the Company estimates the fair value of the selected reporting unit
primarily through the use of a discounted cash flow model based on our best estimate of amounts and timing of future revenues
and cash flows and our most recent business and strategic plans, and compares the estimated fair value to the carrying value of
the reporting unit, including goodwill. If the fair value of the reporting unit exceeds the carrying value, no impairment charge
is recorded. If the carrying value of the reporting unit exceeds the fair value an impairment charge is recorded to goodwill in
the amount by which carrying value exceeds fair value. The discounted cash flow model requires judgmental assumptions about projected
revenue growth, future operating margins, discount rates and terminal values over a multi-year period. There are inherent uncertainties
related to these assumptions and management’s judgment in applying them to the analysis of goodwill impairment. While the
Company believes it has made reasonable estimates and assumptions to calculate the fair value of its reporting units, it is possible
a material change could occur. If actual results are not consistent with management’s estimates and assumptions, goodwill
may be overstated and a charge would need to be taken against net earnings.
Changes
in our projections used in the discounted cash flow model could affect the estimated fair value of the Company’s reporting
unit and could result in a goodwill impairment charge in a future period. In order to evaluate the sensitivity of the fair value
calculations used in the quantitative goodwill impairment test, the Company applied a hypothetical 10% decrease to the fair value
of the CommAgility reporting unit and compared those values to the carrying value. Based on this sensitivity analysis, the Company
did not identify any goodwill impairment. Due to the many variables inherent in the estimation of a reporting unit’s fair
value and the relative size of our recorded goodwill, differences in assumptions may have a material effect on the results of
our impairment analysis.
As
of December 31, 2018 the Company’s consolidated goodwill balance of $9.8 million was comprised of $1.4 million related to
the Microlab reporting unit and $8.4 million related to the CommAgility reporting unit. Management’s qualitative assessment
performed in the fourth quarters of 2018 did not indicate any impairment of goodwill.
Intangible
and Long-lived Assets
Intangible
assets include patents, non-competition agreements, customer relationships and trademarks. Intangible assets with finite lives
are amortized using the straight-line method over the estimated economic lives of the assets, which range from three to five years.
Long-lived assets, including intangible assets with finite lives, are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of such assets may not be recoverable. Determination of recoverability is based on an estimate
of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. Measurement of an impairment
loss for long-lived assets that management expects to hold and use is based on the estimated fair value of the asset. Long-lived
assets to be disposed of are reported at the lower of carrying amount or estimated fair value less costs to sell. The estimated
useful lives of intangible and long-lived assets are based on many factors including assumptions regarding the effects of obsolescence,
demand, competition and other economic factors, expectations regarding the future use of the asset, and our historical experience
with similar assets. The assumptions used to determine the estimated useful lives could change due to numerous factors including
product demand, market conditions, technological developments, economic conditions and competition. Intangible assets determined
to have indefinite useful lives are not amortized but are tested for impairment annually and more frequently if events occur or
circumstances change that indicate an asset may be impaired.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Wireless
Telecom Group, Inc.
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.
Foreign
Currency Translation
Assets
and liabilities of non-U.S. subsidiaries that operate in a local currency environment, where the local currency is the functional
currency, are translated from foreign currencies into U.S. dollars at period-end exchange rates while income and expenses are
translated at the weighted average spot rate for the periods presented. Translation gains or losses related to net assets located
outside the U.S. are shown as a component of accumulated other comprehensive income in the Consolidated Statements of Changes
in Shareholders’ Equity. Gains and losses resulting from foreign currency transactions, which are denominated in currencies
other than the Company’s functional currency, are included in the Consolidated Statements of Operations and Comprehensive
Loss. Foreign exchange transaction losses were not material in fiscal 2019 and were $0.1 million in 2018.
Other
Comprehensive Income (Loss)
Other
comprehensive income (loss) is recorded directly to a separate section of shareholders’ equity in accumulated other comprehensive
income and includes unrealized gains and losses excluded from net income/(loss). These unrealized gains and losses consist of
changes in foreign currency translation.
Research
and Development Costs
Research
and development costs are charged to operations when incurred. The amounts charged to operations for the years ended December
31, 2019 and 2018 were $5.9 million and $4.9 million, respectively.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Wireless
Telecom Group, Inc.
Advertising
Costs
Advertising
expenses are charged to operations during the year in which they are incurred and aggregated $0.1 million for the years ended
December 31, 2019 and 2018.
Stock-Based
Compensation
The
Company follows the provisions of Accounting Standards Codification (“ASC”) 718, “Compensation – Stock
Compensation” which requires that compensation expense be recognized, based on the fair value of the stock awards. The fair
value of the stock awards is equal to the fair value of the Company’s stock on the date of grant. The fair value of options
at the date of grant are estimated using the Black-Scholes option pricing model. When performance-based options are granted, the
Company takes into consideration guidance under ASC 718 and SEC Staff Accounting Bulletin No. 107 (SAB 107) when determining assumptions.
The expected option life is derived from assumed exercise rates based upon historical exercise patterns and represents the period
of time that options granted are expected to be outstanding. The expected volatility is based upon historical volatility of our
shares using daily price observations over an observation period that approximates the expected life of the options. The risk-free
rate is based on the U.S. Treasury yield curve rate in effect at the time of grant for periods similar to the expected option
life. The Company accounts for forfeitures when they occur.
Management
estimates are necessary in determining compensation expense for stock options with performance-based vesting criteria. Compensation
expense for this type of stock-based award is recognized over the period from the date the performance conditions are determined
to be probable of occurring through the implicit service period, which is the date the applicable conditions are expected to be
met. If the performance conditions are not considered probable of being achieved, no expense is recognized until such time as
the performance conditions are considered probable of being met, if ever. If the award is forfeited because the performance condition
is not satisfied, previously recognized compensation cost is reversed. Management evaluates performance conditions on a quarterly
basis.
Income
Taxes
The
Company records deferred taxes in accordance with ASC 740, “Accounting for Income Taxes”. This ASC 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 asset, a majority of which has been generated by a history of net
operating losses and determines the necessity for a valuation allowance. The Company evaluates which portion, if any, will more
likely than not be realized by offsetting future taxable income, taking into consideration any limitations that may exist on its
use of its net operating loss carry-forwards.
Under
ASC 740, the Company must recognize and disclose uncertain tax positions only if it is more-likely-than-not the tax position will
be sustained on examination by the taxing authority, based on the technical merits of the position. The amounts recognized in
the financial statements attributable to such position, if any, are recorded if there is a greater than 50% likelihood of being
realized upon the ultimate resolution of the position. Based on the evaluations noted above, the Company has concluded that there
are no significant uncertain tax positions requiring recognition or disclosure in its consolidated financial statements.
Earnings
(Loss) Per Common 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 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.
|
|
For
the Years Ended December 31,
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding
|
|
|
21,110,632
|
|
|
|
20,858,298
|
|
Potentially
dilutive equity awards
|
|
|
522,996
|
|
|
|
707,492
|
|
Weighted
average common shares outstanding, assuming dilution
|
|
|
21,633,628
|
|
|
|
21,565,790
|
|
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 in 2019 was 1,324,548. The weighted average number of options to purchase common stock
not included in diluted loss per share in 2018, because the effects are anti-dilutive or the performance condition was not met,
was 285,000.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Wireless
Telecom Group, Inc.
Recent
Accounting Pronouncements Adopted in 2019
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 2.
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 an impact on our financial statements
as we did not issue share-based awards to nonemployees during the year.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Wireless
Telecom Group, Inc.
In
January, 2017, FASB issued ASU 2017-04, “Intangibles – Goodwill and Other (Topic 350) Simplifying the Test for
Goodwill Impairment.” ASU 2017-04 removes the requirement to perform a hypothetical purchase price allocation to measure
goodwill impairment. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its
fair value, not to exceed the carrying amount of goodwill. This pronouncement is effective for the Company’s 2020 calendar
year, with early adoption permitted. The Company has elected to adopt this standard effective with the December 31 2019, financials
and its valuation of the CommAgility and Microlab goodwill assessment in the fourth quarter of fiscal 2019.
Recent
Accounting Pronouncements Not Yet Adopted
In
June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326). ASU 2016-13 changes the
impairment model for most financial assets and will require the use of an “expected loss” model for instruments measured
as amortized cost. This pronouncement is effective for small reporting companies for fiscal years, and for interim periods within
those fiscal years, beginning after December 15, 2022. The Company plans to adopt the standard effective January 1, 2023. We do
not expect the adoption of this standard to have a material impact on our consolidated financial statements.
In
August 2018, the FASB issued ASU 2018-13, 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
In
August 2018, the FASB issued ASU 2018-15, “Intangibles – Goodwill and Other – Internal-Use Software, Customers
Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract.” ASU 2018-15
aligns the requirements for capitalizing implementation costs in cloud computing arrangements with the requirements for capitalizing
implementation costs incurred to develop or obtain internal-use software. This pronouncement is effective for the Company’s
2023 calendar year, with early adoption permitted. The Company is in the process of evaluating the impact of ASU 2018-15 on its
consolidated financial statements.
NOTE
2 - 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 December 31, 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 twelve months
ended December 31, 2019. Cash paid for amounts included in the present value of operating lease liabilities was $0.5 million during
the twelve months ended December 31, 2019 and is included in operating cash flows.
Operating
lease costs were $0.8 million during the twelve months ended December 2019.
The
following table presents information about the amount and timing of cash flows arising from the Company’s operating leases
as of December 31, 2019.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Wireless
Telecom Group, Inc.
(in
thousands)
|
|
December
31, 2019
|
|
Maturity
of Lease Liabilities
|
|
|
|
|
2020
|
|
$
|
511
|
|
2021
|
|
|
474
|
|
2022
|
|
|
488
|
|
2023
|
|
|
123
|
|
Thereafter
|
|
|
-
|
|
Total
Undiscounted operating lease payments
|
|
|
1,596
|
|
Less:
imputed interest
|
|
|
(138
|
)
|
Present
Value of operating lease liabilities
|
|
$
|
1,458
|
|
|
|
|
|
|
Other
information
|
|
|
|
|
|
|
|
|
|
Weighted-average
remaining lease term (months)
|
|
|
38
|
|
Weighted-average
discount rate for operating leases
|
|
|
5.76
|
%
|
Total
annual commitments under non-cancelable lease agreements as of December 31, 2018 under the previous accounting guidance were as
follows:
2019
|
|
$
|
539
|
2020
|
|
|
510
|
2021
|
|
|
474
|
2022
|
|
|
488
|
2023
|
|
|
123
|
Total
|
|
$
|
2,134
|
NOTE
3 – 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% and 95% of the Company’s total revenue for the twelve months ended December 31, 2019 and
2018, respectively.
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
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Wireless
Telecom Group, Inc.
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 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 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 are $0.1 million and $0.3 million as of December 31, 2019
and 2018, respectively. Deferred revenue is $42,000 and $0.1 million as of December 31, 2019 and 2018, respectively.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Wireless
Telecom Group, Inc.
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).
|
|
Twelve
Months Ended December 31, 2019
|
|
|
|
Network
Solutions
|
|
|
Test
and Measurement
|
|
|
Embedded
Solutions
|
|
|
Total
|
|
Total
Net Revenues by Revenue Type
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Passive
and Active RF Solutions
|
|
$
|
21,830
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
21,830
|
|
Noise
Generators and Components
|
|
|
-
|
|
|
|
6,198
|
|
|
|
-
|
|
|
|
6,198
|
|
Power
Meters and Analyzers
|
|
|
-
|
|
|
|
6,109
|
|
|
|
-
|
|
|
|
6,109
|
|
Signal
Processing Hardware
|
|
|
-
|
|
|
|
-
|
|
|
|
13,013
|
|
|
|
13,013
|
|
Software
Licenses
|
|
|
-
|
|
|
|
-
|
|
|
|
14
|
|
|
|
14
|
|
Services
|
|
|
-
|
|
|
|
1,259
|
|
|
|
498
|
|
|
|
1,757
|
|
Total
Net Revenue
|
|
$
|
21,830
|
|
|
$
|
13,566
|
|
|
$
|
13,525
|
|
|
$
|
48,921
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Net Revenues by Geographic Areas
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
$
|
19,318
|
|
|
$
|
9,522
|
|
|
$
|
1,321
|
|
|
$
|
30,161
|
|
EMEA
|
|
|
2,241
|
|
|
|
2,105
|
|
|
|
12,154
|
|
|
|
16,500
|
|
APAC
|
|
|
271
|
|
|
|
1,939
|
|
|
|
50
|
|
|
|
2,260
|
|
Total
Net Revenue
|
|
$
|
21,830
|
|
|
$
|
13,566
|
|
|
$
|
13,525
|
|
|
$
|
48,921
|
|
|
|
Twelve
Months Ended December 31, 2018
|
|
|
|
Network
Solutions
|
|
|
Test
and Measurement
|
|
|
Embedded
Solutions
|
|
|
Total
|
|
Total
Net Revenues by Revenue Type
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Passive
and Active RF Solutions
|
|
$
|
22,275
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
22,275
|
|
Noise
Generators and Components
|
|
|
-
|
|
|
|
6,130
|
|
|
|
-
|
|
|
|
6,130
|
|
Power
Meters and Analyzers
|
|
|
-
|
|
|
|
6,769
|
|
|
|
-
|
|
|
|
6,769
|
|
Signal
Processing Hardware
|
|
|
-
|
|
|
|
-
|
|
|
|
12,746
|
|
|
|
12,746
|
|
Software
Licenses
|
|
|
-
|
|
|
|
-
|
|
|
|
704
|
|
|
|
704
|
|
Services
|
|
|
-
|
|
|
|
1,313
|
|
|
|
2,851
|
|
|
|
4,164
|
|
Total
Net Revenue
|
|
$
|
22,275
|
|
|
$
|
14,212
|
|
|
$
|
16,301
|
|
|
$
|
52,788
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Net Revenues by Geographic Areas
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
$
|
18,871
|
|
|
$
|
10,223
|
|
|
$
|
3,755
|
|
|
$
|
32,849
|
|
EMEA
|
|
|
2,591
|
|
|
|
1,659
|
|
|
|
12,019
|
|
|
|
16,269
|
|
APAC
|
|
|
813
|
|
|
|
2,330
|
|
|
|
527
|
|
|
|
3,670
|
|
Total
Net Revenue
|
|
$
|
22,275
|
|
|
$
|
14,212
|
|
|
$
|
16,301
|
|
|
$
|
52,788
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Wireless
Telecom Group, Inc.
NOTE
4 - DEBT
Debt
consists of the following (in thousands):
|
|
December
31, 2019
|
|
Revolver
at LIBOR Plus Margin
|
|
$
|
2,354
|
|
Term
Loan at LIBOR Plus Margin
|
|
|
342
|
|
Total
Debt
|
|
|
2,696
|
|
Debt
Maturing within one year
|
|
|
(2,696
|
)
|
Non-current
portion of long term debt
|
|
$
|
-
|
|
The
Company entered into a Credit Facility with Bank of America, N.A. (the “Lender”) on February 16, 2017 (the “Credit
Facility”), which provided for a term loan in the aggregate principal amount of $0.8 million (the “Term Loan”)
and an asset based revolving loan (the “Revolver”), which is subject to a Borrowing Base Calculation (as defined in
the Credit Facility) of up to a maximum availability of $9.0 million (“Revolver Commitment Amount”). The borrowing
base is calculated as 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.
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 future principal payments under the Term Loan are $0.3 million in 2020. 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 (See Note 15). On November 8, 2019 the Company entered
into Amendment No. 4 to the Credit Facility which extends the maturity date of the Term Loan to coincide with the extension of
the Revolver at March 31, 2020, and then on February 7, 2020, entered into Amendment No. 5 (see Note 15 Subsequent Event), which,
inter alia, extended the maturity date of the Revolver to March 31, 2023.
The
Term Loan and Revolver bear interest at the LIBOR rate plus a margin. The margin on the outstanding balance of the Company’s
Term Loan and Revolver 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 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 December 31, 2019 was 4.63% and 5.13% for the Revolver and Term Loan, respectively. The Company’s interest
rate plus margin as of December 31, 2018 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) or occurrence of conditions
that have a Material Adverse Effect (as defined).
As
of December 31, 2019, and the date hereof, the Company is in compliance with the covenants of the Credit Facility.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Wireless
Telecom Group, Inc.
NOTE
5 - GOODWILL AND INTANGIBLE ASSETS
Goodwill
consists of the following (in thousands):
|
|
Network
Solutions
|
|
|
Embedded
Solutions
|
|
|
Total
|
|
Balance
as of January 1, 2018
|
|
$
|
1,351
|
|
|
$
|
8,909
|
|
|
$
|
10,260
|
|
Foreign
Currency Translation
|
|
|
-
|
|
|
|
(482
|
)
|
|
|
(482
|
)
|
Balance
as of December 31, 2018
|
|
|
1,351
|
|
|
|
8,427
|
|
|
|
9,778
|
|
Foreign
Currency Translation
|
|
|
-
|
|
|
|
291
|
|
|
|
291
|
|
Balance
as of December 31, 2019
|
|
$
|
1,351
|
|
|
$
|
8,718
|
|
|
$
|
10,069
|
|
Intangible
assets consist of the following (in thousands):
|
|
December
31, 2019
|
|
|
|
Gross
Carrying Amount
|
|
|
Accumulated
Amortization
|
|
|
Foreign
Exchange Translation
|
|
|
Net
Carrying Amount
|
|
Customer
Relationships
|
|
$
|
2,766
|
|
|
$
|
(1,644
|
)
|
|
$
|
113
|
|
|
$
|
1,235
|
|
Patents
|
|
|
615
|
|
|
|
(365
|
)
|
|
|
25
|
|
|
|
275
|
|
Non-Compete
Agreements
|
|
|
1,107
|
|
|
|
(1,101
|
)
|
|
|
43
|
|
|
|
49
|
|
Tradename
|
|
|
629
|
|
|
|
-
|
|
|
|
31
|
|
|
|
660
|
|
Total
|
|
$
|
5,117
|
|
|
$
|
(3,110
|
)
|
|
$
|
212
|
|
|
$
|
2,219
|
|
|
|
December
31, 2018
|
|
|
|
Gross
Carrying Amount
|
|
|
Accumulated
Amortization
|
|
|
Foreign
Exchange Translation
|
|
|
Net
Carrying Amount
|
|
Customer
Relationships
|
|
$
|
2,766
|
|
|
$
|
(1,082
|
)
|
|
$
|
71
|
|
|
$
|
1,755
|
|
Patents
|
|
|
615
|
|
|
|
(240
|
)
|
|
|
15
|
|
|
|
390
|
|
Non-Compete
Agreements
|
|
|
1,107
|
|
|
|
(727
|
)
|
|
|
41
|
|
|
|
421
|
|
Tradename
|
|
|
629
|
|
|
|
-
|
|
|
|
11
|
|
|
|
640
|
|
Total
|
|
$
|
5,117
|
|
|
$
|
(2,049
|
)
|
|
$
|
138
|
|
|
$
|
3,206
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Wireless
Telecom Group, Inc.
Amortization
of acquired intangible assets was $1.1 million for each of the twelve months ended December 31, 2019 and 2018. Amortization of
acquired intangible assets is included as part of general and administrative expenses in the accompanying consolidated statements
of operations and comprehensive loss.
The
estimated future amortization expense related to intangible assets is as follows as of December 31, 2019 (in thousands):
2020
|
|
$
|
759
|
|
2021
|
|
|
710
|
|
2022
|
|
|
90
|
|
Total
|
|
$
|
1,559
|
|
NOTE
6 - PROPERTY, PLANT AND EQUIPMENT
Property,
plant and equipment, consist of the following as of December 31 (in thousands):
|
|
2019
|
|
|
2018
|
|
Machinery
& Equipment
|
|
$
|
8,662
|
|
|
$
|
7,928
|
|
Furniture
& Fixtures
|
|
|
461
|
|
|
|
440
|
|
Transportation
Equipment
|
|
|
5
|
|
|
|
2
|
|
Leasehold
Improvements
|
|
|
1,326
|
|
|
|
1,217
|
|
Gross
property, plant and equipment
|
|
|
10,454
|
|
|
|
9,587
|
|
|
|
|
|
|
|
|
|
|
Less:
accumulated depreciation
|
|
|
8,307
|
|
|
|
7,009
|
|
Net
property, plant and equipment
|
|
$
|
2,147
|
|
|
$
|
2,578
|
|
Depreciation
expense of $0.8 million and $1.0 million was recorded for the years ended December 31, 2019 and 2018, respectively.
NOTE
7 - OTHER ASSETS
Other
assets consist of the following as of December 31 (in thousands):
|
|
2019
|
|
|
2018
|
|
Deferred
S3 Costs
|
|
$
|
255
|
|
|
$
|
255
|
|
Tax
Receivable – Long Term
|
|
|
230
|
|
|
|
-
|
|
Product
demo assets
|
|
|
128
|
|
|
|
351
|
|
Long
term debt issuance
|
|
|
91
|
|
|
|
-
|
|
Deferred
cost
|
|
|
82
|
|
|
|
96
|
|
Security
deposit
|
|
|
50
|
|
|
|
50
|
|
Other
|
|
|
38
|
|
|
|
35
|
|
Total
|
|
$
|
874
|
|
|
$
|
787
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Wireless
Telecom Group, Inc.
Product
demo assets are net of accumulated amortization expense of $0.3 million and $1.2 million as of December 31, 2019 and 2018, respectively.
Amortization expense related to demo assets was $0.3 million and $0.2 million in 2019 and 2018, respectively.
NOTE
8 - ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued
expenses and other current liabilities consist of the following as of December 31 (in thousands):
|
|
2019
|
|
|
2018
|
|
Professional
fees
|
|
$
|
464
|
|
|
$
|
233
|
|
Commissions
|
|
|
430
|
|
|
|
444
|
|
Sales
and use and VAT tax
|
|
|
355
|
|
|
|
374
|
|
Goods
received not invoiced
|
|
|
346
|
|
|
|
435
|
|
Payroll
and related taxes
|
|
|
308
|
|
|
|
755
|
|
Return
Reserve
|
|
|
199
|
|
|
|
199
|
|
Warranty
Reserve
|
|
|
160
|
|
|
|
90
|
|
Bonus
|
|
|
126
|
|
|
|
800
|
|
Severance
|
|
|
102
|
|
|
|
-
|
|
Other
|
|
|
167
|
|
|
|
459
|
|
Contingent
Consideration Liability
|
|
|
-
|
|
|
|
1,442
|
|
Deferred
Purchase Price
|
|
|
-
|
|
|
|
852
|
|
Total
|
|
$
|
2,657
|
|
|
$
|
6,083
|
|
NOTE
9 - ACCOUNTING FOR STOCK BASED COMPENSATION
The
Company follows the provisions of ASC 718. The Company’s results for the years ended December 31, 2019 and December 31,
2018 include stock based compensation expense totaling $0.6 million and $0.7 million, respectively. Such amounts have been included
in the consolidated statement of operations and comprehensive loss within operating expenses.
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 December 31, 2019, there are approximately 1.7 million shares available
for issuance under the 2012 Plan.
All
service-based (time vesting) options granted have ten-year terms from the date of grant and typically vest annually and become
fully exercisable after a maximum of five years. However, vesting conditions are determined on a grant by grant basis. Performance-based
options granted have ten-year terms and vest and become fully exercisable when determinable performance targets are achieved.
Performance targets are approved by the Company’s compensation committee of the Board of Directors. Under the 2012 Plan,
options may be granted to purchase shares of the Company’s common stock exercisable only at prices equal to or above the
fair market value on the date of the grant.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Wireless
Telecom Group, Inc.
The
following summarizes the components of share-based compensation expense for the years ending December 31 (in thousands):
|
|
2019
|
|
|
2018
|
|
Service
Based Restricted Stock Awards
|
|
$
|
278
|
|
|
$
|
172
|
|
Service
Based Restricted Stock Units
|
|
|
245
|
|
|
|
175
|
|
Performance
Based Stock Options
|
|
|
(90
|
)
|
|
|
50
|
|
Service
Based Stock Options
|
|
|
151
|
|
|
|
305
|
|
|
|
$
|
584
|
|
|
$
|
702
|
|
As
of December 31, 2019, $0.1 million of unrecognized compensation costs related to unvested stock options is expected to be recognized
over a remaining weighted average period of 1.8 years, $0.2 million of unrecognized compensation costs related to unvested restricted
shares is expected to be recognized over a remaining weighted average period of 1.6 years and $0.1 million of unrecognized compensation
costs related to unvested restricted stock units is expected to be recognized over 6 months.
During
the twelve months ended December 31, 2019 the Company reversed $0.1 million in share based compensation expense related to 240,000
unvested stock options that were forfeited as a result of employees exiting the company.
The
company had no stock option or restricted share forfeitures during the twelve months ended December 31, 2018.
Restricted
Common Stock Awards
A
summary of the status of the Company’s non-vested restricted common stock, as granted under the Company’s approved
equity compensation plans, as of December 31, 2019 and 2018, and changes during the twelve months ended December 31, 2019 and
2018, are presented below:
|
|
2019
|
|
|
2018
|
|
Non-vested
Restricted Shares
|
|
Number
of
Shares
|
|
|
Weighted
Average Grant Date Fair Value
|
|
|
Number
of
Shares
|
|
|
Weighted
Average Grant Date Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested
as of January 1
|
|
|
232,123
|
|
|
$
|
1.68
|
|
|
|
159,207
|
|
|
$
|
1.64
|
|
Granted
|
|
|
95,000
|
|
|
$
|
1.56
|
|
|
|
225,000
|
|
|
$
|
1.68
|
|
Vested
and Issued
|
|
|
(64,583
|
)
|
|
$
|
1.70
|
|
|
|
(152,084
|
)
|
|
$
|
1.64
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Non-vested
as of December 31
|
|
|
262,540
|
|
|
$
|
1.63
|
|
|
|
232,123
|
|
|
$
|
1.68
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Wireless
Telecom Group, Inc.
The
following table summarizes the restricted common stock awards granted to certain employees and officers of the Company during
the years ended December 31, 2019 and 2018 under the 2012 Plan:
|
|
Number
of
Shares
|
|
|
Fair
Market
Value
per
Granted
Share
|
|
|
Vesting
|
2019
|
|
|
|
|
|
|
|
|
1/11/19
- Service Grant - Employees
|
|
|
95,000
|
|
|
$
|
1.56
|
|
|
Annual
Vesting through January 2022
|
2018
|
|
|
|
|
|
|
|
|
8/1/2018
– Service Grant – Employees
|
|
|
75,000
|
|
|
$
|
2.01
|
|
|
Annual
Vesting through August 2021
|
12/20/18
– Service Grant - Employees
|
|
|
150,000
|
|
|
$
|
1.52
|
|
|
Annual
Vesting through December 2022
|
2018
Total
|
|
|
225,000
|
|
|
|
|
|
|
|
Restricted
Stock Units:
In
fiscal 2018 and fiscal 2019 the Company granted Restricted Stock Units (“RSU”) to each of our board members. 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 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.
A
summary of the status of the Company’s non-vested restricted stock units, as granted under the Company’s approved
equity compensation plans, as of December 31, 2019 and 2018, and changes during the twelve months ended December 31, 2019 and
2018, are presented below:
|
|
2019
|
|
|
2018
|
|
Non-vested
Restricted Stock Units
|
|
Number
of
Shares
|
|
|
Weighted
Average Grant Date Fair Value
|
|
|
Number
of
Shares
|
|
|
Weighted
Average Grant Date Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested
as of January 1
|
|
|
125,000
|
|
|
$
|
2.25
|
|
|
|
-
|
|
|
|
-
|
|
Granted
|
|
|
147,917
|
|
|
$
|
1.56
|
|
|
|
125,000
|
|
|
$
|
2.25
|
|
Vested
and Issued
|
|
|
(125,000
|
)
|
|
$
|
2.25
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Non-vested
as of December 31
|
|
|
147,917
|
|
|
$
|
1.56
|
|
|
|
125,000
|
|
|
$
|
2.25
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Wireless
Telecom Group, Inc.
|
|
Number
of
Shares
|
|
|
Fair
Market
Value
per
Granted
Share
|
|
|
Vesting
|
2019
|
|
|
|
|
|
|
|
|
5/30/2019
- Service Grant – Board of Directors
|
|
|
125,000
|
|
|
$
|
1.55
|
|
|
Annual
Board Meeting – June 2020
|
7/8/2019
– Service Grant – Board of Directors
|
|
|
22,917
|
|
|
$
|
1.58
|
|
|
Annual
Board Meeting – June 2020
|
2018
|
|
|
|
|
|
|
|
|
|
|
6/5/2018
– Service Grant – Board of Directors
|
|
|
125,000
|
|
|
$
|
2.25
|
|
|
Annual
Board Meeting – May 2019
|
Performance-Based
Stock Option Awards
A
summary of performance-based stock option activity, and related information for the years ended December 31, 2019 and December
31, 2018 follows:
|
|
2019
|
|
|
2018
|
|
|
|
Options
|
|
|
Weighted
Average Exercise Price
|
|
|
Options
|
|
|
Weighted
Average Exercise Price
|
|
Outstanding
as of January 1
|
|
|
305,000
|
|
|
$
|
1.45
|
|
|
|
605,000
|
|
|
$
|
1.21
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
(300,000
|
)
|
|
$
|
0.96
|
|
Forfeited
|
|
|
(200,000
|
)
|
|
$
|
1.36
|
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding
as of December 31
|
|
|
105,000
|
|
|
$
|
1.61
|
|
|
|
305,000
|
|
|
$
|
1.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at December 31
|
|
|
20,000
|
|
|
$
|
0.78
|
|
|
|
20,000
|
|
|
$
|
0.78
|
|
The
aggregate intrinsic value of performance-based stock options outstanding that were “in the money” (exercise price
was lower than the market price) as of December 31, 2019 was $13,000 and the weighted average remaining contractual life was 1.0
years. All of the aforementioned performance-based stock options were exercisable as of December 31, 2019.
The
range of exercise prices of outstanding performance-based options at December 31, 2019 is $0.78 to $1.83 with a weighted average
exercise price of $1.61 per share.
Under
the terms of the performance-based stock option agreements, the awards will fully vest and become exercisable on the date on which
the Company’s Board of Directors shall have determined that specific financial performance milestones have been met, provided
the employee remains in the employ of the Company at such time; provided, however, upon a Change in Control (as defined in the
stock option agreements and the 2012 Plan), the stock options shall automatically vest as permitted by the 2012 Plan. As of December
31, 2019 and 2018, the Company has determined that the performance conditions on 85,000 and 285,000 options, respectively, granted
in 2013 and later are probable of being achieved by the year ending 2021. The Company’s performance-based stock options
granted prior to 2013 (consisting of 20,000 options) are fully amortized.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Wireless
Telecom Group, Inc.
Service-Based
Stock Option Awards
A
summary of service-based stock option activity and related information for the years ended December 31, 2019 and 2018 follows:
|
|
2019
|
|
|
2018
|
|
|
|
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
Outstanding
as of January 1
|
|
|
1,975,000
|
|
|
$
|
1.52
|
|
|
|
1,815,000
|
|
|
$
|
1.53
|
|
Granted
|
|
|
15,000
|
|
|
$
|
1.56
|
|
|
|
160,000
|
|
|
$
|
1.52
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
(40,000
|
)
|
|
$
|
1.52
|
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding
as of December 31
|
|
|
1,950,000
|
|
|
$
|
1.52
|
|
|
|
1,975,000
|
|
|
$
|
1.52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at December 31
|
|
|
1,515,000
|
|
|
$
|
1.50
|
|
|
|
1,225,000
|
|
|
$
|
1.49
|
|
The
aggregate intrinsic value of service-based stock options outstanding that were “in the money” (exercise price was
lower than the market price) as of December 31, 2019 was $77,600 and the weighted average remaining contractual life was 2.6 years.
The aggregate intrinsic value of exercisable “in the money” service-based stock options as of December 31, 2019 was
$72,225 and the weighted average remaining contractual life was 3.0 years.
The
range of exercise prices of outstanding service-based options at December 31, 2019 is $1.30 to $1.92 with a weighted average exercise
price of $1.52 per share.
The
following table presents the assumptions used to estimate the fair value of stock option awards granted during the twelve months
ended December 31, 2019 and 2018:
|
|
Number
of
Options
|
|
|
Option
Term
(in
years)
|
|
|
Exercise
Price
|
|
|
Risk
Free Interest Rate
|
|
|
Expected
Volatility
|
|
|
Fair
Value at Grant Date
|
|
|
Expected
Dividend Yield
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1/11/2019
– Service Grant
|
|
|
15,000
|
|
|
|
3
|
|
|
$
|
1.56
|
|
|
|
2.52
|
%
|
|
|
49.80
|
%
|
|
$
|
0.56
|
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12/20/2018
– Service Grant
|
|
|
160,000
|
|
|
|
4
|
|
|
$
|
1.52
|
|
|
|
2.65
|
%
|
|
|
48.53
|
%
|
|
$
|
0.62
|
|
|
$
|
0.00
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Wireless
Telecom Group, Inc.
NOTE
10 - SEGMENT AND RELATED INFORMATION
Financial
information by segment
The
operating businesses of the Company are segregated into three reportable segments: (i) Network Solutions, (ii) Test and Measurement
and (iii) 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).
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Wireless
Telecom Group, Inc.
Financial
information by reportable segment as of and for the years ended December 31, 2019 and 2018 is presented below (in thousands):
|
|
For
the twelve months ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Net
sales by segment:
|
|
|
|
|
|
|
|
|
Network
Solutions
|
|
$
|
21,830
|
|
|
$
|
22,275
|
|
Test
and Measurement
|
|
|
13,566
|
|
|
|
14,212
|
|
Embedded
Solutions
|
|
|
13,525
|
|
|
|
16,301
|
|
Total
consolidated net sales of reportable segments
|
|
$
|
48,921
|
|
|
$
|
52,788
|
|
|
|
|
|
|
|
|
|
|
Segment
income:
|
|
|
|
|
|
|
|
|
Network
Solutions
|
|
$
|
2,973
|
|
|
$
|
3,476
|
|
Test
and Measurement
|
|
|
2,125
|
|
|
|
1,728
|
|
Embedded
Solutions
|
|
|
(1,049
|
)
|
|
|
1,093
|
|
Income
from reportable segments
|
|
|
4,049
|
|
|
|
6,297
|
|
|
|
|
|
|
|
|
|
|
Other
unallocated amounts:
|
|
|
|
|
|
|
|
|
Corporate
expenses
|
|
|
(5,528
|
)
|
|
|
(5,519
|
)
|
Other
expenses - net
|
|
|
(307
|
)
|
|
|
(695
|
)
|
Consolidated
income/(loss) before Income tax provision/(benefit)
|
|
$
|
(1,786
|
)
|
|
$
|
83
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization by segment:
|
|
|
|
|
|
|
|
|
Network
Solutions
|
|
$
|
393
|
|
|
$
|
539
|
|
Test
and Measurement
|
|
|
530
|
|
|
|
527
|
|
Embedded
Solutions
|
|
|
1,228
|
|
|
|
1,239
|
|
Total
depreciation and amortization for reportable segments
|
|
$
|
2,151
|
|
|
$
|
2,305
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures by segment:
|
|
|
|
|
|
|
|
|
Network
Solutions
|
|
$
|
83
|
|
|
$
|
359
|
|
Test
and Measurement
|
|
|
149
|
|
|
|
193
|
|
Embedded
Solutions
|
|
|
160
|
|
|
|
301
|
|
Total
consolidated capital expenditures by reportable segment
|
|
$
|
392
|
|
|
$
|
853
|
|
|
|
December
31, 2019
|
|
|
December
31, 2018
|
|
Total
assets by segment:
|
|
|
|
|
|
|
|
|
Network
Solutions
|
|
$
|
9,610
|
|
|
$
|
10,088
|
|
Test
and Measurement
|
|
|
7,380
|
|
|
|
5,943
|
|
Embedded
Solutions
|
|
|
14,330
|
|
|
|
16,804
|
|
Total
assets for reportable segments
|
|
|
31,320
|
|
|
|
32,835
|
|
|
|
|
|
|
|
|
|
|
Corporate
assets, principally cash and cash equivalents and deferred income taxes
|
|
|
11,031
|
|
|
|
11,332
|
|
Total
consolidated assets
|
|
$
|
42,351
|
|
|
$
|
44,167
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Wireless
Telecom Group, Inc.
Regional
Revenues
Net
consolidated revenues from operations by region were as follows (in thousands):
|
|
Twelve
Months Ended
|
|
|
|
December
31
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Americas
|
|
$
|
30,161
|
|
|
$
|
32,849
|
|
Europe,
Middle East, Africa (EMEA)
|
|
|
16,500
|
|
|
|
16,269
|
|
Asia
Pacific (APAC)
|
|
|
2,260
|
|
|
|
3,670
|
|
Total
revenues
|
|
$
|
48,921
|
|
|
$
|
52,788
|
|
Net
revenues are attributable to a geographic area based on the destination of the product shipment.
The
majority of shipments in the Americas are to customers located within the United States. For the years ended December 31, 2019
and 2018, sales in the United States amounted to $30.0 and $31.9 million, respectively.
For
the year ended December 31, 2019 shipments to the EMEA regions for all reportable segments were largely concentrated in the UK,
Germany and Italy. Shipments to the UK, Germany and Italy in 2019 amounted to $12.7 million, $0.7 million and $0.5 million, respectively.
For the year ended December 31, 2018 shipments to the EMEA region for all reportable segments were largely concentrated in the
UK, Italy and Ireland. Shipments to the UK, Italy and Ireland in 2018 amounted $12.4 million, $0.5 million and $0.5 million, respectively.
The
largest concentration of shipments in the APAC region is to China. For the years ended December 31, 2019 and 2018, shipments to
China amounted to $1.3 million and $2.0 million, of all shipments to the APAC region, respectively. There were no other shipments
significantly concentrated in one country in the APAC region.
NOTE
11 - RETIREMENT PLAN
The
Company has a 401(k) profit sharing plan covering all eligible U.S. employees. Company contributions to the plan for the years
ended December 31, 2019 and 2018 amounted to $0.3 million and $0.2 million, respectively.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Wireless
Telecom Group, Inc.
NOTE
12 - INCOME TAXES
The
components of income tax (benefit)/expense related to net income (loss) from operations are as follows:
|
|
Years
Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Current:
|
|
|
|
|
|
|
Federal
|
|
$
|
(9
|
)
|
|
$
|
-
|
|
State
|
|
|
45
|
|
|
|
46
|
|
Foreign
|
|
|
(859
|
)
|
|
|
(223
|
)
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(188
|
)
|
|
|
389
|
|
State
|
|
|
(233
|
)
|
|
|
(41
|
)
|
Foreign
|
|
|
(128
|
)
|
|
|
(123
|
)
|
Total
|
|
$
|
(1,372
|
)
|
|
$
|
48
|
|
The
following is a reconciliation of the maximum statutory federal tax rate to the Company’s effective tax relative to operations:
|
|
Years
Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
%
of
Pre Tax
Earnings
|
|
|
%
of
Pre Tax
Earnings
|
|
Statutory
federal income tax rate
|
|
|
(21.0
|
)%
|
|
|
21.0
|
%
|
State
income tax net of federal tax benefit
|
|
|
0.1
|
|
|
|
137.5
|
|
Foreign
rate difference
|
|
|
7.2
|
|
|
|
(239.7
|
)
|
Change
in valuation allowance
|
|
|
(10.6
|
)
|
|
|
(138.2
|
)
|
Permanent
differences
|
|
|
0.9
|
|
|
|
11.8
|
|
Research
and development incentive
|
|
|
(53.1
|
)
|
|
|
(342.7
|
)
|
Global
intangible low-taxed income
|
|
|
1.3
|
|
|
|
607.6
|
|
Other
|
|
|
(1.6
|
)
|
|
|
(0.2
|
)
|
Total
|
|
|
(76.8
|
)%
|
|
|
57.1
|
%
|
In
2019, the difference between the statutory and effective tax rate is due primarily to research and development deductions in the
United Kingdom and a reduction in the state valuation allowance. In 2018, the difference between the statutory and effective tax
rate is due to global intangible low-taxed income, research and development deductions in the United Kingdom, foreign tax rate
differences and a reduction in the state valuation allowance.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Wireless
Telecom Group, Inc.
The
components of deferred income taxes are as follows:
|
|
Years
Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
|
|
Net
operating loss carryforwards
|
|
$
|
11,538
|
|
|
$
|
11,259
|
|
Inventory
|
|
|
397
|
|
|
|
943
|
|
Research
and development credit
|
|
|
648
|
|
|
|
648
|
|
Stock
compensation
|
|
|
285
|
|
|
|
138
|
|
Other
|
|
|
326
|
|
|
|
73
|
|
Goodwill
and intangible assets
|
|
|
(757
|
)
|
|
|
(925
|
)
|
Fixed
assets
|
|
|
(275
|
)
|
|
|
(438
|
)
|
Gross
deferred tax asset
|
|
|
12,162
|
|
|
|
11,698
|
|
Less
valuation allowance
|
|
|
(6,652
|
)
|
|
|
(6,722
|
)
|
Net
deferred tax asset
|
|
$
|
5,510
|
|
|
$
|
4,976
|
|
The
Company has domestic federal and state net operating loss carryforwards at December 31, 2019 of approximately $18.2 million and
$44.1 million, respectively, which begin to expire in 2029. $0.6 million of the federal net operating loss carryforward has no
expiration. The Company also has foreign net operating loss carryforwards at December 31, 2019 of approximately $15.0 million
for German trade tax purposes, which has no expiration. The Company has domestic federal interest expense carryforward at December
31, 2019 of approximately $0.2 million which has no expiration.
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 valuation allowances of $6.7 million at December 31, 2019 and 2018 are 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 amount of deferred tax assets considered realizable is subject to adjustment
in future periods if estimates of future taxable income are changed. As of December 31, 2019, management believes that it is more
likely than not that the Company will fully realize the benefits of its deferred tax assets associated with its domestic federal
net operating loss carryforward.
The
Company does not have any significant unrecognized tax positions and does not anticipate a significant increase or decrease in
unrecognized tax positions within the next twelve months.
The
Company has elected to record taxes related to the global intangible low-taxed income as a period cost.
NOTE
13 – FAIR VALUE MEASUREMENTS
Fair
value is defined by ASC 820 “Fair Value Measurement” as the price that would be received upon selling an asset or
paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 establishes
a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy requires entities to
maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure
fair value are as follows:
|
●
|
Level
1 - Quoted prices in active markets for identical assets and liabilities.
|
|
●
|
Level
2 - Quoted prices in active markets for similar assets and liabilities, or other inputs that are observable for the asset
or liability, either directly or indirectly, for substantially the full term of the financial instrument.
|
|
●
|
Level
3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the
assets and liabilities. This includes pricing models, discounted cash flow methodologies and similar techniques that use significant
unobservable inputs.
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Wireless
Telecom Group, Inc.
Payment
of a portion of the CommAgility purchase price was contingent on the achievement of certain financial targets for the years ending
December 31, 2017 and 2018. The Company estimated the fair value of contingent consideration at acquisition date to be $0.8 million.
During the twelve months ended December 31, 2018 the Company reassessed the fair value of the contingent consideration and recorded
a loss in the amount of $0.6 million as a result of the improved financial results at CommAgility as compared to prior estimates.
The significant inputs used in the fair value estimate included anticipated gross revenues and Adjusted EBITDA, as defined, and
scenarios for the earn-out periods for which probabilities are assigned to each scenario to arrive at a single estimated outcome.
The estimated outcome was then discounted based on individual risk analysis of the liability which was 15% at December 31, 2018
and was paid in March 2019. The contingent consideration liability is considered a Level 3 fair value measurement.
NOTE
14 - COMMITMENTS AND CONTINGENCIES
Warranties
The
Company typically provides one to three year warranties on all of its products covering both parts and labor. The Company, at
its option, repairs or replaces products that are defective during the warranty period if the proper preventive maintenance procedures
have been followed by its customers.
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 monetary damages, the sum of which
cannot be determined until such time as discovery has been conducted, but is estimated by Harris to be less than $250,000. Harris
is also seeking an injunction against CommAgility’s use of the Work Product which includes rights to certain technology
used for air-to-ground communications. The Company believes the claims are without merit and intends to defend all of the claims
vigorously. The Company has not accrued any amounts in respect of this matter and cannot estimate the possible loss, if any, that
the Company may incur with respect to it.
The
ultimate outcome of this matter is unknown but, in the opinion of management, we do not believe this proceeding will have a material
adverse effect upon our financial condition, cash flows or future results of operations. Legal expenses incurred in connection
with the arbitration from August 2019 are covered by our professional indemnity insurance policy.
Risks
and Uncertainties
Proprietary
information and know-how are important to the Company’s commercial success. There can be no assurance that others will not
either develop independently the same or similar information or obtain and use proprietary information of the Company. Certain
key employees have signed confidentiality and non-compete agreements regarding the Company’s proprietary information.
The
Company believes that its products do not infringe the proprietary rights of third parties. There can be no assurance, however,
that third parties will not assert infringement claims in the future.
The
Company’s deferred tax asset is recorded at tax rates expected to be in existence when those assets are utilized. Should
the tax rates change materially in the future the amount of deferred tax asset could be materially impacted.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Wireless
Telecom Group, Inc.
NOTE
15 – SUBSEQUENT EVENTS
Holzworth
Acquisition
On
November 13, 2019 the Company entered into a Share Purchase Agreement with Holzworth Instrumentation Inc., a Colorado corporation
(“Holzworth”), Jason Breitbarth, Joe Koebel, and Leyla Bly (collectively, the “Sellers”), and Jason Breitbarth,
as the designated representative of the Sellers, as amended by a First Amendment to Share Purchase Agreement, dated January 31,
2020 (collectively, the “Share Purchase Agreement”). On February 7, 2020, the Company completed the acquisition (the
“Acquisition”) of all of the outstanding shares of Holzworth, from the Sellers. The Acquisition was completed pursuant
to the terms of the Share Purchase Agreement. Holzworth instruments which include signal generators and phased noise analyzers
are used by government labs, the semiconductor industry, and network equipment providers, among others, in research and automated
test environments. Holzworth is a complimentary business for our Test and Measurement segment with a common customer base and
channel partners. Holzworth revenues for the year end fiscal 2018 were $4.0 million and for the nine months ended September 30,
2019 were $4.3 million. For the fiscal year ended December 31, 2020, the Company will report the financial results of Holzworth
in our Test and Measurement segment.
The
aggregate purchase price for the Acquisition is a maximum of $17.0 million, consisting of payments in cash and stock, deferred
purchase price payments and contingent consideration in the form of an earnout. At the closing, the Company issued a promissory
note, which required the Company to pay on the next business day $0.5 million of the purchase price by issuing 347,318 shares
of its common stock (the “Stock Consideration”), and $8.0 million in cash (the “Cash Consideration”),
reduced by an indemnification holdback of $0.8 million and payment of certain of Sellers’ transaction expenses and indebtedness
of Holzworth. The parties intend to make a 338(h)(10) election to treat the Acquisition as a purchase and sale of assets, and
the Company has agreed to pay any incremental taxes of Sellers resulting from that election.
The
first deferred purchase price payment of $750,000 is due in three equal quarterly installments on March 31, 2020, June 30, 2020
and September 30, 2020, respectively. The second deferred purchase price payment of $750,000 is payable on March 31, 2021. Each
deferred payment may be reduced as provided in the Purchase Agreement if Holzworth’s EBITDA (as defined in the Purchase
Agreement) for each fiscal year ending December 31, 2019 and December 31, 2020, respectively, is less than $1.25 million.
The
Company may also be required to pay additional amounts in cash and stock as earnout consideration. The first earnout payment will
be equal to two times the amount, if any, by which Holzworth’s EBITDA for the fiscal year ending December 31, 2020 exceeds
$1.25 million. The second earnout payment will be equal to two times the amount, if any, by which Holzworth’s EBITDA for
the fiscal year ending December 31, 2021 exceeds the greater of $1.25 million or Holzworth’s EBITDA for the prior fiscal
year. The aggregate earnout payments, if any, cannot exceed $7.0 million.
Pursuant
to the Purchase Agreement the Company entered into a lock-up and voting agreement (the “Lock-up and Voting Agreement”)
with each of the Sellers. Pursuant to the Lock-up and Voting Agreement, each Seller agrees to restrict the sale, assignment, transfer,
encumbrance or other disposition of its portion of the Stock Consideration (the “Lock-up Shares”). For a period commencing
on the closing date of the Acquisition (the “Effective Date”) and ending on the date which is 36 calendar months following
the Effective Date, each Seller agrees that, without prior written consent by the Company, such Seller shall not sell, assign,
transfer, encumber or otherwise dispose of the Lock-up Shares or enter into any swap, option or short sale, among other transactions.
Upon the prior written consent of the Company, a Seller may transfer Lock-up Shares as a bona fide gift, by will or intestacy
or to a family member or trust for the benefit of the Seller or a family member; provided that any recipient of the Lock-up
Shares sign and deliver to the Company a lock-up and voting agreement substantially in the form of the Lock-up and Voting Agreement.
The Lock-up Shares cease to be locked up in the event of a Change of Control (as defined in the Lock-up and Voting Agreement).
In
addition, each Seller, subject to certain limitations, agrees, among other things, to appear at each meeting of the shareholders
of the Company and vote all of such Seller’s Lock-up Shares (a) in favor or against any proposal presented to the shareholders
in the same manner that the Company’s Board of Directors (the “Board”) recommends shareholders vote on such
proposal and (b) in favor of any proposal presented to the shareholders with respect to an action of the Company, which the Board
has approved, but as to which the Board has not made any recommendation, including in favor of any proposal to adjourn or postpone
any meeting of the Company’s shareholders if such adjournment or postponement is conducted in accordance with the terms
of the Lock-up and Voting Agreement.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Wireless
Telecom Group, Inc.
To
the extent any shares of Company common stock are issued in payment of any Earnout Consideration (as defined in the Share Purchase
Agreement) in accordance with the terms of the Share Purchase Agreement, such shares shall be subject to all applicable transfer
restrictions, voting and other provisions set forth in the Lock-up and Voting Agreement, with the Effective Date with respect
to such shares being the date such shares were issued; provided that, to the extent the portion of the first $1.5 million of Earnout
Consideration that is paid in cash represents less than 30% of such Earnout Consideration, the portion of shares of Company common
stock issued as Earnout Consideration constituting the difference between the cash percentage paid and 30% of the first $1.5 of
Earnout Consideration shall not be considered Lock-Up Shares.
New
Term Loan Facility and Amended Credit Facility
In
connection with the Acquisition, on February 7, 2020, the Company, as borrower, and its subsidiaries, as guarantors, and Muzinich
BDC, Inc., as lender (“Muzinich”), entered into the Term Loan Facility, which provides for a term loan in the principal
amount of $8.4 million (the “Initial Term Loan”). Principal payments on the Initial Term Loan are $21,000 per quarter
with a balloon payment at maturity. The term loan bears interest at LIBOR (subject to a floor of 1.0%) plus a margin of 7.25%.
The Term Loan Facility includes an upfront fee of 2.50% of the aggregate principal amount of the Initial Term Loan.
The
Company may prepay the Initial Term Loan at any time. Prepayments made prior to (a) February 7, 2022 are subject to a prepayment
premium in the amount of 2.0% of the prepaid principal amount and (b) February 7, 2023 are subject to a prepayment premium in
the amount of 1.0% of the prepaid principal amount. The Company is required to make prepayments of the Initial Term Loan with
the proceeds of certain asset dispositions, insurance recoveries and extraordinary receipts, subject to specified reinvestment
rights. The Company is also required to make prepayments of the Initial Term Loan upon the issuance of certain indebtedness and
to make an annual prepayment based upon the Company’s excess cash flow. Mandatory prepayments with asset sale, insurance
or condemnation proceeds and excess cash flow may be made without penalty. Mandatory prepayments with the proceeds of indebtedness
are subject to the same prepayment penalties as are applicable to voluntary prepayments. The maturity date for the Initial Term
Loan is February 7, 2025.
The
Term Loan Facility provides for an additional $11.6 term loan (the “Second Term Loan”) to be used for a second unannounced
acquisition for which the Company has entered into a confidential, non-binding letter-of-intent (the “Additional Acquisition”).
There can be no assurance that the Additional Acquisition will be completed. In the event the Additional Acquisition is completed,
the Second Term Loan will be made available to the Company on the same terms and conditions as the Initial Term Loan, including
interest rate, amortization schedule and financial covenants, subject to the payment of an additional upfront fee and satisfaction
of customary conditions to funding.
The
Term Loan Facility is secured by liens on substantially all of the Company’s and its subsidiaries’ assets including
a pledge of the equity interests in the Company’s subsidiaries. The Term Loan Facility contains customary affirmative and
negative covenants for a transaction of this type, including, among others, the provision of annual, quarterly and monthly financial
statements and compliance certificates, maintenance of property, insurance, compliance with laws and environmental matters, restrictions
on incurrence of indebtedness, granting of liens, making investments and acquisitions, paying dividends, entering into affiliate
transactions and asset sales. In addition, the Company must maintain certain financial covenants typical for this type of arrangement,
including a consolidated leverage ratio, a consolidated fixed charge coverage ratio and minimum liquidity of its foreign subsidiaries.
The consolidated leverage ratio is defined as the ratio of total consolidated indebtedness, as defined, to consolidated EBITDA,
as defined. The required leverage ratio starts at 4.75 to 1.0 for the twelve month periods ended March 31, 2020 and June
30, 2020, and decrease in various increments to 3.75 to 1.0 for the twelve months ended December 31, 2020, 2.75 to 1.0
for the twelve months ended December 31, 2021 and 2.0 to 1.0 for the twelve months ended December 31, 2022 and thereafter.
The consolidated fixed charge coverage ratio is the ratio of consolidated EBITDA, as defined, less consolidated capital expenditures
and cash income taxes paid to consolidated fixed charges, as defined, calculated on a twelve month basis. The consolidated fixed
charge coverage ratio for the twelve month periods ended March 31, 2020, June 30 2020 and September 30, 2020 must be 1.35 to 1
and increases in various increments on a quarterly basis to 1.5 to 1.0 for the twelve month period ended December 31, 2020 and
2021, and to 1.75 to 1.0 for the twelve months ending December 31, 2022 and thereafter. Lastly, the Company must maintain
minimum liquidity, defined as cash and availability under the UK borrowing base, as defined, of $1.0 million over any trailing
four-week period until such time as the foreign subsidiary has positive EBITDA, as defined, for three consecutive quarters and
the Holzworth deferred purchase price has been paid in full. The Term Loan Facility also provides for a number of events of default,
including, among others, nonpayment, bankruptcy, inaccuracy of representations and warranties, breach of covenant, change in control,
entry of final judgement or order, breach of material contracts, and as long as the Company’s consolidated leverage ratio
is greater than 1.0 to 1.0 (as calculated in accordance with the terms of the Term Loan Facility), the cessation of service of
any two of Tim Whelan, Michael Kandell or Daniel Monopoli as Chief Executive Officer, Chief Financial Officer or Chief Technology
Officer, respectively, of the Borrower without a satisfactory replacement within 60 days. Any exercise of remedies by Muzinich
is subject to compliance with the intercreditor agreement entered into at the closing of the Term Loan Facility among the Company,
Muzinich and Bank of America, N.A., as lender under the Credit Facility referenced below.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Wireless
Telecom Group, Inc.
Also
in connection with the Acquisition, on February 7, 2020, the Company and certain of its subsidiaries (the “Borrowers”),
and Bank of America, N.A. entered into Amendment No. 5 (the “Amendment”) to the Credit Facility. By entering into
the Amendment, Holzworth, together with CommAgility Limited, became borrowers under the Credit Facility. The obligations of the
Borrowers under the Credit Facility are guaranteed by Wireless Telecom Group, Ltd., CommAgility Limited and Wireless Telecom
Group, Ltd. are both wholly owned subsidiaries of the Company.
The
Amendment (a) effected certain modifications to the Credit Facility to accommodate the Acquisition, the Company’s incurrence
of the Initial Term Loan and the granting of the related liens and security interests, (b) subject to the satisfaction of certain
conditions precedent, made available to CommAgility an asset based revolving loan, subject to a borrowing base calculation applicable
to CommAgility’s assets, of up to a maximum availability of $5.0 million (the “UK Revolver Commitment”), (c)
reduced the interest rate margin applicable to revolving loans made under the Credit Facility from a range of 2.75% to 3.25% to
a range of 2.00% to 2.50%, based on the Borrowers’ Fixed Charge Coverage Ratio (as defined in the Credit Facility) of the
most recently completed fiscal quarter, (d) extended the Revolver Termination Date to March 31, 2023 and (e) conditioned the Borrowers’
ability to make certain debt payments under the Term Loan Facility (described above) upon compliance with a liquidity test. In
all other material respects, the Credit Facility remains unchanged.
Effectiveness
of the Amendment was conditioned upon, among other things, the prepayment of the remaining principal balance (approximately $0.3
million) of the $0.8 million term loan made available under the Credit Facility and the payment of a closing fee in the amount
of $25,000. The Borrowers satisfied all such conditions on February 7, 2020.
Issuance
of Stock Warrants
Pursuant
to the Term Loan Facility, the Company issued a Warrant, dated February 7, 2020 (the “Warrant”), to Muzinich. Under
the Warrant, Muzinich has the right to purchase 266,167 shares of common stock of the Company at an exercise price of $1.3923
per share (an aggregate value of approximately $370,588), based on a 90-day volume weighted average price for shares of stock
of the Company (the “Warrant Stock”). The Warrant is exercisable for an indefinite period from the date of the Warrant
and may be exercised on a cashless basis. The number of shares of common stock deliverable upon exercise of the Warrant is subject
to adjustment for subdivision or consolidation of shares and other standard dilutive events. In connection with the issuance of
the Warrant, the Company granted Muzinich one demand registration right and piggyback registration rights with respect to the
Warrant Stock, subject to certain exceptions.
If
the Additional Acquisition is consummated, the Company has agreed to issue to Muzinich at the closing of the Additional Acquisition
an additional Warrant for the right to purchase 367,564 shares of common stock of the Company at an exercise price of $1.3923
per share (an aggregate value of approximately $511,765), based upon a 90-day volume weighted average price for shares of stock
of the Company as of February 7, 2020 (the “Additional Warrant”). The Additional Warrant will contain the same terms
and conditions as the Warrant, except that Muzinich will have only one demand registration right, subject to certain exceptions,
with respect to shares of common stock of the Company issued under the Warrant and the Additional Warrant.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Wireless
Telecom Group, Inc.
NOTE
16 - SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The
following is a summary of selected quarterly financial data from operations (in thousands, except per share amounts).
2019
|
|
Quarter
|
|
|
|
1st
|
|
|
2nd
|
|
|
3rd
|
|
|
4th
|
|
Net
revenues
|
|
$
|
13,032
|
|
|
$
|
13,508
|
|
|
$
|
10,812
|
|
|
$
|
11,569
|
|
Gross
profit
|
|
|
5,727
|
|
|
|
6,133
|
|
|
|
4,825
|
|
|
|
5,604
|
|
Operating
income/(loss)
|
|
|
(398
|
)
|
|
|
146
|
|
|
|
(677
|
)
|
|
|
(550
|
)
|
Net
income/(loss)
|
|
|
(345
|
)
|
|
|
157
|
|
|
|
(460
|
)
|
|
|
234
|
|
Diluted
earnings/(loss) per share
|
|
$
|
(0.02
|
)
|
|
$
|
0.01
|
|
|
$
|
(0.02
|
)
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
Quarter
|
|
|
|
|
1st
|
|
|
|
2nd
|
|
|
|
3rd
|
|
|
|
4th
|
|
Net
revenues
|
|
$
|
13,264
|
|
|
$
|
13,414
|
|
|
$
|
14,019
|
|
|
$
|
12,091
|
|
Gross
profit
|
|
|
6,268
|
|
|
|
6,171
|
|
|
|
6,464
|
|
|
|
5,264
|
|
Operating
income/(loss)
|
|
|
568
|
|
|
|
33
|
|
|
|
919
|
|
|
|
(741
|
)
|
Net
income/(loss)
|
|
|
374
|
|
|
|
(179
|
)
|
|
|
558
|
|
|
|
(718
|
)
|
Diluted
earnings/(loss) per share
|
|
$
|
0.02
|
|
|
$
|
(0.01
|
)
|
|
$
|
0.03
|
|
|
$
|
(0.03
|
)
|