NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
1 - Summary of Significant Accounting Principles and Policies
Basis
of Presentation and Preparation
Wireless
Telecom Group, Inc., a New Jersey corporation, together with its subsidiaries (“we”, “us”, “our”
or the “Company”), specializes in the design and manufacture of advanced radio frequency and microwave devices which
enable the development, testing and deployment of wireless technology. The Company provides unique, highly customized and configured
solutions which drive innovation across a wide range of traditional and emerging wireless technologies.
In
2019, Wireless Telecom Group was comprised of four brands – Microlab, Boonton, Noisecom, and CommAgility. Since our acquisition
of Holzworth Instrumentation, Inc. (“Holzworth”) in February of 2020 (see Note 3), we are also offering the Holzworth
brand.
Our
customers include wireless carriers, defense contractors, military and government agencies, satellite communication companies,
network equipment manufacturers, tower companies, semiconductor device manufacturers, system integrators and medical device manufacturers.
Our
products include components, modules, systems and instruments used across the lifecycle of wireless connectivity and communication
development, deployment and testing. Our customers use these products in relation to commercial infrastructure development, the
expansion and upgrade of distributed antenna systems, deployment of small cell technology, use of medical devices and private
long-term evolution (“LTE”) networks. In addition, the Company’s products are used in the development and testing
of satellite communication systems, radar systems, semiconductor devices, automotive electronics and avionics.
The
consolidated balance sheet as of September 30, 2020, the consolidated statements of operations and comprehensive income/(loss)
for the three and nine months ended September 30, 2020 and 2019, the consolidated statements of cash flows for the nine months
ended September 30, 2020 and 2019 and the consolidated statement of shareholders’ equity for the three and nine months ended
September 30, 2020 and 2019 have been prepared by the Company without audit. The consolidated financial statements include the
accounts of Wireless Telecom Group, Inc., doing business as and operating under the trade name, Noisecom, and its wholly owned
subsidiaries including Boonton Electronics Corporation (“Boonton”), Microlab/FXR LLC (“Microlab”), Holzworth
Instrumentation, Inc. (“Holzworth”), Wireless Telecommunications Ltd. and CommAgility Limited (“CommAgility”).
All intercompany transactions and balances have been eliminated in consolidation.
In
June of 2020 the Company completed an internal reorganization and now presents its operations as one reportable segment. Prior
to the second quarter of 2020 the Company presented its operations in three reportable segments. The Company identifies segments
in accordance with ASC 280 Segment Reporting (“ASC 280”). As a result of internal reorganizations that occurred
over the six to nine months prior to June 30th the Company evaluated its segment reporting. We determined that the Chief Operating
Decision Maker (“CODM”) as defined in ASC 280 evaluates operating results and makes decisions on how to allocate resources
at the consolidated level. Although the CODM reviews key performance indicators including bookings, shipments and gross profit
at a product group level, this information by itself is not sufficient enough to make operating decisions. Rather, operating decisions
are made based on review of consolidated profitability metrics rather than the individual results of each product group.
It
is suggested that these interim consolidated financial statements be read in conjunction with the audited consolidated financial
statements, and the notes thereto, included in the Company’s latest annual report (Form 10-K).
The
Company’s fiscal periods are based on the calendar year. Except as otherwise specified, references to “third quarter(s)”
or “three months” indicate the Company’s fiscal periods ending September 30, 2020 and September 30, 2019, and
references to “year-end” indicate the fiscal year ended December 31, 2019.
Consolidated
Financial Statements
In
the opinion of management, the accompanying consolidated financial statements referred to above contain all necessary adjustments,
consisting of normal accruals and recurring entries, which are necessary to fairly present the Company’s results for the
interim periods being presented.
The
accounting policies followed by the Company are set forth in Note 1 to the Company’s consolidated financial statements included
in its annual report on Form 10-K for the year ended December 31, 2019. Specific reference is made to that report since certain
information and footnote disclosures normally included in financial statements in accordance with accounting principles generally
accepted in the United States of America (“US GAAP”) have been reduced for interim periods in accordance with SEC
rules.
WIRELESS
TELECOM GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The
results of operations for the three and nine months ended September 30, 2020 are not necessarily indicative of the results to
be expected for the full year ending December 31, 2020.
Critical
Accounting Estimates
The
preparation of our consolidated financial statements requires the Company to make estimates and judgments that affect the reported
amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and
the reported amount of revenues and expenses for each period. We base our assumptions, judgements and estimates on historical
experience and various other factors that we believe to be reasonable under the circumstances. At least quarterly, we evaluate
our assumptions, judgments and estimates, and make changes as deemed necessary.
Due
to the COVID-19 pandemic, there has been uncertainty and disruption in the global economy and financial markets. As noted in our
Form 10-K for the fiscal year ended December 31, 2019, due to declining demand of our digital signal processing hardware cards
we performed a quantitative assessment of the CommAgility goodwill as of the fourth fiscal quarter of 2019. Our quantitative assessment
did not identify any goodwill impairment. Furthermore, the Company applied a hypothetical 10% decrease to the fair value of the
CommAgility reporting unit and compared those values to the carrying values which also did not result in a goodwill impairment.
The Covid-19 pandemic has had an impact on our financial results for the three and nine months ended September 30, 2020. However,
we believe the markets we serve and the industries in which we operate will recover in the long term. Accordingly, we are not
aware of any specific event or circumstance related to the COVID-19 pandemic that would require updates to our estimates or judgments
or require us to revise the carrying value of our assets or liabilities as of November 13, 2020, the date of issuance of this
Quarterly Report on Form 10-Q. It is, however, reasonably possible that changes in judgements, assumptions and estimates we made
in assessing the fair value of goodwill could cause us to consider some portion of the remaining CommAgility goodwill to become
impaired because of the evolving disruptions and uncertainties caused by Covid-19, as described below.
Although
disruptions related to the Covid-19 pandemic did not impact our estimates and judgements as of the date of this report, it is
reasonably possible that the expected ongoing lack of sales of digital signal processing hardware cards and significant uncertainty
around other sales, cash collections, and costs could impact our mediation efforts in the fourth quarter of the fiscal year and
beyond. These uncertainties include the duration and severity of the pandemic and containment measures and how our compliance
with these measures will impact our day-to-day operations as well as that of our key customers, suppliers (including contract
manufacturers) and other counterparties. Our accounting estimates and judgements may change as new events occur and additional
information becomes available or is obtained. Furthermore, actual results could differ materially from our estimates as of the
date of issuance of this Quarterly Report on Form 10-Q under different assumptions or conditions.
For
further information about our critical accounting estimates, see the discussion in Item 7, “Management’s Discussion
and Analysis of Financial Condition and Results of Operations,” under the heading “Critical Accounting Policies”
in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.
Concentration
Risk
Financial
instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents
and trade accounts receivable. The majority of the Company’s cash balance is held outside of the United States.
Credit
evaluations are performed on customers requiring credit over a certain amount. Credit risk is mitigated to a lesser extent through
collateral such as letters of credit, bank guarantees or payment terms like cash in advance.
For
the three months ended September 30, 2020, one customer accounted for 13% of the Company’s consolidated revenues. For the
nine months ended September 30, 2020 no one customer accounted for greater than 10% of the Company’s consolidated revenues.
For the three and nine months ended September 30, 2019, one customer accounted for approximately 19% and 29% of the Company’s
consolidated revenues, respectively.
WIRELESS
TELECOM GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
No
customer accounted for more than 10% of consolidated accounts receivable as of September 30, 2020. At December 31, 2019, one customer
accounted for 13% of consolidated accounts receivable.
Fair
Value of Financial Instruments
Fair
value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly
transaction between market participants at the reporting date. The accounting guidance establishes a three-tiered hierarchy, which
prioritizes the inputs used in the valuation methodologies in measuring fair value:
Level
1 - Quoted prices in active markets for identical assets or liabilities.
Level
2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in markets that are not
active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of
the assets or liabilities.
Level
3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets
or liabilities.
The
categorization of a financial instrument within the valuation hierarchy is based on the lowest level of input that is significant
to the fair value measurement.
The
carrying amounts of the Company’s financial instruments, including cash, accounts receivable, accounts payable and accrued
liabilities, approximate fair value due to their relatively short maturities. The Company’s term loan and revolving credit
facility bear interest at a variable interest rate plus an applicable margin and, therefore, carrying amount approximates fair
value. We believe the carrying value of the loan obtained under the Paycheck Protection Program approximates fair value due to
the expected short term nature of the loan.
Contingent
Consideration
Under
the terms of the Holzworth Share Purchase Agreement (See Note 3) the Company may be required to pay additional purchase price
in the form of deferred purchase price payments and an earnout if certain financial targets are achieved for the years ending
December 31, 2020 and December 31, 2021. See Note 3 for a discussion of the first deferred purchase price payment related to financial
targets set for 2019. As of September 30, 2020, the Company estimated the fair value of the deferred purchase price and earnout
remaining to be paid related to the 2020 and 2021 financial targets to be $660,000 and $2.4 million, respectively. The earnout
may be paid in cash or common stock at the Company’s option. The Company is required to reassess the fair value of the contingent
consideration at each reporting period.
The
significant inputs used in this fair value estimate include estimated gross revenues and Adjusted EBITDA, as defined in the Holzworth
Share Purchase Agreement, and scenarios for the earnout periods for which probabilities are assigned to each scenario to arrive
at a single estimated outcome. The estimated outcome is then discounted based on the individual risk analysis of the liability.
Although the Company believes its estimates and assumptions are reasonable, different assumptions, including those regarding the
operating results of Holzworth or changes in the future, may result in different estimated amounts. The contingent consideration
liability is considered a Level 3 fair value measurement.
Subsequent
Events
There
were no subsequent events or transactions requiring recognition or disclosure in the consolidated financial statements, and the
notes thereto, through the date the financial statements were issued.
WIRELESS
TELECOM GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
2 – Accounting Pronouncements
Recently
Adopted Accounting Standards
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 2020 calendar year,
with early adoption permitted. The adoption of this standard did not have a material impact on our consolidated financial statements.
There
have been no changes to our significant accounting policies as described in the 2019 Form 10-K that had a material impact on our
consolidated financial statements and related notes.
Recent
Accounting Pronouncements Not Yet Adopted
In
June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326). ASU 2016-13 changes the
impairment model for most financial assets and will require the use of an “expected loss” model for instruments measured
as amortized cost. This pronouncement is effective for small reporting companies for fiscal years, and for interim periods within
those fiscal years, beginning after December 15, 2022. The Company plans to adopt the standard effective January 1, 2023. We do
not expect the adoption of this standard to have a material impact on our consolidated financial statements.
In
December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740) Simplifying the Accounting for Income Taxes. The amendments
simplify the accounting for income taxes by removing certain exceptions to the general principles of Topic 740 and improve consistent
application by clarifying and amending existing guidance. The new standard is effective for fiscal years, and interim periods
within those fiscal years, beginning after December 15, 2020. Early adoption is permitted, with the amendments to be applied on
a retrospective, modified retrospective or prospective basis, depending on the specific amendment. The Company is currently evaluating
the impact of adopting this guidance.
In
March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform
on Financial Reporting, The amendments provide optional expedients and exceptions for applying generally accepted accounting
principles to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are
met. The amendments are intended to ease the potential burden in accounting for, or recognizing the effects of, reference rate
reform on financial reporting. The new standard is effective March 12, 2020 through December 31, 2022, with the adoption date
being dependent upon the Company’s election. The Company is currently evaluating the impact of adopting this guidance.
NOTE
3 – Acquisition of Holzworth
On
November 13, 2019 the Company entered into a Share Purchase Agreement with Holzworth Instrumentation Inc. (“Holzworth”),
Jason Breitbarth, Joe Koebel, and Leyla Bly (collectively, the “Sellers”), and Jason Breitbarth, as the designated
representative of the Sellers, as amended by a First Amendment to Share Purchase Agreement, dated January 31, 2020 (collectively,
the “Share Purchase Agreement”). On February 7, 2020, the Company completed the acquisition (the “Acquisition”)
of all of the outstanding shares of Holzworth, from the Sellers. Holzworth instruments which include signal generators and phased
noise analyzers are used by government labs, the semiconductor industry, and network equipment providers, among others, in research
and automated test environments. Holzworth is a complimentary business for our Boonton and Noisecom brands with a common customer
base and channel partners. For the three and nine months ended September 30, 2020, net revenues of $2.8 million and $5.7 million,
respectively and operating income of $744,000 and $1.2 million, respectively, was included in the consolidated statements of operations
and comprehensive income/(loss) related to the Holzworth business, representing the results from the date of acquisition. For
the three and nine months ended September 30, 2020, the Company recorded $15,000 and $243,000, respectively of transaction expenses
related to the Acquisition and these expenses were recognized in general and administrative expenses in the consolidated statements
of operations and comprehensive income/(loss).
WIRELESS
TELECOM GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 $465,000 of the purchase price by issuing 347,319 shares of its
common stock (the “Stock Consideration”), and $8.0 million in cash (the “Cash Consideration”), reduced
by an indemnification holdback of $800,000 and payment of certain of Sellers’ transaction expenses and indebtedness of Holzworth.
Additionally, the final purchase price is subject to adjustment based on the closing working capital amounts, as defined in the
Share Purchase Agreement, of Holzworth as of the closing balance sheet date as compared to a defined target. The parties intend
to make a 338(h)(10) election to treat the Acquisition as a purchase and sale of assets, and the Company has agreed to pay any
incremental taxes of Sellers resulting from that election.
There
are two deferred purchase price payments that total $1.5 million. Each deferred payment may be reduced as provided in the Share
Purchase Agreement if Holzworth’s EBITDA (as defined in the Share Purchase Agreement) for each fiscal year ending December
31, 2019 and December 31, 2020, respectively, is less than $1.25 million. Holzworth met the EBITDA target for the fiscal year
ended December 31, 2019, and thereby earned the first deferred purchase price payment of $750,000 which is payable in three equal
quarterly installments on March 31, 2020, June 30, 2020 and September 30, 2020, respectively. Under the terms of the working capital
adjustment definition the sellers owed the Company approximately $292,000. Accordingly, this amount was netted against the first
deferred purchase price installment of $250,000 and a portion of the second deferred purchase price installment. The Company paid
the second deferred purchase price installment in the net amount of approximately $208,000 on July 1st. The third quarterly
deferred purchase price installment of $250,000 was paid in full on October 1, 2020. The second deferred purchase price payment
of $750,000, if earned, is payable on March 31, 2021.
The
Company may also be required to pay additional amounts in cash and stock as earnout consideration. The first earnout payment will
be equal to two times the amount, if any, by which Holzworth’s EBITDA for the fiscal year ending December 31, 2020 exceeds
$1.25 million. The second earnout payment will be equal to two times the amount, if any, by which Holzworth’s EBITDA for
the fiscal year ending December 31, 2021 exceeds the greater of $1.25 million or Holzworth’s EBITDA for the prior fiscal
year. The aggregate earnout payments, if any, cannot exceed $7.0 million.
Pursuant
to the Share Purchase Agreement the Company entered into a lock-up and voting agreement (the “Lock-up and Voting Agreement”)
with each of the Sellers. Pursuant to the Lock-up and Voting Agreement, each Seller agrees to restrict the sale, assignment, transfer,
encumbrance or other disposition of its portion of the Stock Consideration (the “Lock-up Shares”). For a period commencing
on the closing date of the Acquisition (the “Effective Date”) and ending on the date which is 36 calendar months following
the Effective Date, each Seller agrees that, without the prior written consent by the Company, such Seller shall not sell, assign,
transfer, encumber or otherwise dispose of the Lock-up Shares or enter into any swap, option or short sale, among other transactions.
Upon the prior written consent of the Company, a Seller may transfer Lock-up Shares as a bona fide gift, by will or intestacy
or to a family member or trust for the benefit of the Seller or a family member; provided that any recipient of the Lock-up
Shares sign and deliver to the Company a lock-up and voting agreement substantially in the form of the Lock-up and Voting Agreement.
The Lock-up Shares cease to be locked up in the event of a Change of Control of the Company (as defined in the Lock-up and Voting
Agreement).
In
addition, each Seller, subject to certain limitations, agrees, among other things, to appear at each meeting of the shareholders
of the Company and vote all of such Seller’s Lock-up Shares (a) in favor or against any proposal presented to the shareholders
in the same manner that the Company’s Board of Directors (the “Board”) recommends shareholders vote on such
proposal and (b) in favor of any proposal presented to the shareholders with respect to an action of the Company which the Board
has approved, but as to which the Board has not made any recommendation, including in favor of any proposal to adjourn or postpone
any meeting of the Company’s shareholders if such adjournment or postponement is conducted in accordance with the terms
of the Lock-up and Voting Agreement.
To
the extent any shares of Company common stock are issued in payment of any Earnout Consideration (as defined in the Share Purchase
Agreement) in accordance with the terms of the Share Purchase Agreement, such shares shall be subject to all applicable transfer
restrictions, voting and other provisions set forth in the Lock-up and Voting Agreement, with the Effective Date with respect
to such shares being the date such shares are 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.
The
acquisition has been accounted for under the acquisition method of accounting in accordance with ASC 805, “Business Combinations”.
Accounting for acquisitions requires us to recognize separately from goodwill the assets acquired and the liabilities assumed
at their acquisition date fair values. Goodwill as of the acquisition date is measured as the excess of consideration transferred
over the net of the acquisition date fair values of the assets acquired and the liabilities assumed. While we use our best estimates
and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date our estimates are inherently
uncertain and subject to refinement. Various valuation techniques were used to estimate the fair value of assets acquired and
the liabilities assumed which use significant unobservable inputs, or Level 3 inputs as defined by the fair value hierarchy. Using
these valuation approaches requires the Company to make significant estimates and assumptions.
WIRELESS
TELECOM GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
As
of September 30, 2020, the valuation studies necessary to determine the fair market value of the assets acquired and liabilities
assumed have been completed, including the validation of the underlying cash flows used to determine the fair value of the identified
intangible assets and contingent consideration. The following amounts represent the determination of the fair value of identifiable
assets acquired and liabilities assumed from the Acquisition along with measurement period adjustments recorded from the preliminary
purchase price allocation to September 30, 2020 (in thousands):
|
|
Amounts
Recognized as of
Acquisition Date
|
|
|
Measurement
Period
Adjustments
|
|
|
Amounts
Recognized as of
Acquisition Date
(as adjusted)
|
|
Cash at close
|
|
$
|
7,219
|
|
|
$
|
-
|
|
|
$
|
7,219
|
|
Equity issued at close
|
|
|
465
|
|
|
|
-
|
|
|
|
465
|
|
Purchase price holdback
|
|
|
800
|
|
|
|
-
|
|
|
|
800
|
|
Working capital adjustment
|
|
|
(295
|
)
|
|
|
3
|
|
|
|
(292
|
)
|
Deferred purchase price
|
|
|
1,300
|
|
|
|
110
|
|
|
|
1,410
|
|
Contingent consideration
|
|
|
555
|
|
|
|
1,885
|
|
|
|
2,440
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total purchase price
|
|
|
10,044
|
|
|
|
1,998
|
|
|
|
12,042
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
30
|
|
|
|
-
|
|
|
|
30
|
|
Accounts receivable
|
|
|
485
|
|
|
|
29
|
|
|
|
514
|
|
Inventory
|
|
|
1,218
|
|
|
|
220
|
|
|
|
1,438
|
|
Intangible assets
|
|
|
4,500
|
|
|
|
(240
|
)
|
|
|
4,260
|
|
Other assets
|
|
|
960
|
|
|
|
7
|
|
|
|
967
|
|
Fixed assets
|
|
|
144
|
|
|
|
-
|
|
|
|
144
|
|
Accounts payable
|
|
|
(129
|
)
|
|
|
-
|
|
|
|
(129
|
)
|
Accrued expenses
|
|
|
(425
|
)
|
|
|
(4
|
)
|
|
|
(429
|
)
|
Deferred revenue
|
|
|
(13
|
)
|
|
|
-
|
|
|
|
(13
|
)
|
Other long term
liabilities
|
|
|
(740
|
)
|
|
|
-
|
|
|
|
(740
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets acquired
|
|
|
6,030
|
|
|
|
12
|
|
|
|
6,042
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
4,014
|
|
|
$
|
1,986
|
|
|
$
|
6,000
|
|
Goodwill
is calculated as the excess of consideration paid over the net assets acquired and represents synergies, assembled workforce,
organic growth and other benefits that are expected to arise from integrating Holzworth into our operations. The goodwill recorded
in this transaction is expected to be tax deductible.
The
Company’s post acquisition consolidated goodwill is shown below (in thousands):
|
|
Holzworth
|
|
|
Microlab
|
|
|
CommAgility
|
|
|
Total
|
|
Balance as of December
31, 2019
|
|
$
|
-
|
|
|
$
|
1,351
|
|
|
$
|
8,718
|
|
|
$
|
10,069
|
|
Holzworth acquisition
|
|
|
6,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,000
|
|
Foreign currency
translation
|
|
|
-
|
|
|
|
-
|
|
|
|
(188
|
)
|
|
|
(188
|
)
|
Balance as of
September 30, 2020
|
|
$
|
6,000
|
|
|
$
|
1,351
|
|
|
$
|
8,530
|
|
|
$
|
15,881
|
|
The
following unaudited pro forma information presents the Company’s operations as if the Holzworth acquisition and related
financing activities had occurred on January 1, 2019. The pro forma information includes the following adjustments (i) amortization
of acquired intangible assets; (ii) interest expense incurred in connection with the Term Loan Facility (described in further
detail in Note 4) used to finance the acquisition of Holzworth; and (iii) inclusion of acquisition-related expenses in the earliest
period presented. The amounts related to Holzworth included in the following unaudited pro
forma information are based on their historical results and, therefore, may not be indicative of the actual results when operated
as part of the Company. The pro forma adjustments represent management’s best estimates based on information available at
the time the pro forma information was prepared and may differ from the adjustments that may actually have been required. Accordingly,
the unaudited pro forma financial information should not be relied upon as being indicative of the results that would have been
realized had the Acquisition occurred as of the date indicated or that may be achieved in the future.
WIRELESS
TELECOM GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The
following table presents the unaudited pro forma consolidated results of operations for the Company for the three months ended
September 30, 2019 and nine months ended September 30, 2020 and 2019 as though the Acquisition had been completed as of January
1, 2019 (in thousands, except per share amounts):
|
|
Q3
2019 WTG Pro Forma
|
|
|
Year
to Date September 2020 Pro-forma
|
|
|
Year
to Date September 2019 Pro-forma
|
|
Net revenues
|
|
$
|
12,917
|
|
|
$
|
31,502
|
|
|
$
|
41,689
|
|
Net income/(loss)
|
|
$
|
(431
|
)
|
|
$
|
(2,714
|
)
|
|
$
|
(1,700
|
)
|
Earnings per diluted share
|
|
$
|
(0.02
|
)
|
|
$
|
(0.13
|
)
|
|
$
|
(0.08
|
)
|
NOTE
4 – Debt
Debt
consists of the following (in thousands):
|
|
September
30, 2020
|
|
Revolver at LIBOR plus margin
|
|
$
|
-
|
|
Term loan at LIBOR plus
margin
|
|
|
8,337
|
|
Less: Debt issuance costs, net of amortization
|
|
|
(877
|
)
|
Less: Fair value of warrants, net of
amortization
|
|
|
(131
|
)
|
Paycheck Protection
Program loan
|
|
|
2,045
|
|
Total Debt
|
|
|
9,374
|
|
Less: Debt maturing
within one year
|
|
|
(84
|
)
|
Non-current
portion of long term debt
|
|
$
|
9,290
|
|
Term
loan payments by period (in thousands):
Remainder
of 2020
|
|
$
|
21
|
|
2021
|
|
|
84
|
|
2022
|
|
|
2,130
|
|
2023
|
|
|
84
|
|
2024
|
|
|
84
|
|
Thereafter
|
|
|
7,979
|
|
Total
|
|
$
|
10,382
|
|
In
connection with the Holzworth Acquisition, on February 7, 2020, the Company, as borrower, and its subsidiaries, as guarantors,
and Muzinich BDC, Inc., as lender (“Muzinich”), entered into a Term Loan Facility, which provides for a term loan
in the principal amount of $8.4 million (the “Initial Term Loan”). All proceeds of the Initial Term Loan were used
to fund the cash portion of the purchase price for the Holzworth acquisition. Principal payments on the Initial Term Loan are
$21,000 per quarter with a balloon payment at maturity which is February 7, 2025. The term loan bears interest at LIBOR (subject
to a floor of 1.0%) plus a margin of 7.25%. The Term Loan Facility includes an upfront fee of 2.50% of the aggregate principal
amount of the Initial Term Loan. In connection with the Term Loan Facility, the Company incurred costs of $1.0 million, including
the aforementioned 2.5% upfront fee to Muzinich, which were recorded as a reduction of the carrying amount of the debt and are
being amortized over the term of the loan.
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.
WIRELESS
TELECOM GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The
Term Loan Facility provides for an additional $11.6 million term loan (the “Second Term Loan”) to be used for a second
unannounced acquisition opportunity (the “Additional Acquisition”). There can be no assurance that the Additional
Acquisition will be completed. In the event the Additional Acquisition is completed, the Second Term Loan will be made available
to the Company on the same terms and conditions as the Initial Term Loan, including interest rate, amortization schedule and financial
covenants, subject to the payment of an additional upfront fee and satisfaction of customary conditions to funding.
The
Term Loan Facility is secured by liens on substantially all of the Company’s and its subsidiaries’ assets including
a pledge of the equity interests in the Company’s subsidiaries. The Term Loan Facility contains customary affirmative and
negative covenants for a transaction of this type, including, among others, the provision of annual, quarterly and monthly financial
statements and compliance certificates, maintenance of property, insurance, compliance with laws and environmental matters, restrictions
on incurrence of indebtedness, granting of liens, making investments and acquisitions, paying dividends, entering into affiliate
transactions and asset sales. In addition, the Company must maintain certain financial covenants typical for this type of arrangement,
including a consolidated leverage ratio, a consolidated fixed charge coverage ratio and minimum liquidity of its foreign subsidiaries.
The consolidated leverage ratio is defined as the ratio of total consolidated indebtedness, as defined, to consolidated EBITDA,
as defined. The required leverage ratio starts at 4.75 to 1.0 for the twelve month periods ended March 31, 2020 and June 30, 2020,
and decreases in various increments to 4.0 to 1.0 for the twelve months ended September 30, 2020, 3.75 to 1.0 for the twelve months
ended December 31, 2020, 2.75 to 1.0 for the twelve months ended December 31, 2021 and 2.0 to 1.0 for the twelve months ended
December 31, 2022 and thereafter. The consolidated fixed charge coverage ratio is the ratio of consolidated EBITDA, as defined,
less consolidated capital expenditures and cash income taxes paid to consolidated fixed charges, as defined, calculated on a twelve-month
basis. The consolidated fixed charge coverage ratio for the twelve month periods ended March 31, 2020, June 30, 2020 and September
30, 2020 must be 1.35 to 1 and increases in various increments on a quarterly basis to 1.5 to 1.0 for the twelve month period
ended December 31, 2020 and 2021, and to 1.75 to 1.0 for the 12 months ending December 31, 2022 and thereafter. Lastly, the Company
must maintain minimum liquidity, defined as cash and availability under the UK borrowing base, as defined, of $1.0 million over
any trailing four-week period until such time as the foreign subsidiary has positive EBITDA, as defined, for three consecutive
quarters and the Holzworth deferred purchase price has been paid in full. The Term Loan Facility also provides for a number of
events of default, including, among others, nonpayment, bankruptcy, inaccuracy of representations and warranties, breach of covenant,
change in control, entry of final judgement or order, breach of material contracts, and as long as the Company’s consolidated
leverage ratio is greater than 1.0 to 1.0 (as calculated in accordance with the terms of the Term Loan Facility), the cessation
of service of any two of Tim Whelan, Michael Kandell or Daniel Monopoli as Chief Executive Officer, Chief Financial Officer or
Chief Technology Officer, respectively, of the Borrower without a satisfactory replacement within 60 days. Any exercise of remedies
by Muzinich is subject to compliance with the intercreditor agreement entered into at the closing of the Term Loan Facility among
the Company, Muzinich and Bank of America, N.A., as lender under the Credit Facility referenced below. It is reasonably possible
that the disruptions caused by Covid-19 and the ongoing lack of demand for our digital signal processing cards will
have an impact on our ability to comply with our financial debt covenants which could result in a default under either or both
of our Credit Facility and Term Loan for the twelve months ended December 31, 2020. Management is actively discussing these
issues with lenders and believes the risk of default will be eliminated through appropriate cash flow management, including
with respect to potential earn out payments and amendments of credit agreements.
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 $760,000 (the “Term Loan”) and
an asset based revolving loan (the “Revolver”), which is subject to a Borrowing Base Calculation (as defined in the
Credit Facility) of up to a maximum availability of $9.0 million (“Revolver Commitment Amount”). The borrowing base
is calculated as a percentage of eligible accounts receivable and inventory, as defined, subject to certain caps and limits. The
borrowing base is calculated on a monthly basis and interest is calculated at LIBOR plus a margin. The proceeds of the Term Loan
and Revolver were used to finance the acquisition of CommAgility in 2017.
In
connection with the Acquisition, on February 7, 2020, the Company and certain of its subsidiaries (the “Borrowers”),
and Bank of America, 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.
WIRELESS
TELECOM GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 ($304,000) of the
$760,000 term loan made available under the Credit Facility and the payment of a closing fee in the amount of $25,000. The Borrowers
satisfied all such conditions on February 7, 2020. In connection with the Amendment the Company incurred costs of $270,000 which
are capitalized as other current and non-current assets in the Consolidated Balance Sheets and are being amortized over the term
of the revolver.
As
of September 30, 2020, the interest rate on the Term Loan Facility was 8.25% and the interest rate on the Revolver was 2.25%.
As of September 30, 2020, and the date hereof the Company is in compliance with all covenants of the Credit Facility and
the Term Loan Facility.
On
May 4, 2020, the Company received $2.0 million pursuant to a loan from Bank of America N.A. under the Paycheck Protection Program
(“PPP”) of the 2020 Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) administered by
the Small Business Association (“SBA”). The loan has an interest rate of 1% and a term of 24 months. A repayment schedule
has not yet been provided by Bank of America. Accordingly, the full amount of the term loan has been shown as due in May 2022.
Funds from the loan may only be used for certain purposes, including payroll, benefits, rent and utilities. The CARES Act and
the PPP provide a mechanism for forgiveness of up to the full amount of the loan upon application to the SBA for forgiveness by
the Company. The loan is evidenced by a promissory note, which contains customary events of default relating to, among other things,
payment defaults and breaches of representations and warranties. The Company may prepay the loan at any time prior to maturity
with no prepayment penalties. The Company expects to apply for forgiveness of the loan, however, has elected to account for the
loan in accordance with Accounting Standard Codification 470 Debt until such time that forgiveness is approved by the SBA.
The Company can provide no assurance that the loan will be forgiven in whole or in part.
On
May 4, 2020 the Company also entered into Amendment No. 6 to the Credit Facility with Bank of America N.A. and Amendment No. 1
to the Term Loan facility with Muzinich. The amendments allowed the Company to accept the PPP loan and provide that the PPP loan
shall not be deemed to constitute “Debt” or “Indebtedness”, as defined, under the Credit Facility and
the Term Loan Facility, respectively, as long as the proceeds of the PPP loan are used for allowable purposes under the provisions
of the CARES Act and the PPP in order to permit the Company to obtain forgiveness of substantially all of the PPP loan. The amendments
to the Credit Facility and Term Loan Facility also contain certain representations and warranties of the Company.
Issuance
of Stock Warrants
Pursuant
to the Term Loan Facility, the Company issued a Warrant, dated February 7, 2020 (the “Warrant”), to Muzinich. Under
the Warrant, Muzinich has the right to purchase 266,167 shares of common stock of the Company at an exercise price of $1.3923
per share (an aggregate value of approximately $370,588), based on a 90-day volume weighted average price for shares of stock
of the Company (the “Warrant Stock”). The Warrant is exercisable for an indefinite period from the date of the Warrant
and may be exercised on a cashless basis. The number of shares of common stock deliverable upon exercise of the Warrant is subject
to adjustment for subdivision or consolidation of shares and other standard dilutive events. In connection with the issuance of
the Warrant, the Company granted Muzinich one demand registration right and piggyback registration rights with respect to the
Warrant Stock, subject to certain exceptions.
If
the Additional Acquisition is consummated, the Company has agreed to issue to Muzinich at the closing of the Additional Acquisition
an additional Warrant for the right to purchase 367,564 shares of common stock of the Company at an exercise price of $1.3923
per share (an aggregate value of approximately $511,765), based upon a 90-day volume weighted average price for shares of stock
of the Company as of February 7, 2020 (the “Additional Warrant”). The Additional Warrant will contain the same terms
and conditions as the Warrant, except that Muzinich will have only one demand registration right, subject to certain exceptions,
with respect to shares of common stock of the Company issued under the Warrant and the Additional Warrant.
The
stock warrants issued to Muzinich are classified as equity. The fair value of the warrants, as calculated using the Black Scholes
model as of the issuance date, was approximately $150,000 and was recorded as a reduction to the carrying value of the debt. The
significant inputs included in the Black Scholes calculation were a risk free rate of 1.41%, volatility of 48.7% and the stock
price on date of grant of $1.34.
WIRELESS
TELECOM GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
5 – Leases
The
Company’s lease agreements consist of building leases for its operating locations and office equipment leases for printers
and copiers with lease terms that range from less than 12 months to 8 years. At inception, the Company determines if an arrangement
contains a lease and whether that lease meets the classification criteria of a finance or operating lease. The Company’s
leases for office equipment such as printers and copiers contain lease and non-lease components (i.e. maintenance). The Company
accounts for lease and non-lease components of office equipment as a single lease component.
All
of the Company’s leases are operating leases and are presented as right of use lease asset, short term lease liability and
long term lease liability on the consolidated balance sheets as of September 30, 2020 and 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).
Operating
lease costs for the three and nine months ended September 30, 2020 were $296,000 and $791,000, respectively. Operating lease costs
for the three and nine months ended September 30, 2019 were $222,000 and $669,000, respectively.
The
following table presents information about the amount and timing of cash flows arising from the Company’s leases as of September
30, 2020:
(in
thousands)
|
|
September
30, 2020
|
|
Maturity of Lease
Liabilities
|
|
|
|
|
Remainder of 2020
|
|
$
|
157
|
|
2021
|
|
|
619
|
|
2022
|
|
|
637
|
|
2023
|
|
|
276
|
|
2024
|
|
|
158
|
|
Thereafter
|
|
|
231
|
|
Total Undiscounted operating lease payments
|
|
|
2,078
|
|
Less: imputed
interest
|
|
|
(213
|
)
|
Present
value of operating lease liabilities
|
|
$
|
1,865
|
|
|
|
|
|
|
Balance sheet classification
|
|
|
|
|
Current lease liabilities
|
|
$
|
527
|
|
Long-term lease
liabilities
|
|
|
1,338
|
|
Total
operating lease liabilities
|
|
$
|
1,865
|
|
|
|
|
|
|
Other information
|
|
|
|
|
Weighted-average remaining term (months)
for operating leases
|
|
|
46
|
|
Weighted-average discount rate for operating
leases
|
|
|
5.87
|
%
|
WIRELESS
TELECOM GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
6 – Disaggregated Revenue
We
disaggregate our revenue from contracts with customers by product family and geographic location as we believe it best depicts
how the nature, timing and uncertainty of our revenue and cash flows are affected by economic factors. For the three and nine
months ended September 30, 2020 and 2019, 99% of our revenue is recognized at a point in time. See details in the tables below
(in thousands).
|
|
Three
Months
Ended
September
30, 2020
|
|
|
Three
Months Ended
September
30, 2019
|
|
|
Nine
Months
Ended
September
30, 2020
|
|
|
Nine
Months Ended
September
30, 2019
|
|
Total net revenues
by revenue type
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Passive and active RF components
|
|
$
|
4,407
|
|
|
$
|
5,185
|
|
|
$
|
14,527
|
|
|
$
|
16,518
|
|
Signal generators and components
|
|
|
3,970
|
|
|
|
1,337
|
|
|
|
8,598
|
|
|
|
4,362
|
|
Signal analyzers and power meters
|
|
|
1,451
|
|
|
|
1,323
|
|
|
|
4,297
|
|
|
|
3,946
|
|
Signal processing hardware
|
|
|
106
|
|
|
|
2,506
|
|
|
|
1,471
|
|
|
|
11,154
|
|
Software licenses
|
|
|
443
|
|
|
|
5
|
|
|
|
1,157
|
|
|
|
11
|
|
Services
|
|
|
491
|
|
|
|
456
|
|
|
|
1,354
|
|
|
|
1,362
|
|
Total
net revenue
|
|
$
|
10,868
|
|
|
$
|
10,812
|
|
|
$
|
31,404
|
|
|
$
|
37,353
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
by geographic areas
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
$
|
8,958
|
|
|
$
|
7,177
|
|
|
$
|
23,598
|
|
|
$
|
21,623
|
|
EMEA
|
|
|
1,145
|
|
|
|
3,184
|
|
|
|
4,793
|
|
|
|
14,103
|
|
APAC
|
|
|
765
|
|
|
|
451
|
|
|
|
3,013
|
|
|
|
1,627
|
|
Total
net revenue
|
|
$
|
10,868
|
|
|
$
|
10,812
|
|
|
$
|
31,404
|
|
|
$
|
37,353
|
|
NOTE
7 – Income Taxes
The
Company records deferred taxes in accordance with ASC 740, “Accounting for Income Taxes.” ASC 740 requires
recognition of deferred tax assets and liabilities for temporary differences between tax basis of assets and liabilities and the
amounts at which they are carried in the financial statements, based upon the enacted rates in effect for the year in which the
differences are expected to reverse. The Company establishes a valuation allowance when necessary to reduce deferred tax assets
to the amount expected to be realized. The Company periodically assesses the value of its deferred tax assets and determines the
necessity for a valuation allowance.
Realization
of the Company’s deferred tax assets is dependent upon the Company generating sufficient taxable income in the appropriate
tax jurisdictions in future years to obtain benefit from the reversal of net deductible temporary differences and from utilization
of net operating losses. The amount of deferred tax assets considered realizable is subject to adjustment in future periods if
estimates of future taxable income are changed.
As
of September 30, 2020, the Company’s net deferred tax asset of approximately $4.5 million is net of a valuation allowance
of approximately $7.1 million which is associated with the Company’s foreign net operating loss carryforward from an inactive
foreign entity, state net operating loss carryforward and a state research and development credit.
The
Company recorded a tax provision of $352,000 for the nine months ended September 30, 2020 due to estimated taxable income in the
U.S. as qualified expenses under the PPP loan are not deductible for tax purposes. In recording the tax provision for the nine
months ended September 30, 2020, the Company has assumed that the PPP loan will be forgiven and, therefore, all PPP qualified
expenses are being treated as non-deductible. This was offset somewhat by estimated losses as well as research and development
deductions in the UK.
The
effective rate of income tax benefit of 28.3% for the nine months ended September 30, 2019 was higher than the statutory rates
in the United States and United Kingdom primarily due to the impact of research and development deductions in the UK.
WIRELESS
TELECOM GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
8 – Earnings (Loss) Per Share
Basic
earnings (loss) per share is calculated by dividing net income (loss) available to common shareholders by the weighted-average
number of shares of common stock outstanding during the period. Diluted earnings (loss) per share is calculated by dividing net
income (loss) available to common shareholders by the weighted-average number of common shares outstanding for the period and,
when dilutive, potential shares from stock options using the treasury stock method, the weighted average number of unvested restricted
shares, the weighted-average number of restricted stock units and the weighted average number of warrants to purchase common stock
outstanding for the period. Shares from stock options are included in the diluted earnings per share calculation only when options
exercise prices are lower than the average market value of the common shares for the period presented. In periods with a net loss,
the basic loss per share equals the diluted loss per share as all common stock equivalents are excluded from the per share calculation
because they are anti-dilutive. In accordance with ASC 260, “Earnings Per Share”, the following table reconciles basic
shares outstanding to fully diluted shares outstanding.
|
|
For
the Three Months Ended September 30,
|
|
|
For
the Nine Months Ended September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
21,703,268
|
|
|
|
20,865,751
|
|
|
|
21,642,955
|
|
|
|
20,854,244
|
|
Potentially dilutive
equity awards
|
|
|
388,366
|
|
|
|
655,351
|
|
|
|
295,186
|
|
|
|
654,239
|
|
Weighted average common shares
outstanding, assuming dilution
|
|
|
22,091,634
|
|
|
|
21,521,102
|
|
|
|
21,938,141
|
|
|
|
21,508,483
|
|
For
the three and nine months ended September 30, 2020, the weighted average number of options and warrants to purchase common stock
not included in diluted loss per share because the effects are anti-dilutive, or the performance condition was not met was 3,246,167
and 2,924,650, respectively. The estimated maximum weighted-average number of shares issuable under the terms of the Holzworth
earnout, if all paid in shares of common stock, (see Note 3) for the three and nine months ended September 30, 2020 are 1,468,374
and 367,094, respectively.
For
the three and nine months ended September 30, 2019 the weighted-average number of options to purchase common stock not included
in diluted loss per share because the effects are anti-dilutive or the performance condition was not met was 1,445,000 and 1,275,000,
respectively.
NOTE
9 – Inventories
Inventory
carrying value is net of inventory reserves of $1.1 million at September 30, 2020 and $1.0 million at December 31, 2019.
Inventories consist of (in thousands):
|
|
|
|
|
|
|
|
|
September
30,
2020
|
|
|
December
31,
2019
|
|
Raw materials
|
|
$
|
4,911
|
|
|
$
|
4,024
|
|
Work-in-process
|
|
|
716
|
|
|
|
406
|
|
Finished goods
|
|
|
3,447
|
|
|
|
2,895
|
|
|
|
$
|
9,074
|
|
|
$
|
7,325
|
|
WIRELESS
TELECOM GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note
10 – Accrued Expenses and Other Current Liabilities
As
of September 30, 2020, and December 31, 2019 accrued expenses and other current liabilities consisted of the following (in
thousands):
|
|
September
30,
2020
|
|
|
December
31
2019
|
|
Contingent consideration
|
|
$
|
2,440
|
|
|
$
|
-
|
|
Deferred purchase price
|
|
|
1,510
|
|
|
|
-
|
|
Professional fees
|
|
|
1,047
|
|
|
|
513
|
|
Payroll and related benefits
|
|
|
908
|
|
|
|
308
|
|
Commissions
|
|
|
535
|
|
|
|
430
|
|
Goods received not invoiced
|
|
|
478
|
|
|
|
346
|
|
Bonus
|
|
|
279
|
|
|
|
126
|
|
Sales and use and VAT tax
|
|
|
262
|
|
|
|
355
|
|
Returns reserve
|
|
|
219
|
|
|
|
199
|
|
Warranty Reserve
|
|
|
160
|
|
|
|
160
|
|
Severance
|
|
|
3
|
|
|
|
102
|
|
Other
|
|
|
656
|
|
|
|
118
|
|
Total
|
|
$
|
8,497
|
|
|
$
|
2,657
|
|
NOTE
11 - Accounting for Stock Based Compensation
The
Company’s results for the three and nine month periods ended September 30, 2020 include $151,000 and $360,000, respectively,
related to stock based compensation expense. The Company’s results for the three and nine month periods ended September
30, 2019 include $160,000 and $560,000, respectively, related to stock based compensation expense. Such amounts have been included
in the consolidated statement of operations and comprehensive income/(loss) within general and administrative expenses in operating
expenses. The Company accounts for forfeitures when they occur.
Incentive
Compensation Plan
In
2012, the Company’s Board of Directors and shareholders approved the 2012 Incentive Compensation Plan (the “Initial
2012 Plan”), which provides for the grant of equity, including restricted stock awards, restricted stock units, non-qualified
stock options and incentive stock options in compliance with the Internal Revenue Code of 1986, as amended, to employees, officers,
directors, consultants and advisors of the Company who are expected to contribute to the Company’s future growth and success.
When originally approved, the Initial 2012 Plan provided for the grant of awards relating to 2 million shares of common stock,
plus those shares subject to awards previously issued under the Company’s 2000 Stock Option Plan that expire, are canceled
or are terminated after adoption of the Initial 2012 Plan without having been exercised in full and would have been available
for subsequent grants under the 2000 Stock Option Plan. In June 2014, the Company’s shareholders approved the Amended and
Restated 2012 Incentive Compensation Plan (the “2012 Plan”) allowing for an additional 1.6 million shares of the Company’s
common stock to be available for future grants under the 2012 Plan. 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 September 30, 2020, there are approximately 243,000 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.
WIRELESS
TELECOM GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Outstanding
Stock Options
On
August 4, 2020 the Company granted 150,000 performance-based stock options to our Chief Revenue Officer under the 2012 Plan.
On
April 7, 2020 the Company granted 970,000 performance-based stock options to various employees under the 2012 Plan.
The
performance options granted on both August 4th and April 7th vest when the Company achieves consolidated
revenue targets as outlined in the schedule below:
Consolidated
annualized gross revenues $55.0 million – 25% vesting
|
|
Consolidated
annualized gross revenues $61.5 million – 50% vesting
|
|
Consolidated
annualized gross revenues $69.0 million – 75% vesting
|
|
Consolidated
annualized gross revenues $77.5 million – 100% vesting
|
Consolidated
annualized gross revenues include revenue from Holzworth from acquisition date (February 7, 2020) forward, but do not include
any additional acquisitions from February 7, 2020 forward. Consolidated annualized gross revenues is calculated on a calendar
year basis (i.e. twelve months ended December 31).
The
grant price of the August 4th grant is $1.20 and the assumptions used to estimate the fair value of the August 4th
performance-based option are as follows: Option Term (in years) – 10; Exercise price $1.20; Risk Free Interest Rate
0.19%; Expected Volatility 52.06%; Expected Dividend Yield 0.00.
The
grant price of the April 7th grants is $1.50 and the assumptions used to estimate the fair value of the April 7th
performance-based options are as follows: Option Term (in years) – 10; Exercise price $1.50; Risk Free Interest Rate
0.48%; Expected Volatility 50.85%; Expected Dividend Yield 0.00.
In
accordance with ASC 718 Compensation-Stock Compensation, compensation expense 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. For the three and nine months ended September 30, 2020 the Company recorded
$38,000 and $68,000 of expense in general and administrative expenses related to the April and August performance-based stock
options, respectively. The estimated implicit service period is April 2020 thru December 2025 for the April performance-based
options and August 2020 thru December 2025 for the August performance-based options.
As
of September 30, 2020, there were 1,925,000 service based stock options outstanding and 1,205,000 performance based stock options
outstanding. The range of exercise prices of outstanding stock options is $1.20 to $1.92. For the nine months ended September
30, 2020 there were no potentially dilutive common shares from the stock options as all options outstanding had an exercise price
higher than the average market value of common shares.
Restricted
Stock Units
On
June 4, 2020 the Company granted 25,000 Restricted Stock Units (“RSU”) to each of our six independent board members
under the 2012 Plan. Each RSU represents the Company’s obligation to issue one share of the Company’s common stock
subject to the RSU award agreement and 2012 Plan. The grant date fair value was $1.18 per share and the RSU’s vest on the
day before the first anniversary of the grant date or, if earlier, the effective date of a separation of service due to death
or disability, provided the board member has rendered continuous service to the Company as a member of the board of directors
from grant date to vesting date. Once vested the RSU will be settled by delivery of shares to the board member no later than 30
days following: 1) the third anniversary of the grant date, 2) separation from service following, or coincident with, a vesting
date, or 3) a change in control.
As
of September 30, 2020, there were 272,917 vested RSU’s and 150,000 unvested RSU’s.
WIRELESS
TELECOM GROUP, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Unvested
Restricted Share Awards
On
August 4th the Company granted 50,000 restricted share awards to our Chief Revenue Officer under the 2012 plan. The
fair market value of the award is $1.20 per granted share and the award vests in four equal installments of 12,500 shares on August
1 of 2021, 2022, 2023 and 2024, respectively
As
of September 30, 2020, there were 238,170 unvested restricted share awards outstanding.
NOTE
12 – SEGMENT INFORMATION
In
June 2020, as a result of certain internal reorganizations completed over the prior six to nine months, the Company concluded
it now operates as one reportable segment in accordance with ASC 280 Segment Reporting. Prior to June the Company operated
as three reportable segments. In June we determined that the Chief Operating Decision Maker (“CODM”) as defined in
ASC 280 evaluates operating results and makes decisions on how to allocate resources as the consolidated level. Although the CODM
reviews key performance indicators including bookings, shipments and gross profit at a product group level, this information by
itself is not sufficient enough to make operating decisions. Rather, operating decisions are made based on review of consolidated
profitability metrics rather than the individual results of each product group.
NOTE
13 – COMMITMENTS AND CONTINGENCIES
Legal
Proceeding
As
previously disclosed, on June 5, 2019 Harris Corporation (“Harris”) filed a request for arbitration before the American
Arbitration Association in accordance with the terms of an executed purchase order, statement of work and software license agreement
(collectively referred to as “Agreements”) with CommAgility entered into in 2014. Harris claims that CommAgility breached
the Agreements and infringed Harris’ copyrighted “Work Product” (as defined in the Agreements) by offering for
sale, marketing, and promoting techniques, capabilities, products and services that incorporate Work Product owned by Harris.
In its arbitration demand, Harris claims that CommAgility has caused Harris significant monetary damages, the sum of which cannot
be determined until such time as discovery has been conducted but is estimated by Harris to be less than $250,000. Harris did
not include a request for monetary damages in its Statement of Claim, which was filed with the arbitration panel on May 22, 2020.
Harris is seeking a declaration of ownership and 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 arbitration proceedings have been suspended by consent
as the parties engage in settlement discussions.
The
ultimate outcome of this matter is unknown but, in the opinion of management, we do not believe this proceeding will have a material
adverse effect upon our financial condition, cash flows or future results of operations. Legal expenses incurred in connection
with the arbitration from August 2019 are covered by our professional indemnity insurance policy.
There
have been no other material changes in our commitments and contingencies and risks and uncertainties as of September 30, 2020
from that previously disclosed in our annual report on Form 10-K for the year ended December 31, 2019.