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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

FORM 10-Q

 

 

 

(Mark One)

 

  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2021

 

OR

 

  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ____ to _____

 

Commission file number: 1-11916

 

WIRELESS TELECOM GROUP, INC.

(Exact name of Registrant as specified in its charter)

 

New Jersey   22-2582295
(State or other jurisdiction   (I.R.S. Employer
of incorporation or organization) Identification No.)

 

25 Eastmans Road, Parsippany, New Jersey

  07054
(Address of principal executive offices)   (Zip Code)

 

(973) 386-9696

(Registrant’s telephone number, including area code)

 

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol   Name of each exchange on which registered
Common Stock   WTT   NYSE American

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   Accelerated filer
Non-accelerated filer   Smaller reporting company
      Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes ☐ No

 

Number of shares of Common Stock outstanding as of August 5, 2021: 22,207,996

 

 

 

 

 

 

WIRELESS TELECOM GROUP, INC.

Form 10-Q

Table of Contents

 

PART I – FINANCIAL INFORMATION  
   
Item 1. Financial Statements (Unaudited) 3
   
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 19
   
Item 3. Quantitative and Qualitative Disclosures About Market Risk 25
   
Item 4. Controls and Procedures 25
   
PART II – OTHER INFORMATION  
   
Item 1. Legal Proceedings 26
   
Item 1A. Risk Factors 26
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 26
   
Item 3. Defaults Upon Senior Securities 26
   
Item 4. Mine Safety Disclosures 26
   
Item 5. Other Information 26
   
Item 6. Exhibits 26
   
SIGNATURES 27

  

  2  
     

 

WIRELESS TELECOM GROUP, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except number of shares and par value)

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

    (Unaudited)        
    June 30
2021
    December 31
2020
 
CURRENT ASSETS                
Cash & cash equivalents   $ 4,213     $ 4,910  
Accounts receivable - net of reserves of $214 and $143, respectively     6,532       5,520  
Inventories - net of reserves of $1,216 and $1,129 respectively     9,365       8,796  
Prepaid expenses and other current assets     2,152       2,172  
TOTAL CURRENT ASSETS     22,262       21,398  
                 
PROPERTY PLANT AND EQUIPMENT - NET     1,731       1,824  
                 
OTHER ASSETS                
Goodwill     11,564       11,512  
Acquired intangible assets, net     4,602       5,242  
Deferred income taxes     5,455       5,701  
Right of use assets     1,417       1,680  
Other assets     509       561  
TOTAL OTHER ASSETS     23,547       24,696  
                 
TOTAL ASSETS   $ 47,540     $ 47,918  
                 
CURRENT LIABILITIES                
Short term debt   $ 84     $ 512  
Accounts payable     2,094       1,546  
Short term leases     559       534  
Accrued expenses and other current liabilities     6,705       7,997  
Deferred revenue     598       924  
TOTAL CURRENT LIABILITIES     10,040       11,513  
                 
LONG TERM LIABILITIES                
Long term debt     6,925       8,895  
Long term leases     914       1,200  
Other long term liabilities     1,778       82  
Deferred tax liability     455       377  
TOTAL LONG TERM LIABILITIES     10,072       10,554  
                 
COMMITMENTS AND CONTINGENCIES     -        -   
                 
SHAREHOLDERS’ EQUITY                
Preferred stock, $.01 par value, 2,000,000 shares authorized, none issued     -       -  
Common stock, $.01 par value, 75,000,000 shares authorized
35,112,421 and 34,888,904 shares issued, 21,883,235 and 21,669,361 shares outstanding
    351       349  
Additional paid in capital     50,364       50,163  
Retained earnings     358       (946 )
Treasury stock at cost, 13,229,186 and 13,219,543 shares     (24,573 )     (24,556 )
Accumulated other comprehensive income     928       841  
TOTAL SHAREHOLDERS’ EQUITY     27,428       25,851  
                 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY   $ 47,540     $ 47,918  

 

See accompanying Notes to Consolidated Financial Statements.

 

  3  
     

 

WIRELESS TELECOM GROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME/(LOSS)

(UNAUDITED)

(In thousands, except per share amounts)

 

      2021       2020       2021       2020  
    For the Three Months Ended     For the Six Months Ended  
    June 30     June 30  
      2021       2020       2021       2020  
Net revenues   $ 12,023     $ 11,108     $ 23,344     $ 20,536  
                                 
Cost of revenues     5,889       5,440       11,265       10,441  
                                 
Gross profit     6,134       5,668       12,079       10,095  
                                 
Operating expenses                                
Research and development     1,464       1,675       2,846       3,254  
Sales and marketing     1,699       1,661       3,412       3,379  
General and administrative     2,806       2,391       5,668       4,878  
Total operating expenses     5,969       5,727       11,926       11,511  
                                 
Operating income/(loss)     165       (59 )     153       (1,416 )
                                 
Extinguishment of PPP loan     2,045       -       2,045       -  
Other income/(expense)     (15 )     56       8       295  
Interest expense     (285 )     (246 )     (582 )     (471 )
                                 
Income/(Loss) before taxes     1,910       (249 )     1,624       (1,592 )
                                 
Tax provision/(benefit)     373       419       321       225  
                                 
Net income/(loss)   $ 1,537     $ (668 )   $ 1,303     $ (1,817 )
                                 
Other comprehensive income/(loss):                                
Foreign currency translation adjustments     12       (35 )     87       (971 )
Comprehensive income/(loss)   $ 1,549     $ (703 )   $ 1,390     $ (2,788 )
                                 
                                 
Income/(Loss) per share:                                
Basic   $ 0.07     $ (0.03 )   $ 0.06     $ (0.08 )
Diluted   $ 0.06     $ (0.03 )   $ 0.05     $ (0.08 )
                                 
Weighted average shares outstanding:                                
Basic     21,763       21,707       21,728       21,626  
Diluted     24,343       21,707       24,063       21,626  

 

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.

 

See accompanying Notes to Consolidated Financial Statements.

 

  4  
     

 

WIRELESS TELECOM GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(In thousands)

 

    2021     2020  
    For the Six Months  
    Ended June 30  
    2021     2020  
CASH FLOWS PROVIDED/(USED) BY OPERATING ACTIVITIES                
Net Income/(Loss)   $ 1,303     $ (1,817 )
Adjustments to reconcile net loss to net cash used by operating activities:                
Depreciation and amortization     1,065       1,049  
Extinguishment of PPP loan     (2,045 )     -  
Amortization of debt issuance fees     150       137  
Share-based compensation expense     203       210  
Deferred rent     (15 )     (14 )
Deferred income taxes     320       695  
Provision for doubtful accounts     71       2  
Inventory reserves     85       90  
Changes in assets and liabilities, net of acquisition:                
Accounts receivable     (1,079 )     (1,351 )
Inventories     (645 )     (260 )
Prepaid expenses and other assets     319       (110 )
Accounts payable     585       16  
Accrued expenses and other liabilities     77       737  
Net cash provided/(used) by operating activities     394       (616 )
                 
CASH FLOWS PROVIDED/(USED) BY INVESTING ACTIVITIES                
Capital expenditures     (313 )     (100 )
Acquisition of business, net of cash acquired     (200 )     (7,189 )
Net cash provided/(used) by investing activities     (513 )     (7,289 )
                 
CASH FLOWS PROVIDED/(USED) BY FINANCING ACTIVITIES                
Revolver borrowings     -       16,856  
Revolver repayments     -       (18,840 )
Term loan borrowings     -       8,400  
Term loan repayments     (470 )     (384 )
Debt issuance fees     -       (1,261 )
PPP loan     -       2,045  
Payment of contingent consideration     (105 )     -  
Shares withheld for employee taxes     (17 )     (26 )
Net cash provided/(used) by financing activities     (592 )     6,790  
                 
Effect of Exchange Rate Changes on Cash and Cash Equivalents     14       (236 )
NET DECREASE IN CASH AND CASH EQUIVALENTS     (697 )     (1,351 )
                 
Cash and Cash Equivalents, at Beginning of Period     4,910       4,245  
                 
CASH AND CASH EQUIVALENTS, AT END OF PERIOD   $ 4,213     $ 2,894  
                 
SUPPLEMENTAL INFORMATION:                
Cash paid during the period for interest   $ 204     $ 347  
Cash paid during the period for income taxes   $ 110     $ 40  

 

See accompanying Notes to Consolidated Financial Statements.

 

  5  
     

 

WIRELESS TELECOM GROUP, INC.

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

(UNAUDITED)

(In thousands, except share amounts)

 

    Common
Stock Issued
    Common
Stock
Amount
    Additional Paid
In Capital
    Retained
Earnings
    Treasury
Stock
    Accumulated
Other
Comprehensive
Income/(Loss)
    Total
Shareholders’
Equity
 
Balances at January 1, 2020     34,488,252     $ 345     $ 49,062     $ 7,142     $ (24,509 )   $ 651     $ 32,691  
                                                         
Net income/(loss)     -       -       -       (1,147 )     -       -       (1,147 )
Forfeiture of restricted stock     (16,667 )                                                
Issuance of shares in connection with
Holzworth acquisition
    347,319       3       462       -       -       -       465  
Issuance of warrants in connection with
 term debt
    -       -       151       -       -       -       151  
Shares withheld for employee taxes     -       -       -       -       (26 )     -       (26 )
Share-based compensation expense     -       -       81       -       -       -       81  
Cumulative translation adjustment     -       -       -       -       -       (935 )     (935 )
Balances at March 31, 2020     34,818,904     $ 348     $ 49,756     $ 5,995     $ (24,535 )   $ (284 )   $ 31,280  
                                                         
Net income/(loss)     -       -       -       (668 )     -       -       (668 )
Share-based compensation expense     -       -       128       -       -       -       128  
Cumulative translation adjustment     -       -       -       -       -       (36 )     (36 )
Balances at June 30, 2020     34,818,904     $ 348     $ 49,884     $ 5,327     $ (24,535 )   $ (320 )   $ 30,704  

 

    Common
Stock Issued
    Common
Stock
Amount
    Additional Paid
In Capital
    Retained
Earnings
    Treasury
Stock
    Accumulated
Other
Comprehensive
Income/(Loss)
    Total
Shareholders’
Equity
 
Balances at January 1, 2021     34,888,904     $ 349     $ 50,163     $ (946 )   $ (24,556 )   $ 841     $ 25,851  
                                                         
Net income/(loss)     -       -       -       (233 )     -       -       (233 )
Shares withheld for employee taxes     -       -       -       -       (17 )     -       (17 )
Share-based compensation expense     -       -       114       -       -       -       114  
Cumulative translation adjustment     -       -       -       -       -       75       75  
Balances at March 31, 2021     34,888,904     $ 349     $ 50,277     $ (1,179 )   $ (24,573 )   $ 916     $ 25,790  
                                                         
Net income/(loss)     -       -       -       1,537       -       -       1,537  
Issuance of restricted stock     223,517       2       (2 )     -       -       -       -  
Share-based compensation expense     -       -       89       -       -       -       89  
Cumulative translation adjustment     -       -       -       -       -       12       12  
Balances at June 30, 2021     35,112,421     $ 351     $ 50,364     $ 358     $ (24,573 )   $ 928     $ 27,428  

 

See accompanying Notes to Consolidated Financial Statements.

 

  6  
     

 

NOTE 1 - Summary of Significant Accounting Principles and Policies

 

Basis of Presentation and Preparation

 

Wireless Telecom Group, Inc., a New Jersey corporation, together with its subsidiaries (“we”, “us”, “our” or the “Company”), specializes in the design and manufacture of advanced radio frequency (“RF”) and microwave devices which enable the development, testing and deployment of wireless technology. The Company provides unique, highly customized and configured solutions which drive innovation across a wide range of traditional and emerging wireless technologies.

 

Our customers include wireless carriers, aerospace companies, defense contractors, military and government agencies, satellite communication companies, network equipment manufacturers, tower companies, semiconductor device manufacturers, system integrators, neutral host providers and medical device manufacturers.

 

Our products include components, modules, instruments, systems and software used across the lifecycle of wireless connectivity and communication development, deployment and testing. Our customers use these products in relation to commercial infrastructure development, the expansion and upgrade of distributed antenna systems, deployment of small cell technology, use of medical devices and private long-term evolution (“LTE”) and 5G networks. In addition, the Company’s products are used in the development and testing of satellite communication systems, radar systems, semiconductor devices, automotive electronics and avionics.

 

The accompanying consolidated financial statements include the accounts of Wireless Telecom Group, Inc., doing business as and operating under the trade name, Noisecom, and its wholly owned subsidiaries including Boonton Electronics Corporation (“Boonton”), Microlab/FXR LLC (“Microlab”), Holzworth Instrumentation, Inc. (“Holzworth”), Wireless Telecommunications Ltd. and CommAgility Limited (“CommAgility”). They have been prepared using accounting principles generally accepted in the United States (“U.S. GAAP”). All intercompany transactions and balances have been eliminated in consolidation.

 

It is suggested that these interim consolidated financial statements be read in conjunction with the audited consolidated financial statements, and the notes thereto, included in the Company’s latest annual report (Form 10-K).

 

The Company’s fiscal periods are based on the calendar year. Except as otherwise specified, references to “second quarter(s)” or “three months” indicate the Company’s three month period ended June 30, 2021 and June 30, 2020, and references to “year-end” indicate the fiscal year ended December 31, 2020.

 

Consolidated Financial Statements

 

In the opinion of management, the accompanying consolidated financial statements referred to above contain all necessary adjustments, consisting of normal accruals and recurring entries, which are necessary to fairly present the Company’s results for the interim periods being presented.

 

The accounting policies followed by the Company are set forth in Note 1 to the Company’s consolidated financial statements included in its annual report on Form 10-K for the year ended December 31, 2020. Specific reference is made to that report since certain information and footnote disclosures normally included in financial statements in accordance with US GAAP have been reduced for interim periods in accordance with SEC rules.

 

The results of operations for the three and six months ended June 30, 2021 are not necessarily indicative of the results to be expected for the full year ending December 31, 2021.

 

Critical Accounting Estimates

 

The preparation of our consolidated financial statements requires the Company to make estimates and judgments that affect the reported amount of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amount of revenues and expenses for each period. We base our assumptions, judgements and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. At least quarterly, we evaluate our assumptions, judgments and estimates, and make changes as deemed necessary.

 

  7  
     

  

The COVID-19 pandemic has negatively impacted regional and global economies, disrupted global supply chains and created significant volatility and disruption of financial markets. Although disruptions related to the COVID-19 pandemic did not impact our estimates and judgements as of the date of this report, it is reasonably possible that our accounting estimates and judgements may change as new events occur and additional information becomes available or is obtained. Furthermore, actual results could differ materially from our estimates as of the date of issuance of this Quarterly Report on Form 10-Q under different assumptions or conditions.

 

For further information about our critical accounting estimates, see the discussion in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” under the heading “Critical Accounting Policies” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.

 

Concentration Risk

 

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents and trade accounts receivable.

 

Credit evaluations are performed on customers requiring credit over a certain amount. Credit risk is mitigated to a lesser extent through collateral such as letters of credit, bank guarantees or payment terms like cash in advance.

 

One customer accounted for 12.4% and 12.5% of the Company’s consolidated revenue for the three and six months ended June 30, 2021, respectively. No one customer accounted for more than 10% of the Company’s consolidated revenue for the three or six months ended June 30, 2020.

 

One customer accounted for 16.3% of consolidated accounts receivable as of June 30, 2021. At December 31, 2020, one customer accounted for 12.7% of consolidated accounts receivable.

 

Fair Value of Financial Instruments

 

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the reporting date. The accounting guidance establishes a three-tiered hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:

 

Level 1 - Quoted prices in active markets for identical assets or liabilities.

 

Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

 

The categorization of a financial instrument within the valuation hierarchy is based on the lowest level of input that is significant to the fair value measurement.

 

The carrying amounts of the Company’s financial instruments, including cash, accounts receivable, accounts payable and accrued liabilities, approximate fair value due to their relatively short maturities. The Company’s term loan and revolving credit facility bear interest at a variable interest rate plus an applicable margin and, therefore, carrying amount approximates fair value.

 

Contingent Consideration

 

Under the terms of the Holzworth Share Purchase Agreement, the Company is required to pay additional purchase price in the form of deferred purchase price payments and an earnout based on Holzworth’s financial results for the year ended December 31, 2020. Additional earnout payments may be due if Holzworth achieves certain financial targets for the year ending December 31, 2021.

 

  8  
     

 

The significant inputs used in this fair value estimate include estimated gross revenues and Adjusted EBITDA, as defined in the Holzworth Share Purchase Agreement, and scenarios for the earnout periods for which probabilities are assigned to each scenario to arrive at a single estimated outcome. The estimated outcome is then discounted based on the individual risk analysis of the liability. The contingent consideration liabilities are considered a Level 3 fair value measurement. 

 

As of June 30, 2021, amounts due for the Holzworth deferred purchase price and earnout were $750,000 and $3.3 million, respectively.

 

Subsequent Events

 

On July 21, 2021, the Company entered into an At Market Issuance Sales Agreement (the “Sales Agreement”) with B. Riley Securities, Inc. (the “Agent”), to issue and sell through the Agent, shares of the Company’s common stock, par value $0.01 per share, having an aggregate offering price of up to $12,000,000 (the “Shares”). The Agent is not required to sell any specific number of Shares. Any Shares to be offered and sold under the Sales Agreement will be issued and sold pursuant to the Company’s previously filed and currently effective registration statement on Form S-3 (File No. 333-227051) filed with the Securities and Exchange Commission (the “Commission”) on August 27, 2018, and declared effective on September 17, 2018. A prospectus supplement relating to the offering of the Shares was filed with the Commission on July 21, 2021.

 

From July 21, 2021 through August 5, 2021 the Agent sold 261,968 shares of the Company’s common stock for net proceeds of $731,815, after deducting sales commissions paid to the Agent in accordance with the terms of the Sales Agreement.

 

NOTE 2 – Accounting Pronouncements

 

Recently Adopted Accounting Standards

 

There have been no changes to our significant accounting policies as described in the 2020 Form 10-K that had a material impact on our consolidated financial statements and related notes.

 

Recent Accounting Pronouncements Not Yet Adopted

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326). ASU 2016-13 changes the impairment model for most financial assets and will require the use of an “expected loss” model for instruments measured as amortized cost. This pronouncement is effective for small reporting companies for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2022. The Company plans to adopt the standard effective January 1, 2023. We do not expect the adoption of this standard to have a material impact on our consolidated financial statements.

  

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendments provide optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments are intended to ease the potential burden in accounting for, or recognizing the effects of, reference rate reform on financial reporting. The new standard is effective March 12, 2020 through December 31, 2022, with the adoption date being dependent upon the Company’s election. We do not expect the adoption of this standard to have a material impact on our consolidated financial statements.

   

NOTE 3 – Acquisition of Holzworth

 

On February 7, 2020 the Company completed the acquisition of all of the outstanding shares of Holzworth. Holzworth instruments which include signal generators and phased noise analyzers are used by government labs, the semiconductor industry, and network equipment providers, among others, in research and automated test environments. Holzworth is a complimentary business for our Boonton and Noisecom brands with a common customer base and channel partners.

 

  9  
     

 

The acquisition has been accounted for under the acquisition method of accounting in accordance with ASC 805, Business Combinations. Accounting for acquisitions requires us to recognize separately from goodwill, the assets acquired and the liabilities assumed at their acquisition date fair values. Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net of the acquisition date fair values of the assets acquired and the liabilities assumed.

 

At closing, a portion of the purchase price was paid to the Sellers through the issuance of 347,319 shares of the Company’s common stock, valued at approximately $500,000 based upon a 90-day volume weighted average price for shares of stock of the Company. The shares issued to the Sellers are subject to Lock-up and Voting Agreements.

 

During 2020, the Company paid $8.3 million in net cash to the Sellers consisting of $7.2 million in cash at close, $600,000 in indemnification holdback payments and $750,000 in deferred purchase price reduced by $292,000 of a working capital adjustment that was owed to the Company by the Sellers. The final indemnification holdback payment of $200,000 was paid on March 31, 2021.

 

The Sellers earned a second deferred purchase price payment of $750,000 when Holzworth exceeded $1.25 million in EBITDA (as defined in the Share Purchase Agreement) for the twelve months ended December 31, 2020. Additionally, the Sellers earned $3.4 million in additional purchase price in the form of an earnout (“Year 1 Earnout”) which was also based on Holzworth’s EBITDA for the twelve months ended December 31, 2020.

 

On February 19, 2021, the Company entered into the Second Amendment to Share Purchase Agreement (the “Second Amendment”) with Holzworth. The Second Amendment, among other things, converted the second deferred purchase price of $750,000 into unsecured seller notes with interest at an annual rate of 6.5% starting from April 1, 2021 until final payment. The payment date has been changed from March 31, 2021 to three equal installments of $250,000, plus accrued interest, due on July 1, 2021, October 1, 2021 and January 1, 2022.

 

Additionally, the parties amended the payment dates of the earnout consideration. The payment date of the Year 1 Earnout has been amended from March 31, 2021 to (i) six (6) equal quarterly installments of 10% of the Year 1 Earnout payable on the last business day of each calendar quarter between June 30, 2021 and September 30, 2022 and (ii) one (1) installment payment equal to 40% of the Year 1 Earnout on December 31, 2022. The Year 1 Earnout is payable in cash or shares of the Company’s common stock, at the Company’s option, based on the 90 trading day volume weighted average price immediately preceding final determination of the Year 1 Earnout or $2.19 per share. The payment for the Year 1 Earnout is $3.4 million, of which $105,000 was paid on June 30, 2021, $1.6 million is recorded in accrued expenses and other current liabilities and $1.7 million is recorded in other long term liabilities in the Consolidated Balance Sheet as of June 30, 2021.

 

The Company may also be required to pay additional amounts in cash and stock as earnout consideration based on Holzworth’s EBITDA for the fiscal year ending December 31, 2021 (“Year 2 Earnout”). The Year 2 Earnout will be equal to two times the amount, if any, by which Holzworth’s EBITDA for fiscal year December 31, 2021 exceeds Holzworth’s EBITDA for fiscal year 2020. Pursuant to the Second Amendment, the Year 2 Earnout is payable in four equal quarterly installments payable on the last business day of each calendar quarter between March 31, 2022 and December 31, 2022. The aggregate payments of the Year 1 Earnout and Year 2 Earnout cannot exceed $7.0 million and the aggregate purchase price cannot exceed $17.0 million.

 

  10  
     

 

The following table summarizes the components of the purchase price and the allocation of the purchase price at fair value at the acquisition date (in thousands):

 

    Amounts Recognized as of Acquisition Date  
Cash at close   $ 7,219  
Equity issued at close     465  
Purchase price holdback     800  
Working capital adjustment     (292 )
Deferred purchase price     1,410  
Contingent consideration     2,440  
         
Total purchase price     12,042  
         
Cash     30  
Accounts receivable     514  
Inventory     1,438  
Intangible assets     4,260  
Other assets     967  
Fixed assets     144  
Accounts payable     (129 )
Accrued expenses     (429 )
Deferred revenue     (13 )
Other long term liabilities     (740 )
         
Net assets acquired     6,042  
         
Goodwill   $ 6,000  

  

Goodwill is calculated as the excess of consideration paid over the net assets acquired and represents synergies, assembled workforce, organic growth and other benefits that are expected to arise from integrating Holzworth into our operations. The goodwill recorded in this transaction is expected to be tax deductible.

  

The Company’s post acquisition consolidated goodwill is shown below (in thousands):

 

    Holzworth     Microlab     CommAgility     Total  
Balance as of January 1, 2020   $ -     $ 1,351     $ 8,718     $ 10,069  
Holzworth acquisition     6,000       -       -       6,000  
Goodwill Impairment     -       -       (4,742 )     (4,742 )
Foreign currency translation     -       -       185       185  
Balance as of December 31, 2020   $ 6,000     $ 1,351     $ 4,161     $ 11,512  
Foreign currency translation     -       -       45       45  
Balance as of March 31, 2021   $ 6,000     $ 1,351     $ 4,206     $ 11,557  
Foreign currency translation     -       -       7       7  
Balance as of June 30, 2021   $ 6,000     $ 1,351     $ 4,213     $ 11,564  

  

NOTE 4 – Debt

 

Debt consists of the following (in thousands):

 

    June 30, 2021  
Revolver at LIBOR plus margin   $ -  
Term loan at LIBOR plus margin     7,846  
Less: Debt issuance costs, net of amortization     (729 )
Less: Fair value of warrants, net of amortization     (108 )
Total Debt     7,009  
Less: Debt maturing within one year     (84 )
Non-current portion of long term debt   $ 6,925  

 

  11  
     

 

Term loan payments by period (in thousands):

 

         
Remainder of 2021   $ 42  
2022     84  
2023     84  
2024     84  
2025     7,552  
Total   $ 7,846  

 

In connection with the Holzworth Acquisition, on February 7, 2020, the Company, as borrower, and its subsidiaries, as guarantors, and Muzinich BDC, Inc., as lender (“Muzinich”), entered into a Term Loan Facility, which provides for a term loan in the principal amount of $8.4 million (the “Initial Term Loan”). All proceeds of the Initial Term Loan were used to fund the cash portion of the purchase price for the Holzworth acquisition. Principal payments on the Initial Term Loan are $21,000 per quarter with a balloon payment at maturity which is February 7, 2025. The Term Loan Facility included an upfront fee of 2.50% of the aggregate principal amount of the Initial Term Loan. In connection with the Term Loan Facility, the Company incurred costs of $1.0 million, including the aforementioned 2.50% upfront fee to Muzinich, which were recorded as a reduction of the carrying amount of the debt and are being amortized over the term of the loan.

 

On May 4, 2020, the Company entered into the First Amendment to the Term Loan Facility which, among other things, amended the definition of “Indebtedness” to include the PPP (as defined below) loan as long as the proceeds are used for allowable purposes under the CARES Act, the receipt of the loan does not violate the Credit Facility and the Company submits an application for forgiveness and substantially all of the loan is forgiven. The Company received notice in June 2021 that the loan and accrued interest were fully forgiven, as described below.

 

On February 25, 2021, the Company and its subsidiaries entered into the Second Amendment to the Credit Agreement and Limited Waiver (“Amendment 2”) with Muzinich, in which Muzinich agreed to waive the Company’s obligation to comply with the consolidated leverage ratio and fixed charge coverage ratio financial covenants in the Term Loan Facility for the fiscal quarter ending December 31, 2020. We were not in compliance with such covenants primarily as a result of the impact the COVID-19 pandemic had on our consolidated financial results. Amendment 2, among other things, amended the definition of consolidated EBITDA to include certain cash tax benefits related to our U.K. tax jurisdiction and reduced our consolidated leverage ratio for the twelve month periods ended September 30, 2021 from 3.00 to 2.75, December 31, 2021 from 2.75 to 2.25, March 31, 2022 from 2.50 to 2.00 and June 30, 2022 from 2.25 to 2.00. Additionally, the interest rate margin was increased from 7.25% to 9.25% effective January 1, 2021 and will step down to 8.50% and 7.25% upon the Company achieving consolidated EBITDA on a trailing twelve-month basis of $4.0 million and $6.3 million, respectively. Muzinich and the Company also agreed on an excess cash flow payment of $428,000 which was made in March 2021 and Muzinich provided consent for the Company to change the deferred purchase price payments to and enter into notes with the Holzworth sellers in the amount of $750,000, as described above in Note 3.

 

The Company entered into a Credit Facility with Bank of America, N.A. 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. Additionally, the Company prepaid the remaining principal balance of the BOA Term Loan in the amount of $304,000.

 

On May 4, 2020, the Company, its subsidiaries and Bank of America entered into Amendment No. 6 which, among other things, amended the definition of “Debt” to include the PPP loan as long as the proceeds are used for allowable purposes under the CARES Act and the Company promptly submits an application for forgiveness and substantially all of the loan is forgiven. The Company received notice in June 2021 that the loan and accrued interest were fully forgiven, as described below.

 

  12  
     

  

On February 25, 2021, the Company, its subsidiaries and Bank of America entered into Amendment No. 7 which revised the Credit Facility to accommodate the changes to the deferred purchase price payments to and notes with the Holzworth sellers, as described above, and provided Bank of America’s consent to the Company entering into the Muzinich Second Amendment, as described above.

 

As of June 30, 2021, the interest rate on the Term Loan Facility was 10.25% and the interest rate on the Revolver was 2.09%. The Company had zero drawn on the asset-based revolver as of June 30, 2021. As of June 30, 2021, 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 had an interest rate of 1% and a term of 24 months. A repayment schedule was not provided by Bank of America. Accordingly, the full amount of the term loan was shown as due in May 2022. Funds from the loan were used only for certain permitted purposes, including payroll, benefits, rent and utilities. The CARES Act and the PPP provided a mechanism for forgiveness of up to the full amount of the loan upon application to the SBA for forgiveness by the Company. The Company applied for forgiveness of the loan and received notice that the loan and accrued interest were fully forgiven, and that the SBA remitted payment in full to Bank of America N.A. on June 5, 2021. The Company elected to account for the loan in accordance with Accounting Standard Codification 470 Debt. Accordingly, the Company recorded a gain on extinguishment of debt on the Consolidated Statement of Operations and Comprehensive Income/(Loss) in the three months ended June 30, 2021.

  

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 June 30, 2021 and December 31, 2020. These assets and liabilities are recognized at the commencement date based on the present value of remaining lease payments over the lease term using the Company’s incremental borrowing rate. Short-term leases, which have an initial term of 12 months or less, are not recorded on the balance sheet.

 

Lease expense is recognized on a straight-line basis over the lease term and is included in cost of revenues and general and administrative expenses on the Consolidated Statement of Operations and Comprehensive Income/(Loss).

 

An initial right-of-use asset of $1.9 million was recognized as a non-cash asset addition with the adoption of the new lease accounting standard on January 1, 2019. With our acquisition of Holzworth on February 7, 2020, we acquired a right-of-use asset of $789,000. There have been no other right-of-use assets recognized since the date of adoption of the new lease standard. Cash paid for amounts included in the present value of operating lease liabilities was $168,000 and $332,000 for the three and six months ended June 30, 2021, respectively, and was included in operating cash flows. Cash paid for amounts included in the present value of operating lease liabilities for the three and six months ended June 30, 2020 was $166,000 and $317,000, respectively.

 

Operating lease costs for the three and six months ended June 30, 2021 were $282,000 and $558,000, respectively. Operating lease costs for the three and six months ended June 30, 2020 were $275,000 and $522,000, respectively.

 

  13  
     

 

The following table presents information about the amount and timing of cash flows arising from the Company’s leases as of June 30, 2021:

 

(in thousands)   June 30, 2021  
Maturity of Lease Liabilities        
Remainder of 2021   $ 312  
2022     637  
2023     276  
2024     158  
2025     163  
Thereafter     69  
Total Undiscounted operating lease payments     1,615  
Less: imputed interest     (142 )
Present value of operating lease liabilities   $ 1,473  
         
Balance sheet classification        
Current lease liabilities   $ 559  
Long-term lease liabilities     914  
Total operating lease liabilities   $ 1,473  
         
Other information        
Weighted-average remaining term (months) for operating leases     39  
Weighted-average discount rate for operating leases     5.88 %

 

NOTE 6 – Revenue

 

Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for promised goods or services. The Company’s performance obligations are satisfied either over time or at a point in time. Revenue from performance obligations that transferred at a point in time accounted for approximately 97% and 100% of the Company’s consolidated revenue for each of the three and six months ended June 30, 2021 and 2020, respectively.

 

Nature of Products and Services

 

Hardware

 

The Company generally has one performance obligation in its arrangements involving the sales of radio frequency solutions, digital signal processing hardware, power meters, analyzers, noise/signal generators, phase noise analyzers and other components. When the terms of a contract include the transfer of multiple products, each distinct product is identified as a separate performance obligation. Generally, satisfaction occurs when control of the promised goods is transferred to the customer in exchange for consideration in an amount for which we expect to be entitled. Generally, control is transferred when legal title of the asset moves from the Company to the customer. We sell our products to a customer based on a purchase order, and the shipping terms per each individual order are primarily used to satisfy the single performance obligation. However, in order to determine when control has transferred to the customer, the Company also considers:

 

  when the Company has a present right to payment for the asset;
  when the Company has transferred physical possession of the asset to the customer;
  when the customer has the significant risks and rewards of ownership of the asset; and
  when the customer has accepted the asset.

 

Software

 

Arrangements involving licenses of software in the CommAgility brand may involve multiple performance obligations, most notably subsequent releases of the software. The Company has concluded that each software release in a multiple deliverable arrangement involving CommAgility software licenses is a distinct performance obligation and, accordingly, transaction price is allocated to each release when the customer obtains control of the software.

 

Performance obligations that are not distinct at contract inception are combined. Specifically, with the Company’s sales of software, contracts that include customization may result in the combination of the customization services with the license as one distinct performance obligation and recognized over time. The duration of these performance obligations are typically one year or less.

 

  14  
     

  

Services

 

Arrangements involving calibration and repair services of the Company’s products are generally considered a single performance obligation and are recognized as the services are rendered.

 

Shipping and Handling

 

Shipping and handling activities performed after the customer obtains control are accounted for as fulfillment activities and recognized as cost of revenues.

 

Significant Judgments

 

For the Company’s more complex software and services arrangements, significant judgment is required in determining whether licenses and services are distinct performance obligations that should be accounted for separately or are not distinct and thus accounted for together. Further, in cases where we determine that performance obligations should be accounted for separately, judgment is required to determine the standalone selling price for each distinct performance obligation.

 

Certain of the Company shipments include a limited return right. In accordance with Topic 606, the Company recognizes revenue net of expected returns.

 

Contract Balances

 

The timing of revenue recognition may differ from the timing of invoicing to customers and these timing differences result in contract assets (unbilled revenue) or contract liabilities (deferred revenue) on the Company’s consolidated balance sheet. The Company records unbilled revenue when revenue is recognized prior to invoicing, or deferred revenue when revenue is recognized subsequent to invoicing. Unbilled revenue was $29,000 and $260,000 as of June 30, 2021 and December 31, 2020, respectively, and recorded in prepaid expenses and other current assets. Deferred revenue was $598,000 and $924,000 as of June 30, 2021 and December 31, 2020, respectively. The decrease in deferred revenue from December 31, 2020 is primarily due to recognition of revenue for certain CommAgility projects involving multiple performance obligations.

 

Disaggregated Revenue

 

We disaggregate our revenue from contracts with customers by product family and geographic location as we believe it best depicts how the nature, timing and uncertainty of our revenue and cash flows are affected by economic factors. See details in the tables below (in thousands).

  

   

Three Months

Ended

June 30, 2021

   

Three Months Ended

June 30, 2020

   

Six Months

Ended

June 30, 2021

   

Six Months

Ended

June 30, 2020

 
Total net revenues by revenue type                                
Passive and active RF components   $ 4,231     $ 5,853     $ 7,365     $ 10,120  
Signal generators and components     3,188       2,808       6,517       4,628  
Signal analyzers and power meters     1,838       1,281       3,396       2,846  
Signal processing hardware     1,530       166       3,013       1,365  
Software licenses     341       606       1,331       714  
Services     895       394       1,722       863  
Total net revenue   $ 12,023     $ 11,108     $ 23,344     $ 20,536  
                                 
Total net revenues by geographic areas                                
Americas   $ 8,692     $ 8,395     $ 16,471     $ 14,640  
EMEA     1,041       1,603       3,575       3,648  
APAC     2,290       1,110       3,298       2,248  
Total net revenue   $ 12,023     $ 11,108     $ 23,344     $ 20,536  

 

  15  
     

  

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 Company’s major tax jurisdictions are New Jersey, Colorado and the United Kingdom (“U.K.”). The amount of deferred tax assets considered realizable is subject to adjustment in future periods if estimates of future taxable income are changed.

 

As of June 30, 2021, the Company’s net deferred tax asset of approximately $5.5 million is net of a valuation allowance of approximately $7.7 million which is associated with the Company’s foreign net operating loss carryforward from an inactive foreign entity, state net operating loss carryforward and a state research and development credit.

  

The Company recorded a tax provision of $321,000 for the six months ended June 30, 2021, primarily due to the impact of an increase of the deferred tax liability for the Company’s U.K. jurisdiction due to an increase in the enacted U.K. tax rate in the three months ended June 30, 2021.

  

The Company recorded a tax provision of $225,000 for the six months ended June 30, 2020 due to estimated taxable income in the U.S. because qualified expenses under the PPP loan were not expected to be deductible for tax purposes. This was offset somewhat by estimated losses as well as research and development deductions in the U.K.. After completion of the financial statements as of and for the three and six months ended June 30, 2020, the Internal Revenue Service clarified that qualified expenses under the PPP loan program would be deductible.

 

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

  

    2021     2020     2021     2020  
    For the Three Months     For the Six Months  
    Ended June 30,     Ended June 30,  
    2021     2020     2021     2020  
                         
Weighted average common shares outstanding     21,762,578       21,706,806       21,727,801       21,626,322  
Potentially dilutive equity awards     2,580,087       260,892       2,335,554       251,181  
Weighted average common shares outstanding, assuming dilution     24,342,665       21,967,698       24,063,355       21,877,503  

   

 

For the three and six months ended June 30, 2021, the weighted average number of options to purchase common stock not included in potentially dilutive equity awards because the effects are anti-dilutive, or the performance condition was not met was 1,205,000. The number of shares issuable under the terms of the Holzworth earnout, if all paid in shares of common stock, is 1,599,807 and is included in potentially dilutive equity awards in the chart above.

 

  16  
     

  

For the three and six months ended June 30, 2020, the weighted average number of options and warrants to purchase common stock not included in potentially dilutive equity awards because the effects are anti-dilutive, or the performance condition was not met was 3,190,302 and 2,690,215, respectively.

 

NOTE 9 – Inventories

 

Inventory carrying value is net of inventory reserves of $1.2 million at June 30, 2021 and $1.1 million at December 31, 2020.

 

Inventories consist of (in thousands):

 

    June 30,
2021
    December 31,
2020
 
Raw materials   $ 5,749     $ 4,644  
Work-in-process     607       618  
Finished goods     3,009       3,534  
Total Inventory   $ 9,365     $ 8,796  

  

NOTE 10 – Accrued Expenses and Other Current Liabilities

 

As of June 30, 2021, and December 31, 2020 accrued expenses and other current liabilities consisted of the following (in thousands):

 

    June 30,
2021
    December 31
2020
 
Holzworth earnout – short term   $ 1,606     $ 3,423  
Goods received not invoiced     1,274       458  
Payroll and related benefits     1,114       864  
Holzworth deferred purchase price     750       950  
Commissions     475       605  
Sales and use and VAT tax     384       315  
Professional fees     322       331  
Returns reserve     248       212  
Warranty reserve     140       140  
Bonus     117       123  
Harris arbitration liability     -       116  
Other     275       460  
Total   $ 6,705     $ 7,997  

 

NOTE 11 - Accounting for Stock Based Compensation

 

The Company’s results for the three months ended June 30, 2021 and 2020 include $89,000 and $128,000, respectively, related to stock based compensation expense. The Company’s results for the six months ended June 30, 2021 and 2020 include $203,000 and $210,000, 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.

 

  17  
     

 

Incentive Compensation Plan

 

In 2012, the Company’s Board of Directors and shareholders approved the 2012 Incentive Compensation Plan (the “Initial 2012 Plan”), which provides for the grant of equity, including restricted stock awards, restricted stock units, non-qualified stock options and incentive stock options in compliance with the Internal Revenue Code of 1986, as amended, to employees, officers, directors, consultants and advisors of the Company who are expected to contribute to the Company’s future growth and success. When originally approved, the Initial 2012 Plan provided for the grant of awards relating to 2 million shares of common stock, plus those shares subject to awards previously issued under the Company’s 2000 Stock Option Plan that expire, are canceled or are terminated after adoption of the Initial 2012 Plan without having been exercised in full and would have been available for subsequent grants under the 2000 Stock Option Plan. In June 2014, the Company’s shareholders approved the Amended and Restated 2012 Incentive Compensation Plan (the “2012 Plan”) allowing for an additional 1.6 million shares of the Company’s common stock to be available for future grants under the 2012 Plan. As of June 30, 2021 there are no awards available for grant under the 2012 Plan.

 

In the second quarter of 2021, the Company’s Board of Directors and shareholders approved the 2021 Long Term Incentive Plan (the “2021 Incentive Plan”), which provides for the grant of equity-based and cash incentives, including stock awards, stock unit awards, performance unit awards, non-qualified stock options, incentive stock options and cash awards, including dividend equivalent rights to employees, officers, directors or other service providers of the Company who are expected to contribute to the Company’s future growth and success. The 2021 Incentive Plan provides for the grant of awards relating to 1.5 million shares of common stock. As of June 30, 2021 no awards have been granted under the 2021 Incentive Plan.

 

NOTE 12 – COMMITMENTS AND CONTINGENCIES

 

There have been no material changes in our commitments and contingencies and risks and uncertainties as of June 30, 2021 from that previously disclosed in our annual report on Form 10-K for the year ended December 31, 2020.

 

  18  
     

  

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion of our financial condition and results of operations should be read in conjunction with our interim consolidated financial statements and the notes to those statements included in Part I, Item I of this Quarterly Report on Form 10-Q and in conjunction with the audited consolidated financial statements contained in our annual report on Form 10-K for the year ended December 31, 2020.

 

Introduction

 

The Company continues to deal with the on-going and evolving impacts of the COVID-19 pandemic. As of the date of this filing, the majority of our employees continue to have flexible work arrangements spending the majority of their time working from home. We continue to take safety precautions in all of our facilities globally for those essential employees that are not working remotely. The Company has started a phased re-entry plan bringing more employees back into our facilities on a gradual basis. The Company will continue to adjust our plans based on the facts and circumstances of each jurisdiction in which we operate.

 

Our second quarter 2021 results reflect increased year over year revenue in two of our three product groups. Revenue at our Radio, baseband and software (“RBS”) product group increased $1.5 million year over year as a result of higher sales of our digital signal processing cards. Revenue in our Test and measurement (“T&M”) product group increased $1.0 million on higher sales from our legacy brands, as we believe customer spending is starting to recover from reductions caused by the COVID-19 pandemic. These increases were partially offset by a decline in the RF components (“RFC”) product group which was due to higher revenues recognized in the second quarter of 2020 prior to the full impact of the COVID-19 pandemic on carrier spending.

 

RESULTS OF OPERATIONS

 

Three Months Ended June 30, 2021 Compared with Three Months Ended June 30, 2020

 

Net Revenues (in thousands)

 

    Three months ended June 30,
    Revenue   % of Revenue   Change
    2021   2020   2021   2020   Amount   Pct.
RF components   $ 4,235     $ 5,861       35.2 %     52.7 %   $ (1,626 )     -27.7 %
Test and measurement     5,521       4,472       45.9 %     40.3 %     1,049       23.5 %
Radio, baseband, software     2,267       775       18.9 %     7.0 %     1,492       192.5 %
Total net revenues   $ 12,023     $ 11,108       100.0 %     100.0 %   $ 915       8.2 %

 

Net consolidated revenue increased 8.2% from the prior year period due primarily to increased sales of our digital signal processing cards. Also contributing to the overall revenue increase was an increase in T&M revenue due to increased revenue from our peak power measurement products as customer spending started to rebound from the COVID-19 pandemic. This was offset by lower revenue at our RFC product group as the second quarter 2020 included several large projects that were started prior to the full impact of the COVID-19 pandemic.

 

  19  
     

 

Gross Profit (in thousands)

 

    Three months ended June 30,
    Gross Profit   Gross Profit %   Change
    2021   2020   2021   2020   Amount   Pct.
RF components   $ 1,757     $ 2,707       41.5 %     46.2 %   $ (950 )     -35.1 %
Test and measurement     3,269       2,365       59.2 %     52.9 %     904       38.3 %
Radio, baseband, software     1,108       596       48.9 %     76.9 %     512       85.9 %
Total gross profit   $ 6,134     $ 5,668       51.0 %     51.0 %   $ 467       8.2 %

 

Consolidated gross profit increased 8.2% due to higher revenues at T&M and RBS and was only partially offset by lower revenues at RFC. Gross profit margin was flat with the prior year. RFC gross profit margin decreased due to lower volumes and lower absorption of fixed manufacturing costs while T&M gross profit margin increased on higher volumes and higher absorption of fixed manufacturing costs. RBS gross profit margin decreased due to a higher mix of lower margin hardware sales.

 

Operating Expenses (in thousands)

 

    Three months ended June 30,
    Operating Expenses   % of Revenue   Change
    2021   2020   2021   2020   Amount   Pct.
Research and development   $ 1,464     $ 1,675       12.2 %     15.1 %   $ (211 )     -12.6 %
Sales and marketing     1,699       1,661       14.1 %     15.0 %     38       2.3 %
General and administrative     2,806       2,391       23.3 %     21.5 %     415       17.4 %
Total operating expenses   $ 5,969     $ 5,727       49.6 %     51.6 %   $ 242       4.2 %

 

Research and development expenses decreased 12.6% from the prior year due primarily to lower third party research and development costs, the majority of which is in connection with our third party 5G collaboration agreement. The mix of third party research and development expenses to internal expenses varies by project. We expect to continue third party investments in research and development dependent upon project deadlines, new product development opportunities and longer term product roadmap dependencies which, in turn, may create increases and decreases to research and development expenses as a percentage of revenue. The decline in third party expenses was offset somewhat by unfavorable foreign exchange impact, specifically the increase in the pound sterling which increased approximately 12% year over year.

 

Sales and marketing expenses were flat with the prior year as higher internal commissions and marketing expenses were offset by lower salaries and benefits driven by lower headcount compared to the prior year.

 

General and administrative expenses increased 17.4% from the prior year period primarily due to an increase in headcount related expenses of $300,000 related to the addition of our Chief Revenue Officer in August of 2020, merit and bonus increases and the reinstatement of other benefits that were previously eliminated in the first half of fiscal 2020 during the COVID-19 pandemic. Also contributing to the increase is an unfavorable foreign exchange impact of $67,000 and an increase in bad debt expense of $60,000.

 

Gain on Extinguishment of Debt

 

The Company recorded a $2.0 million gain on extinguishment of debt in the three months ended June 30, 2021, as we received notice from the SBA that our PPP loan was fully forgiven.

 

Other Income/(Expense)

 

Other income decreased $73,000 from the prior year period due primarily to higher foreign exchange losses and lower gains on sales of assets as compared to the prior year period.

 

Interest Expense

 

Consolidated interest expense increased $39,000 due primarily to higher interest on our Term Loan Facility as compared to the prior year.

 

  20  
     

 

Taxes

 

Consolidated tax provision decreased $46,000 from the prior year period as the prior year interim estimated effective tax rate included an assumption that the qualified expenses under the PPP loan program would not be deductible. This led to a higher estimated taxable income for fiscal 2020.

 

Net Income/Loss

 

The Company had consolidated net income of $1.5 million for the second quarter 2021 as compared to a consolidated net loss of $667,000 for the second quarter of 2020 primarily due to the recognition of a gain on extinguishment of debt due to the forgiveness of the PPP loan in the current year.

 

Six Months Ended June 30, 2021 Compared with Six Months Ended June 30, 2020

 

Net Revenues (in thousands)

 

    Six months ended June 30,
    Revenue   % of Revenue   Change
    2021   2020   2021   2020   Amount   Pct.
RF components   $ 7,372     $ 10,137       31.6 %     49.4 %   $ (2,765 )     -27.3 %
Test and measurement     10,848       8,216       46.5 %     40.0 %     2,632       32.0 %
Radio, baseband, software     5,124       2,183       21.9 %     10.6 %     2,941       134.7 %
Total net revenues   $ 23,344     $ 20,536       100.0 %     100.0 %   $ 2,808       13.7 %

 

Net consolidated revenue increased 13.7% from the prior year period due primarily to higher software and services revenue in our RBS group due to new software and service contracts and higher sales of our digital signal processing cards. Also contributing to the overall revenue increase was an increase in T&M revenue due to a full year contribution of Holzworth in fiscal 2021, as well as increased revenue from our legacy T&M brands. This was offset by lower revenue at our RFC product group as wireless carrier spend in the first half of 2021 was impacted by the on-going impact of the COVID-19 pandemic.

 

Gross Profit (in thousands)

 

    Six months ended June 30,
    Gross Profit   Gross Profit %   Change
    2021   2020   2021   2020   Amount   Pct.
RF components   $ 2,848     $ 4,649       38.6 %     45.9 %   $ (1,801 )     -38.7 %
Test and measurement     6,323       4,269       58.3 %     52.0 %     2,054       48.1 %
Radio, baseband, software     2,908       1,177       56.8 %     53.9 %     1,731       147.1 %
Total gross profit   $ 12,079     $ 10,095       51.7 %     49.2 %   $ 1,984       19.7 %

 

Consolidated gross profit increased 19.7% due to higher revenues at T&M and RBS and was only partially offset by lower revenues at RFC. Gross profit margin increased due to the contribution of higher margin software and services sales at RBS, sales of higher margin Holzworth products at the T&M product group and higher absorption of fixed manufacturing costs on higher volumes at the T&M product group.

 

  21  
     

 

Operating Expenses (in thousands)

 

    Six months ended June 30,
    Operating Expenses   % of Revenue   Change
    2021   2020   2021   2020   Amount   Pct.
Research and development   $ 2,846     $ 3,254       12.2 %     15.8 %   $ (408 )     -12.5 %
Sales and marketing     3,412       3,379       14.6 %     16.5 %     33       1.0 %
General and administrative     5,668       4,878       24.3 %     23.8 %     790       16.2 %
Total operating expenses   $ 11,926     $ 11,511       51.1 %     56.1 %   $ 415       3.6 %

 

Research and development expenses decreased 12.5% from the prior year due primarily to lower third party research and development costs, the majority of which is in connection with our third party 5G collaboration agreement. The mix of third party research and development expenses to internal expenses varies by project. We expect to continue third part investments in research and development dependent upon project deadlines, new product development opportunities and longer term product roadmap dependencies which, in turn, may create increases and decreases to research and development expenses as a percentage of revenue. The decline in third party expenses was offset somewhat by unfavorable foreign exchange impact, specifically the increase in the pound sterling which increased approximately 12% year over year.

 

Sales and marketing expenses were flat with the prior year as higher internal and external commissions expense was offset by lower salaries and benefits expense driven by lower headcount compared to the prior year.

 

General and administrative expenses increased 16.2% from the prior year period due primarily to higher headcount related expenses of $600,000 related to the addition of our Chief Revenue Officer in August of 2020, merit and bonus increases and the reinstatement of other benefits that were previously eliminated in the first half of 2020 during the COVID-19 pandemic. Also contributing to the increase are higher legal expenses of approximately $100,000 primarily related to amendments to the Company’s debt agreements and Holzworth Stock Purchase Agreement and an unfavorable foreign exchange impact of approximately $100,000 as compared to the prior year period.

 

Gain on Extinguishment of Debt

 

The Company recorded a $2.0 million gain on extinguishment of debt in the six month period ended June 30, 2021, as we received notice from the SBA that our PPP loan was fully forgiven.

 

Other Income/(Expense)

 

Other income decreased $287,000 from the prior year period due primarily to lower foreign exchange gains.

 

Interest Expense

 

Consolidated interest expense increased $111,000 due primarily to increased interest on our Term Loan Facility as compared to the prior year.

 

Taxes

 

Consolidated tax provision increased $96,000 from the prior year period due primarily to an increase in the deferred tax liability in our U.K. tax jurisdiction resulting from an increase in the tax rate in the U.K. which was enacted in the second quarter 2021.

 

Net Income/Loss

 

Consolidated net income for the first half of 2021 increased $3.1 million primarily due to the recognition of a gain on extinguishment of debt as a result of the forgiveness of the PPP loan and higher gross profit driven by higher revenues and increased gross profit margin only partially offset by higher operating expenses, lower foreign exchange gains and higher interest expense.

 

  22  
     

 

LIQUIDITY AND CAPITAL RESOURCES

 

The Company has two credit facilities – an asset based revolving loan which is subject to a borrowing base calculation (as defined) with Bank of America, N.A. (the “Credit Facility” or the “Revolver”) and a term loan facility with Muzinich BDC Inc. (“Muzinich”) in the amount of $8.4 million (the “Term Loan Facility”) which was used to finance the Holzworth acquisition in February of 2020. Additionally, on May 4, 2020 the Company received $2.0 million pursuant to a PPP loan, which was fully forgiven by the SBA in June 2021. See Note 4 above and our Annual Report on Form 10-K for the year ended December 31, 2020 for a more detailed description of our credit facilities.

 

Sources and Uses of Cash

 

During the six months ended June 30, 2021, the Company’s consolidated cash balance decreased approximately $700,000 due primarily to a paydown of $470,000 per the terms of our Term Loan Facility, the payment of contingent consideration related to the Holzworth acquisition of $105,000, payment of the final holdback amount of the Holzworth purchase price of $200,000, and capital expenditures of $313,000. These payments were offset by cash provided by operations due primarily to operating income generated during the six months ended June 30, 2021.

 

Operating Activities

 

Cash provided by operations was $394,000 for the six months ended June 30, 2021 as compared to cash used by operations of $616,000 in the prior year period. This was primarily due to higher operating income as compared to the prior year.

 

Investing Activities

 

Cash used by investing activities decreased from $7.3 million to $513,000 as the prior year period included $7.2 million in cash paid for the Holzworth acquisition. Capital expenditures increased from $100,000 in the prior year to $313,000 in the current year period as capital expenditures for infrastructure to support our research and development roadmaps have increased.

 

Financing Activities

 

Cash from financing activities decreased from cash provided of $6.8 million to cash used of $592,000 as the current year includes a term debt paydown of $470,000 and $105,000 related to the payment of contingent consideration related to the Holzworth acquisition. The prior year cash provided from financing includes the receipt of the Term Loan Facility proceeds to finance the Holzworth acquisition.

 

As of June 30, 2021, the Company’s consolidated cash balance was $4.2 million. No funds were drawn on our Revolver and we had availability under our asset-based Credit Facility of $7.6 million. Our gross debt balance as of June 30, 2021 was $7.8 million which represents the term loan balance.

 

We expect borrowings available to us under our Credit Facility, net proceeds from sales of our common stock pursuant to our At Market Issuance Sales Agreement with B. Riley Securities, Inc., our existing cash balance and cash generated by operations will be sufficient to meet our liquidity needs for the next twelve months. Our ability to meet our cash requirements will depend on our ability to generate cash in the future, which is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control, including the impact the evolving COVID-19 pandemic has had on our business including our supply chain. We expect the uncertainty caused by the COVID-19 pandemic might extend to our business into the second half of the year.

 

The Company expects to realize tax benefits in future periods due to the available net operating loss carryforwards resulting from the disposition of a former wholly owned subsidiary in 2010. Accordingly, future taxable income is expected to be offset by the utilization of operating loss carryforwards and, as a result, should increase the Company’s liquidity as cash needed to pay federal and New Jersey state income taxes should be substantially reduced. Additionally, CommAgility benefits from a research and development deduction which significantly reduces the cash needed to pay taxes in the U.K..

 

On August 27, 2018 the Company filed a shelf registration statement on Form S-3 which was declared effective on September 17, 2018. On July 21, 2021, the Company entered into the Sales Agreement with the Agent to issue and sell through the Agent, shares having an aggregate offering price of up to $12,000,000, as described in Note 1 – Summary of Significant Accounting Principles and Policies under “Subsequent Events” above. The Agent is not required to sell any specific number of Shares. Any Shares to be offered and sold under the Sales Agreement will be issued and sold pursuant to the aforementioned Form S-3. A prospectus supplement relating to the offering of the Shares was filed with the Commission on July 21, 2021.

 

  23  
     

 

From July 21, 2021 through August 5, 2021 the Agent sold 261,968 shares of the Company’s common stock for net proceeds of $731,815, after deducting sales commissions paid to the Agent in accordance with the terms of the Sales Agreement.

 

The shelf registration statement expires on September 17, 2021. The Company intends to update the registration statement prior to expiration.

 

Off-Balance Sheet Arrangements

 

Other than contractual obligations incurred in the normal course of business, the Company does not have any off-balance sheet arrangements.

 

Effects of Inflation and Changing Prices

 

The Company does not anticipate that inflation or other expected changes in prices will significantly impact its business.

 

Critical Accounting Policies

 

There have been no changes in our critical accounting policies or significant accounting estimates as disclosed in our 2020 Form 10-K.

 

Forward Looking Statements

 

The statements contained in this Quarterly Report on Form 10-Q that are not historical facts, including, without limitation, some of the statements under “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Such forward-looking statements include statements about our expectations that our existing cash balance, cash generated by operations, net proceeds from sales of our common stock pursuant to our At Market Issuance Sales Agreement with B. Riley Securities, Inc. and availability under our Credit Facility will be sufficient to meet our liquidity needs for the next twelve months; our expectation to realize tax benefits in future periods; our expectation that investments in third party research and development may create increases and decreases to research and development expenses as a percentage of revenue and our expectation that uncertainties around the impact of the ongoing and evolving COVID-19 pandemic might extend into the second half of the year. These statements involve risks and uncertainties. These statements are based on the Company’s current expectations of future events and are subject to a number of risks and uncertainties that may cause the Company’s actual results to differ materially from those described in the forward-looking statements. These risks and uncertainties include, but are not limited to, the impact that the evolving COVID-19 pandemic will have on our business, our supply chain and the economy in the future, our dependency on capital spending on data and communication networks by our customers and end users, our dependency on the deployment of 4G LTE and 5G NR private networks and related services to grow our business, the impact of the loss of any significant customers, the ability of our management to successfully implement our business plan and strategy, our ability to raise additional capital to fund our operations given our degree of leverage, product demand and development of competitive technologies in our market sector, the impact of competitive products and pricing, our abilities to protect our intellectual property rights, our ability to manage risks related to our information technology and cyber security, among others. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. These risks and uncertainties are disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020. The Company’s forward-looking statements speak only as of the date of this Quarterly Report. The Company undertakes no obligation to publicly update or review any forward-looking statements whether as a result of new information, future developments or otherwise.

 

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ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

 

Not applicable.

 

ITEM 4. Controls and Procedures

 

(a) Evaluation of Disclosure Controls and Procedures

 

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, as of the end of the period covered by this report, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended. Our disclosure controls and procedures are designed to ensure that the information required to be included in our Securities and Exchange Commission (“SEC”) reports is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that the information relating to Wireless Telecom Group, Inc., including our consolidated subsidiaries, is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. Based on this evaluation, our principal executive officer and principal financial officer concluded that, as of the period covered by this report, our disclosure controls and procedures are effective.

 

(b) Changes in Internal Control over Financial Reporting

 

There were no changes in our internal control over financial reporting during the three and six months ended June 30, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, as described in our 2020 Annual Report on Form 10-K.

 

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PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

 

No material changes in the quarter.

 

Item 1A. Risk Factors

 

There have been no material changes in our risk factors as previously disclosed in Part I, Item 1A of our Annual Report on Form10-K for the year ended December 31, 2020.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

None.

 

Item 3. Defaults upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

None.

 

Item 6. Exhibits

 

Exhibit

Number

  Exhibit Description
     
10.1   Wireless Telecom Group, Inc. 2021 Long-Term Incentive Plan.
     
10.2   Form of Restricted Stock Award Agreement under Wireless Telecom Group, Inc. 2021 Long-Term Incentive Plan.
     
10.3   Form of Stock Option Award Agreement under Wireless Telecom Group, Inc. 2021 Long-Term Incentive Plan.
     
10.4   Form of Non-Employee Director Restricted Stock Unit Award Agreement under Wireless Telecom Group, Inc. 2021 Long-Term Incentive Plan.
     
31.1   Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
31.2