NOTE
1 - DESCRIPTION OF COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Organization
and Basis of Presentation
Wireless
Telecom Group, Inc., a New Jersey corporation, together with its subsidiaries (“we”, “us”, “our”
or the “Company”), 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.
In
June 2020 the Company completed an internal reorganization and now presents its operations as one reportable segment. Prior to June 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
30, 2020 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.
Reclassification
Certain
account balances from prior periods have been reclassified in these financial statements so as to conform to current period classifications.
Use
of Estimates
The
accompanying financial statements have been prepared in accordance with U.S. GAAP, which requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosures of contingent liabilities at the date of the financial statements,
as well as the reported amounts of revenues and expenses during the reporting period. We base our assumptions, judgements and estimates
on historical experience and various other factors that we believe to be reasonable under the circumstances. Accordingly, actual results
could differ from those estimates. The most significant estimates and assumptions include management’s analysis in support of inventory
valuation, accounts receivable valuation, valuation of deferred tax assets, returns reserves, warranty accruals, goodwill and intangible
assets, estimated fair values of stock options and vesting periods of performance-based stock options and restricted stock. At least
quarterly, we evaluate our assumptions, judgements and estimates, and make changes as deemed necessary.
Concentrations
of Credit Risk, Purchases and Fair Value
Financial
instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and 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.
For
the twelve months ended December 31, 2021 and December 31, 2020, no one customer accounted for more than 10% of the Company’s total
consolidated revenues. At December 31, 2021 no one customer accounted for more than 10% of consolidated gross accounts receivable. At
December 31, 2020, one customer exceeded 10% of consolidated gross accounts receivable at 12.7%.
For
the year ended December 31, 2021, two suppliers exceeded 10% of consolidated inventory purchases at 12% each. For the year ended December
31, 2020, two suppliers exceeded 10% of consolidated inventory purchases at 14% each.
Cash
and Cash Equivalents
Cash
and cash equivalents represent deposits in banks and highly liquid investments purchased with maturities of three months or less at the
date of purchase.
Accounts
Receivable and Allowance for Doubtful Accounts
Trade
accounts receivable and contract assets for unbilled receivables are stated at the amount owed by the customer, net of allowances for
doubtful accounts, returns and rebates. Estimated allowances for doubtful accounts are reviewed periodically taking into account the
customer’s recent payment history, the customer’s current financial statements and other information regarding the customer’s
credit worthiness. Account balances are charged off against the allowance when it is determined the receivable will not be recovered.
Inventories
Inventories
are stated at the lower of cost or net realizable value. Inventory cost is determined on an average cost basis. Net realizable value
is based upon an estimated average selling price reduced by estimated costs of completion, disposal and transportation. Reductions in
inventory valuation are included in cost of revenues in the accompanying Consolidated Statements of Operations and Comprehensive Income/Loss.
Finished goods and work-in-process include material, labor and overhead expenses.
The
Company reviews inventory for excess and obsolescence based on best estimates of future demand, product lifecycle status and product
development plans. The Company uses historical information along with these future estimates to reduce the inventory cost basis. Subsequent
changes in facts and circumstances do not result in the restoration or increase in that newly established cost basis.
Inventory
carrying value is net of inventory reserves of approximately $909,000 as of December 31, 2021 and $1.1 million as of December 31, 2020.
SCHEDULE
OF INVENTORY CURRENT
| | |
December
31, | | |
December
31, | |
| Inventories consist
of (in thousands): | |
2021 | | |
2020 | |
| Raw
materials | |
$ | 5,271 | | |
$ | 4,644 | |
| Work-in-process | |
| 821 | | |
| 618 | |
| Finished
goods | |
| 2,982 | | |
| 3,534 | |
|
Inventory net | |
$ | 9,074 | | |
$ | 8,796 | |
Prepaid
Expenses and Other Current Assets
Prepaid
expenses and other current assets generally consist of income tax receivables, contract assets for unbilled receivables, prepaid insurance,
prepaid maintenance agreements and the short term portion of debt issuance costs. The income tax receivable balance included in prepaid
and other current assets was $826,000 and $1.2 million as of December 31, 2021 and December 31, 2020, respectively.
Property,
Plant and Equipment
Property,
plant and equipment are reflected at cost, less accumulated depreciation. Upon application of acquisition accounting, property, plant
and equipment are measured at estimated fair value as of the acquisition date to establish a new historical cost basis.
Depreciation
and amortization are provided on a straight-line basis over the estimated useful lives of the assets. The estimated useful lives for
the property, plant and equipment are:
SCHEDULE
OF PROPERTY PLANT AND EQUIPMENT ESTIMATED USEFUL LIVES
| Machinery
and computer equipment/software |
3-8
years |
| Furniture
and fixtures |
5-7
years |
Leasehold
improvements are amortized over the shorter of the remaining term of the lease or the estimated economic life of the improvement. Repairs
and maintenance are charged to operations as incurred; renewals and betterments are capitalized.
Business
Combinations
The
Company uses the acquisition method of accounting for business combinations which requires the tangible and intangible assets acquired
and liabilities assumed to be recorded at their respective fair market value as of the acquisition date. Goodwill represents the excess
of the consideration transferred over the fair value of the net assets acquired. The fair values of the assets acquired and liabilities
assumed are determined based upon the Company’s valuation and involves making significant estimates and assumptions based on facts
and circumstances that existed as of the acquisition date. The Company uses a measurement period following the acquisition date to gather
information that existed as of the acquisition date that is needed to determine the fair value of the assets acquired and liabilities
assumed. The measurement period ends once all information is obtained, but no later than one year from the acquisition date.
Goodwill
Goodwill
represents the excess of the aggregate purchase price over the fair value of the net assets acquired in a purchase business combination.
Goodwill is evaluated for impairment annually, or more frequently if events occur or circumstances change that would indicate that goodwill
might be impaired, by first performing a qualitative evaluation of events and circumstances impacting the reporting unit to determine
the likelihood of goodwill impairment. Based on that qualitative evaluation, if the Company determines it is more likely than not that
the fair value of a reporting unit exceeds its carrying amount, no further evaluation is necessary. Otherwise, we perform a quantitative
impairment test.
The
Company has three reporting units with goodwill – Holzworth, Microlab and CommAgility. The Company performed a qualitative assessment
in the fourth quarter of 2021 of each reporting unit. The qualitative assessment of Holzworth and Microlab did not indicate any impairment
of goodwill. As a result of declining hardware sales and the early stages of adoption of software and services for specialized applications
the Company performed a quantitative impairment test of the goodwill of the CommAgility reporting unit.
For
goodwill impairment testing using the quantitative approach, the Company estimates the fair value of the selected reporting unit using
the income approach and the market approach. Fair value under the income approach is derived primarily through the use of a discounted
cash flow model based on our best estimate of amounts and timing of future revenues and cash flows and our most recent business and strategic
plans. Fair value under the market approach is derived by applying a multiple to our best estimate of future revenue. The Company applies
equal weighting to the income approach and the market approach to arrive at an estimated fair value. The estimated fair value is compared
to the carrying value of the reporting unit, including goodwill. If the fair value of the reporting unit exceeds the carrying value,
no impairment charge is recorded. If the carrying value of the reporting unit exceeds the fair value an impairment charge is recorded
to goodwill in the amount by which carrying value exceeds fair value. Both the income approach and market approach require judgmental
assumptions about projected revenue growth, future operating margins, discount rates and terminal values over a multi-year period. There
are inherent uncertainties related to these assumptions and management’s judgment in applying them to the analysis of goodwill
impairment. While the Company believes it has made reasonable estimates and assumptions to calculate the fair value of its reporting
units, it is possible a material change could occur.
The
result of our quantitative analysis was that the estimated fair value of the CommAgility reporting unit exceeded its carrying value thus
no goodwill impairment charge was recorded in the fourth quarter of 2021. The excess of fair value above its carrying value was approximately
25% of the fair value. Recent operating performance, along with assumptions for specific customer opportunities, were considered in the
key assumptions used during the fiscal 2021 impairment analysis. Management of the Company has determined the goodwill of CommAgility
may have an increased likelihood of impairment if CommAgility is not able to execute against customer opportunities, and the long-term
outlook for their cash flows are adversely impacted. Furthermore, changes in the long-term outlook may result in a change to other valuation
assumptions. Factors monitored by management which could result in a change to CommAgility estimates include the outcome of customer
requests for proposals and subsequent awards, labor market conditions and levels of overall economic activity.
In
the fourth quarter of 2020, the Company recorded a goodwill impairment charge of $4.7 million related to the CommAgility reporting unit.
The non-cash impairment charge was due to a number of factors that arose as part of our quantitative assessment as of the valuation date
in the prior year, including an assessment of our historical results and the significant decline in hardware sales in 2020, the difficulty
of predicting future customer demand, the uncertainty of future sales of 4G hardware cards, the uncertainty of the growth of 5G software
and services revenues due to the early stages of 5G adoption for new technology and expectations for 5G deployments, the uncertainty
of the impact of the COVID 19 pandemic on customer spending, and the uncertainty for enterprise spending and longer-term investment.
Due
to the many variables inherent in the estimation of a reporting unit’s fair value and the relative size of our recorded goodwill,
differences in assumptions may have a material effect on the results of our impairment analysis. As of December 31, 2021 and 2020, the
Company’s consolidated goodwill balance of $11.5 million was comprised of $1.4 million related to the Microlab reporting unit,
$6.0 million related to the Holzworth reporting unit and $4.1 million related to the CommAgility reporting unit.
Intangible
and Long-lived Assets
Intangible
assets include acquired technology, patents, non-competition agreements, customer relationships and tradenames. Intangible assets with
finite lives are amortized using the straight-line method over the estimated economic lives of the assets, which range from three to
twelve years. Long-lived assets, including intangible assets with finite lives, are reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of such assets may not be recoverable. Determination of recoverability is based on
an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. Measurement of an impairment
loss for long-lived assets that management expects to hold and use is based on the estimated fair value of the asset. Long-lived assets
to be disposed of are reported at the lower of carrying amount or estimated fair value less costs to sell. The estimated useful lives
of intangible and long-lived assets are based on many factors including assumptions regarding the effects of obsolescence, demand, competition
and other economic factors, expectations regarding the future use of the asset, and our historical experience with similar assets. The
assumptions used to determine the estimated useful lives could change due to numerous factors including product demand, market conditions,
technological developments, economic conditions and competition. Intangible assets determined to have indefinite useful lives are not
amortized but are tested for impairment annually and more frequently if events occur or circumstances change that indicate an asset may
be impaired.
In
the fourth quarter of 2021, the Company recorded an impairment charge of $258,000 related to the CommAgility tradename. The non-cash
impairment charge was due to a number of factors that arose as part of our quantitative assessment, most notably declining hardware sales
since 2019. Additionally, the continued emergence of technical standards and the complexity of the specialized applications that our
CommAgility software and related services would be integrated with as part of new customer projects were a factor in the tradename impairment
analysis.
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 approximated fair value due to the expected short term nature of the
loan.
During
the fourth quarter of 2021, the Company recorded an impairment charge related to an indefinite lived intangible asset related to the
CommAgility reporting unit as part of our annual impairment analysis. The Company used the relief from royalty calculation method which
is based on estimated after tax royalty savings of estimated future revenues. Significant assumptions and estimates utilized in the model
include the royalty and discount rates and estimated future revenues. The determination of the impairment charge was based on Level 3
valuation inputs.
During
the fourth quarter of 2020, the Company recorded a goodwill impairment charge of $4.7 million related to the CommAgility reporting unit.
The determination of the impairment charge was based on the income and market approaches which are based on the present value of future
cash flows and an estimated multiple of future revenues, respectively. The determination of the impairment charge was based on Level
3 valuation inputs.
Contingent
Consideration
Under
the terms of the Holzworth Share Purchase Agreement (as defined in Note 2) the Company is 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 ended December 31,
2020 and December 31, 2021 (see Note 2). As of the acquisition date, 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. The contingent
consideration liabilities are considered a Level 3 fair value measurement.
Due
to the better than expected financial performance of the Holzworth reporting unit during fiscal 2020 and 2021, the Company recorded an
increase to the contingent consideration liabilities in the amount of $1.1 million and $386,000 in 2020 and 2021, respectively. The adjustments
were recorded as a loss on change in fair value of contingent consideration in the Consolidated Statement of Operations and Comprehensive
Income/(Loss).
As
of December 31, 2021, amounts due for the Holzworth deferred purchase price and earnout were $250,000 and $2.9 million, respectively.
Foreign
Currency Translation
Assets
and liabilities of non-U.S. subsidiaries that operate in a local currency environment, where the local currency is the functional currency,
are translated from foreign currencies into U.S. dollars at period-end exchange rates while income and expenses are translated at the
weighted average spot rate for the periods presented. Translation gains or losses related to net assets located outside the U.S. are
shown as a component of accumulated other comprehensive income in the Consolidated Statements of Changes in Shareholders’ Equity.
Aggregate
foreign currency gains and losses, such as those resulting from the settlement of receivables or payables in a currency other than the
subsidiary’s functional currency, are recorded in the Consolidated Statements of Operations and Comprehensive Income/(Loss) (included
in other income/expense). Foreign currency transaction gains were $13,000 and $64,000 in fiscal 2021 and 2020, respectively.
Other
Comprehensive Income/(Loss)
Other
comprehensive income/(loss) is recorded directly to a separate section of shareholders’ equity in accumulated other comprehensive
income and includes unrealized gains and losses excluded from net income/(loss). These unrealized gains and losses consist of changes
in foreign currency translation.
Research
and Development Costs
Research
and development (R&D) costs are charged to operations when incurred. R&D costs include salaries and benefits, depreciation expense
on equipment used for R&D purposes and third-party material and consulting costs, if clearly related to an R&D activity. Salaries
and benefits of engineers working on customer contracts for which the Company is earning services or consulting revenues are allocated
to costs of revenues. The amounts charged to operations for R&D costs for the years ended December 31, 2021 and 2020 were $5.6 million
and $6.4 million, respectively.
Advertising
Costs
Advertising
expenses are charged to operations during the year in which they are incurred and were $279,000 and $235,000 for the years ended December
31, 2021 and 2020, respectively.
Stock-Based
Compensation
The
Company follows the provisions of Accounting Standards Codification (“ASC”) 718, “Compensation – Stock Compensation”
which requires that compensation expense be recognized, based on the fair value of the equity awards on the date of grant. The fair value
of restricted share awards and restricted stock unit awards is determined using the market value of our common stock on the date of the
grant. The fair value of stock options at the date of grant are estimated using the Black-Scholes option pricing model. When performance-based
stock options are granted, the Company takes into consideration guidance under ASC 718 and SEC Staff Accounting Bulletin No. 107 (SAB
107) when determining assumptions. The expected option life is derived from assumed exercise rates based upon historical exercise patterns
and represents the period of time that options granted are expected to be outstanding. The expected volatility is based upon historical
volatility of our shares using daily price observations over an observation period that approximates the expected life of the options.
The risk-free rate is based on the U.S. Treasury yield curve rate in effect at the time of grant for periods similar to the expected
option life. The Company accounts for forfeitures for all equity awards when they occur.
Management
estimates are necessary in determining compensation expense for stock options with performance-based vesting criteria. Compensation expense
for this type of stock-based award is recognized over the period from the date the performance conditions are determined to be probable
of occurring through the implicit service period, which is the date the applicable conditions are expected to be met. If the performance
conditions are not considered probable of being achieved, no expense is recognized until such time as the performance conditions are
considered probable of being met, if ever. If the award is forfeited because the performance condition is not satisfied, previously recognized
compensation cost is reversed. Management evaluates performance conditions on a quarterly basis.
In
the fourth quarter 2021, management deemed the revenue performance targets related to certain performance option grants dated April 7,
2020 and August 4, 2020 as not probable of being met. This was primarily due to the pending divestiture of Microlab and its related revenues.
Accordingly, the Company reversed $217,000 of stock compensation expense previously recognized related to these grants.
Income
Taxes
The
Company records deferred taxes in accordance with ASC 740, “Accounting for Income Taxes”. This ASC requires recognition of
deferred tax assets and liabilities for temporary differences between tax basis of assets and liabilities and the amounts at which they
are carried in the financial statements, based upon the enacted rates in effect for the year in which the differences are expected to
reverse. The Company establishes a valuation allowance when necessary to reduce deferred tax assets to the amount expected to be realized.
The
Company periodically assesses the value of its deferred tax asset, a majority of which has been generated by a history of net operating
losses and determines the necessity for a valuation allowance. The Company evaluates which portion, if any, will more likely than not
be realized by offsetting future taxable income, taking into consideration any limitations that may exist on its use of its net operating
loss carry-forwards.
Under
ASC 740, the Company must recognize and disclose uncertain tax positions only if it is more-likely-than-not the tax position will be
sustained on examination by the taxing authority, based on the technical merits of the position. The amounts recognized in the financial
statements attributable to such position, if any, are recorded if there is a greater than 50% likelihood of being realized upon the ultimate
resolution of the position. Based on the evaluations noted above, the Company has concluded that there are no significant uncertain tax
positions requiring recognition or disclosure in its consolidated financial statements.
Earnings/(Loss)
Per Common Share
Basic
earnings/(loss) per share is calculated by dividing net income/(loss) available to common shareholders by the weighted average number
of shares of common stock outstanding during the period. Diluted earnings/(loss) per share is calculated by dividing net income/(loss)
available to common shareholders by the weighted average number of common shares outstanding for the period and, when dilutive, potential
shares from stock options using the treasury stock method, the weighted average number of unvested restricted shares, 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 and warrants 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.
SCHEDULE
OF WEIGHTED AVERAGE NUMBER OF SHARES
| | |
2021 | | |
2020 | |
| | |
For
the Years Ended December 31, | |
| | |
2021 | | |
2020 | |
| | |
| | |
| |
| Weighted
average common shares outstanding | |
| 22,049,636 | | |
| 21,656,906 | |
| Potentially
dilutive equity awards | |
| 2,247,470 | | |
| 313,341 | |
| Weighted
average common shares outstanding, assuming dilution | |
| 24,297,106 | | |
| 21,970,247 | |
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 in 2021, was 1,205,000. The estimated number of shares issuable under the terms
of the Holzworth earnout, if the balance of the earnout was paid in shares of common stock (see Note 2) at December 31, 2021 was 1,340,637.
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 in 2020 was 3,114,792. The estimated number of shares issuable under the terms
of the Holzworth earnout, if the entire earnout was paid in shares of common stock, (see Note 2) at December 31, 2020 was 1,559,807.
Recent
Accounting Pronouncements Adopted in 2021
In
December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU
2019-12”), which simplifies the accounting for income taxes by removing certain exceptions related to the approach for intra-period
tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for
outside basis differences. The new ASU also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws
or rates. These changes aim to improve the overall usefulness of disclosures to financial statement users and reduce unnecessary costs
to companies when preparing the disclosures. The guidance was effective for the Company beginning on January 1, 2021 and prescribes different
transition methods for the various provisions. The adoption of this standard had no material impact on the Company’s financial
statements or related disclosures.
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
2 - 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 labs, automated test environments and military and aerospace production applications. Holzworth is a complimentary
business for our Boonton and Noisecom brands with a common customer base and channel partners.
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 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 was 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 was 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
total payment for the Year 1 Earnout is $3.4 million, of which $552,000 was paid in cash and $315,000 was issued in common stock as of
December 31, 2021. The Year 1 Earnout accrual is $2.6 million as of December 31, 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.
Due
to the anticipated better than expected financial performance of the Holzworth reporting unit for fiscal year 2021, the Company recorded
an increase to the contingent consideration liabilities in the amount of $386,000 related to the Year 2 Earnout. The adjustment was recorded
as a loss on change in contingent consideration in the Consolidated Statement of Operations and Comprehensive Income/(Loss).
The
total accrual as of December 31, 2021 related to the Year 1 and Year 2 Earnout is $2.9 million and is recorded in accrued expenses and
other current liabilities on the consolidated balance sheet.
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):
SCHEDULE OF BUSINESS CONSIDERATION
| | |
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 tax deductible.
In
accordance with ASC 805 adjustments to contingent consideration after the measurement period closes are recorded in the statement of
operations rather than through goodwill. Due to the better than expected financial performance of Holzworth in 2020 and 2021, we recorded
an increase through the consolidated statement of operations to our initial estimates of the Year 1 Earnout and Year 2 Earnout in the
amounts of $1,073,000 and $386,000, respectively. Taking into account these adjustments to the contingent consideration liability the
total purchase price for Holzworth was approximately $13.5 million. There are no additional earnout payments due related to the Holzworth
acquisition.
NOTE
3 - DEBT
Debt
consists of the following (in thousands):
SCHEDULE OF DEBT
| | |
December
31,
2021 | |
| Revolver
at LIBOR plus margin | |
$ | - | |
| Term
loan at LIBOR plus margin | |
| 4,104 | |
| Less:
Debt issuance costs, net of amortization | |
| (627 | ) |
| Less:
Fair value of warrants, net of amortization | |
| (93 | ) |
| CIBLS
Loan at Bank of England plus margin | |
| 337 | |
| Total
Debt | |
| 3,721 | |
| Less:
Debt maturing within one year | |
| (126 | ) |
| Non-current
portion of long term debt | |
$ | 3,595 | |
Term
loan payments by period (in thousands):
SCHEDULE OF TERM LOAN PAYMENTS
| | |
| | |
| 2022 | |
$ | 126 | |
| 2023 | |
| 168 | |
| 2024 | |
| 168 | |
| 2025 | |
| 3,936 | |
| 2026 | |
| 43 | |
| Total | |
$ | 4,441 | |
Muzinich
Term Loan Facility
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 provided 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 on 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 were used for allowable purposes under
the CARES Act, the receipt of the loan did not violate the Credit Facility and the Company submitted an application for forgiveness and
substantially all of the loan was 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 would 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 2.
On
May 27, 2021, the Company and its subsidiaries entered into the Third Amendment to the Credit Agreement and Limited Waiver (“Amendment
3)” with Muzinich in which Muzinich, among other things, permitted CommAgility to enter into the CIBLS Loan Agreement with Lloyds
Bank Plc. See description below.
On
September 28, 2021, the Company and its subsidiaries entered into the Fourth Amendment to Credit Agreement and Limited Waiver (“Amendment
4”) with Muzinich. Amendment 4 was executed in connection with a prepayment of the principal balance of the Muzinich term loan
in the amount of $3.7 million and accrued interest thereon of $95,000 on September 28, 2021. Additionally, the Company paid a prepayment
fee of 2% of the prepayment amount or $74,000.
Under
the terms of Amendment 4, the
interest rate margin was decreased from 9.25% to 8.75% when trailing twelve month Consolidated EBITDA, as defined, excluding the U.K.
R&D tax credit, was less than or equal to $4.0 million and decreased from 8.50% to 8.00% when trailing twelve month Consolidated
EBITDA, as defined, excluding the U.K. R&D tax credit, was greater than $4.0 million but equal to or less than $6.3 million.
Muzinich also agreed to waive compliance with the financial covenant set forth in Section 7.11(c) of the Credit Agreement from September
28, 2021 until March 31, 2022. Section 7.11(c) required the trailing four week average liquidity, as defined, of the Company’s
CommAgility subsidiary to be no less than $1.0 million.
The waiver of this covenant could be extended upon the consent of Muzinich. Additionally, under Amendment 4, the definition of Consolidated
Interest Charges was amended to treat the aforementioned principal prepayment of $3.7
million as being made on October 1, 2020.
Credit
Facility with Bank of America, N.A.
The
Company entered into a Credit Facility with Bank of America, N.A. (“Bank of America”) 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 was calculated on a
monthly basis and interest was 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 Holzworth acquisition, on February 7, 2020, the Company and certain of its subsidiaries (the “Borrowers”),
and Bank of America entered into Amendment No. 5 to the Credit Facility (“BOA Amendment 5”). By entering into BOA Amendment
5, Holzworth, together with CommAgility Limited, became borrowers under the Credit Facility. The obligations of the Borrowers under the
Credit Facility were 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 were used for allowable purposes under the CARES Act and the Company
promptly submitted an application for forgiveness and substantially all of the loan was 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, 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.
On
September 28, 2021, the Company and its subsidiaries entered into Amendment No. 8 (“BOA Amendment 8”) in which Bank of America
consented to the aforementioned principal prepayment of the Muzinich term loan and amended the definition of Fixed Charge Coverage Ratio
to treat the Muzinich principal prepayment as being made on October 1, 2020. Additionally, Bank of America and the Company agreed that,
in accordance with the Credit Facility, the LIBOR would be replaced with a successor rate in accordance with the provisions of BOA Amendment
5. Accordingly, BOA Amendment 8 defined the LIBOR successor rate for loans denominated in U.S. dollars to be the Bloomberg Short-Term
Bank Yield Index rate (“BSBY”), loans denominated in Sterling to be the Sterling Overnight Index Average Reference Rate (“SONIA”)
and loans denominated in Euros to be the Euro Interbank Offered Rate (“EURIBOR”). Loans drawn after the effective date of
BOA Amendment 8 would bear interest as the successor rates named above plus the applicable margin, as defined.
As
of December 31, 2021, the principal balance on the Term Loan Facility was $4.1 million and the interest rate was 9.75%. As of December
31, 2021, the Company had no balance drawn on the Revolver and the interest rate was 2.00%. Additionally, the Company was in compliance
with all debt covenants.
PPP
Loan
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, as of December 31, 2020 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 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 in the amount of $2.0 million on the Consolidated Statement of Operations and Comprehensive Income/(Loss) in the twelve months
ended December 31, 2021.
CIBLS
Loan
On
May 27, 2021, CommAgility entered into the Coronavirus Business Interruption Loan Agreement (“CIBLS Loan”) with Lloyds Bank
PLC (“Lloyds”). Under the terms of the CIBLS Loan CommAgility can draw up to a maximum of £250,000 for purposes of
supporting daily business cash flow. The CIBLS Loan is repayable in 48 consecutive equal monthly installments beginning in month 13 after
the initial loan drawdown (12 month principal repayment holiday). Interest is payable monthly at the official bank rate of the Bank of
England plus an interest margin of 2.35% per annum. Interest payments begin in month 13 after the initial loan drawdown.
The first twelve months of interest payments are paid by the U.K. government. The CIBLS Loan is secured by the assets of CommAgility
subject to a Deed of Priority between Muzinich, Bank of America and Lloyds. The CIBLS Loan ranks subordinate to both the Muzinich Term
Loan and Bank of America Credit Facility.
On
July 1, 2021 CommAgility executed a draw down of the maximum amount of £250,000. As of December 31, 2021, $42,000 is included in
short term debt and $295,000 is included long term debt on the Consolidated Balance Sheet.
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. Additionally, the exercise price may be adjusted based on a formula in the event of a common
stock offering by the Company at an offering price below fair market value, as defined, and below exercise price. 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 (as defined in Term Loan Facility above) 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. No further acquisitions were
undertaken under the Term Loan Facility and as such no additional warrants will be issued.
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.
NOTE
4 - EQUITY
On
July 21, 2021, the Company entered into a Sales Agreement with B. Riley Securities, Inc. (the “Agent”), to issue and sell
through the Agent, shares of the Company’s common stock, having an aggregate offering price of up to $12,000,000. The Agent was
not required to sell any specific number of shares. Shares sold under the Sales Agreement were issued and sold pursuant to the Company’s
previously filed 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 6, 2021 the Agent sold 264,701 shares of the Company’s common stock for net proceeds of $739,000,
after deducting sales commissions paid to the Agent in accordance with the terms of the Sales Agreement and $563,000 after deducting
legal and other expenses.
The
registration statement pursuant to which the shares were sold expired on September 17, 2021 and was not renewed.
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 December 31, 2021 and 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 $668,000 and $648,000 during the twelve months ended December 31, 2021 and 2020,
respectively, and is included in operating cash flows.
Operating
lease costs were $1.1 million and $1.0 million during the twelve months ended December 31, 2021 and 2020, respectively.
The
following table presents information about the amount and timing of cash flows arising from the Company’s operating leases as of
December 31, 2021.
SCHEDULE
OF MATURITY OF OPERATING LEASE LIABILITIES
| (in
thousands) | |
December
31,
2021 | |
| Maturity
of Lease Liabilities | |
| | |
| 2022 | |
$ | 637 | |
| 2023 | |
| 276 | |
| 2024 | |
| 158 | |
| 2025 | |
| 163 | |
| 2026 | |
| 69 | |
| Total
undiscounted operating lease payments | |
| 1,303 | |
| Less:
imputed interest | |
| (103 | ) |
| Present
Value of operating lease liabilities | |
$ | 1,200 | |
| | |
| | |
| Balance
sheet classification | |
| | |
| Current
lease liabilities | |
$ | 585 | |
| Long-term
lease liabilities | |
| 615 | |
| Total
operating lease liabilities | |
$ | 1,200 | |
| | |
| | |
| Other
information | |
| | |
| Weighted-average
remaining lease term (months) | |
| 35 | |
| 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 96% and 99% of the Company’s total revenue for the twelve months ended December 31, 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 control has transferred to the customer, the Company also considers:
| |
● |
when
the Company has a present right to payment for the asset |
| |
● |
when
the Company has transferred physical possession of the asset to the customer |
| |
● |
when
the customer has the significant risks and rewards of ownership of the asset |
| |
● |
when
the customer has accepted the asset |
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.
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
a contract asset when revenue is recognized prior to invoicing, or deferred revenue when revenue is recognized subsequent to invoicing.
Unbilled revenue is $292,000 and $260,000 as of December 31, 2021 and 2020, respectively, and recorded in prepaid expenses and other
current assets. Deferred revenue is $408,000 and $924,000 as of December 31, 2021 and 2020, respectively. The decrease in deferred revenue
from the prior year is primarily due to recognition of billings in advance of revenue recognition for certain CommAgility projects involving
multiple performance obligations which were deferred at December 31, 2020, only partially offset by new contract billings in advance
of revenue recognition in 2021.
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).
SCHEDULE
OF DISAGGREGATED REVENUE
| | |
Twelve
Months Ended
December
31,
2021 | | |
Twelve
Months Ended December 31,
2020 | |
| Total
net revenues by revenue type | |
| | | |
| | |
| Passive
and active RF solutions | |
$ | 17,743 | | |
$ | 17,633 | |
| Noise
generators and components | |
| 13,744 | | |
| 13,356 | |
| Power
meters and analyzers | |
| 7,154 | | |
| 5,737 | |
| Signal
processing hardware | |
| 4,884 | | |
| 1,672 | |
| Software
licenses | |
| 1,892 | | |
| 1,284 | |
| Services | |
| 3,828 | | |
| 2,066 | |
| Total
net revenue | |
$ | 49,245 | | |
$ | 41,748 | |
| | |
| | | |
| | |
| Total
net revenues by geographic areas | |
| | | |
| | |
| Americas | |
$ | 35,800 | | |
$ | 31,329 | |
| EMEA | |
| 7,366 | | |
| 6,329 | |
| APAC | |
| 6,079 | | |
| 4,090 | |
| Total
net revenue | |
$ | 49,245 | | |
$ | 41,748 | |
Net
revenues are attributable to a geographic area based on the destination of the product shipment.
The
majority of shipments in the Americas are to customers located within the United States. For the years ended December 31, 2021 and 2020,
sales in the United States amounted to $33.8 million and $30.6 million, respectively.
For
the year ended December 31, 2021 shipments to the EMEA region were largely concentrated in the UK and Germany. Shipments to the UK and
Germany in 2021 amounted to $5.3 million and $1.0 million, respectively. For the year ended December 31, 2020 shipments to the EMEA region
were largely concentrated in the UK, Russia and France. Shipments to the UK, Russia and France in 2020 amounted to $1.7 million, $897,000
and $859,000, respectively.
The
largest concentration of shipments in the APAC region is to China, where shipments amounted to $2.0 million for both years ended December
31, 2021 and 2020 There were no other shipments significantly concentrated in one country in the APAC region.
NOTE
7 - GOODWILL AND INTANGIBLE ASSETS
Goodwill
consists of the following (in thousands):
SCHEDULE
OF GOODWILL
| | |
Holzworth | | |
Microlab | | |
CommAgility | | |
Total | |
| Balance
as of December 31, 2019 | |
$ | - | | |
$ | 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 | |
| - | | |
| - | | |
| (53 | ) | |
| (53 | ) |
| Balance
as of December 31, 2021 | |
$ | 6,000 | | |
$ | 1,351 | | |
$ | 4,108 | | |
$ | 11,459 | |
Intangible
assets consist of the following (in thousands):
SCHEDULE
OF INTANGIBLE ASSETS
| | |
December
31, 2021 | |
| | |
Gross
Carrying
Amount | | |
Accumulated
Amortization | | |
Impairment | | |
Foreign
Exchange
Translation | | |
Net
Carrying
Amount | |
| Customer
relationships | |
$ | 5,075 | | |
$ | (3,554 | ) | |
$ | - | | |
$ | 124 | | |
$ | 1,645 | |
| Patents | |
| 615 | | |
| (626 | ) | |
| - | | |
| 27 | | |
| 16 | |
| Proprietary
technology | |
| 1,550 | | |
| (297 | ) | |
| - | | |
| - | | |
| 1,253 | |
| Non-compete
agreements | |
| 1,107 | | |
| (1,150 | ) | |
| - | | |
| 43 | | |
| - | |
| Holzworth
tradename | |
| 400 | | |
| (64 | ) | |
| - | | |
| - | | |
| 336 | |
| CommAgility
tradename | |
| 629 | | |
| - | | |
| (258 | ) | |
| 40 | | |
| 411 | |
| Total | |
$ | 9,376 | | |
$ | (5,691 | ) | |
$ | (258 | ) | |
$ | 234 | | |
$ | 3,661 | |
| | |
December
31, 2020 | |
| | |
Gross
Carrying
Amount | | |
Accumulated
Amortization | | |
Impairment | | |
Foreign
Exchange
Translation | | |
Net
Carrying
Amount | |
| Customer
relationships | |
$ | 5,075 | | |
$ | (2,564 | ) | |
$ | - | | |
$ | 121 | | |
$ | 2,632 | |
| Patents | |
| 615 | | |
| (491 | ) | |
| - | | |
| 26 | | |
| 150 | |
| Proprietary
technology | |
| 1,550 | | |
| (142 | ) | |
| - | | |
| - | | |
| 1,408 | |
| Non-compete
agreements | |
| 1,107 | | |
| (1,150 | ) | |
| - | | |
| 43 | | |
| - | |
| Holzworth
tradename | |
| 400 | | |
| (31 | ) | |
| - | | |
| - | | |
| 369 | |
| CommAgility
tradename | |
| 629 | | |
| - | | |
| - | | |
| 54 | | |
| 683 | |
| Total | |
$ | 9,376 | | |
$ | (4,378 | ) | |
$ | - | | |
$ | 244 | | |
$ | 5,242 | |
Amortization
of acquired intangible assets was $1.3 million for each of the twelve months periods ended December 31, 2021 and 2020. In the fourth
quarter of 2021, the Company recorded a $258,000 impairment related to the CommAgility tradename. Amortization of proprietary technology
is included in costs of revenues in the Consolidated Statements of Operations and Comprehensive Income/(Loss). Amortization of all other
acquired intangible assets is included in general and administrative expenses.
The
estimated future amortization expense related to intangible assets is as follows as of December 31, 2021 (in thousands):
SCHEDULE
OF INTANGIBLE ASSETS, FUTURE AMORTIZATION EXPENSE
| | |
| | |
| 2022 | |
$ | 664 | |
| 2023 | |
| 573 | |
| 2024 | |
| 573 | |
| 2025 | |
| 573 | |
| 2026 | |
| 220 | |
| Thereafter | |
| 647 | |
| Total | |
$ | 3,250 | |
NOTE
8 - PROPERTY, PLANT AND EQUIPMENT
Property,
plant and equipment, consist of the following as of December 31 (in thousands):
SCHEDULE
OF PROPERTY, PLANT AND EQUIPMENT
| | |
2021 | | |
2020 | |
| Machinery
& computer equipment/software | |
$ | 9,399 | | |
$ | 9,085 | |
| Furniture
& fixtures | |
| 484 | | |
| 483 | |
| Leasehold
improvements | |
| 1,406 | | |
| 1,358 | |
| Gross
property, plant and equipment | |
| 11,289 | | |
| 10,926 | |
| | |
| | | |
| | |
| Less:
Accumulated depreciation | |
| 9,757 | | |
| 9,102 | |
| Net
property, plant and equipment | |
$ | 1,532 | | |
$ | 1,824 | |
Depreciation
expense of $772,000 and $884,000 was recorded for the years ended December 31, 2021 and 2020, respectively.
NOTE
9 - OTHER ASSETS
Other
assets consist of the following as of December 31 (in thousands):
SCHEDULE
OF OTHER ASSETS
| | |
2021 | | |
2020 | |
| Product
demo assets | |
$ | 202 | | |
$ | 187 | |
| Deferred
costs | |
| 123 | | |
| 82 | |
| Security
deposit | |
| 63 | | |
| 63 | |
| Debt
issuance costs - Revolver | |
| 25 | | |
| 127 | |
| Income
tax receivable | |
| - | | |
| 65 | |
| Other | |
| 35 | | |
| 37 | |
| Total | |
$ | 448 | | |
$ | 561 | |
Product
demo assets are net of accumulated amortization expense of $459,000 and $397,000 as of December 31, 2021 and 2020, respectively. Amortization
expense related to demo assets was $49,000 and $84,000 in 2021 and 2020, respectively.
NOTE
10 - ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued
expenses and other current liabilities consist of the following as of December 31 (in thousands):
SCHEDULE OF ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
| | |
2021 | | |
2020 | |
| Holzworth
earnout (Year 1 and Year 2) | |
$ | 2,942 | | |
$ | 3,423 | |
| Goods
received not invoiced | |
| 1,057 | | |
| 458 | |
| Payroll
and related benefits | |
| 718 | | |
| 864 | |
| Accrued
bonus | |
| 590 | | |
| 123 | |
| Accrued
commissions | |
| 531 | | |
| 605 | |
| Accrued
professional fees | |
| 524 | | |
| 331 | |
| Return
reserve | |
| 319 | | |
| 212 | |
| Sales
and use and VAT tax | |
| 277 | | |
| 315 | |
| Holzworth
deferred purchase price | |
| 250 | | |
| 950 | |
| Warranty
reserve | |
| 78 | | |
| 140 | |
| Harris
arbitration liability | |
| - | | |
| 116 | |
| Other | |
| 572 | | |
| 460 | |
| Total | |
$ | 7,858 | | |
$ | 7,997 | |