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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 September 30, 2022

 

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 Identification No.)
of incorporation or organization)    

 

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 November 7, 2022: 21,556,751

 

 

 

 

 

 

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 18
   
Item 3. Quantitative and Qualitative Disclosures About Market Risk 23
   
Item 4. Controls and Procedures 23
   
PART II – OTHER INFORMATION  
   
Item 1. Legal Proceedings 24
   
Item 1A. Risk Factors 24
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 24
   
Item 3. Defaults Upon Senior Securities 24
   
Item 4. Mine Safety Disclosures 24
   
Item 5. Other Information 24
   
Item 6. Exhibits 24
   
SIGNATURES 25

 

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

 

    September 30
2022		     December 31
2021		  
    (Unaudited)        
    September 30
2022		     December 31
2021		  
CURRENT ASSETS                
Cash & cash equivalents   $ 10,726     $ 4,472  
Accounts receivable - net of reserves of $183 and $196, respectively     4,329       2,407  
Inventories - net of reserves of $686 and $681, respectively     5,685       5,088  
Prepaid expenses and other current assets     2,196       1,689  
Current assets of discontinued operations     -       6,869  
TOTAL CURRENT ASSETS     22,936       20,525  
                 
PROPERTY PLANT AND EQUIPMENT - NET     1,162       1,110  
                 
OTHER ASSETS                
Goodwill     9,405       10,108  
Acquired intangible assets, net     3,070       3,661  
Deferred income taxes     2,412       5,580  
Right of use assets     724       1,146  
Other assets     253       284  
Non current assets of discontinued operations     -       1,937  
TOTAL OTHER ASSETS     15,864       22,716  
                 
TOTAL ASSETS   $ 39,962     $ 44,351  
                 
CURRENT LIABILITIES                
Short term debt   $ -     $ 126  
Accounts payable     1,527       1,481  
Short term leases     369       585  
Accrued expenses and other current liabilities     4,307       6,676  
Deferred revenue     92       408  
Current liabilities of discontinued operations     -       1,965  
TOTAL CURRENT LIABILITIES     6,295       11,241  
                 
LONG TERM LIABILITIES                
Long term debt     -       3,595  
Long term leases     397       615  
Other long term liabilities     30       52  
Deferred tax liability     189       228  
TOTAL LONG TERM LIABILITIES     616       4,490  
                 
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
36,535,636 and 35,915,636 shares issued, 21,570,439 and 22,666,072 shares outstanding		     366       359  
Additional paid in capital     52,635       51,555  
Retained earnings     7,210       554  
Treasury stock at cost, 14,965,197 and 13,249,564 shares     (27,170 )     (24,619 )
Accumulated other comprehensive income     10       771  
TOTAL SHAREHOLDERS’ EQUITY     33,051       28,620  
                 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY   $ 39,962     $ 44,351  

 

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)

 

    2022     2021     2022     2021  
    For the Three Months Ended     For the Nine Months Ended  
    September 30     September 30  
    2022     2021     2022     2021  
Net revenues   $ 5,330     $ 7,376     $ 18,994     $ 23,348  
                                 
Cost of revenues     2,672       3,334       8,566       10,074  
                                 
Gross profit     2,658       4,042       10,428       13,274  
                                 
Operating expenses                                
Research and development     1,068       1,210       3,352       3,610  
Sales and marketing     1,100       1,201       3,620       3,540  
General and administrative     3,071       2,741       9,169       8,379  
Loss on change in contingent consideration     -       1,000       -       1,000  
Total operating expenses     5,239       6,152       16,141       16,529  
                                 
Operating loss     (2,581 )     (2,110 )     (5,713 )     (3,255 )
                                 
Gain/(loss) on extinguishment of debt     -       -       (792 )     2,045  
Other income/(expense)     (46 )     20       87       29  
Interest income/(expense)     18       (365 )     (159 )     (947 )
                                 
Income/(loss) before taxes     (2,609 )     (2,455 )     (6,577 )     (2,128 )
Tax benefit     (341 )     (1,255 )     (1,540 )     (1,390 )
Net income/(loss) from continuing operations   $ (2,268 )   $ (1,200 )   $ (5,037 )   $ (738 )
                                 
Net income from discontinued operations, net of taxes     87       1,013       11,695       1,854  
Net income/(loss)   $ (2,181 )   $ (187 )   $ 6,658     $ 1,116  
                                 
Other comprehensive income/(loss):                                
Foreign currency translation adjustments     (244 )     (152 )     (761 )     (64 )
Comprehensive income/(loss)   $ (2,425 )   $ (339 )   $ 5,897     $ 1,052  
                                 
Income/(loss) per share from continuing operations:                                
Basic   $ (0.11 )   $ (0.05 )   $ (0.23 )   $ (0.03 )
Diluted   $ (0.11 )   $ (0.05 )   $ (0.23 )   $ (0.03 )
                                 
Income per share from discontinued operations:                                
Basic   $ 0.00     $ 0.05     $ 0.53     $ 0.08  
Diluted   $ 0.00     $ 0.05     $ 0.53     $ 0.08  
                                 
Income/(loss) per share:                                
Basic   $ (0.10 )   $ 0.00     $ 0.30     $ 0.05  
Diluted   $ (0.10 )   $ (0.00 )   $ 0.30     $ 0.05  
                                 
Weighted average shares outstanding:                                
Basic     21,134       22,234       21,886       21,900  
Diluted     21,134       22,234       21,886       21,900  

 

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)

 

    2022     2021  
    For the Nine Months  
    Ended September 30  
    2022     2021  
CASH FLOWS PROVIDED/(USED) BY OPERATING ACTIVITIES                
Net income   $ 6,658     $ 1,116  
Adjustments to reconcile net loss to net cash provided/(used) by operating activities:                
Depreciation and amortization     1,081       1,604  
Extinguishment of PPP loan     -       (2,045 )
Loss on extinguishment of term debt     792       -  
Gain on sale of Microlab     (16,490 )     -  
Amortization of debt issuance fees     55       217  
Share-based compensation expense     950       302  
Deferred rent     (22 )     (22 )
Deferred income taxes     3,169       (387 )
Provision for doubtful accounts     (13 )     72  
Inventory reserves     35       115  
Changes in assets and liabilities, net of divestiture:                
Accounts receivable     (2,052 )     (1,998 )
Inventories     (960 )     (993 )
Prepaid expenses and other assets     (88 )     459  
`Accounts payable     506       728  
Deferred revenue     (285 )     (225 )
Accrued expenses and other liabilities     (1,034 )     1,592  
Net cash provided/(used) by operating activities     (7,698 )     535  
                 
CASH FLOWS PROVIDED/(USED) BY INVESTING ACTIVITIES                
Capital expenditures     (582 )     (417 )
Deferred purchase price payment     (250 )     (200 )
Divestiture of Microlab, net     22,969       -  
Net cash provided/(used) by investing activities     22,137       (617 )
                 
CASH FLOWS USED BY FINANCING ACTIVITIES                
Revolver borrowings/(repayments), net     -       45  
Term loan borrowings     -       345  
Term loan repayments     (4,422 )     (4,191 )
Acquisition of treasury stock     (2,525 )     -  
Payment of contingent consideration     (1,097 )     (460 )
Proceeds from exercise of stock options     137       209  
Shares withheld for employee taxes     (26 )     (44 )
ATM share sold     -       565  
Net cash used by financing activities     (7,933 )     (3,531 )
                 
Effect of Exchange Rate Changes on Cash and Cash Equivalents     (252 )     (14 )
NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS     6,254       (3,627 )
                 
Cash and Cash Equivalents, at Beginning of Period     4,472       4,910  
                 
CASH AND CASH EQUIVALENTS, AT END OF PERIOD   $ 10,726     $ 1,283  
                 
SUPPLEMENTAL INFORMATION:                
Cash paid during the period for interest   $ 122     $ 698  
Cash paid during the period for income taxes   $ 957     $ 150  

 

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

  
   

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  
                                                         
Net income/(loss)     -       -       -       (187 )     -       -       (187 )
Issuance of shares in connection with stock options exercised     140,000       1       208       -       -       -       209  
Issuance of shares in connection with Holzworth acquisition     33,220       -       73       -       -       -       73  
Shares withheld for employee taxes     -       -       -       -       (27 )     -       (27 )
Share-based compensation expense     -       -       98       -       -       -       98  
ATM shares sold     264,701       3       562       -       -       -       565  
Cumulative translation adjustment     -       -       -       -       -       (152 )     (152 )
Balances at September 30, 2021     35,550,342     $ 355     $ 51,305     $ 171     $ (24,600 )   $ 776     $ 28,007  
                                                         

Balances at January 1, 2022

     35,915,636     $ 359     $ 51,555     $ 554     $ (24,619 )   $ 771     $ 28,620  
Net income/(loss)     -       -       -       10,197       -       -       10,197  
Issuance of shares in connection with stock options exercised     15,000       -       24       -       -       -       24  
Issuance of restricted stock     300,000       3       (3 )     -       -       -       -  
Shares withheld for employee taxes     -       -       -       -       (19 )     -       (19 )
Share-based compensation expense     -       -       330       -       -       -       330  
Cumulative translation adjustment     -       -       -       -       -       (137 )     (137 )
Balances at March 31, 2022     36,230,636     $ 362     $ 51,906     $ 10,751     $ (24,638 )   $ 634     $ 39,015  
                                                         
Net income/(loss)     -       -       -       (1,360 )     -       -       (1,360 )
Issuance of restricted stock     20,000       -       -       -       -       -       -  
Share Repurchase     -       -       -       -       (2,525 )     -       (2,525 )
Share-based compensation expense     -       -       320       -       -       -       320  
Cumulative translation adjustment     -       -       -       -       -       (380 )     (380 )
Balances at June 30, 2022     36,250,636     $ 362     $ 52,226     $ 9,391     $ (27,163 )   $ 254     $ 35,070  
                                                         
Net income/(loss)     -       -       -       (2,181 )     -       -       (2,181 )
Issuance of shares in connection with stock options exercised     85,000       2       111       -       -       -       113  
Issuance of restricted stock     200,000       2       (2 )     -       -       -       -  
Shares withheld for employee taxes     -       -       -       -       (7 )     -       (7 )
Share-based compensation expense     -       -       300       -       -       -       300  
Cumulative translation adjustment     -       -       -       -       -       (244 )     (244 )
Balances at September 30, 2022     36,535,636     $ 366     $ 52,635     $ 7,210     $ (27,170 )   $ 10     $ 33,051  

 

The quarterly amounts above may not add to the full year Consolidated Statement of Operations due to rounding.

 

See accompanying Notes to Consolidated Financial Statements.

 

6

 

 

WIRELESS TELECOM GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

NOTE 1 - Summary of Significant Accounting Principles and Policies

 

Basis of Presentation and Preparation

 

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

 

The consolidated financial statements for the twelve months ended December 31, 2021 included the accounts of Wireless Telecom Group, Inc., doing business as, and operating under the trade name Noise Com, Inc., and its wholly owned subsidiaries including Boonton Electronics Corporation, Microlab/FXR, Wireless Telecommunications Ltd., CommAgility Limited and Holzworth Instrumentation, Inc. Noise Com, Inc., Boonton Electronics Corporation, Microlab/FXR, CommAgility Limited Ltd., and Holzworth Instrumentation, Inc. are hereinafter referred to as “Noisecom”, “Boonton”, “Microlab”, “CommAgility” and “Holzworth”, respectively.

 

As more fully described in Note 3, on March 1, 2022, the Company completed the sale of Microlab to RF Industries, Ltd. In accordance with applicable accounting guidance, the results of Microlab are presented as discontinued operations in the Consolidated Statements of Operations and Comprehensive Income/(Loss) and, as such, have been excluded from continuing operations. Further, the Company reclassified the assets and liabilities of Microlab as assets and liabilities of discontinued operations in the Consolidated Balance Sheet as of December 31, 2021. The Consolidated Statements of Cash Flows are presented on a consolidated basis for both continuing operations and discontinued operations.

 

Our consolidated financial statements from continuing operations include the accounts of Noisecom, Boonton, Holzworth, and CommAgility and 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 “third quarter(s)” or “three months” indicate the Company’s fiscal periods ended September 30, 2022 and September 30, 2021, and references to “year-end” indicate the fiscal year ended December 31, 2021.

 

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, 2021. 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 nine months ended September 30, 2022 are not necessarily indicative of the results to be expected for the full year ending December 31, 2022.

 

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.

 

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

 

7

 

 

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, 2021.

 

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 16.6% of consolidated revenue for the three months ended September 30, 2022. A different customer accounted for 10.5% of consolidated revenue for the nine months ended September 30, 2022. One customer accounted for 10.8% of consolidated revenue for the three months ended September 30, 2021. Two customers accounted for 15.9% and 10.4% of consolidated revenue, respectively, for the nine months ended September 30, 2021.

 

Two customers accounted for 23.6% and 10.7%, respectively, of consolidated accounts receivable as of September 30, 2022. At December 31, 2021, no one customer accounted for greater than 10% 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.

 

Contingent Consideration

 

Under the terms of the Holzworth Share Purchase Agreement, the Company was required to pay additional purchase price in the form of an earnout based on Holzworth’s financial results for the years ended December 31, 2020 and 2021.

 

As of September 30, 2022, the amount due for the Holzworth earnout was $1.8 million and is included in accrued expenses and other current liabilities in the Consolidated Balance Sheet.

 

Segments

 

The Company evaluates its financial reporting in accordance with ASC 280 Segment Reporting. As of March 1, 2022, the Company determined that the chief operating decision maker makes financial decisions and allocates resources based on segment operating profit. See Note 12.

 

8

 

 

NOTE 2 – Accounting Pronouncements

 

Recently Adopted Accounting Standards

 

There have been no changes to our significant accounting policies as described in the 2021 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 at amortized cost. This pronouncement is effective for small reporting companies for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2022. The 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.

 

NOTE 3 – Discontinued Operations

 

On March 1, 2022, the Company completed the sale of Microlab to RF Industries, Ltd (the “Transaction”). At closing, the Company received approximately $22.8 million in proceeds net of indemnification and purchase price adjustment holdbacks of $150,000 and $100,000, respectively, and direct expenses. The indemnification holdback expires one year from close. In July, the Company received $225,000 in final purchase price adjustment primarily related to the working capital adjustment. This amount is recorded as proceeds of the Microlab divestiture in the Consolidated Statements of Cash Flows. Approximately, $4.1 million of the net proceeds were used to repay our outstanding Term Loan Facility (as defined in Note 4) with Muzinich BDC, approximately $600,000 of the net proceeds were used to repay our outstanding revolver balance related to the Bank of America Credit Facility (as defined in Note 4) and approximately $486,000 were used to pay our advisors.

 

The Company terminated its Term Loan Facility with Muzinich BDC and Credit Facility with Bank of America N.A. as of the Transaction close date (see Note 4 below). Additionally, concurrent with the closing, the Company entered into a sublease with RF Industries, Ltd for approximately one-half of the square footage of our corporate headquarters in Parsippany, NJ (see Note 5 below).

 

The Transaction was treated as a sale of the assets and liabilities of Microlab to RF Industries, Ltd. for U.S. federal and applicable state income tax purposes. The Company has approximately $14.9 million of U.S. federal net operating loss carryforwards and approximately $41.2 million of New Jersey state net operating loss carryforwards as of December 31, 2021. We expect to utilize all of our federal net operating loss carryforwards and approximately 50% of our state net operating loss carryforwards to offset the taxable gain generated from the Microlab divestiture.

 

In accordance with Accounting Standards Codification (“ASC”) 205-20 Discontinued Operations, the results of Microlab are presented as discontinued operations in the Consolidated Statements of Operations and, as such, have been excluded from continuing operations. Further, the Company reclassified the assets and liabilities of Microlab as assets and liabilities of discontinued operations in the Consolidated Balance Sheet as of December 31, 2021. The Consolidated Statements of Cash Flows are presented on a consolidated basis for both continuing operations and discontinued operations.

 

9

 

 

The following table summarizes the significant items included in income from discontinued operations, net of tax in the Consolidated Statement of Operations for the three and nine months ended September 30, 2022 and 2021 (in thousands):

 

   

September 30,

2022

    

September 30,

2021

    

September 30,

2022

    

September 30,

2021

  
    Three months ended     Nine months ended  
   

September 30,

2022

    

September 30,

2021

    

September 30,

2022

    

September 30,

2021

  
Net revenues   $               -     $ 5,447     $ 2,477     $ 12,820  
Cost of revenues     -       2,950       1,626       7,475  
Gross profit     -       2,497       851       5,345  
Operating expenses     -       938       693       2,486  
Gain on divestiture, net of expenses     87       -       16,490       -  
Income from Discontinued Operations before income taxes     87       1,559       16,648       2,859  
Income tax expense     -       546       4,953       1,005  
Income from Discontinued Operations, net of income taxes   $ 87     $ 1,013     $ 11,695     $ 1,854  

 

The following table summarizes the carrying value of the significant classes of assets and liabilities classified as discontinued operations as of December 31, 2021:

 

       
Current Assets      
Accounts receivable, net   $ 2,883  
Inventories, net     3,986  
Total current assets     6,869  
         
Property, plant and equipment, net     421  
Goodwill     1,351  
Other non current assets     165  
Total non current assets     1,937  
         
Total assets   $ 8,806  
         
Current liabilities        
Accounts payable   $ 783  
Accrued expenses and other current liabilities     1,182  
         
Total current liabilities   $ 1,965  

 

The cash flows related to discontinued operations have not been segregated and are included in the consolidated statements of cash flows for all periods presented. Microlab depreciation expense for the nine months ended September 30, 2021 and included in the consolidated statement of cash flow was $186,000. Depreciation expense recorded in the three months ended March 31, 2022 for Microlab was not material and there were no capital expenditures for Microlab in the three months ended March 31, 2022. Capital expenditures in the three and nine months ended September, 2021 were approximately $38,000 and $88,000, respectively.

 

10

 

 

NOTE 4 – Debt

 

Termination of Muzinich Term Loan Facility and Bank of America N.A. Credit Facility

 

On March 1, 2022, the Company repaid in full and terminated that certain Credit Agreement dated February 7, 2020, among the Company, its subsidiaries and Muzinich BDC, Inc., as amended on May 4, 2020, February 25, 2021, May 27, 2021, and September 28, 2021 (the “Term Loan Facility”). The Company repaid the outstanding principal balance of $4.1 million and accrued interest thereon. Additionally, on March 1, 2022, the Company terminated that certain Loan and Security Agreement dated as of February 16, 2017 among the Company, its subsidiaries and Bank of America, as amended on June 30, 2017, January 23, 2019, February 27, 2019, November 8, 2019, February 7, 2020, May 1, 2020, February 25, 2021 and September 28, 2021 (the “Credit Facility”), which included an asset based revolving loan (“revolver”) which was subject to a borrowing base calculation. The outstanding balance of the revolver at March 1, 2022 was approximately $600,000. The repayment of the Term Loan Facility and Revolver were funded by the proceeds of the Microlab divestiture.

 

The Company accounted for the termination of the Term Loan Facility and Credit Facility as an extinguishment of debt in accordance with ASC 470 Debt. The Company recognized a loss on extinguishment of debt of $792,000 which was primarily comprised of unamortized debt issuance costs.

 

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.

 

On July 1, 2021, CommAgility executed a draw down of the maximum amount of £250,000. On May 30, 2022, CommAgility repaid the CIBLS Loan in full.

 

As of September 30, 2022, the Company has no outstanding debt obligations.

 

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, 2022 and December 31, 2021. 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 $160,000 and $476,000 for the three and nine months ended September 30, 2022, 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 nine months ended September 30, 2021, was $155,000 and $463,000, respectively.

 

Operating lease costs for the three and nine months ended September 30, 2022, were $299,000 and $787,000, respectively. Operating lease costs for the three and nine months ended September 30, 2021, were $250,000 and $801,000, respectively.

 

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The following table presents information about the amount and timing of cash flows arising from the Company’s leases as of September 30, 2022:

 

       
(in thousands)  

September 30, 2022

  
Maturity of Lease Liabilities        
Remainder of 2022   $ 161  
2023     276  
2024     158  
2025     163  
2026     69  
Total undiscounted operating lease payments     827  
Less: imputed interest     (61 )
Present value of operating lease liabilities   $ 766  
         
Balance sheet classification        
Current lease liabilities   $ 369  
Long-term lease liabilities     397  
Total operating lease liabilities   $ 766  
         
Other information        
Weighted-average remaining term (months) for operating leases     33  
Weighted-average discount rate for operating leases     5.88 %

 

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

 

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 94% and 96% of the Company’s consolidated revenue for the three months ended September 30, 2022 and 2021, respectively. Revenue recognized over time was 6% and 4% of the Company’s consolidated revenue for the three months ended September 30, 2022 and 2021, respectively. Revenue from performance obligations that transferred at a point in time accounted for approximately 92% and 97% of the Company’s consolidated revenue for the nine months ended September 30, 2022 and 2021, respectively. Revenue recognized over time was 8% and 3% of the Company’s consolidated revenue for the nine months ended September 30, 2022 and 2021, respectively.

 

Nature of Products and Services

 

Hardware

 

The Company generally has one performance obligation in its arrangements involving the sales of 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.

 

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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.

 

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 $100,000 and $292,000 as of September 30, 2022 and December 31, 2021, respectively, and recorded in prepaid expenses and other current assets. Deferred revenue was $92,000 and $408,000 as of September 30, 2022 and December 31, 2021, respectively. The decrease in deferred revenue from December 31, 2021 is due to recognition of revenue for certain CommAgility projects involving multiple performance obligations.

 

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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 September 30, 2022     Nine Months Ended September 30, 2022  
    Test and
Measurement		     Radio, Baseband, Software     Consolidated     Test and
Measurement		     Radio, Baseband, Software     Consolidated  
Total net revenues by revenue type                                                
Signal generators and components   $ 2,428     $ -     $  2,428     $ 9,475     $ -     $ 9,475  
Signal analyzers and power meters     1,232       -       1,232       4,738       -       4,738  
Signal processing hardware     -       885       885       -       1,446       1,446  
Software licenses     -       66       66       -       481       481  
Services     420       299       719       1,415       1,439       2,854  
Total net revenue   $ 4,080     $ 1,250     $ 5,330     $ 15,628     $ 3,366     $ 18,994  
                                                 
Total net revenues by geographic areas                                                
Americas   $ 2,925     $ 332     $ 3,257     $ 11,012     $ 1,822     $ 12,834  
EMEA     452       899       1,351       1,952       1,370       3,322  
APAC     703       19       722       2,664       174       2,838  
Total net revenue   $ 4,080     $ 1,250     $ 5,330     $ 15,628     $ 3,366     $ 18,994  

 

                                     
    Three Months Ended September 30, 2021     Nine Months Ended September 30, 2021  
    Test and
Measurement		     Radio, Baseband, Software     Consolidated     Test and
Measurement		     Radio, Baseband, Software     Consolidated  
Total net revenues by revenue type                                                
Signal generators and components   $ 3,485     $ -     $ 3,485     $ 10,002     $ -     $ 10,002  
Signal analyzers and power meters     1,996       -       1,996       5,392       -       5,392  
Signal processing hardware     -       813       813       -       3,826       3,826  
Software licenses     -       178       178       -       1,508       1,508  
Services     450       454       904       1,385       1,235       2,620  
Total net revenue   $ 5,931     $ 1,445     $ 7,376     $ 16,779     $ 6,569     $ 23,348  
                                                 
Total net revenues by geographic areas                                                
Americas   $ 4,219     $ 488     $ 4,707     $ 11,988     $ 2,640     $ 14,628  
EMEA     517       808       1,325       2,015       3,741       5,756  
APAC     1,195       149       1,344       2,776       188       2,964  
Total net revenue   $ 5,931     $ 1,445     $ 7,376     $ 16,779     $ 6,569     $ 23,348  

 

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, California 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 September 30, 2022, the Company’s net deferred tax asset of $2.4 million is net of a valuation allowance of approximately $2.8 million which is associated with the Company’s state net operating loss carryforward and a state research and development credit. The net deferred tax asset decreased approximately $3.2 million from December 31, 2021 due to the reduction in federal and New Jersey net operating loss carryforwards due to the taxable gain to be recognized on the Microlab divestiture. The Company expects to utilize in 2022 all of its federal net operating loss carryforwards and approximately one-half of its New Jersey state net operating loss carryforwards to offset the taxable gain recognized on the Microlab divestiture.

 

In accordance with Accounting Standards Update (“ASU”) 2019-12 the Company recorded a tax benefit from continuing operations of $341,000 and $1.5 million for the three and nine months ended September 30, 2022, respectively. The Company recorded a tax provision of approximately $5.0 million related to income from discontinued operations for the nine months ended September 30, 2022. The Company recorded a tax benefit from continuing operations of $1.3 million and $1.4 million for the three and nine months ended September 30, 2021, respectively. The Company recorded a tax provision of approximately $500,000 and $1.0 million related to income from discontinued operations for the three and nine months ended September 30, 2021.

 

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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.

 

    2022     2021     2022     2021  
    For the Three Months     For the Nine Months  
    Ended September 30,     Ended September 30,  
    2022     2021     2022     2021  
                         
Weighted average common shares outstanding     21,133,536       22,233,876       21,885,805       21,899,799  
Potentially dilutive equity awards     1,583,915       2,449,930       2,020,993       2,319,127  
Weighted average common shares outstanding, assuming dilution     22,717,451       24,683,806       23,906,798       24,218,926  

 

For the three and nine months ended September 30, 2022, the weighted average number of options to purchase common stock not included in potentially dilutive equity awards because the effects are anti-dilutive, or the performance condition was not met was 1,965,000 and 1,317,216, respectively. The number of shares issuable under the terms of the Holzworth earnout as of September 30, 2022, if all paid in shares of common stock, is 839,161 and is included in potentially dilutive equity awards in the chart above.

 

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 for the three and nine month periods ended September 30, 2021. The number of shares issuable under the terms of the Holzworth earnout as of September 30, 2021, if all paid in shares of common stock, is 1,430,889 and is included in potentially dilutive equity awards in the chart above.

 

NOTE 9 – Inventories

 

Inventory carrying value is net of inventory reserves of $686,000 at September 30, 2022 and $681,000 at December 31, 2021.

 

   

September 30,

2022

    

December 31,

2021

  
Inventories consist of (in thousands):            
   

September 30,

2022

    

December 31,

2021

  
Raw materials   $ 3,856     $ 3,213  
Work-in-process     508       542  
Finished goods     1,321       1,333  
Total Inventory   $ 5,685     $ 5,088  

 

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NOTE 10 – Accrued Expenses and Other Current Liabilities

 

As of September 30, 2022, and December 31, 2021 accrued expenses and other current liabilities consisted of the following (in thousands):

 

   

September 30,

2022

    

December 31

2021

  
Holzworth earnout (Year 1 and Year 2)   $ 1,845     $ 2,942  
Payroll and related benefits     889       718  
Accrued commissions     192       465  
Accrued professional fees     398       524  
Goods received not invoiced     110       277  
Sales and use and VAT tax     241