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WIRELESS TELECOM GROUP INC - Quarter Report: 2017 September (Form 10-Q)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

 

FORM 10-Q

(Mark One)

 

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

 

For the quarterly period ended September 30, 2017

 

OR

 

o 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
of Incorporation or Organization)
    (I.R.S. Employer
Identification No.)

25 Eastmans Road

Parsippany, New Jersey

  07054
(Address of Principal Executive Offices)   (Zip Code)

 

(973) 386-9696

(Registrant’s Telephone Number, Including Area Code)

 

Not Applicable

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

 

 

 

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 x No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes x No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 o Accelerated filer o Non-accelerated filer o Smaller reporting company x Emerging growth company o

 

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. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

 

Number of shares of Common Stock outstanding as of October 22, 2017: 22,790,667

 

WIRELESS TELECOM GROUP, INC.

Table of Contents

 

PART I – FINANCIAL INFORMATION   3
     
Item 1. FINANCIAL STATEMENTS   3
     
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS   26
     
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK   33
     
Item 4. CONTROLS AND PROCEDURES   33
     
PART II – OTHER INFORMATION   34
     
Item 1. LEGAL PROCEEDINGS   34
     
Item 1A. RISK FACTORS   34
     
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS   34
     
Item 3. DEFAULTS UPON SENIOR SECURITIES   34
     
Item 5. OTHER INFORMATION   34
     
Item 6. EXHIBITS   34
     
SIGNATURES   36
2

WIRELESS TELECOM GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

PART I – FINANCIAL INFORMATION

 

Item 1 – Financial Statements

 

   September 30
2017
   December 31  
2016
 
   (unaudited)      
CURRENT ASSETS          
Cash & cash equivalents  $2,266,532   $9,350,803 
Accounts receivable - net of reserves of $23,026 and $10,740, respectively   8,107,931    5,183,869 
Inventories - net of reserves of $2,067,103 and $1,549,089, respectively   6,485,796    8,452,751 
Prepaid expenses and other current assets   4,789,567    866,036 
TOTAL CURRENT ASSETS   21,649,826    23,853,459 
PROPERTY PLANT AND EQUIPMENT – NET   2,428,245    2,166,566 
OTHER ASSETS          
Goodwill   10,113,158    1,351,392 
Acquired Intangible Assets, net   4,756,386    - 
Deferred income taxes   8,822,687    7,403,600 
Other   794,058    660,118 
TOTAL OTHER ASSETS   24,486,289    9,415,110 
TOTAL ASSETS  $48,564,360   $35,435,135 
           
CURRENT LIABILITIES          
Short term debt   1,423,927    - 
Accounts payable   2,416,202    2,986,797 
Accrued expenses and other current liabilities   3,290,598    673,067 
Deferred Revenue   573,477    - 
TOTAL CURRENT LIABILITIES   7,704,204    3,659,864 
LONG TERM LIABILITIES          
Long term debt   532,000    - 
Other long term liabilities   1,810,990    69,058 
Deferred Tax Liability   789,263    - 
TOTAL LONG TERM LIABILITIES   3,132,253    69,058 
           
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, 33,886,752 and 29,786,224 shares issued, 22,790,667 and 18,751,346 shares outstanding   338,867    297,862 
Additional paid in capital   47,453,286    40,563,002 
Retained earnings   9,722,650    11,668,829 
Treasury stock at cost, - 11,096,085 and  11,034,878 shares, respectively   (20,910,394)   (20,823,480)
Accumulated Other Comprehensive Income   1,123,494    - 
TOTAL SHAREHOLDERS’ EQUITY   37,727,903    31,706,213 
           
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY  $48,564,360   $35,435,135 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

3

WIRELESS TELECOM GROUP, INC.

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME/(LOSS)

(unaudited) 

 

   Three Months Ended
September 30
   Nine Months Ended
September 30
 
   2017   2016   2017   2016 
NET SALES  $12,560,298   $8,344,301   $34,042,230   $22,322,820 
                     
COST OF SALES   6,446,992    4,521,302    20,252,254    12,440,817 
                     
GROSS PROFIT   6,113,306    3,822,999    13,789,976    9,882,003 
                     
Operating Expenses                    
Research and Development   1,051,233    948,654    3,267,955    3,042,916 
Sales and Marketing   1,946,443    1,216,265    5,161,181    3,703,522 
General and Administrative   2,333,795    1,389,996    8,567,102    4,141,520 
Total Operating Expenses   5,331,471    3,554,915    16,996,238    10,887,958 
                     
Other income/(expense)   (1,033)   (27,090)   (4,253)   (78,675)
                     
Interest Expense   (70,607)   (178)   (229,453)   (463)
                     
Income/(loss) before taxes   710,195    240,816    (3,439,968)   (1,085,093)
                     
Tax Provision/(Benefit)   56,799    118,980    (1,493,789)   (412,409)
                     
Net Income/(Loss)   653,396    121,836    (1,946,179)   (672,684)
                     
Other Comprehensive Income/(Loss):                    
Foreign currency translation adjustments   547,160    -    1,123,494    - 
Comprehensive Income/(Loss)  $1,200,556   $121,836   $(822,685)  $(672,684)
                     
Net Income/(Loss) per common share:                    
                     
Basic  $0.03   $0.01   $(0.10)  $(0.04)
Diluted  $0.03   $0.01   $(0.10)  $(0.04)
                     
Weighted average shares outstanding:                    
Basic   20,235,876    18,721,346    19,799,219    18,650,274 
Diluted   22,938,188    19,358,968    19,799,219    18,650,274 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

4

WIRELESS TELECOM GROUP, INC.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(unaudited) 

 

 For the Nine Months
Ended September 30
 
   2017   2016 
CASH FLOWS PROVIDED/(USED) BY OPERATING ACTIVITIES          
Net income (loss)  $(1,946,179)  $(672,684)
Adjustments to reconcile net income/(loss) to net cash provided/(used) by operating activities:          
Depreciation and amortization   1,345,806    363,634 
Amortization of debt issuance fees   48,503    - 
Share-based compensation expense   507,791    432,612 
Deferred rent   18,277    27,454 
Deferred income taxes   (1,419,087)   (434,333)
Provision for doubtful accounts   12,286    (8,788)
Inventory reserves   1,314,528    221,369 
Changes in assets and liabilities, net of acquisition:          
Accounts receivable   (529,198)   (176,019)
Inventories   1,820,249    (1,603,381)
Prepaid expenses and other assets   238,351    (14,162)
Accounts payable   (1,776,291)   1,091,071 
Accrued expenses and other liabilities   814,989    30,818 
Net cash provided/(used) by operating activities   450,025    (742,409)
CASH FLOWS (USED) BY INVESTING ACTIVITIES          
Capital expenditures   (588,180)   (715,128)
Proceeds from asset disposal   7,397    - 
Acquisition of business net of cash acquired   (9,137,534)   - 
Net cash (used by) investing activities   (9,718,317)   (715,128)
CASH FLOWS PROVIDED/(USED) BY FINANCING ACTIVITIES          
Revolver borrowings   25,281,935    - 
Revolver repayments   (24,010,007)   - 
Term loan borrowings   760,000    - 
Term loan repayments   (76,000)   - 
Debt issuance fees   (215,358)   - 
Proceeds from exercise of stock options   424,950    - 
Repayments of equipment lease payable   -    (101,296)
Repurchase of stock   (86,914)   (65,468)
Net cash provided/(used by) financing activities   2,078,606    (166,764)
Effect of exchange rate changes on cash and cash equivalents   105,415    - 
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS   (7,084,271)   (1,624,301)
Cash and cash equivalents, at beginning of period   9,350,803    9,726,007 
CASH AND CASH EQUIVALENTS, AT END OF PERIOD  $2,266,532   $8,101,706 
           
SUPPLEMENTAL INFORMATION:          
Cash paid during the period for interest  $90,084   $- 
Cash paid during the period for income taxes  $58,454   $67,438 
           
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:          
Capital expenditures  $-   $(41,904)
Equipment lease payable  $-   $41,904 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

5

WIRELESS TELECOM GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(unaudited)

 

   Common
Stock Issued
   Common Stock
Amount
   Additional
Paid
In Capital
   Retained
Earnings
   Accumulated
Other
Comprehensive
Loss
   Treasury Stock    Total
Shareholders’
Equity
 
Balances at December 31, 2016   29,786,224   $297,862   $40,563,002   $11,668,829    -   $(20,823,480)  $31,706,213 
                                    
Net Income (loss)   -    -    -    (1,946,179)   -    -    (1,946,179)
                                    
Issuance of shares in connection with stock options exercised   550,000    5,500    419,450    -    -    -    424,950 
                                    
Share-based compensation expense   -    -    507,791    -    -    -    507,791 
                                    
Issuance of shares in connection with CommAgility acquisition   3,487,528    34,875    5,963,673    -    -    -    5,998,548 
                                    
Issuance of restricted stock   150,000    1,500    (1,500)   -    -    -    - 
                                    
Forfeiture of Restricted Stock   (87,000)   (870)   870    -    -    -    - 
                                    
Cumulative translation adjustment   -    -    -    -    1,123,494    -    1,123,494 
                                    
Repurchase of Stock   -    -    -    -    -    (86,914)   (86,914)
                                    
Balances at September 30, 2017   33,886,752   $338,867   $47,453,286   $9,722,650   $1,123,494   $(20,910,394)  $37,727,903 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

6

WIRELESS TELECOM GROUP, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES AND POLICIES

 

Basis of Presentation

 

The condensed consolidated balance sheet as of September 30, 2017, the condensed consolidated statements of operations and comprehensive income/loss for the three and nine months ended September 30, 2017 and 2016, the condensed consolidated statements of cash flows for the nine months ended September 30, 2017 and 2016 and the condensed consolidated statement of shareholder’s equity for the nine months ended September 30, 2017 have been prepared by the Company (as defined below) without audit. The condensed 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 (“Microlab”), Wireless Telecommunications Ltd. and CommAgility Limited (“CommAgility”), which are collectively referred to herein as the “Company”. All intercompany transactions and balances have been eliminated in consolidation.

 

It is suggested that these condensed financial statements be read in conjunction with the financial statements and the notes thereto included in the company’s latest shareholders’ annual report (Form 10-K).

 

Interim Financial Statements

 

In the opinion of management, the accompanying condensed 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 financial statements included in its annual report on Form 10-K for the year ended December 31, 2016. Specific reference is made to that report since certain information and footnote disclosures normally included in financial statements in accordance with accounting principles generally accepted in the United States of America (US GAAP) have been condensed or omitted from this report.

 

The results of operations for the three and nine month periods ended September 30, 2017 are not necessarily indicative of the results to be expected for the full year ending December 31, 2017.

 

Use of Estimates

 

The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities (including inventory valuation, accounts receivable valuation, valuation of deferred tax assets, intangible assets, estimated fair values of stock options and vesting periods of performance-based stock options and restricted stock and estimated fair values of acquired assets and liabilities in business combinations) and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of net revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Concentration Risk

 

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

 

The Company generally has limited concentration of credit risk in accounts receivable due to the large number of entities comprising the Company’s customer base and their dispersion across many different industries and geographies. 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. Credit evaluation is performed independent of the Company’s sales team to ensure segregation of duties.

7

WIRELESS TELECOM GROUP, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

For the three months ended September 30, 2017, one customer accounted for approximately 13% of the Company’s consolidated revenues and for the nine months ended September 30, 2017 one customer accounted for approximately 10% of the Company’s consolidated revenue. For the three and nine months ended September 30, 2016, one customer accounted for approximately 11% and 10%, respectively, of the Company’s consolidated revenues. At September 30, 2017 two customers represented 19% and 17% of the Company’s gross accounts receivable, respectively. At December 31, 2016, one customer represented 16% of the Company’s gross accounts receivable balance.

 

Fair Value of Financial Instruments

 

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

 

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

 

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

 

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

 

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

 

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

 

Contingent Consideration

 

Under the terms of the CommAgility Share Purchase Agreement the Company may be required to pay additional purchase price if certain financial targets are achieved for the years ending December 31, 2017 and December 31, 2018 (“CommAgility Earn-Out”). As of the acquisition date, the Company estimated the fair value of the contingent consideration to be $754,500 (see Note 3) and 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 gross revenues and Adjusted EBITDA, as defined, scenarios for the earn-out periods for which probabilities are assigned to each scenario to arrive at a single estimated outcome (Level 3). The estimated outcome is then discounted based on the individual risk analysis of the liability. Although the Company believes its estimates and assumptions are reasonable, different assumptions, including those regarding the operating results of CommAgility or changes in the future, may result in different estimated amounts.

 

The contingent consideration is included in other long term liabilities in the accompanying condensed consolidated balance sheets. The Company will satisfy this obligation with a cash payment to the sellers of CommAgility upon the achievement of the respective milestone discussed above.

8

WIRELESS TELECOM GROUP, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Revenue Recognition

 

Revenue from product shipments, including shipping and handling fees, is recognized once delivery has occurred, provided that persuasive evidence of an arrangement exists, the price is fixed or determinable, and collectability is reasonably assured. Delivery is considered to have occurred when title and risk of loss have transferred to the customer. Revenues from international distributors are recognized in the same manner. If title does not pass until the product reaches the customer’s delivery site, then revenue recognition is deferred until that time. There are no formal sales incentives offered to any of the Company’s customers. Volume discounts may be offered from time to time to customers purchasing large quantities on a per transaction basis.

 

Standalone sales of software or software-related items are recognized in accordance with the software revenue recognition guidance. For multiple deliverable arrangements that only include software items, the Company generally uses the residual method to allocate the arrangement consideration. Under the residual method, the amount of consideration allocated to the delivered items equals the total arrangement consideration, less the fair value of the undelivered items. Where vendor-specific objective evidence of fair value for the undelivered items cannot be determined, the Company generally defers revenue until all items are delivered and services have been performed, or until such evidence of fair value can be determined for the undelivered items.

 

Software arrangements that require significant customization or modification of software are accounted for under percentage of completion accounting. The Company uses the input method to measure progress for arrangements accounted for under percentage of completion accounting.

 

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 Condensed Consolidated Statements of Shareholders’ Equity. Gains and losses resulting from foreign currency transactions, which are denominated in currencies other than the Company’s functional currency, are included in the Condensed Consolidated Statements of Operations and Comprehensive Income/(Loss).

 

Other Comprehensive Income (Loss)

 

Other comprehensive income (loss) is recorded directly to a separate section of shareholders’ equity in accumulated other comprehensive income and primarily includes unrealized gains and losses excluded from the Consolidated Statements of Operations and Comprehensive Income/(Loss). These unrealized gains and losses consist of changes in foreign currency translation.

 

Intangible and Long-lived Assets

 

Intangible assets include patents, non-competition agreements, customer relationships and trademarks. Intangible assets with finite lives are amortized using the straight-line method over the estimated economic lives of the assets, which range from five to seven 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,

9

WIRELESS TELECOM GROUP, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

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 event occur or circumstances change that indicate an asset may be impaired.

 

Goodwill

 

Goodwill represents the excess of the aggregate purchase price over the fair value of the net assets acquired in a purchase business combination. Goodwill is evaluated for impairment annually by first performing a qualitative assessment to determine whether a quantitative goodwill test is necessary. After assessing the totality of events or circumstances, if we determine it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then we perform additional quantitative tests to determine the magnitude of any impairment.

 

Subsequent Events

 

Management has evaluated subsequent events and determined that there were no subsequent events or transactions requiring recognition or disclosure in the condensed consolidated financial statements through the date the financial statements were issued.

 

NOTE 2 – RECENT ACCOUNTING PRONOUNCEMENTS

 

In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment (“ASU 2017-04”). ASU 2017-04 removes the requirement to perform a hypothetical purchase price allocation to measure goodwill impairment. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. ASU 2017-04 is effective for annual periods and interim periods within those annual periods beginning after December 15, 2019, and early adoption is permitted. The Company early adopted this standard as of January 1, 2017.

 

In March 2016, the FASB issued ASU 2016-09, Compensation-Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting. Under ASU 2016-09, companies will no longer record excess tax benefits and certain tax deficiencies in additional paid in capital (“APIC”). Instead, they will record all excess tax benefits and tax deficiencies as income tax expense or benefit in the income statement and the APIC pools will be eliminated. In addition, ASU 2016-09 eliminates the requirement that excess tax benefits be realized before companies can recognize them. ASU 2016-09 also requires companies to present excess tax benefits as an operating activity on the statement of cash flows rather than as a financing activity. Furthermore, ASU 2016-09 will increase the amount an employer can withhold to cover income taxes on awards and still qualify for the exception to liability classification for shares used to satisfy the employer’s statutory income tax withholding obligation. An employer with a statutory income tax withholding obligation will now be allowed to withhold shares with the fair value up to the amount of taxes owed using the maximum statutory rate in the employee’s applicable jurisdiction(s). ASU 2016- 09 requires a company to classify the cash paid to a tax authority when shares are withheld to satisfy its statutory income tax withholding obligation as a financing activity on the statement of cash flows. Under current U.S. GAAP, it is not specified how these cash flows should be classified. In addition, companies will now have to elect whether to account for forfeitures on share-based payments by (1) recognizing forfeiture awards as they occur or (2) estimating the number of awards expected to be forfeited and adjusting the estimate when it is likely to change, as is currently required. The amendments of this ASU are effective for reporting periods beginning after December 15, 2016, with early adoption permitted but all of the guidance must be adopted in the same period. The adopted standard has not had any impact on the Company’s financial statements.

 

In January 2017, the FASB issued ASU No. 2017-01, Business Combinations: Clarifying the Definition of a Business (“ASU 2017-01”). ASU 2017-01 clarifies the definition of a business for determining whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. ASU 2017-01 is effective for annual periods and interim periods within those annual periods beginning

10

WIRELESS TELECOM GROUP, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

after December 15, 2017, and early adoption is permitted. The adoption of this ASU is not expected to have a material impact on our consolidated financial statements.

 

In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments, to address some questions about the presentation and classification of certain cash receipts and payments in the statement of cash flows. The update addresses eight specific issues, including contingent consideration payments made after a business combination, distribution received from equity method investees and the classification of cash receipts and payments that have aspects of more than one class of cash flows. This standard will be effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. The Company is in the process of evaluating the impact of the adoption of ASU 2016-15 on its consolidated financial statements.

 

In February 2016, the FASB issued ASU 2016-02, Leases, which creates new accounting and reporting guidelines for leasing arrangements. The new guidance requires organizations that lease assets to recognize assets and liabilities on the balance sheet related to the rights and obligations created by those leases, regardless of whether they are classified as finance or operating leases. Consistent with current guidance, the recognition, measurement, and presentation of expenses and cash flows arising from a lease primarily will depend on its classification as a finance or operating lease. The guidance also requires new disclosures to help financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. The new standard is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period, with early application permitted. The new standard is to be applied using a modified retrospective approach. The Company is in the process of evaluating the impact of ASU 2016-02 on its consolidated financial statements.

 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 is a comprehensive new revenue recognition model requiring a company to recognize revenue to depict the transfer of goods or services to a customer at an amount reflecting the consideration it expects to receive in exchange for those goods or services. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which defers the effective date by one year, with early adoption on the original effective date permitted. As a result, ASU 2014-09 will be effective for annual and interim periods beginning after December 15, 2017. During the third quarter the Company began an implementation project regarding adoption of Topic 606. The Company believes that adoption of Topic 606 will not have a material impact on the Company’s results of operations, however, the implementation project is on-going.

 

The Company does not believe there are any other recently issued, but not yet effective accounting pronouncements, that if adopted would have a material effect on the accompanying consolidated financial statements.

 

NOTE 3 – ACQUISITION

 

On February 17, 2017, Wireless Telecommunications, Ltd. (the “Acquisition Subsidiary”), a company incorporated in England and Wales which is a wholly owned subsidiary of Wireless Telecom Group, Inc., completed the acquisition of all of the issued shares in CommAgility Limited, (“CommAgility”) a company incorporated in England and Wales (the “Acquisition”) from CommAgility’s founders. The Acquisition was completed pursuant to the terms of a Share Purchase Agreement, dated February 17, 2017, and entered into by and among the Company, the Acquisition Subsidiary and the founders. The Company paid $11,317,500 in cash on acquisition date and issued 3,487,528 shares of newly issued common stock (“Consideration Shares”) with an acquisition date fair value of $5,998,548. The Company financed the cash portion of the transaction with proceeds from a term loan totaling $760,000, proceeds from an asset based revolver totaling $1,098,000 and cash on hand of $9,459,500. Refer to Note 8 for additional details regarding the financing arrangement entered into in connection with this transaction. In addition to the acquisition date cash purchase price the sellers are to be paid an additional £2,000,000 (approximately $2,500,000 at acquisition date) in the form of deferred purchase price payable beginning in March 2017 through January 2019 and are due an additional purchase price adjustment based on working capital and cash levels delivered to the buyer as of February 17, 2017 (“Completion Cash Adjustment”). Lastly, the sellers may earn up to an

11

WIRELESS TELECOM GROUP, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

additional £10,000,000 (approximately $12,500,000 at the acquisition date) payment if certain financial targets are achieved by CommAgility during calendar years 2017 and 2018.

 

Pursuant to the Share Purchase Agreement, 2,092,516 of the Consideration Shares are subject to forfeiture and return to the Company if (a) 2017 EBITDA, as defined, generated by CommAgility is less than £2,400,000; or (b) 2018 EBITDA, as defined, generated by CommAgility is less than £2,400,000 (in each case as determined by an audit of CommAgility conducted by the accountants of the Acquisition Subsidiary in accordance with the terms of the Share Purchase Agreement). As of acquisition date the Company estimates that the 2017 Adjusted EBITDA target will not be met thus we believe all 2,092,516 Consideration shares will be forfeited. Accordingly, the Company recorded a contingent asset of $3,599,128 which represents the fair value of the consideration shares as of acquisition date. This contingent asset is included in prepaid expenses and other current assets in the Condensed Consolidated Balance Sheet as of September 30, 2017.

 

The acquisition has been accounted for under the acquisition method of accounting in accordance with ASC 805, Business Combinations. Accounting for acquisitions requires us to recognize separately from goodwill the assets acquired and the liabilities assumed at their acquisition date fair values. Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net of the acquisition date fair values of the assets acquired and the liabilities assumed. While we use our best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date as well as contingent consideration, where applicable, our estimates are inherently uncertain and subject to refinement. During the three months ended September 30, 2017 the Company recorded measurement period adjustments related to the completion of the valuation of intangible assets, contingent consideration and contingent asset associated with the equity claw back and deferred taxes. The Company incurred $0 and $1,289,517 of acquisition-related costs during the three and nine months ended September 30, 2017, respectively, which is included as part of general and administrative expense in the accompanying condensed consolidated statements of operations and comprehensive loss. Since the acquisition date of February 17, 2017, CommAgility contributed $2,231,166 and $6,228,157 of net sales to the Company for the three and nine months ended September 30, 2017, respectively.

 

Various valuation techniques were used to estimate the fair value of assets acquired and the liabilities assumed which use significant unobservable inputs, or Level 3 inputs as defined by the fair value hierarchy. Using these valuation approaches requires the Company to make significant estimates and assumptions. The following table summarizes the allocation of the purchase consideration to the fair value of assets acquired and liabilities assumed at the date of acquisition:

12

WIRELESS TELECOM GROUP, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

             
   As Reported
3/31/2017
    Measurement
Period
Adjustments
    Revised
9/30/2017
 
Cash at close  $11,317,500       $11,317,500 
Equity issued at close  5,998,548       5,998,548 
Completion Cash Adjustment  1,382,288       1,382,288 
Deferred Purchase Price  2,515,000       2,515,000 
Contingent Consideration  2,700,353   (1,945,853)  754,500 
             
Total Purchase Price  23,913,689   (1,945,853)  21,967,836 
             
Cash  4,566,510       4,566,510 
Accounts Receivable  2,267,124       2,267,124 
Inventory  1,125,532       1,125,532 
Intangible Assets  9,657,600   (4,540,833)  5,116,768 
Contingent Asset      3,599,128   3,599,128 
Other Assets  167,650       167,650 
Fixed Assets  303,904       303,904 
Accounts Payable  (1,171,846)      (1,171,846)
Accrued Expenses  (417,213)      (417,213)
Deferred Revenue  (638,671)      (638,671)
Deferred Tax Liability  (1,701,586)  867,308   (834,279)
Other Long Term Liabilities  (339,096)      (339,096)
             
Net Assets Acquired  13,819,908       13,745,511 
             
Goodwill  $10,093,781       $8,222,325 
13

WIRELESS TELECOM GROUP, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Goodwill is calculated as the excess of consideration paid over the net assets acquired and represents synergies, organic growth and other benefits that are expected to arise from integrating CommAgility into our operations. None of the goodwill recorded in this transaction is expected to be tax deductible.

 

The following table summarizes the activity related to Contingent Consideration and Deferred Purchase Price for the nine months ended September 30, 2017:

 

   Contingent
Consideration
   Deferred Purchase
Price
 
Balance at Beginning of Period  $-   $- 
Fair Value At Acquisition Date   2,700,353    2,515,000 
Accretion of Interest   68,204      
Payment        (1,071,666)
Measurement Period Adjustment   (1,945,853)     
Foreign Currency Translation   52,571    120,000 
Balance as of September 30, 2017  $875,275   $1,563,334 

 

As of September 30, 2017, $1,116,666 of deferred purchase price is included in accrued expenses and other current liabilities on the condensed consolidated balance sheet. As of September 30, 2017, $875,275 of contingent consideration and $446,668 of deferred purchase price is included in other long term liabilities on the condensed consolidated balance sheet.

 

Pro Forma Information (Unaudited)

 

The following unaudited pro forma information presents the Company’s operations as if the CommAgility acquisition and related financing activities had occurred on January 1, 2016. The pro forma information includes the following adjustments (i) amortization of acquired definite-lived intangible assets; (ii) interest expense incurred in connection with the New Credit Facility (described in further detail in Note 8) used to finance the acquisition of CommAgility; and (iii) inclusion of acquisition-related expenses in the earliest period presented. The pro forma combined statements of operations are not necessarily indicative of the results of operations as they would have been had the transaction been effected on the assumed date and are not intended to be a projection of future results.

 

Pro-forma results for the three months ended September 30, 2016 are presented below:

 

(Unaudited)  2016 
Net Revenues  $11,613,576 
Net (loss)  $(125,515)
Basic net (loss) per share  $(0.01)
Diluted net (loss) per share  $(0.01)

 

Pro-forma results for the nine months ended September 30, 2016 and 2017 are presented below:

 

(Unaudited)  2017   2016 
Net Revenues  $35,416,074   $31,066,037 
Net (loss)  $(1,441,141)  $(1,602,277)
Basic net (loss) per share  $(0.07)  $(0.08)
Diluted net (loss) per share  $(0.07)  $(0.08)
14

WIRELESS TELECOM GROUP, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

NOTE 4 – INCOME TAXES

 

The Company records deferred taxes in accordance with Accounting Standards Codification (“ASC”) 740, “Accounting for Income Taxes.” ASC 740 requires recognition of deferred tax assets and liabilities for temporary differences between tax basis of assets and liabilities and the amounts at which they are carried in the financial statements, based upon the enacted rates in effect for the year in which the differences are expected to reverse. The Company establishes a valuation allowance when necessary to reduce deferred tax assets to the amount expected to be realized. The Company periodically assesses the value of its deferred tax assets and determines the necessity for a valuation allowance.

 

Realization of the Company’s deferred tax assets is dependent upon the Company generating sufficient taxable income in the appropriate tax jurisdictions in future years to obtain benefit from the reversal of net deductible temporary differences and from utilization of net operating losses. The amount of deferred tax assets considered realizable is subject to adjustment in future periods if estimates of future taxable income are changed.

 

The effective rate of income tax benefit of 44% for the nine months ended September 30, 2017 was higher than the statutory rates in the United States and United Kingdom primarily due to research and development deductions, state tax benefits related to net operating losses, non-qualified stock option deductions offset by nondeductible expenses and a lower rate in the United Kingdom.

 

NOTE 5 - INCOME (LOSS) PER COMMON SHARE

 

Basic earnings (loss) per share is calculated by dividing 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 are calculated by using the weighted average number of shares of common stock outstanding and, when dilutive, potential shares from stock options, contingent shares and restricted shares, using the treasury stock method.

 

   For the Three Months
Ended September 30,
   For the Nine Months
Ended September 30,
 
   2017   2016   2017   2016 
Weighted average common shares outstanding   20,235,876    18,721,346    19,799,219    18,650,274 
                     
Potentially dilutive shares   2,702,312    637,622    -    - 
Weighted average common shares outstanding, assuming dilution   22,938,188    19,358,968    19,799,219    18,650,274 

 

Common stock options are included in the diluted earnings (loss) per share calculation when the various option exercise prices are less than their relative average market price during the periods presented in this quarterly report. The weighted average number of shares not included in diluted earnings (loss) per share, because the effects are anti-dilutive, was 2,810,143 and 2,781,844 for the three-months ended September 30, 2017 and 2016, respectively. For the nine months ended September 30, 2017 and 2016, the weighted average number of shares not included in diluted earnings (loss) per share was 5,755,490 and 3,980,229, respectively.

15

WIRELESS TELECOM GROUP, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

NOTE 6 – INVENTORIES

 

Inventory carrying value is net of inventory reserves of $2,067,103 and $1,549,089 at September 30, 2017 and December 31, 2016, respectively.

 

  September 30,
2017
   December 31,
2016
 
Inventories consist of:        
Raw materials  $3,214,276    $3,558,430 
Work-in-process   641,449    531,210 
Finished goods   2,630,071    4,363,111 
   $6,485,796   $8,452,751 

 

During the nine month period ended September 30, 2017 the Company recorded inventory adjustments totaling $1,930,000 comprised of an increase to the Company’s excess and obsolescence reserve of $1,121,000 and the write off of gross inventory of $809,000. The charge was effected as a result of a review of inventory balances and net realizable value of the inventory following the launch of the Company’s lean manufacturing initiative and the adoption of a strategic product plan focused on product lifecycle acceleration.

 

NOTE 7 – GOODWILL AND INTANGIBLE ASSETS

 

The Company’s goodwill balance of $10,113,158 at September 30, 2017 relates to two of the Company’s reporting units, Microlab ($1,351,392) and Embedded Solutions ($8,761,766). Management’s qualitative assessment performed in the fourth quarter of 2016 did not indicate any impairment of Microlab’s goodwill as its fair value was estimated to be in excess of its carrying value. Furthermore, no events have occurred since then that would change this assessment. The Embedded Solutions reporting unit was acquired on February 17, 2017 (see Note 3). No events have occurred since the acquisition date that would indicate any impairment of Embedded Solutions goodwill.

 

Goodwill consists of the following:

 

   
September 30,
2017
 
 
Beginning Balance   $1,351,392  
CommAgility Acquisition   10,093,781  
Measurement Period Adj   (1,871,456)  
Foreign Currency Translation   539,441  
Ending Balance   $10,113,158  
16

WIRELESS TELECOM GROUP, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Intangible assets consist of the following:

 

   Gross Carrying
Amount
   Accumulated
Amortization
   Foreign
Exchange
Translation
   Net Carrying
Amount
 
                 
Customer Relationships   $2,766,500    ($346,437)   $159,437    $2,579,500 
                     
Patents   614,918    (76,593)   35,028    573,353 
                     
Non Compete Agreements   1,106,600    (236,133)   63,069    933,535 
                     
Tradename   628,750    -    41,250    670,000 
Total   $5,116,768    (659,163)   $298,784    $4,756,388 

 

Amortization of acquired intangible assets was $47,737 and $659,163 for the three and nine months ended September 30, 2017. As a result of finalizing the fair value of intangible assets the Company recorded measurement period adjustments of $4,540,833 to reduce gross intangible assets and increase goodwill during the three months ended September 30, 2017. Additionally, the Company recorded an indefinite lived intangible asset representing the fair value of the CommAgility tradename. As a result of the measurement period adjustments the Company recorded a reduction of intangible amortization expense of $228,459 during the three months ended September 30, 2017 which represents a year to date true up of amortization expense based on the final intangible asset fair value. Amortization of acquired intangible assets is included as part of general and administrative expenses in the accompanying condensed consolidated statements of operations and comprehensive income/(loss).

 

The estimated future amortization expense related to intangible assets is as follows as of September 30, 2017:

 

Remainder of 2017    $278,430 
       
2018    1,113,719 
2019    1,113,719 
2020    769,786 
2021    720,652 
Thereafter    90,082 
       
Total    $4,086,388 

NOTE 8 – DEBT

 

Debt consists of the following:

 

    September 30, 2017 
Revolver at LIBOR Plus Margin   $1,271,927 
Term Loan at LIBOR Plus Margin   684,000 
Total Debt   1,955,927 
Debt Maturing within one year   (1,423,927)
Non-current portion of long term debt   $532,000 
17

WIRELESS TELECOM GROUP, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

In connection with the acquisition of CommAgility, the Company entered into a Credit Agreement with Bank of America, N.A. (the “Lender”) on February 16, 2017 (the “New 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 New Credit Facility) of up to a maximum availability of $9,000,000 (“Revolver Commitment Amount”). The borrowing base is calculated as 85% of Eligible accounts receivable and inventory, as defined, subject to certain caps and limits. The borrowing base is calculated on a monthly basis. The proceeds of the term loan and revolver were used to finance the acquisition of CommAgility.

 

In connection with the issuance of the New Credit Facility, the Company paid lender and legal fees of $215,358 which were primarily related to the Revolver and are capitalized and presented as other current and non-current assets in the condensed consolidated balance sheets. These costs are recognized as additional interest expense over the term of the related debt instrument using the straight line method.

 

The Company must repay the Term Loan in installments of $38,000 per quarter due on the first day of each fiscal quarter beginning April 1, 2017 and continuing until the term loan maturity date, on which the remaining balance is due in a final installment. The future principal payments under the term loan are $38,000 for the remainder of 2017, $152,000 in 2018 and $494,000 in 2019. The Term Loan and Revolver are both scheduled to mature on November 16, 2019.

 

The Term and Revolving Loans bear interest at the LIBOR rate plus a margin. The margin on the outstanding balance of the Company’s Term Loans and Revolving Loans is 3.50% and 3.00% per annum, respectively, at June 30, 2017 and will continue at these rates until September 30, 2017. Thereafter, the margins shall be subject to increase or decrease by Lender on the first day of each of the Borrowers’ fiscal quarters based upon the Fixed Charge Coverage Ratio as of the most recently ended fiscal quarter falling into three levels. If the Company’s Fixed Coverage Leverage Ratio (as defined in the New Credit Facility) is greater than or equal to ratio 1.25 to 1.00, a margin of 3.25% and 2.75%, respectively, is added to LIBOR rate with a step up to 3.50% and 3.00%, respectively, if the ratio is greater than or equal 1.00 to 1.00 but less than 1.25 to 1.00 and another step up to 3.75% and 3.25%, respectively, if the ratio is less than 1.00 to 1.00. The Company is also required to pay a commitment fee on the unused commitments under the Revolver at a rate equal to 0.50% per annum and early termination fee of (a) 2% of the Revolver Commitment Amount and Term Loan if termination occurs before the first anniversary of the New Credit Facility or (b) 1% of the Revolver Commitment Amount and Term Loan if termination occurs after the first anniversary of the New Credit Facility but before the second anniversary of the New Credit Facility.

 

The New Credit Facility is secured by liens on substantially all of the Company’s and its domestic subsidiaries’ assets including a pledge of 66 2/3% of the equity interests in the Company’s Foreign Subsidiaries (as defined in the New Credit Facility). The New Credit Facility contains customary affirmative and negative covenants for a transaction of this type, including, among others, the provision of annual, quarterly and monthly financial statements and compliance certificates, maintenance of property, insurance, compliance with laws and environmental matters, restrictions on incurrence of indebtedness, granting of liens, making investments and acquisitions, paying dividends, entering into affiliate transactions and asset sales. Events of default under the New Credit Facility include but are not limited to: failure to pay obligations when due, breach or failure of any covenant, insolvency or bankruptcy, materially misleading representations or warranties, occurrence of a Change in Control (as defined) or occurrence of conditions that have a Material Adverse Effect (as defined).

 

On August 3, 2017 the Company entered into Amendment No. 1 to the New Credit Facility, effective June 30, 2017, which amended the definition of EBITDA to exclude the non-cash inventory adjustment of $1,930,000 recorded during the three months ended June 30, 2017 and the reduce the pledge of equity interests in the Company’s Foreign Subsidiaries from 66 2/3% to 66 1/3%.

 

As of September 30, 2017, and the date hereof, the Company is in compliance with the covenants of the New Credit Facility.

18

WIRELESS TELECOM GROUP, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

NOTE 9 - ACCOUNTING FOR SHARE BASED COMPENSATION

 

The Company follows the provisions of ASC 718, “Share-Based Payment.” The Company’s results for the three and nine months ended September 30, 2017 include share-based compensation expense totaling $223,919 and $507,791, respectively. Results for the three and nine month period ended September 30, 2016 include share-based compensation expense totaling $235,374 and $432,612, respectively. Such amounts have been included in the Condensed Consolidated Statements of Operations and Comprehensive Income/(Loss) within operating expenses.

 

During the nine months ended September 30, 2017 the Company reversed $324,922 and $92,017 in stock compensation expense for unvested stock options and restricted shares, respectively, that were forfeited as a result of employees exiting the Company. The total amounts forfeited were 87,000 restricted shares and 655,000 stock options. The Company had assumed a zero forfeiture rate in prior periods.

 

Incentive Compensation Plan:

 

In 2012, the Company’s Board of Directors and shareholders approved the 2012 Incentive Compensation Plan (the “Initial 2012 Plan”), which provides for the grant of restricted stock awards, non-qualified stock options and incentive stock options in compliance with the Internal Revenue Code of 1986, as amended, to employees, officers, directors, consultants and advisors of the Company who are expected to contribute to the Company’s future growth and success. When originally approved, the Initial 2012 Plan provided for the grant of awards relating to 2,000,000 shares of common stock, plus those shares still available under the Company’s prior incentive compensation plan. In June 2014, the Company’s shareholders approved the Amended and Restated 2012 Incentive Compensation Plan (the “2012 Plan”) allowing for an additional 1,658,045 shares of the Company’s common stock to be available for future grants under the 2012 Plan. As of September 30, 2017, there were 26,000 shares available for issuance under the 2012 Plan, including those shares available under the Company’s prior incentive compensation plan as of such date.

 

All service-based options granted have ten-year terms from the date of grant and typically vest annually and become fully exercisable after a maximum of five years. However, vesting conditions are determined on a grant by grant basis. Performance-based options granted have ten-year terms and vest and become fully exercisable when determinable performance targets are achieved. Performance targets are agreed to, and approved by, the Company’s compensation committee of the board of directors.

 

Under the 2012 Plan, options may be granted to purchase shares of the Company’s common stock exercisable at prices equal to or above the fair market value on the date of the grant.

19

WIRELESS TELECOM GROUP, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

The following summarizes the components of share-based compensation expense by equity type for the three and nine months ended September 30:

 

   Three Months Ended 
   September 30 
   2017   2016 
Service - based Restricted Common Stock   $22,673    $40,598 
Performance-based Restricted Common Stock   1,846    5,353 
Performance-based Stock Options   21,500    28,650 
Service -based Stock Options   177,900    160,773 
    223,919    235,374 
     
   Nine Months Ended
September 30
 
    2017    2016 
Service - based Restricted Common Stock   $167,106    $151,598 
Performance-based Restricted Common Stock   (34,211)   16,059 
Performance-based Stock Options   (135,997)   85,950 
Service -based Stock Options   510,893    179,005 
    507,791    432,612 

 

As of September 30, 2017, $926,322 of unrecognized compensation costs related to unvested stock options is expected to be recognized over a remaining weighted average period of 3.06 years and $186,361 of unrecognized compensation costs related to unvested restricted shares is expected to be recognized over a remaining weighted average period of 1.2 years.

 

Restricted Common Stock Awards:

 

A summary of the status of the Company’s non-vested restricted common stock, as granted under the Company’s approved equity compensation plans, as of September 30, 2017, and changes during the nine months ended September 30, 2017, are presented below:

 

Non-vested Restricted Shares  Number of Shares   Weighted
Average Grant
Date Fair Value
 
           
Non-vested as of January 1, 2017   244,291    $1.52 
Granted   150,000    $1.65 
Vested and Issued   (121,563)   $1.40 
Forfeited   (87,000)   $1.62 
Non-vested as of September 30, 2017   185,728    $1.66 
20

WIRELESS TELECOM GROUP, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Performance-Based Stock Option Awards:

 

A summary of performance-based stock option activity, and related information for the nine months ended September 30, 2017 follows:

 

   Options   Weighted
Average
Exercise Price
 
Outstanding as of January 1, 2017   2,165,000    $1.32 
Granted   -    - 
Exercised   (550,000)   $0.77 
Forfeited   (540,000)   $1.77 
Expired   -    - 
Outstanding as of September 30, 2017   1,075,000    $1.38 
           
Exercisable at September 30, 2017   540,000    $1.14 

 

The aggregate intrinsic value of performance-based stock options outstanding (regardless of whether or not such options are exercisable) as of September 30, 2017 was $347,800 and the weighted average remaining contractual life was 4.4 years. The aggregate intrinsic value of performance-based stock options exercisable as of September 30, 2017 was $285,800 and the weighted average remaining contractual life was 1.7 years. The intrinsic value of options exercised during the nine months ended September 30, 2017 was $359,100.

 

Under the terms of the performance-based stock option agreements, the awards will fully vest and become exercisable on the date on which the Company’s Board of Directors shall have determined that specific financial performance milestones have been met, provided the employee remains in the employ of the Company at such time; provided, however, upon a Change in Control (as defined in the stock option agreements and the 2012 Plan), the stock options shall automatically vest as permitted by the 2012 Plan. As of September 30, 2017, the Company has determined that the performance conditions on 535,000 options granted 2013 and later are probable of being achieved by the year ending 2020. The Company’s performance-based stock options granted prior to 2013 (consisting of 540,000 options) are fully amortized.

 

Service-Based Stock Option Awards:

 

A summary of service-based stock option activity and related information for the nine months ended September 30, 2017 follows:

 

   Options   Weighted Average Exercise Price 
Outstanding as of January 1, 2017   1,198,000    $1.51 
Granted   845,000    $1.68 
Exercised   -    - 
Forfeited   (115,000)  $1.45 
Expired   (83,000)   $3.00 
Outstanding as of September 30, 2017   1,845,000    $1.53 
           
Exercisable at September 30, 2017   508,333    $1.40 
21

WIRELESS TELECOM GROUP, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

The aggregate intrinsic value of service-based stock options (regardless of whether or not such options are exercisable) as of September 30, 2017 was $297,750 and the weighted average remaining contractual life was 9.1 years. The aggregate intrinsic value of service-based stock options exercisable as of September 30, 2017 was $137,608 and the weighted average remaining contractual life was 8.8 years.

 

The following table presents the assumptions used to estimate the fair value of stock option awards granted during the nine months ended September 30, 2017:

 

   Option Term
(in years)
   Exercise
Price
   Risk Free
Interest Rate
   Expected
Volatility
   Fair Value at
Grant Date
   Expected
Dividend
Yield
   Expected
Forfeiture
Rate
 
1/2/17 Grant   4    $1.91    1.94%   77.78%   $1.11    0    0 
1/12/17 Grant   4    1.92    1.87%   77.88%   1.11    0    0 
2/17/17 Grant   4    1.72    1.92%   72.01%   0.94    0    0 
                                    
5/22/17 Grant   4    1.38    1.80%   68.93%   0.73    0    0 
6/5/17 Grant   1    1.65    1.74%   69.02%   0.46    0    0 
6/5/17 Grant   4    1.65    1.74%   69.02%   0.87    0    0 
6/15/17 Grant   4    1.60    1.76%   69.09%   0.84    0    0 

 

NOTE 10 – SEGMENT INFORMATION

 

The operating businesses of the Company are segregated into three reportable segments: (i) network solutions, (ii) test and measurement and (iii) embedded solutions. The network solutions segment is comprised primarily of the operations of Wireless Telecom Group Inc.’s subsidiary, Microlab. The test and measurement segment is comprised primarily of the Company’s operations of the Noisecom product line and the operations of its subsidiary, Boonton. The embedded solutions segment is comprised of the operations of CommAgility Limited which was acquired on February 17, 2017.

 

The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies. The Company allocates resources and evaluates the performance of segments based on income or loss from operations, excluding interest, corporate expenses and other income (expenses).

 

Financial information by reportable segment for the three and nine months ended September 30, 2017 and 2016 is set forth below:

22

WIRELESS TELECOM GROUP, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

   Three Months Ended September 30,  Nine Months Ended September 30,
   2017  2016  2017  2016
Net sales by segment:                
Network solutions  $6,427,646   $5,507,065   $17,560,210   $15,196,799 
Test and measurement  3,901,486   2,837,236   10,253,863   7,126,021 
Embedded solutions  2,231,166   -   6,228,157   - 
Total consolidated net sales of reportable segments  12,560,298   8,344,301   34,042,230   22,322,820 
                 
Segment income (loss):                
Network solutions  1,424,496   1,081,854   2,002,818   2,466,115 
Test and measurement  769,603   179,879   253,471   (499,220)
Embedded solutions  41,206   -   (112,939)  - 
Income (loss) from reportable segments  2,235,305   1,261,733   2,143,350   1,966,895 
                 
                 
Other unallocated amounts:                
Corporate expenses  (1,453,470)  (993,650)  (5,349,614)  (2,972,851)
Other (expenses) income - net  (71,640)  (27,267)  (233,705)  (79,137)
Consolidated income (loss) before Income tax provision (benefit)  710,195   240,816   (3,439,968)  (1,085,093)
                 
Depreciation and amortization by segment:                
Network solutions  106,785   68,002   311,777   181,706 
Test and measurement  96,696   62,936   285,329   181,928 
Embedded solutions  82,972   -   748,700   - 
Total depreciation and amortization for reportable segments  286,453   130,938   1,345,806   363,634 
                 
Capital expenditures by segment:                
Network solutions  107,162   132,022   249,701   415,401 
Test and measurement  94,665   81,083   201,495   299,727 
Embedded solutions  68,278   -   136,984   - 
Total consolidated capital expenditures by reportable segment  270,104   213,105   588,180   715,128 
                 
   September 30,
2017
   December 31,
2016
         
Total assets by segment:                
Network solutions  10,055,232   10,594,770         
Test and measurement  6,441,510   7,851,479         
Embedded solutions  20,588,726   -         
Total assets for reportable segments  37,085,468   18,446,249         
                 
Corporate assets, principally cash and cash equivalents and deferred income taxes  11,478,892   16,988,886         
Total consolidated assets  48,564,360   35,435,135         
23

WIRELESS TELECOM GROUP, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Consolidated net sales by region were as follows:

 

   Three Months Ended  Nine Months Ended
   September 30  September 30
   2017  2016  2017  2016
Sales by region                
Americas  $10,083,348   $6,394,496   $25,343,053   $17,262,164 
Europe, Middle East, Africa(EMEA)  2,051,218   1,600,694   7,253,334   4,042,081 
Asia Pacific (APAC)  425,732   349,111   1,445,843   1,018,575 
Total sales  $12,560,298   $8,344,301   $34,042,230   $22,322,820 

 

Net sales 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 three-months ended September 30, 2017 and 2016, revenues in the United States for all reportable segments amounted to $9,685,577 and $6,210,423, respectively. For the nine months ended September 30, 2017 and 2016, revenues in the United States for all reportable segments amounted to $24,115,968 and $16,593,877, respectively.

 

Shipments to the EMEA region for all reportable segments were largely concentrated in the UK, Germany and Israel. For the three-months ended September 30, 2017 shipments to the UK and Germany amounted to $1,294,150 and $187,373, respectively. For the three-months ended September 30, 2016 shipments were largely concentrated in Israel and Germany amounting to $349,418 and $100,653, respectively. For the nine months ended September 30, 2017 shipments to the UK, Germany and Israel amounted to $4,078,506, $731,165 and $374,298, respectively. For the nine months ended September 30, 2016, shipments to Israel and Germany amounted to $722,595 and $573,058, respectively.

 

The largest concentration of shipments in the APAC region is to China. For the three month period ending September 30, 2017 and 2016, shipments to China amounted to $188,426 and $231,485, respectively. For the nine month period ending September 30, 2017 and 2016 shipments to China amounted to $797,273 and $652,654, respectively.

 

NOTE 11 – COMMITMENTS AND CONTINGENCIES

 

Warranties:

 

The Company typically provides one to two year warranties on all of its products, covering both parts and labor. The Company, at its option, repairs or replaces products that are defective during the warranty period if the proper preventive maintenance procedures have been followed by its customers. Historically, the Company’s warranty expense has been minimal.

 

Leases:

 

In May 2015, the Company and its landlord entered into an amendment to the existing lease agreement to provide for the Company to remain at its principal corporate headquarters in Hanover Township, Parsippany, New Jersey through March 31, 2023. Monthly lease payments range from approximately $33,000 in year one to approximately $41,000 in year eight. Additionally, the Company had available an allowance of approximately $300,000 towards alterations and improvements to the premises, which expired on January 31, 2017. The Company used substantially all of the improvement allowance prior to its expiration. The lease can be renewed at the Company’s option for one five-year period at fair market value to be determined at term expiration.

24

WIRELESS TELECOM GROUP, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

The following is a summary of the Company’s contractual obligations as of September 30, 2017:

 

   Payments by Period
     Remainder     
   Total  2017  2018-2019  2020-2021  Thereafter
Facility Leases  $2,674,362   $121,879   $1,007,135   $934,184   $611,164 
Purchase Obligations  4,866,041   4,866,041   -   -   - 
Operating and Equipment Leases  238,648   13,508   108,067   108,067   9,006 
   $7,779,051   $5,001,428   $1,115,202   $1,042,251   $620,170 

 

Risks and Uncertainties:

 

Proprietary information and know-how are important to the Company’s commercial success. There can be no assurance that others will not either develop independently the same or similar information or obtain and use proprietary information of the Company. Certain key employees have signed confidentiality and non-compete agreements regarding the Company’s proprietary information.

 

The Company believes that its products do not infringe the proprietary rights of third parties. There can be no assurance, however, that third parties will not assert infringement claims in the future.

 

The Company’s deferred tax asset is recorded at tax rates expected to be in existence when those assets are utilized. Should the tax rates change materially in the future the amount of deferred tax asset could be materially impacted.

25

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion of our financial condition and results of operations should be read in conjunction with our interim condensed consolidated financial statements and the notes to those statements included in Part I, Item I of this Quarterly Report on Form 10-Q and in conjunction with the audited consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2016.

 

INTRODUCTION

 

The Company develops, manufactures and markets a wide variety of radio frequency and microwave noise sources, electronic testing and measuring instruments including power meters, voltmeters and modulation meters and passive components for wireless radio frequency conditioning. Additionally, the Company is a supplier of signal processing technology for network validation systems, supporting LTE/4G and emerging 5G networks. The majority of the Company’s products are primarily used by its customers in relation to commercial infrastructure development in support of the expansion and upgrade to distributed antenna systems, deployment of small cell technology and private LTE networks. In addition, the Company’s products are used to test the performance and capability of cellular/PCS and satellite communication systems and to measure the power of radiofrequency and microwave systems. Other applications include radio, radar, wireless local area network and digital television.

 

The company has accomplished its highest quarter of revenue in three years for the combined Test and measurement and Network solutions segments, reflecting successful execution in both segments. The addition of the strong performing Embedded solutions segment helped drive consolidated revenues 50.5% higher than the third quarter of 2016. Management is pleased with the revenue performance and profitability of the Embedded solutions segment since the acquisition in the first quarter of 2017 and expects it to continue to contribute to the company’s growth.

 

Highlights from the Third Quarter:

 

·Net revenues of $12,560,298 and $34,042,230 for the three and nine months ended September 30, 2017, a year over year increase of 50.5% and 52.5%, respectively, reflecting the inclusion of the new Embedded solutions segment.

 

·Income before taxes of $710,195 for the three months ended September 30, 2017 representing an increase of $469,379 over the prior year period.

 

·New customer orders of $15,430,000 for the three months ended September 30, 2017 representing a year over year increase of $4,284,000 or 38%

 

·September 30, 2017 order backlog of $9,950,000 representing a year over year increase of $3,821,000 or 62%, reflecting the inclusion of the Embedded solutions segment.

 

RESULTS OF OPERATIONS

 

Three Months Ended September 30, 2017 Compared with Three Months Ended September 30, 2016

 

Net Revenues

 

   Three months ended September 30
   Revenue  % of Rev  Change
   2017  2016  2017  2016  Amount  Pct.
Network solutions  $6,427,646   $5,507,065   51.2%  66.0%  $920,581   16.7%
Test and measurement  3,901,486   2,837,236   31.0%  34.0%  1,064,250   37.5%
Embedded solutions  2,231,166   -   17.8%  0.0%  2,231,166   - 
Total net revenues  $12,560,298   $8,344,301   100.0%  100.0%  $4,215,997   50.5%

 

Net consolidated revenues for the three months ended September 30, 2017 were $12,560,298 as compared to $8,344,301 for the three months ended September 30, 2016, an increase of $4,215,997 or 50.5%. The primary driver for the year over year increase is the inclusion of the Embedded solutions segment which was acquired on February 17, 2017 and contributed $2,231,166 in revenue for the period.

26

Net revenues from the Company’s Network solutions products for the three months ended September 30, 2017 were up 16.7% from the prior year. Net revenues from Network solutions products accounted for 51.2% and 66.0% of net consolidated revenues for the three months ended September 30, 2017 and 2016, respectively. The increase in revenues in this segment was due to increased demand for the Company’s passive radio frequency components and subassemblies, largely as a result of increased capital spending by domestic wireless carriers and tower operators in capacity densification projects and small cell deployments.

 

Net revenues from the Company’s Test and measurement products for the three months ended September 30, 2017 were up 37.5% over the prior year period. Net revenues from Test and measurement products accounted for 31.1% and 34.0% of net consolidated revenues for the three months ended September 30, 2017 and 2016, respectively. The increase in revenues was primarily due to an increase in military and government spending as compared to the corresponding period in the prior year.

 

Gross Profit

 

   Three months ended September 30
   Gross Profit  Gross Margin  Change
   2017  2016  2017  2016  Amount  Pct.
Network solutions  $2,981,120   $2,512,910   46.4%  45.6%  468,210   18.6%
Test and measurement  2,165,830   1,310,089   55.5%  46.2%  855,741   65.3%
Embedded solutions  966,356   -   43.3%  0.0%  966,356   - 
Total gross profit  $6,113,306   $3,822,999   48.7%  45.8%  2,290,307   59.9%

 

Consolidated gross profit for the three months ended September 30, 2017 was $6,113,306 as compared to $3,822,999 in the corresponding period in the prior year. The increase was primarily due to the contribution of the Embedded solutions segment in the current quarter and improved profitability in the Test and measurement segment due to higher sales of products which have a high gross profit margin. Also contributing to the increase was higher absorption of our fixed labor and manufacturing overhead costs as a result of increased volumes in the Network solutions and Test and measurement segments.

 

Operating Expenses

 

Consolidated operating expenses for the three months ended September 30, 2017 were $5,331,471 or 42.4% of consolidated net revenues as compared to $3,554,915 or 42.6% of consolidated net revenues for the three months ended September 30, 2016. For the three months ended September 30, 2017 as compared to the prior year, consolidated operating expenses increased by $1,776,556 or 50.0%. Consolidated operating expenses were higher in the three months ended September 30, 2017 due to the inclusion of $925,150 of expenses associated with the Embedded solutions segment which was acquired on February 17, 2017 and included $43,737 of amortization expense related to purchased intangibles. Additionally, operating expenses increased from the same period in the prior year due to higher commission expense of $373,691, increased employee compensation and benefits of $165,500 associated with higher headcount and higher corporate expenses primarily due to integration related expenses of $158,447.

 

Interest Expense

 

Interest expense increased $70,429 related to our new credit facility and amortization of capitalized debt issuance costs.

 

Other Income/(Expense)

 

Other expense decreased $26,057 due to reduction in environmental remediation costs from the prior year.

27

Taxes

 

For the three months ended September 30, 2017 and 2016, the Company recorded tax expense of $56,799 and $118,980, respectively, due primarily to income generated from the Company’s operations during those periods and was predominately comprised of non-cash deferred tax expense.

 

Net Income

 

For the three months ended September 30, 2017, the Company realized net income of $653,396 or $.03 per share on a basic and diluted basis, as compared to a net income of $121,836 or $.01 per share on a basic and diluted basis for the three months ended September 30, 2016, an increase of $531,560 or $.02 per basic and diluted share. The increase was due to the factors discussed above.

 

Nine Months Ended September 30, 2017 Compared with Nine Months Ended September 30, 2016

 

Net Revenues

 

   Nine months ended September 30
   Revenue  % of Rev  Change
   2017  2016  2017  2016  Amount  Pct.
Network solutions  $17,560,210   $15,196,800   51.6%  68.1%  $2,363,410   15.6%
Test and measurement  10,253,863   7,126,020   30.1%  31.9%  3,127,843   43.9%
Embedded solutions  6,228,157   -   18.3%  0.0%  6,228,157   - 
Total net revenues  $34,042,230   $22,322,820   100.0%  100.0%  $11,719,410   52.5%

 

Net consolidated revenues for the nine months ended September 30, 2017 were $34,042,230 as compared to $22,322,820 for the nine months ended September 30, 2016, an increase of $11,719,410 or 52.5%. The primary driver for the year over year increase is the inclusion of the Embedded solutions segment which was acquired on February 17, 2017 and contributed $6,228,157 in revenue for the period.

 

Net revenues from the Company’s Network solutions products were up significantly over the prior year period. Net revenues from Network solutions products accounted for 51.6% and 68.1% of net consolidated revenues for the nine months ended September 30, 2017 and 2016, respectively. The increase in revenues was primarily due to increased demand for the Company’s passive radio frequency components and subassemblies, largely as a result of increased capital spending by domestic wireless carriers and tower operators in capacity densification projects and small cell deployments.

 

Net revenues from the Company’s Test and measurement products were up significantly over the prior year period. Net revenues from Test and measurement products accounted for 30.1% and 31.9% of net consolidated revenues for the nine months ended September 30, 2017 and 2016, respectively. The increase in revenues was primarily due to an increase in military and government spending as compared to the corresponding period in the prior year.

28

Gross Profit

 

   Nine months ended September 30
   Gross Profit  Gross Margin  Change
   2017  2016  2017  2016  Amount  Pct.
Network solutions  $6,623,630   $6,799,036   37.7%  44.7%  (175,406)  -2.6%
Test and measurement  4,332,165   3,082,967   42.2%  43.3%  1,249,198   40.5%
Embedded solutions  2,834,181   -   45.5%  0.0%  2,834,181   - 
Total gross profit  $13,789,976   $9,882,003   40.5%  44.3%  3,907,973   39.5%

 

The Company’s gross profit on consolidated net revenues for the nine months ended September 30, 2017 was negatively impacted by a non cash inventory adjustment of $1,930,000 recorded in the second quarter of 2017. The adjustment was effected as a result of a review of inventory balances and net realizable value of the inventory following the launch of the Company’s lean manufacturing initiative and the adoption of product lifecycle acceleration. The lean manufacturing program focuses on inventory reductions, the minimization of product redesign for alternate use, and the acceleration of the evaluation process of slow moving inventory for product redesign and repurpose. This, combined with the need to focus manufacturing, operations and engineering efforts on the increasing current order flow, dictated the significant write down at the end of the second quarter. The inventory adjustments negatively impacted the Network solutions and Test and measurement segments gross profit by $1,206,266 and $723,734, respectively, for the nine months ended September 30, 2017. The impact of the inventory adjustment was offset by the gross profit of the Embedded Solutions segment which contributed $2,834,181 to the overall gross profit increase from the same period last year as well as improved profitability in the Test and measurement segment due to higher sales of products which have a high gross profit margin. Also offsetting the inventory impairment charge in the nine months ended September 30, 2017 was higher absorption of fixed labor and manufacturing overhead associated with higher volumes as compared to the prior period for the Network solutions and Test and measurement segments.

 

Operating Expenses

 

Consolidated operating expenses for the nine months ended September 30, 2017 were $16,996,238 or 49.9% of consolidated net revenues as compared to $10,887,958 or 48.8% of consolidated net revenues for the nine months ended September 30, 2016. For the nine months ended September 30, 2017 as compared to the prior year, consolidated operating expenses increased by $6,108,280 or 56.1%. Consolidated operating expenses were higher in the nine months ended September 30, 2017 due to the inclusion of $2,947,120 of expenses associated with the Embedded solutions segment which was acquired on February 17, 2017 and included $659,163 of amortization expense related to purchased intangibles. Additionally, operating expenses increased from the same period in the prior year due to $1,289,517 of expenses related to the CommAgility acquisition consisting primarily of professional fees, increased commission expenses of $748,954 due to higher revenues, severance and legal charges of $572,912 associated with restructuring actions during the nine months ended September 30, 2017, increased employee compensation and benefits of $336,735 due to increased headcount and higher corporate expenses primarily due to integration expenses.

 

Other Expenses

 

Other expenses decreased $74,422 due to the reduction in environmental remediation expenses from the prior year. Interest expense increased $228,990 related to our new credit facility, amortization of capitalized debt issuance costs and accretion of the contingent consideration liability.

29

Tax

 

For the nine months ended September 30, 2017, the Company recorded a tax benefit of $1,493,789 due primarily to losses generated from the Company’s operations. For the nine months ended September 30, 2016, the Company recorded a tax benefit of $412,409 primarily due to losses generated from the Company’s operations during the period.

 

Net Loss

 

For the nine months ended September 30, 2017, the Company realized a net loss of $1,946,179 or $.10 loss per share on a basic and diluted basis, as compared to a net loss of $672,684 or $.04 loss per share on a basic and diluted basis for the nine months ended September 30, 2016, a decrease of $1,273,495 or $.06 per diluted share. The decrease was due to the factors discussed above.

 

LIQUIDITY AND CAPITAL RESOURCES

 

We expect our existing cash balance, cash generated by operations and borrowings available under our new credit facility (as described in Note 8 ) to be our primary sources of short-term liquidity, and we believe these sources will be sufficient to meet our liquidity needs for at least the next twelve months. Our ability to meet our cash requirements will depend on our ability to generate cash in the future, which is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control.

 

Operating Activities

 

Cash provided by operating activities was $450,025 for the nine months ended September 30, 2017 as compared to cash used by operating activities of $742,409 for the nine months ended September 30, 2016. During the nine months ended September 30, 2017 changes in our operating assets and liabilities resulted in a net increase in cash of $568,100 primarily due to reductions in inventory, prepaids and other asset and higher accrued expenses and other liabilities. This was offset by lower accounts payable and an increase in accounts receivable. During the nine months ended September 30, 2016, changes in our operating assets and liabilities resulted in a net decrease in cash of $671,673 primarily due to an increase in inventory offset by an increase in accounts payable.

 

Investing Activities

 

Cash used by investing activities was $9,718,317 for the nine months ended September 30, 2017 and was primarily comprised of cash used for the CommAgility acquisition of $9,137,534, net of cash acquired and capital expenditures of $588,180. For the nine months ended September 30, 2016 cash used by investing activities was $715,128 and was related to capital expenditures.

 

Financing Activities

 

Cash provided by financing activities was $2,078,606 for the nine months ended September 30, 2017 as compared to cash used of $166,764 for the nine months ended September 30, 2016. During the nine months ended September 30, 2017 the Company received net proceeds of $1,271,928 from the asset based revolver and received $760,000 from the term loan. Principal repayments of the term loan during the nine months ended September 30, 2017 were $76,000. Additionally, the Company paid $215,358 in debt issuance costs associated with the new credit facility. During the nine months ended September 30, 2016 the Company paid $101,296 related to a capital equipment lease and $65,468 related to the repurchase of common stock.

 

As disclosed in Note 8, on February 16, 2017 the Company entered into a Credit Agreement which provided for a term loan in the aggregate principal amount of $760,000 and an asset based revolving loan (the “Revolver”), which is subject to a Borrowing Base Calculation (as defined in the New Credit Facility) of up to a maximum availability of $9,000,000. The proceeds of the term loan and revolver were used to finance the acquisition of CommAgility. As of September 30, 2017, $1,271,928 was outstanding on the asset based revolver. At September 30, 2017 the Company has excess availability under the Revolver of $4,252,538.

30

On August 3, 2017 the Company entered into Amendment No. 1 to the New Credit Facility, effective June 30, 2017, which amended the definition of EBITDA to exclude the non-cash inventory adjustment of $1,930,000 recorded during the three months ended June 30, 2017 and the reduce the pledge of equity interests in the Company’s Foreign Subsidiaries from 66 2/3% to 66 1/3%.

 

As of September 30, 2017, and the date hereof, the Company is in compliance with the covenants of the New Credit Facility.

 

As of September 30, 2017, future minimum lease payments related to the Company’s facility lease and equipment leases are shown below:

 

   Payments by Period
     Remainder     
   Total  2017  2018-2019  2020-2021  Thereafter
Facility Leases  $2,674,362   $121,879   $1,007,135   $934,184   $611,164 
Purchase Obligations  4,866,041   4,866,041   -   -   - 
Operating and Equipment Leases  238,648   13,508   108,067   108,067   9,006 
   $7,779,051   $5,001,428   $1,115,202   $1,042,251   $620,170 

 

The Company may pursue strategic opportunities, including potential acquisitions, mergers, divestitures or other activities, which may require significant use of the Company’s capital resources. The Company may incur costs as a result of such activities and such activities may affect the Company’s liquidity in future periods. In order to fund such activities the Company may need to incur additional debt or issue additional securities if market conditions are favorable. However, there can be no certainty that such funding will be available in needed quantities or terms favorable to the Company.

 

The Company believes that its financial resources from working capital and availability under the asset based revolver are adequate to meet its current needs. The Company expects the cash flow of CommAgility to fund the deferred purchase price and contingent consideration liabilities. However, should current global economic conditions deteriorate, additional working capital funding may be required which may be difficult to obtain due to restrictive credit markets.

 

OFF-BALANCE SHEET ARRANGEMENTS

 

The Company does not have any off-balance sheet arrangements.

 

INFLATION AND SEASONALITY

 

The Company does not anticipate that inflation will significantly impact its business or its results of operations nor does it believe that its business is seasonal.

 

Critical Accounting Policies

 

There have been no changes in our critical accounting policies or significant accounting estimates as disclosed in our 2016 Form 10-K, except as disclosed below:

 

Revenue Recognition

 

Revenue from product shipments, including shipping and handling fees, is recognized once delivery has occurred, provided that persuasive evidence of an arrangement exists, the price is fixed or determinable, and collectability is reasonably assured. Delivery is considered to have occurred when title and risk of loss have transferred to the customer. Revenues from international distributors are recognized in the same manner. If title does not pass until the product reaches the customer’s delivery site, then revenue recognition is deferred until that time. There are no formal sales incentives offered to any of the Company’s customers. Volume discounts may be offered from time to time to customers purchasing large quantities on a per transaction basis.

31

Standalone sales of software or software-related items are recognized in accordance with the software revenue recognition guidance. For multiple deliverable arrangements that only include software items, the Company generally uses the residual method to allocate the arrangement consideration. Under the residual method, the amount of consideration allocated to the delivered items equals the total arrangement consideration, less the fair value of the undelivered items. Where vendor-specific objective evidence of fair value for the undelivered items cannot be determined, the Company generally defers revenue until all items are delivered and services have been performed, or until such evidence of fair value can be determined for the undelivered items.

 

Software arrangements that require significant customization or modification of software are accounted for under percentage of completion accounting. The Company uses the input method to measure of progress for arrangements accounted for under percentage of completion accounting.

 

Valuation of Goodwill

 

Goodwill represents the excess of the aggregate purchase price over the fair value of the net assets acquired in a purchase business combination. Goodwill is evaluated for impairment annually by first performing a qualitative assessment to determine whether a quantitative goodwill test is necessary. After assessing the totality of events or circumstances, if we determine it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then we perform additional quantitative tests to determine the magnitude of any impairment.

 

Intangible and Long-lived Assets

 

Intangible assets include patents, non-competition agreements, customer relationships and trademarks. Intangible assets with finite lives are amortized using the straight-line method over the estimated economic lives of the assets, which range from five to seven 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 event occur or circumstances change that indicate an asset may be impaired.

 

FORWARD LOOKING STATEMENTS

 

The statements contained in this Quarterly Report on Form 10-Q that are not historical facts, including, without limitation, some of the statements under “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Such forward-looking statements include statements that adoption of ASU 2017-01 and Topic 606 are not expected to have a material impact on the Company’s financial statements or results of operations, respectively; about our sources of short-term liquidity and our belief that these sources will be sufficient to meet our liquidity needs for at least the next 12 months; that is financial resources from working capital and our availability under the asset based revolver are adequate to meet our current needs; that Embedded solutions will continue to contribute to the company’s revenue and profitability growth; and that cash flow from CommAgility will fund the deferred purchase price and contingent consideration. These statements involve risks and uncertainties. These statements are based on the Company’s current expectations of future events and are subject to a number of risks and uncertainties that may cause the Company’s actual results to differ materially from those described in the forward-looking statements. These risks and uncertainties include, but are not limited to, the ability of our management to successfully implement our business plan and strategy, product demand and development of competitive technologies in our market sector,

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the impact of competitive products and pricing, the loss of any significant customers, our abilities to protect our property rights, the effects of adoption of newly announced accounting standards, the effects of economic conditions and trade, legal and other economic risks, among others. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. These risks and uncertainties are disclosed in our Annual Report on Form 10-K for the year ended December 31, 2016 and elsewhere in this Quarterly Report on Form 10Q. The Company’s forward-looking statements speak only as of the date of this Quarterly Report. The Company undertakes no obligation to publicly update or review any forward-looking statements whether as a result of new information, future developments or otherwise.

 

ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

 

ITEM 4 – CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures

 

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

 

(b) Changes in Internal Control over Financial Reporting

 

We acquired CommAgility on February 17, 2017. We have begun the process to integrate the operations of CommAgility into our overall system of internal control over financial reporting.

 

There were no other changes in our internal control over financial reporting during the three or nine months ended September 30, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, as described in our 2016 Annual Report on Form 10-K.

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PART II – OTHER INFORMATION

 

Item 1. LEGAL PROCEEDINGS

There have been no material developments in the legal proceedings described in Item 3 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

 

Item 1A. RISK FACTORS

There have been no material changes in our risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2016.

 

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

 

Item 3. DEFAULTS UPON SENIOR SECURITIES

None.

 

Item 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

Item 5. OTHER INFORMATION

None.

 

Item 6. EXHIBITS

Exhibit No.   Description
     
3.1   Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to our Annual Report on Form 10-K/A filed with the SEC on April 22, 2005, Commission File No. 1-11916)
     
3.2   Amended and Restated By-laws (incorporated herein by reference to Exhibit 3.1 to Wireless Telecom Group, Inc.’s Current Report on Form 8-K, filed on July 1, 2016, Commission File No. 011-11916)
     
10.1   Share Purchase Agreement, dated February 17, 2017, by and among Wireless Telecom Group, Inc., Edward De Salis Young, Paul Moakes, Simon Pack and Martin Hollinshead (incorporated herein by reference to Exhibit 10.2 to Wireless Telecom Group Inc.’s Current Report on Form 8-K, filed on February 21, 2017, Commission File No. 001-11916)
     
10.2   Registration Rights Agreement, dated February 17, 2017, by and among Wireless Telecom Group, Inc., Edward De Salis Young, Paul Moakes, Simon Pack and Martin Hollinshead (incorporated herein by reference to Exhibit 10.2 to Wireless Telecom Group Inc.’s Current Report on Form 8-K, filed on February 21, 2017, Commission File No. 001-11916)
     
10.3   Lock Up Agreement, dated February 17, 2017, by and among Wireless Telecom Group, Inc., Edward De Salis Young, Paul Moakes, Simon Pack and Martin Hollinshead (incorporated herein by reference to Exhibit 10.3 to Wireless Telecom Group Inc.’s Current Report on Form 8-K, filed on February 21, 2017, Commission File No. 001-11916)
     
10.4   Voting Agreement, dated February 17, 2017, by and among Wireless Telecom Group, Inc., Edward De Salis Young, Paul Moakes, Simon Pack and Martin Hollinshead (incorporated herein by reference to Exhibit 10.4 to Wireless Telecom Group Inc.’s Current Report on Form 8-K, filed on February 21, 2017, Commission File No. 001-11916)
     
10.5   Loan and Security Agreement, dated February 16, 2017, Wireless Telecom Group, Inc. Boonton Electronics Corporation, Microlab/FXR and Bank of America, N.A. (incorporated herein by reference to Exhibit 10.5 to Wireless Telecom Group Inc.’s Current Report on Form 8-K, filed on February 21, 2017, Commission File No. 001-11916)
     
10.6   Amendment No. 1 to the Loan and Security Agreement by and among Wireless Telecom Group, Inc., Boonton Electronic Corporation, Microlab/FXR and Bank of America, N.A. dated August 3, 2017 (incorporated herein by reference to Exhibit 10.6 to Wireless Telecom Group Inc.’s Quarterly Report on Form 10-Q filed on August 9, 2017, Commission File No. 001-11916).
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10.7*   Separation Agreement and General Release by and between Wireless Telecom Group, Inc. and Paul Steven Genova dated May 22, 2017 (incorporated herein by reference to Exhibit 10.7 to Wireless Telecom Group Inc.’s Quarterly Report on Form 10-Q filed on August 9, 2017, Commission File No. 001-11916).
     
10.8*   Amendment to the Executive Employment Agreement by and between Wireless Telecom Group Inc. and Timothy Whelan (incorporated herein by reference to Exhibit 10.8 to Wireless Telecom Group Inc.’s Quarterly Report on Form 10-Q filed on August 9, 2017, Commission File No. 001-11916).
     
31.1   Certification Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002 (Principal Executive Officer)
     
31.2   Certification Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002 (Principal Financial Officer)
     
32.1   Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002 (Principal Executive Officer)
     
32.2   Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002 (Principal Financial Officer)
     
101**   The following financial statements from Wireless Telecom Group, Inc.’s Quarterly Report on Form 10-Q for the three and nine months ended September 30, 2017, filed on November 9, 2017, formatted in Extensible Business Reporting Language (XBRL): (i) condensed consolidated balance sheets, (ii) condensed consolidated statements of operations and comprehensive (loss), (iii) condensed consolidated statements of cash flows, (iv) condensed consolidated statement of shareholders’ equity, and (v) the notes to interim condensed consolidated financial statements.
     
101.INS**   XBRL INSTANCE DOCUMENT
     
101.SCH**   XBRL TAXONOMY EXTENSION SCHEMA DOCUMENT
     
101.CAL**   XBRL TAXONOMY EXTENSION CALCULATION LINKBASE DOCUMENT
     
101.DEF**   XBRL TAXONOMY EXTENSION DEFINITION LINKBASE DOCUMENT
     
101.LAB**   XBRL TAXONOMY EXTENSION LABEL LINKBASE DOCUMENT
     
101.PRE**   XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE DOCUMENT

 

* Denotes a management contract or compensatory plan or arrangement.

** Furnished herewith.

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  WIRELESS TELECOM GROUP, INC.
  (Registrant)  
     
Date:  November 9, 2017 /s/ Timothy Whelan  
  Timothy Whelan  
  Chief Executive Officer  
     
Date:  November 9, 2017 /s/ Michael Kandell  
  Michael Kandell  
  Chief Financial Officer  
36

EXHIBIT INDEX

 

Exhibit No.   Description
     
31.1   Certification Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002 (Principal Executive Officer)
     
31.2   Certification Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002 (Principal Financial Officer)
     
32.1   Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002 (Principal Executive Officer)
     
32.2   Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002 (Principal Financial Officer)
     
101**   The following financial statements from Wireless Telecom Group, Inc.’s Quarterly Report on Form 10-Q for the three and nine months ended September 30, 2017, filed on November 9, 2017, formatted in Extensible Business Reporting Language (XBRL): (i) condensed consolidated balance sheets, (ii) condensed consolidated statements of operations and comprehensive (loss), (iii) condensed consolidated statements of cash flows, (iv) condensed consolidated statement of shareholders’ equity, and (v) the notes to interim condensed consolidated financial statements.

 

 

 

101.INS**   XBRL INSTANCE DOCUMENT
     
101.SCH**   XBRL TAXONOMY EXTENSION SCHEMA DOCUMENT
     
101.CAL**   XBRL TAXONOMY EXTENSION CALCULATION LINKBASE DOCUMENT
     
101.DEF**   XBRL TAXONOMY EXTENSION DEFINITION LINKBASE DOCUMENT
     
101.LAB**   XBRL TAXONOMY EXTENSION LABEL LINKBASE DOCUMENT
     
101.PRE**   XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE DOCUMENT
37