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WIRELESS TELECOM GROUP INC - Quarter Report: 2017 March (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 March 31, 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   (I.R.S. Employer
of Incorporation or Organization)   Identification No.)
25 Eastmans Road
Parsippany, New Jersey
  07054
(Address of Principal Executive Offices)   (Zip Code)

 

(973) 386-9696

(Registrant’s Telephone Number, Including Area Code)

 

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 o No x

 

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 May 10, 2017: 22,289,475

 

WIRELESS TELECOM GROUP, INC.

 

Table of Contents

 

Page

 

Item 1 – Financial Statements 3
   
Notes to Interim Condensed Consolidated Financial Statements (unaudited) 7
   
Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations 25
   
Item 3 – Quantitative and Qualitative Disclosures About Market Risk 31
   
Item 4 – Controls and Procedures 31
   
PART II – OTHER INFORMATION 32
   
Item 1 – Legal Proceedings 32
   
Item 1A – Risk Factors 32
   
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds 32
   
Item 3 – Defaults Upon Senior Securities 32
   
Item 4 – Mine Safety Disclosures 32
   
Item 5 – Other Information 32
   
Item 6 – Exhibits 32
   
Signatures 34
   
Exhibit Index 35
2

PART 1 – FINANCIAL INFORMATION

WIRELESS TELECOM GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

Item 1 – Financial Statements

 

   March 31,  December 31,
   2017  2016
   (unaudited)   
Assets      
CURRENT ASSETS        
Cash & cash equivalents  $2,175,481   $9,350,803 
Accounts receivable - net of allowance for doubtful accounts of $11,929 and $10,740, respectively  7,672,167   5,183,869 
Inventories - net of reserves of $1,648,618 and $1,549,089, respectively  9,890,709   8,452,751 
Prepaid expenses and other current assets  870,217   866,035 
TOTAL CURRENT ASSETS  20,608,574   23,853,458 
         
PROPERTY PLANT AND EQUIPMENT - NET  2,482,089   2,166,566 
         
OTHER ASSETS        
Goodwill  11,412,264   1,351,392 
Acquired Intangible Assets, net  9,422,210   - 
Deferred income taxes  7,899,240   7,403,600 
Other long term assets  832,493   660,119 
TOTAL OTHER ASSETS  29,566,207   9,415,111 
         
TOTAL ASSETS  $52,656,870   $35,435,135 
Liabilities and Shareholders’ Equity        
CURRENT LIABILITIES        
Short term debt  $2,056,037   - 
Accounts payable  4,501,861   2,986,797 
Accrued expenses and other current liabilities  2,924,479   673,067 
Deferred Revenue  614,466   - 
         
TOTAL CURRENT LIABILITIES  10,096,843   3,659,864 
         
LONG TERM LIABILITIES        
Long term debt  608,000   - 
Other long term liabilities  3,546,406   69,058 
Deferred Tax Liability  1,652,321   - 
TOTAL LONG TERM LIABILITIES  5,806,727   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, 33,323,752 and 29,786,224 shares issued, 22,288,874 and 18,751,346 shares outstanding, respectively  333,237   297,862 
Additional paid in capital  46,865,064   40,563,002 
Retained earnings  10,437,386   11,668,829 
Treasury stock at cost, - 11,034,878 and  11,034,878 shares, respectively  (20,823,480)  (20,823,480)
Accumulated Other Comprehensive (Loss)  (58,907)    
         
TOTAL SHAREHOLDERS’ EQUITY  36,753,300   31,706,213 
         
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY  $52,656,870   $35,435,135 

 

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

3

WIRELESS TELECOM GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS)

(unaudited)

 

   Three Months Ended
   March 31
    
   2017   2016 
NET REVENUES  $9,548,758   $6,368,415 
           
COST OF REVENUES   5,216,248    3,648,301 
           
GROSS PROFIT   4,332,510    2,720,114 
           
Operating Expenses          
Research and development   1,086,914    1,064,321 
Sales and marketing   1,552,086    1,251,176 
General and administrative   3,412,491    1,325,268 
Total Operating Expenses   6,051,491    3,640,765 
           
Other income/(expense)   (1,545)   (41,604)
Interest Expense   (49,218)   0 
           
Income/(Loss) Before Taxes   (1,769,744)   (962,255)
           
Tax Provision/(Benefit)   (538,301)   (385,928)
           
Net (Loss)/Income  $(1,231,443)  $(576,327)
           
Other Comprehensive (Loss):          
Foreign currency translation adjustments   (58,907)   - 
Comprehensive (Loss)  $(1,290,350)  $(576,327)
           
Net (Loss)/Income Per Common Share:          
Basic  $(0.06)  $(0.03)
Diluted  $(0.06)  $(0.03)
           
Weighted Average Shares Outstanding:          
Basic   20,386,678    18,606,582 
Diluted   21,166,681    19,013,726 

 

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

4

WIRELESS TELECOM GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

   For the Three Months Ended March
   2017   2016 
         
CASH FLOWS PROVIDED/(USED) BY OPERATING ACTIVITIES        
Net loss  ($1,231,443)   ($576,327) 
Adjustments to reconcile net loss to cash provided/(used) from operating activities        
Depreciation and amortization  414,120   115,858 
Shared based compensation  301,389   98,619 
Amortization of debt issuance fees  9,228   - 
Deferred rent  8,151   11,150 
Deferred income taxes  (495,640)   (385,928) 
Provision for doubtful accounts  1,189   (35,416) 
Provision inventory reserves  99,528   64,433 
Changes in assets and liabilities, net of acquisition        
Accounts receivables  (230,712)   991,152 
Inventories  (412,189)   (795,581) 
Prepaid expenses and other assets  124,575   110,862 
Accounts payable  352,132   637,921 
Accrued expenses and other current liabilities  159,840   (9,129) 
         
NET CASH PROVIDED/(USED) BY OPERATING ACTIVITIES  ($899,832)   $227,614 
         
CASH FLOWS (USED FOR) INVESTING ACTIVITIES        
Capital expenditures  ($192,075)   (74,474) 
Acquisition of business net of cash acquired  (8,596,183)   - 
NET CASH (USED) BY INVESTING ACTIVITIES  ($8,788,258)   (74,474) 
         
CASH FLOWS PROVIDED/(USED) FOR FINANCING ACTIVITIES        
Revolver Borrowings  3,398,500   - 
Revolver Repayments  (1,494,463)   - 
Term Loan Borrowings  760,000   - 
Debt Issuance Fees  (215,358)   - 
Proceeds from exercise of stock options  37,500   - 
Repayments of equipment lease payable  -   (42,089) 
Repurchase of common stock - 42,995 shares  -   (65,468) 
         
NET CASH PROVIDED/(USED) BY FINANCING ACTIVITIES  2,486,179   (107,557) 
         
Effect of exchange rate changes on cash  26,589   - 
         
NET (DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS  ($7,175,322)   $45,583 
         
Cash and equivalents, at beginning of year  $9,350,803   $9,726,007 
         
CASH AND CASH EQUIVALENTS, AT END OF PERIOD  $2,175,481   $9,771,590 
SUPPLEMENTAL INFORMATION        
Cash paid during the period for interest  $4,807   - 
Cash paid during the period for income taxes  -   $3,723 
         
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND        
FINANCING ACTIVITIES:        
Issuance of Common Shares as Consideration  $5,998,548   - 
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)

 

           Accumulated   
     Common        Other    Total
   Common    Stock    Additional Paid    Retained    Comprehensive    Shareholders’
   Stock Issued    Amount    In Capital    Earnings    Loss  Treasury Stock  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)              (1,231,443)          (1,231,443)
Issuance of shares in connection with stock options exercised  50,000   500   37,000               37,500 
Share-based compensation expense          301,389               301,389 
Issuance of shares in connection with CommAgility acquisition  3,487,528   34,875   5,963,673               5,998,548 
Cumulative translation adjustment                  (58,907)      (58,907)
Repurchase of treasury stock                          - 
Balances at March 31, 2017  33,323,752   $333,237   $46,865,064   $10,437,386   ($58,907)  ($20,823,480)  $36,753,300 

 

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

 

 

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES AND POLICIES

 

Basis of Presentation

 

The condensed consolidated balance sheet as of March 31, 2017, the condensed consolidated statements of operations and cash flows for the three-month periods ended March 31, 2017 and 2016, and the condensed consolidated statement of shareholders’ equity for the three-month period ended March 31, 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, 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.

 

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-month period ended March 31, 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 disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of net sales 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 has limited concentration of credit risk in accounts receivable due to the large number of entities comprising our 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.

 

For the three-months ended March 31, 2017, one customer accounted for approximately 11% of the Company’s consolidated sales. For the three-months ended March 31, 2016, no customer accounted for 10% or more of the Company’s consolidated sales. At March 31, 2017 two customers represented approximately 19% and 13% of the Company’s consolidated gross accounts receivable, respectively. At December 31, 2016, one customer represented 16% of the Company’s gross accounts receivable balance.

7

WIRELESS TELECOM GROUP, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

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 (defined below) the Company may be required to pay additional amounts if certain financial targets are achieved for the years ended 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 $2,700,353 (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 sales 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.

 

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.

8

WIRELESS TELECOM GROUP, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

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 average spot rate. Translation gains or losses related to net assets located outside the U.S. are shown as a component of accumulated other comprehensive loss in the Condensed Consolidated Statements of Changes in 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.

 

Other Comprehensive Income (Loss)

 

Other comprehensive income (loss) is recorded directly to a separate section of shareholders’ equity in accumulated other comprehensive loss and primarily includes unrealized gains and losses excluded from the Consolidated Statements of Operations. These unrealized gains and losses consist of changes in foreign currency translation, interest rate swaps, and changes in unamortized pension, postretirement and postemployment actuarial gains and losses. At March 31, 2017 all of the Company’s other comprehensive income/(loss) consists of foreign currency translation.

 

Intangible and Long-lived Assets

 

Intangible assets include patents and customer relationships and 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.

 

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 not amortized but rather is reviewed for impairment at least annually or more frequently if a triggering event occurs. Management first makes a qualitative assessment of whether it is more-likely-than-not that a reporting unit’s fair value is less than its carrying amount. If, based on the qualitative assessment, the estimated fair value is well in excess of its carrying amount, no impairment is recorded. If, however, the reporting unit’s carrying value exceeds its fair value an impairment is recorded by the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill.

9

WIRELESS TELECOM GROUP, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

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 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 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. The Company is in the process of evaluating the impact of this ASU on its consolidated financial statements.

10

WIRELESS TELECOM GROUP, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

The Company does not believe there are any other recently issued, but not yet effective accounting pronouncements, if adopted, that 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 “Share Purchase Agreement”). 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 $2,515,000 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 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 Adjusted EBITDA, as defined, generated by CommAgility is less than £2,400,000; or (b) 2018 Adjusted 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).

 

The acquisition has been accounted for under the acquisition method of accounting in accordance with ASC 805 Business Combinations, whereby the purchase consideration was allocated to tangible and intangible net assets acquired and liabilities assumed at their estimated fair values on the date of acquisition. The excess purchase consideration over fair value of net assets acquired and liabilities assumed was recorded as goodwill. The Company incurred $1,272,083 of acquisition-related costs during the three months ended March 31, 2017, 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 $996,776 of net sales to the Company for the three months ended March 31, 2017.

 

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 estimated fair values are expected to change as the Company completes is valuation analyses and purchase price allocation. Management is responsible for these internal and third-party valuations and appraisals and is continuing to review the amounts and allocations. The following table summarizes the preliminary allocation of the purchase consideration to the estimated fair value of assets acquired and liabilities assumed at the date of acquisition:

11

WIRELESS TELECOM GROUP, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Cash at close  $  11,317,500  
Equity issued at close    5,998,548  
Completion Cash Adjustment    1,382,288  
Deferred Purchase Price    2,515,000  
Contingent Consideration    2,700,353  
        
Total Purchase Price  $ 23,913,689  
        
Cash  $ 4,566,510  
Accounts Receivable    2,267,124  
Inventory    1,125,532  
Intangible Assets    9,657,600  
Other Assets    167,650  
Fixed Assets    303,904  
Accounts Payable    (1,171,846)  
Accrued Expenses    (417,213)  
Deferred Revenue    (638,671)  
Deferred Tax Liability    (1,701,586)  
Other LongTerm Liabilities    (339,096)  
        
Net Assets Acquired    13,819,908  
        
Goodwill  $ 10,093,781  

 

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 three months ended March 31, 2017:

12

WIRELESS TELECOM GROUP, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

   Contingent
Consideration
   Deferred
Purchase Price
 
Balance at Beginning of Period  $-   $- 
           
Fair Value At Acquisition Date   2,700,353   $2,515,000 
           
Accretion of Interest   21,916      
           
Payment        (419,166) 
           
Foreign Currency Translation   (8,521)    (6,834) 
           
Balance as of March 31, 2017  $2,713,748   $2,089,000 

 

As of March 31, 2017 Contingent Consideration in included in Other long term liabilities on the Condensed Consolidated Balance Sheet. As of March 31, 2017 $1,671,200 of Deferred Purchase Price is included in Accrued expenses and other current liabilities and $417,800 is included in Other long term liabilities on the Condensed Consolidated Balance Sheet. The Completion Cash Adjustment was paid prior to March 31, 2017.

 

Pro Forma Information(Unaudited)

 

The following unaudited pro forma information present 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 7) 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:

 

   Three Months Ended March 31, 
     
(Unaudited)  2017   2016 
Net Revenues  $10,922,602   $9,175,189 
Net (loss)  $(351,433)   $(1,613,947) 
Basic net (loss) per share  $(0.02)   $(0.07) 
Diluted net (loss) per share  $(0.02)   $(0.07) 

 

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.

 

The Company has a domestic federal and state net operating loss carryforward at March 31, 2017 of approximately $18,900,000 and $44,400,000, respectively, which expires in 2029. The Company also

13

WIRELESS TELECOM GROUP, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

has foreign net operating loss carryforwards at March 31, 2017 of approximately Euro 12,800,000 relating to an inactive German subsidiary and £848,000 related to CommAgility.

 

Realization of the Company’s deferred tax assets is dependent upon the Company generating sufficient taxable income in the appropriate tax jurisdictions in future years to obtain benefit from the reversal of net deductible temporary differences and from utilization of net operating losses. The Company’s valuation allowance of $5,568,950 is primarily associated with the Company’s German net operating loss carryforward from an inactive German entity which is unlikely to be realized in future periods. The amount of deferred tax assets considered realizable is subject to adjustment in future periods if estimates of future taxable income are changed. As of March 31, 2017, management believed that it is more likely than not that the Company will fully realize the benefits of its deferred tax asset associated with its domestic federal net operating loss carryforward.

 

The deferred income tax assets (liabilities) are summarized as follows:

 

   March 31,   December 31, 
Net deferred tax asset:  2017   2016 
Uniform capitalization of inventory costs for tax purposes  $170,555   $166,017 
Reserves on inventories   659,236    619,636 
Reserves on product returns   48,564    48,564 
Tax effect of goodwill   (540,557)    (540,557) 
Book depreciation over tax   (200,266)    (121,890) 
Other timing differences   150,777    135,156 
Net operating loss carryforward   13,179,881    12,559,023 
    13,468,190    12,865,949 
Valuation allowance for deferred tax assets   (5,568,950)    (5,462,349) 
   $7,899,240   $7,403,600 

 

Under ASC 740, the Company must recognize the tax benefit from an uncertain position only if it is more-likely-than-not the tax position will be sustained on examination by the taxing authority, based on the technical merits of the position. The tax benefits recognized in the financial statements attributable to such position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon the ultimate resolution of the position.

 

The components of income tax expense (benefit) related to income from operations are as follows:

 

   Three Months Ended
March 31,
 
   2017   2016 
Current:          
Federal  $-   $- 
State   18,839    - 
Foreign   -    - 
Deferred:          
Federal   (495,640)    (336,915) 
State   -    (49,013) 
Foreign   (61,500)    - 
   $(538,301)   $(385,928) 
14

WIRELESS TELECOM GROUP, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

The Company and its subsidiaries file income tax returns in the U.S. (federal and state of New Jersey) and the United Kingdom. With few exceptions, the Company is no longer subject to U.S. federal and state tax examinations in its major tax jurisdictions for periods before 2013.

 

The Company does not have any significant unrecognized tax positions and does not anticipate significant increases or decreases in unrecognized tax positions within the next twelve months.

 

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 and warrants to purchase common stock, using the treasury stock method.

 

   Three Months Ended
March 31,
 
   2017   2016 
Weighted average common shares outstanding   20,386,678    18,606,582 
Potentially dilutive stock options   780,003    407,144 
Weighted average common shares outstanding,
assuming dilution
   21,166,681    19,013,726 

 

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 of common stock underlying options not included in diluted earnings (loss) per share, because the effects are anti-dilutive, was 1,412,500 and 2,080,857 for the three-months ended March 31, 2017 and 2016, respectively.

 

NOTE 6 – INVENTORIES

 

Inventory carrying value is net of inventory reserves of $1,648,618 and $1,549,089 at March 31, 2017 and December 31, 2016, respectively.

 

Inventories consist of:  March 31,
2017
   December 31,
2016
 
Raw materials  $4,102,194   $3,558,430 
Work-in-process   725,356    531,210 
Finished goods   5,063,159    4,363,111 
   $9,890,709   $8,452,751 

 

NOTE 7 – GOODWILL AND INTANGIBLE ASSETS

 

The Company’s goodwill balance of $11,412,264 at March 31, 2017 relates to two of the Company’s reporting units, Microlab ($1,351,392) and Embedded Solutions ($10,060,872). Management’s qualitative assessment performed in the fourth quarter of 2016 did not indicate any impairment of

15

WIRELESS TELECOM GROUP, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

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:

 

   March 31,
2017
 
Beginning Balance  $1,351,392 
      
CommAgility Acquisition   10,093,781 
Foreign Currency Translation   (32,909) 
      
Ending Balance  $11,412,264 

 

Intangible assets consist of the following:

 

   Gross
Carrying
Amount
   Accumulated
Amortization
   Foreign
Exchange
Translation
   Net Carrying
Amount
 
                 
Customer Relationships  $7,419,250    ($130,525)   (26,541)  $7,262,184 
                     
Patents   1,320,375    (32,482)   (4,725)   1,283,168 
                     
Non Compete Agreements   917,975    (37,638)   (3,479)   876,858 
                     
Total  $9,657,600    ($200,645)   (34,745)  $9,422,210 

 

Amortization of acquired intangible assets was $200,645 for the three months ended March 31, 2017. Amortization of acquired intangible assets is included as part of general and administrative expenses in the accompanying condensed consolidated statements of operations and comprehensive (loss).

 

The estimated future amortization expense related to intangible assets is as follows as of March 31, 2017:

 

Remainder of 2017  $1,218,484 
2018   1,624,645 
2019   1,624,645 
2020   1,357,775 
2021   1,319,651 
Thereafter   2,277,010 
      
Total  $9,422,210 
16

WIRELESS TELECOM GROUP, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

 

NOTE 8 – DEBT

 

Debt consists of the following:

 

    March 31
2017
 
Revolver at LIBOR Plus Margin   $ 1,904,037  
Term Loan at LIBOR Plus Margin     760,000  
Total Debt     2,664,037  
         
Debt Maturing within one year     (2,056,037 )
Non-current portion of long term debt   $ 608,000  

 

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 $212,258 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 at maturity in a final installment. The future principal payments under the term loan are $114,000 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 March 31, 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. The New Credit Facility also provides for a number of customary

17

WIRELESS TELECOM GROUP, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

 

events of default, including, among others, payment, bankruptcy, representation and warranty, covenant, change in control, judgment and events or conditions that have a Material Adverse Effect (as defined in the New Credit Facility).

 

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-month periods ended March 31, 2017 and 2016 include share-based compensation expense totaling $301,389 and $98,619, respectively. Such amounts have been included in the Condensed Consolidated Statements of Operations within operating expenses.

 

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 March 31, 2017, there were 876,000 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.

 

The following summarizes the components of share-based compensation expense by equity type for the three-months ended March 31:

 

 

   Three Months Ended 
   March 31, 
   2017   2016 
Service - based Restricted Common Stock  $56,748   $55,500 
Performance-based Stock Options   58,641    28,650 
Service -based Stock Options   180,647    9,116 
Performance-based Restricted Common Stock   5,353    5,353 
   $301,389   $98,619 

 

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 March 31, 2017, and changes during the three-months ended March 31, 2017, are presented below:

18

WIRELESS TELECOM GROUP, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

 

Non-vested Restricted Shares  Number of Shares  Weighted Average
Grant Date Fair Value
Non-vested at January 1, 2017   244,291       $1.52    
Granted   -    - 
Forfeited   -    - 
Vested   (521)     1.34 
Non-vested at March 31, 2017   243,770     $1.52 

 

As of March 31, 2017, the unearned compensation related to Company granted restricted common stock was $145,420 of which $39,900 (pertaining to 120,000 service-based restricted common stock awards) will be amortized on a straight-line basis through the date of the Company’s next annual shareholders meeting scheduled to be held in June 2017, the vesting date, and $16,150 (pertaining to 30,000 service-based restricted common stock awards) will be amortized on a straight-line basis through the date of the Company’s next annual shareholders meeting scheduled to be held in June 2017, the vesting date. The remaining balance of $80,298 (pertaining to 87,000 performance-based shares of restricted common stock awarded in 2013) and $9,073 (pertaining 8,333 service-based restricted common stock awards) will be amortized on a straight-line basis through December 31, 2020 and June 30, 2020, respectively, the implicit service period.

 

Performance-Based Stock Option Awards:

 

A summary of performance-based stock option activity, and related information for the three-months ended March 31, 2017 follows:

 

   Options  Weighted Average
Exercise Price
Outstanding, January 1, 2017   2,165,000     $1.32 
Granted   -      - 
Exercised   (50,000)    $0.75 
Forfeited   -      - 
Expired   -      - 
Outstanding, March 31, 2017   2,115,000     $1.34 
             
Options exercisable:            
March 31, 2017   1,040,000     $0.96 

 

The aggregate intrinsic value of performance-based stock options outstanding (regardless of whether or not such options are exercisable) as of March 31, 2017 and December 31, 2016 was $352,000 and $1,282,950, respectively. The aggregate intrinsic value of performance-based stock options exercisable as of March 31, 2017 and December 31, 2016 was $548,250 and $1,053,450, respectively. The intrinsic value of options exercised during the three months ended March 31, 2017 was $36,550.

 

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 March 31, 2017, the Company has determined that the performance conditions are probable of being achieved by the year ending 2020. As of March 31, 2017, the unearned compensation related to the 875,000 performance-based stock options with an implicit service period through December 31, 2020 is $429,729. As of March 31, 2017, the unearned compensation related to 200,000 performance-based stock options with an implicit service period through December 31, 2021 is $125,866.

 

The Company’s performance-based stock options granted prior to 2013 (consisting of 1,090,000 options) are fully amortized.

19

WIRELESS TELECOM GROUP, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

 

Service-Based Stock Option Awards:

 

A summary of service-based stock option activity, and related information for the three-months ended March 31, 2017 follows:

 

   Options  Weighted Average
Exercise Price
Outstanding, January 1, 2017   1,198,000     $1.51 
Granted   220,000      1.82 
Exercised   -      - 
Forfeited   -      - 
Expired   -      - 
Outstanding, March 31, 2017   1,418,000     $1.59 
             
Options exercisable:            
March 31, 2017   218,417     $1.96 

 

The aggregate intrinsic value of service-based stock options (regardless of whether or not such options are exercisable) as of March 31, 2017 and December 31, 2016 was $12,050 and $567,300, respectively. As of March 31, 2017, the unearned compensation related to service-based stock options is $564,562.

 

On January 2, 2017, the Company granted to its newly appointed Chief Financial Officer a service-based stock option to acquire 100,000 shares of common stock at an exercise price of $1.91 per share, which represented the closing price of the Company’s common stock as reported on the NYSE MKT on the date of grant. The per share fair-value of this service-based option was $1.11. The per share fair-value was estimated on the date of grant using the Black-Scholes option pricing method and included the following range of assumptions: dividend yield 0%, risk-free interest rate of 1.94% and expected option life of four years. The volatility assumption was 77.78% and the forfeiture rate was assumed to be 0%.

 

Under the terms of the service-based stock option agreement relating to the January 2, 2017 stock option grant, the award vests in four annual installments over a period of four years and shall be fully vested on January 2, 2021.

 

On January 12, 2017, the Company granted to certain employees service-based stock options to acquire 20,000 shares of common stock at an exercise price of $1.92 per share, which represented the closing price of the Company’s common stock as reported on the NYSE MKT on the date of grant. The per share fair-value of this service-based option was $1.11. The per share fair-value was estimated on the date of grant using the Black-Scholes option pricing method and included the following range of assumptions: dividend yield 0%, risk-free interest rate of 1.87% and expected option life of four years. The volatility assumption was 77.88% and the forfeiture rate was assumed to be 0%.

 

Under the terms of the service-based stock option agreement relating to the January 12, 2017 stock option grant, the award vests in four annual installments over a period of four years and shall be fully vested on January 12, 2021.

 

On February 17, 2017, the Company granted to certain employees service-based stock options to acquire 100,000 shares of common stock at an exercise price of $1.72 per share, which represented the closing price of the Company’s common stock as reported on the NYSE MKT on the date of grant. The per share fair-value of this service-based option was $0.94. The per share fair-value was estimated on the date of grant using the Black-Scholes option pricing method and included the following range of assumptions: dividend yield 0%, risk-free interest rate of 1.92% and expected option life of four years. The volatility assumption was 72.01% and the forfeiture rate was assumed to be 0%.

 

Under the terms of the service-based stock option agreements relating to the February 17, 2017 stock option grant, the award vests in four annual installments over a period of four years and shall be fully vested on February 17, 2021.

20

WIRELESS TELECOM GROUP, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

 

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-months ended March 31, 2017 and 2016 is set forth below:

21

WIRELESS TELECOM GROUP, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

 

   Three Months Ended March 31, 
   2017   2016 
Net sales by segment:          
Network solutions  $5,515,301   $4,213,314 
Test and measurement   3,036,681    2,155,101 
Embedded solutions   996,776    - 
Total consolidated net sales of reportable segments  $9,548,758   $6,368,415 
           
Segment income (loss):          
Network solutions  $908,221   $339,926 
Test and measurement   25,206    (312,447)
Embedded solutions   (229,471)   - 
Income (loss) from reportable segments  $703,956   $27,479 
           
Other unallocated amounts:          
Corporate expenses  $(2,422,936)  $(948,130)
Other (expenses) income - net   (50,764)   (41,604)
Consolidated income (loss) before Income tax provision (benefit)  $(1,769,744)  $(962,255)
           
Depreciation and amortization by segment:          
Network solutions  $101,364   $55,747 
Test and measurement   93,386    60,111 
Embedded solutions   219,370    - 
Total depreciation and amortization for reportable segments  $414,120   $115,858 
           
Capital expenditures by segment:          
Network solutions  $83,959   $55,230 
Test and measurement   66,139    19,244 
Embedded solutions   41,977    - 
Total consolidated capital expenditures by reportable segment  $192,075   $74,474 
           
    2017    2016 
Total assets by segment:          
Network solutions  $11,345,314   $10,594,770 
Test and measurement   7,449,613    7,851,479 
Embedded solutions   23,592,296    - 
Total assets for reportable segments   42,387,223    18,446,249 
           
Corporate assets, principally cash and cash equivalents and deferred income taxes   10,269,647    16,988,886 
Total consolidated assets  $52,656,870   $35,435,135 
22

WIRELESS TELECOM GROUP, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

 

Consolidated net sales by region were as follows:

 

   Three Months Ended
March 31,
 
Sales by region   2017    2016 
Americas  $6,959,419   $5,065,636 
Europe, Middle East, Africa (EMEA)   1,971,924    948,357 
Asia Pacific (APAC)   617,415    354,422 
Total Sales  $9,548,758   $6,368,415 

 

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 March 31, 2017 and 2016, sales in the United States for all reportable segments amounted to $6,461,065 and $4,772,171 respectively. For the three months ended March 31, 2017, shipments to the EMEA region were largely concentrated in the United Kingdom ($595,629), Germany ($212,036) and Israel ($249,422). For three months ended March 31, 2016 sales to the EMEA region were largely concentrated in Germany ($236,400). For the three months ended March 31, 2016 and 2015 sales to the APAC region were largely concentrated in China and were $437,951 and 187,171, respectively.

 

NOTE 11 – COMMITMENTS AND CONTINGENCIES

 

Warranties:

 

The Company typically provides one-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 has 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.

 

The following is a summary of the Company’s contractual obligations as of March 31, 2017:

23

WIRELESS TELECOM GROUP, INC.

NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

 

       Payments by Period
       Less than           More than 
   Total   1 year   1-3 Years   4-5 Years   5 Years 
Facility Leases  $2,906,871   $468,626   $1,468,978   $477,472   $491,796 
Purchase Obligations   2,739,602    2,739,602    -    -    - 
Operating and Equipment Leases   265,665    54,034    162,101    49,531    - 
   $5,912,138   $3,262,262   $1,631,079   $527,003   $491,796 

 

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.

24

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

 

FORWARD LOOKING STATEMENTS

 

The statements contained in this Quarterly Report on Form 10-Q that are not historical facts, including, without limitation, 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 may be identified by, among other things, the use of forward-looking terminology such as “believes,” “expects,” “intends,” “plans,” “may,” “will,” “should,” “anticipates” or “continues” or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy that 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, 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 the Company’s filings with the Securities and Exchange Commission including in our Annual Report on Form 10-K for the year ended December 31, 2016. 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.

 

INTRODUCTION

 

The Company develops, manufactures and markets a wide variety of electronic noise sources, electronic testing and measuring instruments including power meters, voltmeters and modulation meters and high-power passive microwave components for wireless products. Additionally, the Company is a supplier of signal processing technology for network validation systems, supporting LTE and emerging 5G networks and its products and services solve unique solutions in LTE/4G. The Company serves both commercial and government markets with work-flow-oriented, built-for-purpose solutions in distributed antenna systems (“DAS”), cellular/mobile, WiFi, satellite, cable, radar and computing applications. 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 (RF) and microwave systems.

 

The operating businesses of the Company are segregated into three reportable segments: (1) network solutions (2) test and measurement and (3) embedded solutions. The network solutions segment is comprised primarily of the operations of the Company’s subsidiary, Microlab. The test and measurement segment is comprised primarily of the Company’s operations (Noisecom) and the operations of its subsidiary, Boonton. The embedded solutions segment is comprised primarily of the operations of the Company’s subsidiary, CommAgility Limited. Additional financial information on the Company’s reportable segments as of March 31, 2017 and December 31, 2016, as well as for the three-months ended March 31, 2017 and 2016 is included in Note 8 to the Company’s interim condensed consolidated financial statements set forth in this current report on Form 10-Q.

 

The financial information presented herein includes:

 

(i) Condensed Consolidated Balance Sheets as of March 31, 2017 (unaudited) and as of December 31, 2016; (ii) Condensed Consolidated Statements of Operations and Comprehensive (Loss) for the three-month periods ended March 31, 2017 (unaudited) and 2016 (unaudited); (iii) Condensed Consolidated Statements of Cash Flows for the three-month periods ended March 31, 2017 (unaudited) and 2016 (unaudited); and (iv) Condensed Consolidated Statement of Shareholders’ Equity for the three-month period ended March 31, 2017 (unaudited).

25

Critical Accounting Policies

 

Estimates and Assumptions

 

Management’s discussion and analysis of the financial condition and results of operations are based upon the consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses for each period. The following represents a summary of the Company’s critical accounting policies, defined as those policies that the Company believes are: (a) the most important to the portrayal of our financial condition and results of operations, and (b) that require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effects of matters that are inherently uncertain. Estimates and assumptions are made by management to assess the overall likelihood that an accounting estimate or assumption may require adjustment. Management assumptions have been reasonably accurate in the past, and future estimates or assumptions are likely to be calculated on the same basis.

 

Stock-based Compensation

 

The Company follows the provisions of Accounting Standards Codification (ASC) 718, “Share-Based Payment” which requires that compensation expense be recognized based on the fair value of the stock awards less estimated forfeitures. The fair value of the stock awards is equal to the fair value of the Company’s stock on the date of grant. The fair value of options at the date of grant is estimated using the Black-Scholes option pricing model. When options are granted, the Company takes into consideration guidance under ASC 718 and SEC Staff Accounting Bulletin No. 107 (SAB 107) when determining assumptions. The expected option life is derived from assumed exercise rates based upon historical exercise patterns and represents the period of time that options granted are expected to be outstanding. The expected volatility is based upon historical volatility of our shares using weekly price observations over an observation period that approximates the expected life of the options. The risk-free rate is based on the U.S. Treasury yield curve rate in effect at the time of grant for periods similar to the expected option life. The estimated forfeiture rate included in the option valuation is based on our past history of forfeitures. Due to the limited amount of forfeitures in the past, the Company’s estimated forfeiture rate has been zero.

 

Management estimates are necessary in determining compensation expense for stock options with performance-based vesting criteria. Compensation expense for this type of stock-based award is recognized over the period from the date the performance conditions are determined to be probable of occurring through the date the applicable conditions are expected to be met. If the performance conditions are not considered probable of being achieved, no expense is recognized until such time as the performance conditions are considered probable of being met, if ever. Management evaluates whether performance conditions are probable of occurring on a quarterly basis.

 

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.

26

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.

 

Inventories and Inventory Valuation

 

Inventories are stated at the lower of cost (average cost) or market. The Company reviews inventory for excess and obsolescence based on best estimates of future demand, product lifecycle status and product development plans.

 

Allowances for Doubtful Accounts

 

The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. A key consideration in estimating the allowance for doubtful accounts has been, and will continue to be, our customer’s payment history and aging of its accounts receivable balance.

 

Income Taxes

 

The Company records deferred taxes in accordance with ASC 740, “Accounting for Income Taxes”. This ASC requires recognition of deferred tax assets and liabilities for temporary differences between tax basis of assets and liabilities and the amounts at which they are carried in the financial statements, based upon the enacted rates in effect for the year in which the differences are expected to reverse. The Company establishes a valuation allowance when necessary to reduce deferred tax assets to the amount expected to be realized. The Company periodically assesses the value of its deferred tax asset and determines the necessity for a valuation allowance. The Company evaluates which portion, if any, will more likely than not be realized by offsetting future taxable income, taking into consideration any limitations that may exist on its use of its net operating loss carryforwards.

 

Uncertain Tax Positions

 

Under ASC 740, the Company must recognize and disclose uncertain tax positions only if it is more-likely-than-not that the tax position will be sustained on examination by the taxing authority, based on the technical merits of the position. The amounts recognized in the financial statements attributable to such position, if any, are recorded if there is a greater than 50% likelihood of being realized upon the ultimate resolution of the position.

 

The Company has analyzed its filing positions in all of the federal and state jurisdictions where it is required to file income tax returns. As of December 31, 2016 and 2015, the Company has identified its federal tax return and its state tax return in New Jersey as “major” tax jurisdictions, as defined in ASC 740, in which it is required to file income tax returns. Based on the evaluations noted above, the Company has concluded that there are no significant uncertain tax positions requiring recognition or disclosure in its consolidated financial statements.

 

Based on a review of tax positions for all open years and contingencies as set out in the Company’s Notes to the consolidated financial statements, no reserves for uncertain income tax positions have been recorded pursuant to ASC 740 during the years ended December 31, 2016 and 2015, and the Company does not anticipate that it is reasonably possible that any material increase or decrease in its unrecognized tax benefits will occur within the next twelve months.

 

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 not amortized but rather is reviewed for impairment at least annually or more frequently if a triggering event occurs. Management first makes a qualitative assessment of whether it is more-likely-than-not that a reporting unit’s fair value is less than its carrying amount. If, based on the qualitative assessment, the estimated fair value is well in excess of its carrying amount, no impairment is recorded. If, however, the reporting unit’s carrying value exceeds its fair value an impairment is recorded by the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill.

27

Intangible and Long-lived Assets

 

Intangible assets include patents and customer relationships and 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.

 

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 consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2016.

 

   Three months ended March 31, 
   Revenue   % of Rev   Change 
   2017  2016  2017  2016  Amount   Pct.
Network solutions  $5,515,301   $4,213,314    57.8%   66.2%  $1,301,987    30.9%
                               
Test and measurement   3,036,681    2,155,101    31.8%   33.8%   881,580    40.9%
                               
Embedded solutions   996,776    -    10.4%   0.0%   996,776    - 
                               
Total revenue  $9,548,758   $6,368,415    100.0%   100.0%  $3,180,343    49.9%

 

Net consolidated revenues for the three months ended March 31, 2017 were $9,548,758 as compared to $6,368,415 for the three months ended March 31, 2016, an increase of $3,180,343 or 49.9%. Net revenue from the Network solutions segment was $5,515,301 for the three months ended March 31, 2017 as compared to $4,213,314 for the three months ended March 31, 2016, an increase of $1,301,987 or 30.9%. Net revenue from the Test and measurement segment was $3,036,681 for the three months ended March 31, 2017 as compared to $2,155,101 for the three months ended March 31, 2016, an increase of $881,580 or 40.9%. The Embedded solutions segment which was acquired on February 17, 2017 contributed $996,776 in revenue for the stub period from acquisition date to March 31, 2017.

 

Net revenues from the Company’s Network solutions products for the three months ended March 31, 2017 were $5,515,301 as compared to $4,213,314 for the three months ended March 31, 2016, an increase of $1,301,987 or 30.9%. Net revenues from Network solutions products accounted for 57.8% and 66.2% of net consolidated revenues for the three months ended March 31, 2017 and 2016, respectively. The increase in revenues was primarily due to increased demand for the Company’s passive RF components and subassemblies, largely as a result of increased capital spending by certain domestic wireless operators.

 

Net revenues from the Company’s Test and measurement products for the three months ended March 31, 2017 were $3,036,681 as compared to $2,155,101 for the three months ended March 31, 2016, an increase of $881,580 or 40.9%. Net revenues from Test and measurement products accounted for

28

31.8% and 33.8% of net consolidated revenues for the three months ended March 31, 2017 and 2016, respectively. The increase in revenues was primarily due to an increase in government spending.

 

The Company acquired CommAgility Limited on February 17, 2017 which represents the Company’s Embedded solutions segment. Embedded Solutions contributed $996,776 of revenue for the period from acquisition to March 31, 2017.

 

   Three months ended March 31,
   Gross Profit  Gross Margin  Change
   2017  2016  2017  2016  Amount  Pct.
Network solutions  $2,460,482   $1,782,990    44.6%   42.3%   677,492    38.0%
                               
Test and measurement   1,334,207    937,124    43.9%   43.5%   397,083    42.4%
                               
Embedded solutions   537,821    -    54.0%   0.0%   537,821    - 
                               
Total gross profit  $4,332,510   $2,720,114    45.4%   42.7%   1,612,396    59.3%

 

The Company’s gross profit on consolidated net revenues for the three months ended March 31, 2017 was $4,332,510 or 45.4% as compared to $2,720,114 or 42.7% as reported for the three months ended March 31, 2016. Gross profit increased primarily due to increased revenue and higher absorption of fixed manufacturing costs for the three months ended March 31, 2017 as compared to same period in 2016. Gross profit of the Company’s newly acquired Embedded solutions segment contributed $537,820 to the overall gross profit increase from the same period last year.

 

Consolidated operating expenses for the three months ended March 31, 2017 were $6,051,491 or 63.4% of consolidated net revenues as compared to $3,640,765 or 57.2% of consolidated net revenues for the three months ended March 31, 2016. For the three months ended March 31, 2017 as compared to the prior year, consolidated operating expenses increased by $2,410,726 or 66.2%. Consolidated operating expenses were higher in the three months ended March 31, 2017 due to the inclusion of $767,292 of expenses associated with the Embedded solutions segment which was acquired on February 17, 2017 and included $200,645 of amortization expense related to purchased intangibles as well as $156,436 of non-recurring expenses associated with establishing Wireless Telecommunications Ltd. Additionally, operating expenses increased from the same period in the prior year due to acquisition and closing costs associated with the CommAgility acquisition of approximately $1,200,000, increased incentive compensation expense associated with new stock option and restricted stock grants of approximately $200,000, increased general and administrative salaries of approximately $125,000 due to an expanded executive team and increased commissions to our third party sales reps of approximately $140,000 due to higher sales.

 

Other expenses decreased $40,000 as the Company incurred $38,000 in the three months ended March 31, 2016 related to ground water remediation efforts. Interest expense increased $49,000 related to our new credit facility and accretion of the contingent consideration liability.

 

For the three months ended March 31, 2017, the Company recorded a tax benefit of $538,301. The tax benefit was primarily due to losses generated from the Company’s operations. For the three months ended March 31, 2016, the Company recorded a tax benefit of $385,928. The tax benefit recorded for the three-months ended March 31, 2016 was primarily due to losses generated from the Company’s operations during the period.

 

For the three months ended March 31, 2017, the Company realized a net loss of $1,231,443 or $0.06 loss per share on a basic and diluted basis, as compared to a net loss of $576,327 or $0.03 loss per share on a basic and diluted basis for the three months ended March 31, 2017, a decrease of $655,116 or $0.03 per diluted share. The decrease was due to the factors discussed above.

29

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 the financial statements) 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 used by operating activities was $(899,832) for the three months ended March 31, 2017 as compared to cash provided by operating activities of $227,614 for the three months ended March 31, 2016. During the three months ended March 31, 2017 changes in our operating assets and liabilities resulted in a net decrease in cash of $(6,354) primarily due to cash used for inventory and higher accounts receivable. During the three months ended March 31, 2016, changes in our operating assets and liabilities resulted in a net increase in cash of $935,225. The increase was driven by increased accounts payable and accounts receivable collections in the three months ended March 31, 2016. These increases were offset by cash used for inventory. Cash used for the three months ended March 31, 2017 was primarily generated by the net operating loss incurred by the Company driven by high acquisition expenses associated with the CommAgility acquisition.

 

Investing Activities

 

Cash used by investing activities was $(8,788,258) and $(74,474) for the three months ended March 31, 2017 and 2016, respectively, and included capital expenditures of $192,075 and $74,474, respectively. For the three months ended March 31, 2017 cash used for the acquisition of CommAgility was $8,596,183 net of cash acquired.

 

Financing Activities

 

Cash provided by financing activities was $2,486,179 for the three months ended March 31, 2017 as compared to cash used of $(107,557) for the three months ended March 31, 2016. During the three months ended March 31, 2017 the Company received net proceeds of $1,904,037 and $760,000 from the asset based revolver and term loan, respectively. The Company paid $215,358 in debt issuance costs associated with the new credit facility. During the three months ended March 31, 2016 the Company paid $(42,089) related to a capital equipment lease and $(65,468) related to the repurchase of common stock.

 

As noted in Note 7 to the financial statements, 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, 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 March 31, 2017, $1,904,037 was outstanding on the asset based revolver. At March 31, 2017 the Company has excess availability under the Revolver of $3,410,000.

 

As of March 31, 2017, future minimum lease payments related to the Company’s facility lease and equipment leases are shown below:

 

           Payments by Period
      Less than        More than
   Total  1 year  1-3 Years  4-5 Years  5 Years
Facility Leases  $2,906,871   $468,626   $1,468,978   $477,472   $491,796 
                          
Purchase Obligations   2,739,602    2,739,602    -    -    - 
Operating and Equipment Leases   265,665    54,034    162,101    49,531    - 
   $5,912,139   $3,262,262   $1,631,079   $527,003   $491,796 
30

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.

 

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.

 

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 Controls 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 over financial reporting during the three months ended March 31, 2017that have materially affected, or arereasonably likely to materially affect, our internal control over financial reporting, as described in our 2016 Annual Report on Form 10-K.

31

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., Wireless Telecommunications, Ltd., Edward De Salis Young, Paul Moakes, Simon Pack and Martin Hollinshead (incorporated herein by reference to Exhibit 10.1 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
32
  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)
   
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 quarter ended March 31, 2017, filed on May 15, 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

 

*Filed herewith.

** Furnished herewith.

33

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:  May 15, 2017 /s/ Timothy Whelan  
    Timothy Whelan
    Chief Executive Officer
     
  Date:  May 15, 2017 /s/ Michael Kandell  
    Michael Kandell
    Chief Financial Officer
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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 quarter ended March 31, 2017, filed on May 15, 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

 

*Filed herewith.
** Furnished herewith.

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