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WIRELESS TELECOM GROUP INC - Quarter Report: 2021 September (Form 10-Q)

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

FORM 10-Q

 

 

 

(Mark One)

 

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

 

For the quarterly period ended September 30, 2021

 

OR

 

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

 

For the transition period from                       to     

 

Commission file number: 1-11916

 

WIRELESS TELECOM GROUP, INC.

(Exact name of Registrant as specified in its charter)

 

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

 

25 Eastmans Road, Parsippany, New Jersey

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

 

(973) 386-9696

(Registrant’s telephone number, including area code)

 

 

 

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

 

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

 

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

Yes ☒ No ☐

 

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

Yes ☒ No ☐

 

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

 

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

 

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

 

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

 

Yes ☐ No

 

Number of shares of Common Stock outstanding as of November 5, 2021: 22,421,183

 

 

 

 
 

 

WIRELESS TELECOM GROUP, INC.

Form 10-Q

Table of Contents

 

PART I – FINANCIAL INFORMATION  
   
Item 1. Financial Statements (Unaudited) 3
   
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 21
   
Item 3. Quantitative and Qualitative Disclosures About Market Risk 27
   
Item 4. Controls and Procedures 27
   
PART II – OTHER INFORMATION  
   
Item 1. Legal Proceedings 28
   
Item 1A. Risk Factors 28
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 28
   
Item 3. Defaults Upon Senior Securities 28
   
Item 4. Mine Safety Disclosures 28
   
Item 5. Other Information 28
   
Item 6. Exhibits 28
   
SIGNATURES 30

 

2
 

 

WIRELESS TELECOM GROUP, INC.

CONSOLIDATED BALANCE SHEETS

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

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

   (Unaudited)     
   September 30
2021
   December 31
2020
 
CURRENT ASSETS          
Cash & cash equivalents  $1,283   $4,910 
Accounts receivable - net of reserves of $216 and $143, respectively   7,420    5,520 
Inventories - net of reserves of $1,241 and $1,129 respectively   9,655    8,796 
Prepaid expenses and other current assets   2,058    2,172 
TOTAL CURRENT ASSETS   20,416    21,398 
           
PROPERTY PLANT AND EQUIPMENT - NET   1,629    1,824 
           
OTHER ASSETS          
Goodwill   11,461    11,512 
Acquired intangible assets, net   4,249    5,242 
Deferred income taxes   6,162    5,701 
Right of use assets   1,282    1,680 
Other assets   548    561 
TOTAL OTHER ASSETS   23,702    24,696 
           
TOTAL ASSETS  $45,747   $47,918 
           
CURRENT LIABILITIES          
Short term debt  $150   $512 
Accounts payable   2,205    1,546 
Short term leases   572    534 
Accrued expenses and other current liabilities   7,656    7,997 
Deferred revenue   691    924 
TOTAL CURRENT LIABILITIES   11,274    11,513 
           
LONG TERM LIABILITIES          
Long term debt   3,578    8,895 
Long term leases   766    1,200 
Other long term liabilities   1,678    82 
Deferred tax liability   444    377 
TOTAL LONG TERM LIABILITIES   6,466    10,554 
           
COMMITMENTS AND CONTINGENCIES   -    - 
           
SHAREHOLDERS’ EQUITY          
Preferred stock, $.01 par value, 2,000,000 shares authorized, none issued   -    - 
Common stock, $.01 par value, 75,000,000 shares authorized 35,550,342 and 34,888,904 shares issued, 22,310,889 and 21,669,361 shares outstanding   355    349 
Additional paid in capital   51,305    50,163 
Retained earnings/(deficit)   171    (946)
Treasury stock at cost, 13,239,453 and 13,219,543 shares   (24,600)   (24,556)
Accumulated other comprehensive income   776    841 
TOTAL SHAREHOLDERS’ EQUITY   28,007    25,851 
           
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY  $45,747   $47,918 

 

See accompanying Notes to Consolidated Financial Statements.

 

3
 

 

WIRELESS TELECOM GROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME/(LOSS)

(UNAUDITED)

(In thousands, except per share amounts)

 

                 
   For the Three Months Ended   For the Nine Months Ended 
   September 30   September 30 
   2021   2020   2021   2020 
Net revenues  $12,824   $10,868   $36,168   $31,404 
                     
Cost of revenues   6,284    5,214    17,549    15,655 
                     
Gross profit   6,540    5,654    18,619    15,749 
                     
                     
Operating expenses                    
Research and development   1,435    1,826    4,281    5,080 
Sales and marketing   1,854    1,732    5,266    5,111 
General and administrative   2,800    2,444    8,469    7,322 
Loss on Change in Contingent Consideration   1,000    -    1,000    - 
Total operating expenses   7,089    6,002    19,016    17,513 
                     
Operating income/(loss)   (549)   (348)   (397)   (1,764)
                     
Extinguishment of PPP loan   -    -    2,045    - 
Other income/(expense)   20    (43)   29    252 
Interest expense   (365)   (256)   (947)   (727)
                     
Income/(Loss) before taxes   (894)   (647)   730    (2,239)
                     
Tax provision/(benefit)   (707)   128    (386)   352 
                     
Net income/(loss)  $(187)  $(775)  $1,116   $(2,591)
                     
Other comprehensive income/(loss):                    
Foreign currency translation adjustments   (152)   565    (64)   (406)
Comprehensive income/(loss)  $(339)  $(210)  $1,052   $(2,997)
                     
                     
Income/(Loss) per share:                    
Basic  $(0.01)  $(0.04)  $0.05   $(0.12)
Diluted  $(0.01)  $(0.04)  $0.05   $(0.12)
                     
Weighted average shares outstanding:                    
Basic   22,234    21,703    21,900    21,643 
Diluted   22,234    21,703    24,219    21,643 

 

In periods with a net loss, the basic loss per share equals the diluted loss per share as all common stock equivalents are excluded from the per share calculation because they are anti-dilutive.

 

See accompanying Notes to Consolidated Financial Statements.

 

4
 

 

WIRELESS TELECOM GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(In thousands)

 

         
   For the Nine Months 
   Ended September 30 
   2021   2020 
CASH FLOWS PROVIDED/(USED) BY OPERATING ACTIVITIES          
Net Income/(Loss)  $1,116   $(2,591)
Adjustments to reconcile net income/(loss) to net cash provided/(used) by operating activities:          
Depreciation and amortization   1,604    1,631 
Extinguishment of PPP loan   (2,045)   - 
Amortization of debt issuance fees   217    215 
Share-based compensation expense   301    360 
Deferred rent   (22)   (22)
Deferred income taxes   (387)   1,057 
Provision for doubtful accounts   72    (28)
Inventory reserves   115    119 
Changes in assets and liabilities, net of acquisition:          
Accounts receivable   (1,998)   (1,343)
Inventories   (993)   (461)
Prepaid expenses and other assets   459    (226)
Accounts payable   728    (451)
Accrued expenses and other liabilities   1,368    888 
Net cash provided/(used) by operating activities   535    (852)
           
CASH FLOWS PROVIDED/(USED) BY INVESTING ACTIVITIES          
Capital expenditures   (417)   (228)
Acquisition of business, net of cash acquired   (200)   (7,189)
Net cash provided/(used) by investing activities   (617)   (7,417)
           
CASH FLOWS PROVIDED/(USED) BY FINANCING ACTIVITIES          
Revolver borrowings   50,220    27,432 
Revolver repayments   (50,175)   (29,786)
Term loan borrowings   345    8,400 
Term loan repayments   (4,191)   (405)
Debt issuance fees   -    (1,305)
PPP loan   -    2,045 
Payment of contingent consideration   (460)   - 
Proceeds from exercise of stock options   209    15 
Shares withheld for employee taxes   (44)   (31)
ATM shares sold   565    - 
Net cash provided/(used) by financing activities   (3,531)   6,365 
           
Effect of Exchange Rate Changes on Cash and Cash Equivalents   (14)   (138)
NET DECREASE IN CASH AND CASH EQUIVALENTS   (3,627)   (2,042)
           
Cash and Cash Equivalents, at Beginning of Period   4,910    4,245 
           
CASH AND CASH EQUIVALENTS, AT END OF PERIOD  $1,283   $2,203 
           
SUPPLEMENTAL INFORMATION:          
Cash paid during the period for interest  $698   $527 
Cash paid during the period for income taxes  $150   $53 
Non cash issuance of common stock in connection with acquisition – see Note 3          

 

See accompanying Notes to Consolidated Financial Statements.

  

5
 

 

WIRELESS TELECOM GROUP, INC.

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

(UNAUDITED)

(In thousands, except share amounts)

 

                             
   Common
Stock Issued
   Common
Stock
Amount
   Additional Paid
In Capital
   Retained
Earnings
   Treasury
Stock
   Accumulated
Other
Comprehensive
Income/(Loss)
   Total
Shareholders’
Equity
 
Balances at January 1, 2020   34,488,252   $345   $49,062   $7,142   $(24,509)  $651   $32,691 
                                    
Net income/(loss)   -    -    -    (1,147)   -    -    (1,147)
Issuance of shares in connection with stock options exercised                                   
Issuance of shares in connection with stock options exercised, shares                                   
Issuance of restricted stock                                   
Issuance of restricted stock, shares                                   
Forfeiture of restricted stock   (16,667)                              
Issuance of shares in connection with Holzworth acquisition   347,319    3    462    -    -    -    465 
Issuance of warrants in connection with term debt   -    -    151    -    -    -    151 
Shares withheld for employee taxes   -    -    -    -    (26)   -    (26)
Share-based compensation expense   -    -    81    -    -    -    81 
ATM shares sold                                   
ATM shares sold, shares                                   
Cumulative translation adjustment   -    -    -    -    -    (935)   (935)
Balances at March 31, 2020   34,818,904   $348   $49,756   $5,995   $(24,535)  $(284)  $31,280 
                                    
Net income/(loss)   -    -    -    (668)   -    -    (668)
Share-based compensation expense   -    -    128    -    -    -    128 
Cumulative translation adjustment   -    -    -    -    -    (36)   (36)
Balances at June 30, 2020   34,818,904   $348   $49,884   $5,327   $(24,535)  $(320)  $30,704 
                                    
Net income/(loss)   -    -    -    (775)   -    -    (775)
Issuance of shares in connection with stock options exercised   20,000    -    15    -    -    -    15 
Issuance of restricted stock   50,000    1    (1)   -    -    -    - 
Shares withheld for employee taxes   -    -    -    -    (5)   -    (5)
Share-based compensation expense   -    -    151    -    -    -    151 
Cumulative translation adjustment   -    -    -    -    -    565    565 
Balances at September, 2020   34,888,904   $349   $50,049   $4,552   $(24,540)  $245   $30,655 

 

  

Common

Stock Issued

   Common
Stock
Amount
  

Additional Paid

In Capital

  

Retained

Earnings

  

Treasury

Stock

  

Accumulated
Other

Comprehensive

Income/(Loss)

  

Total

Shareholders’

Equity

 
Balances at January 1, 2021   34,888,904   $349   $50,163   $(946)  $(24,556)  $841   $25,851 
                                    
Net income/(loss)   -    -    -    (233)   -    -    (233)
Shares withheld for employee taxes   -    -    -    -    (17)   -    (17)
Share-based compensation expense   -    -    114    -    -    -    114 
Cumulative translation adjustment   -    -    -    -    -    75    75 
Balances at March 31, 2021   34,888,904   $349   $50,277   $(1,179)  $(24,573)  $916   $25,790 
                                    
Net income/(loss)   -    -    -    1,537    -    -    1,537 
Issuance of restricted stock   223,517    2    (2)   -    -    -    - 
Share-based compensation expense   -    -    89    -    -    -    89 
Cumulative translation adjustment   -    -    -    -    -    12    12 
Balances at June 30, 2021   35,112,421   $351   $50,364   $358   $(24,573)  $928   $27,428 
Balances   35,112,421   $351   $50,364   $358   $(24,573)  $928   $27,428 
                                    
Net income/(loss)   -    -    -    (187)   -    -    (187)
Issuance of shares in connection with stock options exercised   140,000    1    208    -    -    -    209 
Issuance of shares in connection with Holzworth acquisition   33,220    -    73    -    -    -    73 
Shares withheld for employee taxes   -    -    -    -    (27)   -    (27)
Share-based compensation expense   -    -    98    -    -    -    98 
ATM shares sold   264,701    3    562    -    -    -    565 
Cumulative translation adjustment   -    -    -    -    -    (152)   (152)
Balances at September 30, 2021   35,550,342   $355   $51,305   $171   $(24,600)  $776   $28,007 
Balances   35,550,342   $355   $51,305   $171   $(24,600)  $776   $28,007 

 

See accompanying Notes to Consolidated Financial Statements.

  

6
 

 

NOTE 1 - Summary of Significant Accounting Principles and Policies

 

Basis of Presentation and Preparation

 

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

 

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

 

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

 

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

 

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

 

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

 

Consolidated Financial Statements

 

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

 

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

 

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

 

Critical Accounting Estimates

 

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

 

7
 

 

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

 

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

 

Concentration Risk

 

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

 

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

 

For the three months ended September 30, 2021 no one customer accounted for greater than 10% of consolidated revenue. For the nine months ended September 30, 2021 one customer accounted for 10.32% of consolidated revenue. For the three months ended September 30, 2020, one customer accounted for 12.5% of the Company’s consolidated revenues. For the nine months ended September 30, 2020 no one customer accounted for greater than 10% of the Company’s consolidated revenues.

 

One customer accounted for 12.2% of consolidated accounts receivable as of September 30, 2021. At December 31, 2020, one customer accounted for 12.7% of consolidated accounts receivable.

 

Fair Value of Financial Instruments

 

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

 

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

 

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

 

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

 

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

 

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

 

Contingent Consideration

 

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

 

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

 

8
 

 

The Company accounts for business acquisitions in accordance with ASC 805, Business Combinations. Under ASC 805 the Company is required to reassess contingent consideration liabilities as of each reporting date. Additionally, adjustments to contingent consideration liabilities that occur after the measurement period, which is typically one year, are recorded as a component of operating income in the Consolidated Statement of Operations and Comprehensive Income/(Loss). Due to the anticipated better than expected financial performance of the Holzworth reporting unit for fiscal year 2021, the Company recorded an increase to the contingent consideration liabilities in the amount of $1.0 million in the three months ended September 30, 2021, which represents the Company’s best estimate of the earnout payable based on the expected financial results for the year ending December 31, 2021. This earnout will be payable in four equal installments in fiscal 2022. The adjustment was recorded as a loss on change in contingent consideration in the Consolidated Statement of Operations and Comprehensive Income/(Loss).

 

As of September 30, 2021, amounts due for the Holzworth deferred purchase price and earnout were $500,000 and $4.1 million, respectively.

 

NOTE 2 – Accounting Pronouncements

 

Recently Adopted Accounting Standards

 

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

 

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which simplifies the accounting for income taxes by removing certain exceptions related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The new ASU also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates. These changes aim to improve the overall usefulness of disclosures to financial statement users and reduce unnecessary costs to companies when preparing the disclosures. The guidance was effective for the Company beginning on January 1, 2021 and prescribes different transition methods for the various provisions. The adoption of this standard had no material impact on the Company’s financial statements or related disclosures.

 

Recent Accounting Pronouncements Not Yet Adopted

 

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

 

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

 

NOTE 3 – Acquisition of Holzworth

 

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

 

9
 

 

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

 

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

 

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

 

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

 

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

 

Additionally, the parties amended the payment dates of the earnout consideration. The payment date of the Year 1 Earnout has been amended from March 31, 2021 to (i) six (6) equal quarterly installments of 10% of the Year 1 Earnout payable on the last business day of each calendar quarter between June 30, 2021 and September 30, 2022 and (ii) one (1) installment payment equal to 40% of the Year 1 Earnout on December 31, 2022. The Year 1 Earnout is payable in cash or shares of the Company’s common stock, at the Company’s option, based on the 90 trading day volume weighted average price immediately preceding final determination of the Year 1 Earnout or $2.19 per share. The payment for the Year 1 Earnout is $3.4 million, of which $210,000 was paid in cash and $73,000 was issued in common stock as of September 30, 2021.

 

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

 

Due to the anticipated better than expected financial performance of the Holzworth reporting unit for fiscal year 2021, the Company recorded an increase to the contingent consideration liabilities in the amount of $1.0 million in the three months ended September 30, 2021 which represents the Company’s best estimate of the Year 2 Earnout. The adjustment was recorded as a loss on change in contingent consideration in the Consolidated Statement of Operations and Comprehensive Income/(Loss).

 

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

 

10
 

 

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

 

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

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

 

   Holzworth   Microlab   CommAgility   Total 
Balance as of January 1, 2020  $-   $1,351   $8,718   $10,069 
Holzworth acquisition   6,000    -    -    6,000 
Goodwill Impairment   -    -    (4,742)   (4,742)
Foreign currency translation   -    -    185    185 
Balance as of December 31, 2020  $6,000   $1,351   $4,161   $11,512 
Foreign currency translation   -    -    45    45 
Balance as of March 31, 2021  $6,000   $1,351   $4,206   $11,557 
Foreign currency translation   -    -    7    7 
Balance as of June 30, 2021  $6,000   $1,351   $4,213   $11,564 
Foreign currency translation   -    -    (103)   (103)
Balance as of September 30, 2021  $6,000   $1,351   $4,110   $11,461 

 

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NOTE 4 – Debt

 

Debt consists of the following (in thousands):

 

   September 30, 2021 
Revolver at LIBOR plus margin  $45 
Term loan at LIBOR plus margin   4,125 
Less: Debt issuance costs, net of amortization   (678)
Less: Fair value of warrants, net of amortization   (101)
CIBLS Loan at Bank of England plus margin   337 
Total Debt   3,728 
Less: Debt maturing within one year   (150)
Non-current portion of long term debt  $3,578 

 

Term loan payments by period (in thousands):

 

      
Remainder of 2021  $21 
2022   126 
2023   168 
2024   168 
2025   3,936 
Thereafter   43 
Total  $4,462 

 

Muzinich Term Loan Facility

 

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

 

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

 

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

 

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On May 27, 2021, the Company and its subsidiaries entered into the Third Amendment to the Credit Agreement and Limited Waiver (“Amendment 3)” with Muzinich in which Muzinich, among other things, permitted CommAgility to enter into the CIBLS Loan Agreement with Lloyds Bank Plc. See description below.

 

On September 28, 2021, the Company and its subsidiaries entered into the Fourth Amendment to Credit Agreement and Limited Waiver (“Amendment 4”) with Muzinich. Amendment 4 was executed in connection with a prepayment of the principal balance of the Muzinich term loan in the amount of $3.7 million and accrued interest thereon of $95,000 on September 28, 2021. Additionally, the Company paid a prepayment premium of 2% of the prepayment amount or $74,000.

 

Under the terms of Amendment 4, the interest rate margin was decreased from 9.25% to 8.75% when trailing twelve month Consolidated EBITDA, as defined, excluding the US R&D tax credit, is less than or equal to $4.0 million and decreased from 8.50% to 8.00% when trailing twelve month Consolidated EBITDA, as defined, excluding the US R&D tax credit, is greater than $4.0 million but equal to or less than $6.3 million. Muzinich also agreed to waive compliance with the financial covenant set forth in Section 7.11(c) of the Credit Agreement from September 28, 2021 until March 31, 2022. Section 7.11(c) requires the trailing four week average liquidity, as defined, of the Company’s CommAgility subsidiary to be no less than $1.0 million. The waiver of this covenant may be extended upon the consent of Muzinich. Additionally, under Amendment 4, the definition of Consolidated Interest Charges was amended to treat the aforementioned principal prepayment of $3.7 million as being made on October 1, 2020.

 

Credit Facility with Bank of America, N.A.

 

The Company entered into a Credit Facility with Bank of America, N.A. (“Bank of America”) on February 16, 2017 (the “Credit Facility”), which provided for a term loan in the aggregate principal amount of $760,000 (the “Term Loan”) and an asset based revolving loan (the “Revolver”), which is subject to a Borrowing Base Calculation (as defined in the Credit Facility) of up to a maximum availability of $9.0 million (“Revolver Commitment Amount”). The borrowing base is calculated as a percentage of eligible accounts receivable and inventory, as defined, subject to certain caps and limits. The borrowing base is calculated on a monthly basis and interest is calculated at LIBOR plus a margin. The proceeds of the Term Loan and Revolver were used to finance the acquisition of CommAgility in 2017.

 

In connection with the Acquisition, on February 7, 2020, the Company and certain of its subsidiaries (the “Borrowers”), and Bank of America entered into Amendment No. 5 to the Credit Facility (“BOA Amendment 5”). By entering into BOA Amendment 5, Holzworth, together with CommAgility Limited, became borrowers under the Credit Facility. The obligations of the Borrowers under the Credit Facility are guaranteed by Wireless Telecom Group, Ltd. CommAgility Limited and Wireless Telecom Group, Ltd. are both wholly owned subsidiaries of the Company. Additionally, the Company prepaid the remaining principal balance of the BOA Term Loan in the amount of $304,000.

 

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

 

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

 

On September 28, 2021, the Company and its subsidiaries entered into Amendment No. 8 (“BOA Amendment 8”) in which Bank of America consented to the aforementioned principal prepayment of the Muzinich term loan and amended the definition of Fixed Charge Coverage Ratio to treat the Muzinich principal prepayment as being made on October 1, 2020. Additionally, Bank of America and the Company agreed that, in accordance with the Credit Facility, the LIBOR should be replaced with a successor rate in accordance with the provisions of BOA Amendment 5. Accordingly, BOA Amendment 8 defines the LIBOR successor rate for loans denominated in U.S. dollars to be the Bloomberg Short-Term Bank Yield Index rate (“BSBY”), loans denominated in Sterling to be the Sterling Overnight Index Average Reference Rate (“SONIA”) and loans denominated in Euros to be the Euro Interbank Offered Rate (“EURIBOR”). Loans drawn after the effective date of BOA Amendment 8 will bear interest as the successor rates named above plus the applicable margin, as defined.

 

13
 

 

As of September 30, 2021, the interest rate on the Term Loan Facility was 9.75% and the interest rate on the Revolver was 2.13%. The Company had $45,000 drawn on the asset-based revolver as of September 30, 2021. As of September 30, 2021, and the date hereof the Company is in compliance with all covenants of the Credit Facility and the Term Loan Facility.

 

PPP Loan

 

On May 4, 2020, the Company received $2.0 million pursuant to a loan from Bank of America N.A. under the Paycheck Protection Program (“PPP”) of the 2020 Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) administered by the Small Business Association (“SBA”). The loan had an interest rate of 1% and a term of 24 months. A repayment schedule was not provided by Bank of America. Accordingly, as of December 31, 2020 the full amount of the term loan was shown as due in May 2022. Funds from the loan were used only for certain permitted purposes, including payroll, benefits, rent and utilities. The CARES Act and the PPP provided a mechanism for forgiveness of up to the full amount of the loan upon application to the SBA for forgiveness by the Company. The Company applied for forgiveness of the loan and received notice that the loan and accrued interest were fully forgiven, and that the SBA remitted payment in full to Bank of America N.A. on June 5, 2021. The Company elected to account for the loan in accordance with Accounting Standard Codification 470 Debt. Accordingly, the Company recorded a gain on extinguishment of debt on the Consolidated Statement of Operations and Comprehensive Income/(Loss) in the nine months ended September 30, 2021.

 

CIBLS Loan

 

On May 27, 2021, CommAgility entered into the Coronavirus Business Interruption Loan Agreement (“CIBLS Loan”) with Lloyds Bank PLC (“Lloyds”). Under the terms of the CIBLS Loan CommAgility can draw up to a maximum of £250,000 for purposes of supporting daily business cash flow. The CIBLS Loan is repayable in 48 consecutive equal monthly installments beginning in month 13 after the initial loan drawdown (12 month principal repayment holiday). Interest is payable monthly at the official bank rate of the Bank of England plus an interest margin of 2.35% per annum. Interest payments are due monthly beginning in month 13 after the initial loan drawdown. The first twelve months of interest payments are paid by the U.K. government. The CIBLS Loan is secured by the assets of CommAgility subject to a Deed of Priority between Muzinich, Bank of America and Lloyds. The CIBLS Loan ranks subordinate to both the Muzinich Term Loan and Bank of America Credit Facility.

 

On July 1, 2021 CommAgility executed a draw down of the maximum amount of £250,000. As of September 30, 2021, $21,000 is included in short term debt and $316,000 is included long term debt on the Consolidated Balance Sheet.

 

NOTE 5 – Equity

 

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

 

From July 21, 2021 through August 6, 2021 the Agent sold 264,701 shares of the Company’s common stock for net proceeds of $738,827, after deducting sales commissions paid to the Agent in accordance with the terms of the Sales Agreement.

 

The registration statement pursuant to which the shares were sold expired on September 17, 2021 and was not renewed.

 

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NOTE 6 – Leases

 

The Company’s lease agreements consist of building leases for its operating locations and office equipment leases for printers and copiers with lease terms that range from less than 12 months to 8 years. At inception, the Company determines if an arrangement contains a lease and whether that lease meets the classification criteria of a finance or operating lease. The Company’s leases for office equipment such as printers and copiers contain lease and non-lease components (i.e., maintenance). The Company accounts for lease and non-lease components of office equipment as a single lease component.

 

All of the Company’s leases are operating leases and are presented as right of use lease asset, short term lease liability and long term lease liability on the consolidated balance sheets as of September 30, 2021 and December 31, 2020. These assets and liabilities are recognized at the commencement date based on the present value of remaining lease payments over the lease term using the Company’s incremental borrowing rate. Short-term leases, which have an initial term of 12 months or less, are not recorded on the balance sheet.

 

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

 

An initial right-of-use asset of $1.9 million was recognized as a non-cash asset addition with the adoption of the new lease accounting standard on January 1, 2019. With our acquisition of Holzworth on February 7, 2020, we acquired a right-of-use asset of $789,000. There have been no other right-of-use assets recognized since the date of adoption of the new lease standard. Cash paid for amounts included in the present value of operating lease liabilities was $168,000 and $500,000 for the three and nine months ended September 30, 2021, respectively, and was included in operating cash flows. Cash paid for amounts included in the present value of operating lease liabilities for the three and nine months ended September 30, 2020 was $167,000 and $483,000, respectively.

 

Operating lease costs for the three and nine months ended September 30, 2021 were $258,000 and $825,000, respectively. Operating lease costs for the three and nine months ended September 30, 2020 were $269,000 and $791,000, respectively.

 

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

(in thousands)  September 30, 2021 
Maturity of Lease Liabilities     
Remainder of 2021  $156 
2022   637 
2023   276 
2024   158 
2025   163 
Thereafter   69 
Total Undiscounted operating lease payments   1,459 
Less: imputed interest   (121)
Present value of operating lease liabilities  $1,338 
      
Balance sheet classification     
Current lease liabilities  $572 
Long-term lease liabilities   766 
Total operating lease liabilities  $1,338 
      
Other information     
Weighted-average remaining term (months) for operating leases   37 
Weighted-average discount rate for operating leases   5.88%

 

15
 

 

NOTE 7 – Revenue

 

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

 

Nature of Products and Services

 

Hardware

 

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

 

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

 

Software

 

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

 

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

 

Services

 

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

 

Shipping and Handling

 

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

 

Significant Judgments

 

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

 

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

 

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Contract Balances

 

The timing of revenue recognition may differ from the timing of invoicing to customers and these timing differences result in contract assets (unbilled revenue) or contract liabilities (deferred revenue) on the Company’s consolidated balance sheet. The Company records unbilled revenue when revenue is recognized prior to invoicing, or deferred revenue when revenue is recognized subsequent to invoicing. Unbilled revenue was $179,000 and $260,000 as of September 30, 2021 and December 31, 2020, respectively, and recorded in prepaid expenses and other current assets. Deferred revenue was $691,000 and $924,000 as of September 30, 2021 and December 31, 2020, respectively. The decrease in deferred revenue from December 31, 2020 is primarily due to recognition of revenue for certain CommAgility projects involving multiple performance obligations, offset by billing in advance of revenue recognition for new projects with multiple performance obligations.

 

Disaggregated Revenue

 

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

 

   

Three Months

Ended

September 30, 2021

   

Three Months Ended

September 30, 2020

   

Nine Months

Ended

September 30, 2021

   

Nine Months Ended

September 30, 2020

 
Total net revenues by revenue type                                
Passive and active RF components   $ 5,444     $ 4,407     $ 12,809     $ 14,527  
Signal generators and components     3,485       3,970       10,003       8,598  
Signal analyzers and power meters     1,996       1,451       5,392       4,297  
Signal processing hardware     813       106       3,825       1,471  
Software licenses     178       443       1,509       1,157  
Services     908       491       2,630       1,354  
Total net revenue   $ 12,824     $ 10,868     $ 36,168     $ 31,404  
Total net revenues by geographic areas                                
Americas   $ 9,547     $ 8,958     $ 26,018     $ 23,598  
EMEA     1,815       1,145       5,390       4,793  
APAC     1,462       765       4,760       3,013  
Total net revenue   $ 12,824     $ 10,868     $ 36,168     $ 31,404  

 

NOTE 8 – Income Taxes

 

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

 

Realization of the Company’s deferred tax assets is dependent upon the Company generating sufficient taxable income in the appropriate tax jurisdictions in future years to obtain benefit from the reversal of net deductible temporary differences and from utilization of net operating losses. The Company’s major tax jurisdictions are New Jersey, Colorado and the United Kingdom (“U.K.”). The amount of deferred tax assets considered realizable is subject to adjustment in future periods if estimates of future taxable income are changed.

 

17
 

 

As of September 30, 2021, the Company’s net deferred tax asset of approximately $6.2 million is net of a valuation allowance of approximately $7.7 million which is associated with the Company’s foreign net operating loss carryforward from an inactive foreign entity, state net operating loss carryforward and a state research and development credit.

 

The Company recorded a tax benefit of $386,000 for the nine months ended September 30, 2021 due to estimated taxable losses primarily as a result of anticipated research and development deductions in the U.K. This was partially offset by the recognition of tax provisions due to the impact of an increase of the deferred tax liability for the Company’s U.K. jurisdiction due to an increase in the enacted U.K. tax rate in the nine months ended September 30, 2021.

 

The Company recorded a tax provision of $352,000 for the nine months ended September 30, 2020 due to estimated taxable income in the U.S. because qualified expenses under the PPP loan were not expected to be deductible for tax purposes. In recording the tax provision for the nine months ended September 30, 2020, the Company had assumed that the PPP loan would be forgiven and, therefore, all PPP qualified expenses were treated as non-deductible. This was offset somewhat by estimated losses as well as research and development deductions in the UK.

 

NOTE 9 – Earnings (Loss) Per Share

 

Basic earnings (loss) per share is calculated by dividing net income (loss) available to common shareholders by the weighted-average number of shares of common stock outstanding during the period. Diluted earnings (loss) per share is calculated by dividing net income (loss) available to common shareholders by the weighted-average number of common shares outstanding for the period and, when dilutive, potential shares from stock options using the treasury stock method, the weighted average number of unvested restricted shares, the weighted-average number of restricted stock units, the number of shares issuable under the terms of the Holzworth earnout and the weighted average number of warrants to purchase common stock outstanding for the period. Shares from stock options are included in the diluted earnings per share calculation only when options exercise prices are lower than the average market value of the common shares for the period presented. In periods with a net loss, the basic loss per share equals the diluted loss per share as all common stock equivalents are excluded from the per share calculation because they are anti-dilutive. In accordance with ASC 260, “Earnings Per Share”, the following table reconciles basic shares outstanding to fully diluted shares outstanding.

 

   2021   2020   2021   2020 
   For the Three Months   For the Nine Months 
   Ended September 30,   Ended September 30, 
   2021   2020   2021   2020 
                 
Weighted average common shares outstanding   22,233,876    21,703,268    21,899,799    21,642,955 
Potentially dilutive equity awards   2,449,930    388,366    2,319,127    295,186 
Weighted average common shares outstanding, assuming dilution   24,683,806    22,091,634    24,218,926    21,938,141 

 

For the three and nine months ended September 30, 2021, the weighted average number of options to purchase common stock not included in potentially dilutive equity awards because the performance condition was not met was 1,205,000. The number of shares issuable under the terms of the Holzworth earnout, if all paid in shares of common stock, is 1,430,889 and is included in potentially dilutive equity awards in the chart above.

 

For the three and nine months ended September 30, 2020, the weighted average number of options and warrants to purchase common stock not included in diluted loss per share because the effects are anti-dilutive, or the performance condition was not met, was 3,246,167 and 2,924,650, respectively.

 

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NOTE 10 – Inventories

 

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

 

Inventories consist of (in thousands):

 

   September 30, 2021   December 31, 2020 
Raw materials  $6,067   $4,644 
Work-in-process   787    618 
Finished goods   2,801    3,534 
 Total Inventory  $9,655   $8,796 

 

NOTE 11 – Accrued Expenses and Other Current Liabilities

 

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

 

   September 30, 2021   December 31, 2020 
Holzworth earnout – short term  $2,521   $3,423 
Payroll and related benefits   1,141    864 
Goods received not invoiced   1,085    458 
Holzworth deferred purchase price   500    950 
Professional fees   481    331 
Commissions   462    605 
Bonus   446    123 
Returns reserve   248    212 
Sales and use and VAT tax   216    315 
Warranty reserve   140    140 
Harris arbitration liability   -    116 
Other   416    460 
Total  $7,656   $7,997 

 

NOTE 12 - Accounting for Stock Based Compensation

 

The Company’s results for the three months ended September 30, 2021 and 2020 include $98,000 and $151,000, respectively, related to stock based compensation expense. The Company’s results for the nine months ended September 30, 2021 and 2020 include $301,000 and $360,000, respectively related to stock based compensation expense. Such amounts have been included in the Consolidated Statement of Operations and Comprehensive Income/(Loss) within general and administrative expenses in operating expenses. The Company accounts for forfeitures when they occur.

 

Incentive Compensation Plan

 

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

 

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In the second quarter of 2021, the Company’s Board of Directors and shareholders approved the 2021 Long Term Incentive Plan (the “2021 Incentive Plan”), which provides for the grant of equity-based and cash incentives, including stock awards, stock unit awards, performance unit awards, non-qualified stock options, incentive stock options and cash awards, including dividend equivalent rights to employees, officers, directors or other service providers of the Company who are expected to contribute to the Company’s future growth and success. The 2021 Incentive Plan provides for the grant of awards relating to 1.5 million shares of common stock.

 

On August 2, 2021 the Company granted 25,000 Restricted Stock Units (“RSU”) to each of our six independent Board members under the 2021 Incentive Plan. Each RSU represents the Company’s obligation to issue one share of the Company’s common stock subject to the RSU award agreement and 2021 Incentive Plan. The grant date fair value was $2.70 per share and the RSUs vest on the day before the first anniversary of the grant date or, if earlier, the effective date of a separation of service due to death or disability, provided the Board member has rendered continuous service to the Company as a member of the Board of Directors from grant date to vesting date. Once vested the RSU will be settled by delivery of shares to the Board member no later than 30 days following: 1) the third anniversary of the grant date, 2) separation from service following, or coincident with, a vesting date, or 3) a change in control.

 

NOTE 13 – COMMITMENTS AND CONTINGENCIES

 

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

 

NOTE 14 - SUBSEQUENT EVENTS

 

There were no subsequent events or transactions requiring recognition or disclosure in the consolidated financial statements, and the notes thereto, through the date the financial statements were issued.

 

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

 

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

 

Introduction

 

The Company started to see signs of an economic recovery from the COVID-19 pandemic in the third quarter of 2021, specifically in our RF Components (“RFC”) product group. However, the Company continues to deal with major global disruptions caused by the pandemic including global supply chain shortages of key components and a difficult labor market especially for roles requiring technical expertise. We are also assessing President Biden’s executive order on vaccine mandates and the possible impact on us as a supplier to large global defense subcontractors. We have adopted flexible work arrangements in our locations for those employees that can work remotely and continue to implement safety precautions in our facilities.

 

Our third quarter 2021 consolidated revenue increased 18% from the prior year period reflecting increases in all three of our product groups. The largest increase was in our RFCproduct group due to a recovery in carrier spending from the prior year. Our consolidated gross margin exceeded 50% as improving margins at the RFC and Test and measurement (“T&M”) product groups were offset by lower margins at our Radio, baseband and software product group (“RBS”) due to a higher mix of lower margin hardware and services sales in the quarter. Due to the better than expected performance of our Holzworth brand we recorded a $1.0 million loss on contingent consideration in the quarter which represents the estimated earnout payment for financial performance in fiscal 2021. This earnout will be payable in four equal installments in fiscal 2022.

 

RESULTS OF OPERATIONS

 

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

 

Net Revenues (in thousands)

 

   Three months ended September 30, 
   Revenue   % of Revenue   Change 
   2021   2020   2021   2020   Amount   Pct. 
RF components  $5,448   $4,418    42.5%   40.7%  $1,030    23.3%
Test and measurement   5,931    5,797    46.2%   53.3%   134    2.3%
Radio, baseband, software   1,445    653    11.3%   6.0%   792    121.3%
Total net revenues  $12,824   $10,868    100.0%   100.0%  $1,956    18.0%

 

Net consolidated revenue increased 18.0% from the prior year period due primarily to increased sales at the RFC product group due to increased carrier spending specifically on large projects. Also contributing to the increase were higher sales of our digital signal processing cards at the RBS product group.

 

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Gross Profit (in thousands)

 

   Three months ended September 30, 
   Gross Profit   Gross Profit %   Change 
   2021   2020   2021   2020   Amount   Pct. 
RF components  $2,497   $1,927    45.8%   43.6%  $570    29.6%
Test and measurement   3,367    3,182    56.8%   54.9%   185    5.8%
Radio, baseband, software   676    545    46.8%   83.5%   131    24.0%
Total gross profit  $6,540   $5,654    51.0%   52.0%  $886    15.7%

 

Consolidated gross profit increased 15.7% due to higher revenues at all three product groups. Gross profit margin increased at the RFC product group due to higher absorption of fixed manufacturing and overhead costs and at the T&M product group due to a purchase accounting adjustment recorded in the prior year period in the amount of $258,000. Excluding the purchase accounting adjustment, gross margins at the T&M product group declined due to product mix. Gross profit margin at the RBS product group declined due to a higher mix of lower margin hardware and services revenues as compared to the prior year period.

 

Operating Expenses (in thousands)

 

   Three months ended September 30, 
   Operating Expenses   % of Revenue   Change 
   2021   2020   2021   2020   Amount   Pct. 
Research and development  $1,435   $1,826    11.2%   16.8%  $(391)   -21.4%
Sales and marketing   1,854    1,732    14.5%   15.9%   122    7.0%
General and administrative   2,800    2,444    21.8%   22.5%   357    14.6%
Loss on change in fair value of contingent consideration   1,000    -    7.8%   -    1,000    - 
Total operating expenses  $7,089   $6,002    55.3%   55.2%  $1,088    18.1%

 

Research and development expenses decreased 21.4% from the prior year due primarily to lower third party research and development costs, the majority of which is in connection with our T&M product group. The mix of third party research and development expenses to internal expenses varies by project. We expect to continue third party investments in research and development dependent upon project deadlines, new product development opportunities and longer term product roadmap dependencies which, in turn, may create increases and decreases to research and development expenses as a percentage of revenue. The decline in third party expenses was offset somewhat by unfavorable foreign exchange impact, specifically the increase in the pound sterling which increased approximately 6.9% year over year resulting in an increase in research and development expenses of $61,000.

 

Sales and marketing expenses increased $122,000 due to increases in internal commissions, marketing expenses and headcount expenses. The aforementioned unfavorable foreign exchange impact on sales and marketing expenses was approximately $13,000.

 

General and administrative expenses increased 14.6% from the prior year period primarily due to an increase in headcount related expenses and legal expenses associated with our debt amendments. The aforementioned unfavorable foreign exchange impact on general and administrative expenses was approximately $29,000.

 

Loss on Contingent Consideration

 

The Company recorded a $1.0 million loss on contingent consideration in the three months ended September 30, 2021 due to an increase in the estimated Holzworth year 2 earnout.

 

Other Income/(Expense)

 

Other income increased $63,000 from the prior year period due primarily to higher foreign exchange gains as compared to the prior year period.

 

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Interest Expense

 

Consolidated interest expense increased $109,000 from the prior year due to the premium associated with our term debt prepayment in September of $74,000 as well as a higher interest rate on our term debt as compared to the prior year.

 

Taxes

 

The Company recorded a tax benefit in the current year period as compared to a tax provision in the prior year period due to estimated taxable losses in the current year due primarily to anticipated research and development deductions in the U.K. In the prior year period the Company estimated that qualified PPP loan expenses were not deductible which resulted in a tax provision.

 

Net Income/Loss

 

Net loss decreased $588,000 due to increased sales and gross margin in the current year and the recognition of a tax benefit offset by the recognition of the loss on contingent consideration and higher interest expense.

 

Nine Months Ended September 30, 2021 Compared with Nine Months Ended September 30, 2020

 

Net Revenues (in thousands)

 

   Nine months ended September 30, 
   Revenue   % of Revenue   Change 
   2021   2020   2021   2020   Amount   Pct. 
RF components  $12,820   $14,555    35.4%   46.4%  $(1,735)   -11.9%
Test and measurement   16,779    14,013    46.4%   44.6%   2,766    19.7%
Radio, baseband, software   6,569    2,836    18.2%   9.0%   3,733    131.6%
Total net revenues  $36,168   $31,404    100.0%   100.0%  $4,764    15.2%

 

Net consolidated revenue increased 15.2% from the prior year period due primarily to the RBS product group due to higher revenue associated with new software and service contracts and higher sales of our digital signal processing cards as compared to the prior year period. Also contributing to the overall revenue increase was an increase in T&M revenue due to a full year contribution of Holzworth in fiscal 2021, as well as increased revenue from our legacy T&M brands. This was offset by lower revenue at our RFC product group as wireless carrier spend in the first half of 2021 was impacted by the on-going impact of the COVID-19 pandemic.

 

Gross Profit (in thousands)

 

   Nine months ended September 30, 
   Gross Profit   Gross Profit %   Change 
   2021   2020   2021   2020   Amount   Pct. 
RF components  $5,345   $6,576    41.7%   45.2%  $(1,231)   -18.7%
Test and measurement   9,690    7,451    57.8%   53.2%   2,239    30.0%
Radio, baseband, software   3,584    1,722    54.6%   60.7%   1,862    108.1%
Total gross profit  $18,619   $15,749    51.5%   50.1%  $2,870    18.2%

 

Consolidated gross profit increased 18.2% due to higher revenues at the T&M and RBS product groups and was only partially offset by lower revenues at the RFC product group. Gross profit margin increased due to the contribution of higher margin software and services sales at the RBS product group and the prior year purchase accounting adjustment of $448,000 at the T&M product group. Excluding the purchase accounting adjustment, gross margin at the T&M product group increased on higher absorption of fixed manufacturing costs.

 

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Operating Expenses (in thousands)

 

   Nine months ended September 30, 
   Operating Expenses   % of Revenue   Change 
   2021   2020   2021   2020   Amount   Pct. 
Research and development  $4,281   $5,080    11.8%   16.2%  $(799)   -15.7%
Sales and marketing   5,266    5,111    14.6%   16.3%   155    3.0%
General and administrative   8,469    7,322    23.4%   23.3%   1,147    15.7%
Loss on change in fair value of contingent consideration   1,000    -    2.8%   -    1,000    - 
Total operating expenses  $19,016   $17,513    52.6%   55.8%  $1,503    8.6%

 

Research and development expenses decreased 15.7% from the prior year due primarily to lower third party research and development costs, the majority of which is in connection with our third party 5G collaboration agreement and our T&M product group. The mix of third party research and development expenses to internal expenses varies by project. We expect to continue third part investments in research and development dependent upon project deadlines, new product development opportunities and longer term product roadmap dependencies which, in turn, may create increases and decreases to research and development expenses as a percentage of revenue. The decline in third party expenses was offset somewhat by unfavorable foreign exchange impact, specifically the increase in the pound sterling which increased approximately 8.1% year over year resulting in an increase in research and development expenses of $225,000.

 

Sales and marketing expenses increased 3.0% from the prior year due primarily to higher internal commissions expense and marketing expenses. The aforementioned unfavorable foreign exchange impact on sales and marketing expenses was approximately $50,000.

 

General and administrative expenses increased 15.7% from the prior year period due primarily to higher headcount related expenses of $844,000 related to the addition of our Chief Revenue Officer in August of 2020, merit and bonus increases and the reinstatement of other benefits that were previously eliminated in the first half of 2020 during the COVID-19 pandemic. Also contributing to the increase are higher legal expenses of $169,000 primarily related to amendments to the Company’s debt agreements and Holzworth Stock Purchase Agreement, higher insurance expenses of $122,000 only partially offset by lower merger and acquisition expenses, and severance and stock compensation expense which decreased $278,000 in total from the prior year period. The aforementioned unfavorable foreign exchange impact on general and administrative expenses was approximately $111,000.

 

Loss on Contingent Consideration

 

The Company recorded a $1.0 million loss on contingent consideration in the nine months ended September 30, 2021 due to an increase in the estimated Holzworth year 2 earnout.

 

Gain on Extinguishment of Debt

 

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

 

Other Income/(Expense)

 

Other income decreased $223,000 from the prior year period due primarily to lower foreign exchange gains and lower gains on sales of assets.

 

Interest Expense

 

Consolidated interest expense increased $220,000 due primarily to increased interest on our Term Loan Facility as compared to the prior year.

 

Taxes

 

The Company recorded a tax benefit in the current year period as compared to a tax provision in the prior year period due to estimated taxable losses in the current year due primarily to anticipated research and development deductions in the U.K. In the prior year period the Company estimated that qualified PPP loan expenses were not deductible which resulted in a tax provision.

 

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Net Income/Loss

 

The Company recorded net income of $1.1 million in the nine months ended September 30, 2021 as compared to a net loss of $2.6 million in the prior year period due to higher sales and gross margin, the recognition of the gain on extinguishment of the PPP Loan and the recognition of a tax benefit offset by higher operating expenses due to the recognition of a loss on contingent consideration and higher interest expense.

 

LIQUIDITY AND CAPITAL RESOURCES

 

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

 

Sources and Uses of Cash

 

During the nine months ended September 30, 2021, the Company’s consolidated cash balance decreased approximately $3.6 million due primarily to a paydown of $4.2 million of our Term Loan Facility which includes a $3.7 million prepayment on September 28, 2021, the payment of contingent consideration and deferred purchase price related to the Holzworth acquisition of $460,000, payment of the final holdback amount of the Holzworth purchase price of $200,000, and capital expenditures of $417,000. These payments were offset by cash provided by operations due primarily to operating income generated during the nine months ended September 30, 2021.

 

Operating Activities

 

Cash provided by operations was $535,000 for the nine months ended September 30, 2021 as compared to cash used by operations of $852,000 in the prior year period. This was due to higher operating income and lower cash used for working capital as compared to the prior year.

 

Investing Activities

 

Cash used by investing activities decreased from $7.4 million to $617,000 as the prior year period included $7.2 million in cash paid for the Holzworth acquisition. Capital expenditures increased from $228,000 in the prior year to $417,000 in the current year period as capital expenditures for infrastructure to support our research and development roadmaps have increased.

 

Financing Activities

 

Cash from financing activities decreased from cash provided of $6.4 million to cash used of $3.5 million as the current year includes term debt paydowns of $4.2 million including a $3.7 million prepayment on September 28th, 2021, and $460,000 related to the payment of contingent consideration and deferred purchase price payment related to the Holzworth acquisition. These uses of cash were offset by the net proceeds of the Company’s at the market equity offering of $565,000, proceeds from the exercise of stock options of $209,000 and proceeds from the CIBLS loan of $345,000. The prior year cash provided from financing includes the receipt of the Term Loan Facility proceeds to finance the Holzworth acquisition.

 

As of September 30, 2021, the Company’s consolidated cash balance was $1.3 million, $45,000 was drawn on our Revolver and we had availability under our asset-based Credit Facility of $5.1 million. Our gross debt balance as of September 30, 2021 was $4.5 million.

 

We expect borrowings available to us under our Credit Facility, our existing cash balance and cash generated by operations will be sufficient to meet our liquidity needs for the next twelve months. Our ability to meet our cash requirements will depend on our ability to generate cash in the future, which is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control, including the impact the evolving COVID-19 pandemic has had on our business including our supply chain.

 

25
 

 

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

 

On August 27, 2018 the Company filed a shelf registration statement on Form S-3 which was declared effective on September 17, 2018. On July 21, 2021, the Company entered into the Sales Agreement with the Agent to issue and sell through the Agent, shares having an aggregate offering price of up to $12,000,000, as described in Note 5 – Equity above. The Agent was not required to sell any specific number of Shares. Shares sold under the Sales Agreement were issued and sold pursuant to the aforementioned Form S-3. A prospectus supplement relating to the offering of the Shares was filed with the Commission on July 21, 2021.

 

From July 21, 2021 through August 6, 2021 the Agent sold 264,701 shares of the Company’s common stock for net proceeds of $739,000 after deducting sales commissions paid to the Agent in accordance with the terms of the Sales Agreement and $565,000 after deducting direct legal and accounting fees associated with the offering.

 

The shelf registration statement expired on September 17, 2021 and was not renewed by the Company.

 

Off-Balance Sheet Arrangements

 

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

 

Effects of Inflation and Changing Prices

 

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

 

Critical Accounting Policies

 

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

 

Forward Looking Statements

 

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

 

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ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

 

Not applicable.

 

ITEM 4. Controls and Procedures

 

(a) Evaluation of Disclosure Controls and Procedures

 

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

 

(b) Changes in Internal Control over Financial Reporting

 

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

 

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PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

 

No material changes in the quarter.

 

Item 1A. Risk Factors

 

The ongoing COVID-19 pandemic has caused and may continue to cause significant uncertainty in the U.S. and global economies as well as the markets we serve. It has affected, and could continue to adversely affect our business, results of operations and financial condition.

 

The COVID-19 pandemic has resulted in and could continue to adversely affect broader economies, financial markets, and the business environment worldwide. We have been and continue to be unable to accurately predict the full impact that COVID-19 will have on our results of operations, financial condition, liquidity and cash flows due to numerous uncertainties, including the duration and severity of the pandemic and containment measures, the nature and length of actions taken by governments, businesses and individuals to contain or mitigate its impact, the severity and duration of the economic impact caused by the pandemic, the uncertainty surrounding possible treatments and rollout of vaccines, along with the effectiveness of our response.

 

The COVID-19 pandemic has impacted our workforce, the workforce of our customer, suppliers and contract manufacturers and has resulted in reduced demand for our products and services in fiscal 2020 and the first half of fiscal 2021 which negatively impacted our financial results for those periods. Although we have started to experience a recovery in the third quarter of 2021, if the pandemic continues, recurs, or worsens, we may experience additional adverse impacts on our operational and commercial activities, including rising costs, volatility in customer orders, supply chain constraints, labor shortages and purchases and declines in our collections of accounts receivable. Due to the speed with which the situation is developing, the breadth of its spread and the range of governmental and community reactions thereto, there is uncertainty around its duration, ultimate impact and the timing of recovery. Therefore, the pandemic could lead to an extended disruption of economic activity and the impact on our stock price, access to capital, consolidated results of operations, financial position and cash flows could be material.

 

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

 

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

 

None.

 

Item 3. Defaults upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

None.

 

Item 6. Exhibits

 

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Exhibit

Number

  Exhibit Description
     
10.1   Third Amendment to Credit Agreement and Limited Waiver by and between Wireless Telecom Group, Inc., the Borrower’s subsidiaries and Muzinich BDC, Inc. dated May 27, 2021.
     
10.2   Business Loan Agreement by and between Lloyds Bank PLC and CommAgility Limited dated May 27, 2021.
     
10.3   Deed of Priority by and between CommAgility Limited, Lloyds Bank PLC, Muzinich BDC, Inc. and Bank of America, N.A. dated June 17, 2021.
     
10.4   Fourth Amendment to the Credit Agreement by and between Wireless Telecom Group, Inc., the Borrower’s subsidiaries and Muzinich BDC, Inc. dated as of September 28, 2021.
     
10.5   Amendment No. 8 to Loan and Security Agreement by and among Wireless Telecom Group, Inc., Boonton Electronics Corp., Microlab/FXR LLC, Holzworth Instrumentation Inc., CommAgility Limited and Bank of America, N.A., dated September 28, 2021.
     
31.1   Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
31.2   Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
32.1   Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
32.2   Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
101**   The following financial information from Wireless Telecom Group, Inc.’s Quarterly Report on Form 10-Q for the three and nine months ended September 30,2021, filed on November 10, 2021, formatted in Inline Extensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations and Comprehensive Income/(Loss), (iii) Consolidated Statements of Cash Flows, (iv) Consolidated Statements of Shareholders’ Equity, and (v) the Notes to the 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
     
104**   COVER PAGE FORMATTED AS INLINE XBRL AND CONTAINED IN EXHIBIT 101
     
    ** Furnished herewith.

 

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SIGNATURES

 

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

 

  WIRELESS TELECOM GROUP, INC.
     
Dated: November 10, 2021    
  By: /s/ Timothy Whelan
    Timothy Whelan
    Chief Executive Officer
     
Dated: November 10, 2021  

 

  By: /s/ Michael Kandell
    Michael Kandell
    Chief Financial Officer

 

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