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WIRELESS TELECOM GROUP INC - Quarter Report: 2022 June (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 June 30, 2022

 

OR

 

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

 

For the transition period from ____ to____

 

Commission file number: 1-11916

 

WIRELESS TELECOM GROUP, INC.

(Exact name of Registrant as specified in its charter)

 

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

 

25 Eastmans Road, Parsippany, New Jersey

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

 

(973) 386-9696

(Registrant’s telephone number, including area code)

 

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

 

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

 

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

Yes ☒ No ☐

 

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

Yes ☒ No ☐

 

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

 

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

 

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

 

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

Yes ☐ No

 

Number of shares of Common Stock outstanding as of July 29, 2022: 21,440,098

 

 

 

 
 

 

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 19
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 23
     
Item 4. Controls and Procedures 23
     
PART II – OTHER INFORMATION  
   
Item 1. Legal Proceedings 24
     
Item 1A. Risk Factors 24
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 24
     
Item 3. Defaults Upon Senior Securities 24
     
Item 4. Mine Safety Disclosures 24
     
Item 5. Other Information 24
     
Item 6. Exhibits 25
     
SIGNATURES 26

 

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)     
   June 30
2022
   December 31
2021
 
CURRENT ASSETS          
Cash & cash equivalents  $13,338   $4,472 
Accounts receivable - net of reserves of $180 and $196, respectively   4,007    2,407 
Inventories - net of reserves of $678 and $681, respectively   5,247    5,088 
Prepaid expenses and other current assets   2,156    1,689 
Current assets of discontinued operations   -    6,869 
TOTAL CURRENT ASSETS   24,748    20,525 
           
PROPERTY PLANT AND EQUIPMENT - NET   1,272    1,110 
           
OTHER ASSETS          
Goodwill   9,701    10,108 
Acquired intangible assets, net   3,243    3,661 
Deferred income taxes   2,904    5,580 
Right of use assets   867    1,146 
Other assets   269    284 
Non current assets of discontinued operations   -    1,937 
TOTAL OTHER ASSETS   16,984    22,716 
           
TOTAL ASSETS  $43,004   $44,351 
           
CURRENT LIABILITIES          
Short term debt  $-   $126 
Accounts payable   1,404    1,481 
Short term leases   484    585 
Accrued expenses and other current liabilities   5,242    6,676 
Deferred revenue   132    408 
Current liabilities of discontinued operations   -    1,965 
TOTAL CURRENT LIABILITIES   7,262    11,241 
           
LONG TERM LIABILITIES          
Long term debt   -    3,595 
Long term leases   430    615 
Other long term liabilities   37    52 
Deferred tax liability   205    228 
TOTAL LONG TERM LIABILITIES   672    4,490 
           
COMMITMENTS AND CONTINGENCIES   -       
           
SHAREHOLDERS’ EQUITY          
Preferred stock, $.01 par value, 2,000,000 shares authorized, none issued   -    - 
Common stock, $.01 par value, 75,000,000 shares authorized
36,250,636 and 35,915,636 shares issued, 21,290,098 and 22,666,072 shares outstanding
   362    359 
Additional paid in capital   52,226    51,555 
Retained earnings   9,391    554 
Treasury stock at cost, 14,960,538 and 13,249,564 shares   (27,163)   (24,619)
Accumulated other comprehensive income   254    771 
TOTAL SHAREHOLDERS’ EQUITY   35,070    28,620 
           
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY  $43,004   $44,351 

 

See accompanying Notes to Consolidated Financial Statements.

 

3
 

 

WIRELESS TELECOM GROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME/(LOSS)

(UNAUDITED)

(In thousands, except per share amounts)

 

                     
   For the Three Months Ended   For the Six Months Ended 
   June 30   June 30 
   2022   2021   2022   2021 
Net revenues  $6,068   $7,788   $13,664   $15,972 
                     
Cost of revenues   2,653    3,410    5,894    6,740 
                     
Gross profit   3,415    4,378    7,770    9,232 
                     
Operating expenses                    
Research and development   1,126    1,244    2,285    2,400 
Sales and marketing   1,261    1,144    2,520    2,339 
General and administrative   2,706    2,787    6,098    5,638 
Total operating expenses   5,093    5,175    10,903    10,377 
                     
Operating loss   (1,678)   (797)   (3,133)   (1,145)
                     
Gain/(loss) on extinguishment of debt   -    2,045    (792)   2,045 
Other income/(expense)   32    (17)   133    10 
Interest expense   -    (285)   (177)   (582)
                     
Income/(loss) before taxes   (1,646)   946    (3,969)   328 
Tax benefit   (286)   (179)   (1,136)   (323)
Net income/(loss) from continuing operations  $(1,360)  $1,125   $(2,833)  $651 
                     
Net income from discontinued operations, net of taxes   -    412    11,670    652 
Net income/(loss)  $(1,360)  $1,537   $8,837   $1,303 
                     
Other comprehensive income/(loss):                    
Foreign currency translation adjustments   (380)   12    (517)   87 
Comprehensive income/(loss)  $(1,740)  $1,549   $8,320   $1,390 
                     
Income/(loss) per share from continuing operations:                    
Basic  $(0.06)  $0.05   $(0.13)  $0.03 
Diluted  $(0.06)  $0.05   $(0.13)  $0.03 
                     
Income per share from discontinued operations:                    
Basic  $0.00   $0.02   $0.53   $0.03 
Diluted  $0.00   $0.01   $0.48   $0.02 
                     
Income/(loss) per share:                    
Basic  $(0.06)  $0.07   $0.40   $0.06 
Diluted  $(0.06)  $0.06   $0.35   $0.05 
                     
Weighted average shares outstanding:                    
Basic   21,857    21,763    22,151    21,728 
Diluted   21,857    24,343    24,200    24,063 

 

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 Six Months 
   Ended June 30 
   2022   2021 
CASH FLOWS PROVIDED/(USED) BY OPERATING ACTIVITIES          
Net income  $8,837   $1,303 
Adjustments to reconcile net loss to net cash provided/(used) by operating activities:          
Depreciation and amortization   751    1,065 
Extinguishment of PPP loan   -    (2,045)
Loss on extinguishment of term debt   792    - 
Gain on sale of Microlab   (16,403)   - 
Amortization of debt issuance fees   55    150 
Share-based compensation expense   650    203 
Deferred rent   (15)   (15)
Deferred income taxes   2,677    320 
Provision for doubtful accounts   (16)   71 
Inventory reserves   28    85 
Changes in assets and liabilities, net of divestiture:          
Accounts receivable   (1,581)   (1,079)
Inventories   (457)   (645)
Prepaid expenses and other assets   (57)   319 
Accounts payable   304    585 
Deferred revenue   (257)   - 
Accrued expenses and other liabilities   (842)   77 
Net cash provided/(used) by operating activities   (5,534)   394 
           
CASH FLOWS PROVIDED/(USED) BY INVESTING ACTIVITIES          
Capital expenditures   (326)   (313)
Deferred purchase price payment   (250)   (200)
Divestiture of Microlab, net   22,753    - 
Net cash provided/(used) by investing activities   22,177    (513)
           
CASH FLOWS USED BY FINANCING ACTIVITIES          
Term loan repayments   (4,432)   (470)
Acquisition of treasury stock   (2,525)   - 
Payment of contingent consideration   (658)   (105)
Proceeds from exercise of stock options   24    - 
Shares withheld for employee taxes   (19)   (17)
Net cash used by financing activities   (7,610)   (592)
           
Effect of Exchange Rate Changes on Cash and Cash Equivalents   (167)   14 
NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS   8,866    (697)
           
Cash and Cash Equivalents, at Beginning of Period   4,472    4,910 
           
CASH AND CASH EQUIVALENTS, AT END OF PERIOD  $13,338   $4,213 
           
SUPPLEMENTAL INFORMATION:          
Cash paid during the period for interest  $122   $204 
Cash paid during the period for income taxes  $597   $110 

 

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, 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 

 

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

 

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 and microwave devices which enable the development, testing and deployment of wireless technology. The Company provides unique, highly customized and configured solutions which drive innovation across a wide range of traditional and emerging wireless technologies.

 

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

 

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

 

Our consolidated financial statements from continuing operations include the accounts of Noisecom, Boonton, Holzworth, and CommAgility and have been prepared using accounting principles generally accepted in the United States (“U.S. GAAP”). All intercompany transactions and balances have been eliminated in consolidation.

 

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

The Company’s fiscal periods are based on the calendar year. Except as otherwise specified, references to “second quarter(s)” or “three months” indicate the Company’s fiscal periods ended June 30, 2022 and June 30, 2021, and references to “year-end” indicate the fiscal year ended December 31, 2021.

 

7
 

 

Consolidated Financial Statements

 

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

 

The accounting policies followed by the Company are set forth in Note 1 to the Company’s consolidated financial statements included in its annual report on Form 10-K for the year ended December 31, 2021. Specific reference is made to that report since certain information and footnote disclosures normally included in financial statements in accordance with US GAAP have been reduced for interim periods in accordance with SEC rules.

 

The results of operations for the three and six months ended June 30, 2022 are not necessarily indicative of the results to be expected for the full year ending December 31, 2022.

 

Critical Accounting Estimates

 

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

 

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

 

For further information about our critical accounting estimates, see the discussion in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” under the heading “Critical Accounting Policies” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.

 

Concentration Risk

 

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

 

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

 

No one customer accounted for more than 10% of the Company’s consolidated revenue for the three months ended June 30, 2022. One customer accounted for 10.6% of consolidated revenue for the six months ended June 30, 2022. Two customers accounted for more than 10% of the Company’s consolidated revenue for the three months ended June 30, 2021 at 19.2% and 12.8%, respectively. The same two customers also accounted for more than 10% of the Company’s consolidated revenue for the six month period ended June 30, 2021 at 18.2% and 11.3%, respectively.

 

One customer accounted for 10.9% of consolidated accounts receivable as of June 30, 2022. At December 31, 2021, no one customer accounted for greater than 10% of consolidated accounts receivable.

 

Fair Value of Financial Instruments

 

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

 

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

 

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

 

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

 

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

 

The carrying amounts of the Company’s financial instruments, including cash, accounts receivable, accounts payable and accrued liabilities, approximate fair value due to their relatively short maturities.

 

8
 

 

Contingent Consideration

 

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

 

As of June 30, 2022, the amount due for the Holzworth earnout was $2.3 million and included in accrued expenses and other current liabilities in the Consolidated Balance Sheet.

 

Segments

 

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

 

NOTE 2 – Accounting Pronouncements

 

Recently Adopted Accounting Standards

 

There have been no changes to our significant accounting policies as described in the 2021 Form 10-K that had a material impact on our consolidated financial statements and related notes.

 

Recent Accounting Pronouncements Not Yet Adopted

 

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

 

NOTE 3 – Discontinued Operations

 

On March 1, 2022, the Company completed the sale of Microlab to RF Industries, Ltd (the “Transaction”). At closing, the Company received approximately $22.8 million in proceeds net of indemnification and purchase price adjustment holdbacks of $150,000 and $100,000, respectively, and direct expenses. The indemnification holdback expires one year from close and the final purchase price adjustment, which is primarily comprised of a working capital adjustment, is to be settled 90 days after close. $4.1 million of the net proceeds were used to repay our outstanding Term Loan Facility (as defined in Note 4) with Muzinich BDC, approximately $600,000 of the net proceeds were used to repay our outstanding revolver balance related to the Bank of America Credit Facility (as defined in Note 4) and approximately $486,000 were used to pay our advisors.

 

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

 

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

 

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

 

9
 

 

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

 

                     
   Three months ended   Six months ended 
   June 30, 2022   June 30, 2021   June 30, 2022   June 30, 2021 
Net revenues  $-   $4,235   $2,477   $7,372 
Cost of revenues   -    2,478    1,626    4,524 
Gross profit   -    1,757    851    2,848 
Operating expenses   -    793    693    1,549 
Gain on divestiture, net of expenses   -    -    16,403    - 
Income from Discontinued Operations before income taxes   -    964    16,561    1,299 
Income tax expense   -    552    4,891    647 
Income from Discontinued Operations, net of income taxes  $-   $412   $11,670   $652 

 

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

 

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

 

The cash flows related to discontinued operations have not been segregated and are included in the consolidated statements of cash flows for all periods presented. Microlab depreciation expense for the six months ended June 30, 2021 and included in the consolidated statement of cash flow was $123,000. Depreciation expense recorded in the three months ended March 31, 2022 for Microlab was not material and there were no capital expenditures for Microlab in the three months ended March 31, 2022. Capital expenditures in the three and six months ended June, 2021 were approximately $50,000.

 

10
 

 

NOTE 4 – Debt

 

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

 

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

 

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

 

CIBLS Loan

 

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

 

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

 

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

 

NOTE 5 – Leases

 

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

 

All of the Company’s leases are operating leases and are presented as right of use lease asset, short term lease liability and long term lease liability on the consolidated balance sheets as of June 30, 2022 and December 31, 2021. These assets and liabilities are recognized at the commencement date based on the present value of remaining lease payments over the lease term using the Company’s incremental borrowing rate. Short-term leases, which have an initial term of 12 months or less, are not recorded on the balance sheet.

 

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

 

An initial right-of-use asset of $1.9 million was recognized as a non-cash asset addition with the adoption of the new lease accounting standard on January 1, 2019. With our acquisition of Holzworth on February 7, 2020, we acquired a right-of-use asset of $789,000. There have been no other right-of-use assets recognized since the date of adoption of the new lease standard. Cash paid for amounts included in the present value of operating lease liabilities was $160,000 and $316,000 for the three and six months ended June 30, 2022, respectively, and was included in operating cash flows. Cash paid for amounts included in the present value of operating lease liabilities for the three and six months ended June 30, 2021, was $155,000 and $307,000, respectively.

 

Operating lease costs for the three and six months ended June 30, 2022, were $259,000 and $500,000, respectively. Operating lease costs for the three and six months ended June 30, 2021, were $291,000 and $567,000, respectively.

 

11
 

 

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

 

      
(in thousands)  June 30, 2022 
Maturity of Lease Liabilities     
Remainder of 2022  $321 
2023   276 
2024   158 
2025   163 
2026   69 
Total undiscounted operating lease payments   987 
Less: imputed interest   (73)
Present value of operating lease liabilities  $914 
      
Balance sheet classification     
Current lease liabilities  $484 
Long-term lease liabilities   430 
Total operating lease liabilities  $914 
      
Other information     
Weighted-average remaining term (months) for operating leases   33 
Weighted-average discount rate for operating leases   5.88%

 

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

 

NOTE 6 – Revenue

 

Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for promised goods or services. The Company’s performance obligations are satisfied either over time or at a point in time. Revenue from performance obligations that transferred at a point in time accounted for approximately 93% and 97% of the Company’s consolidated revenue for the three months ended June 30, 2022 and 2021, respectively. Revenue recognized over time was 7% and 3% of the Company’s consolidated revenue for the three months ended June 30, 2022 and 2021, respectively. Revenue from performance obligations that transferred at a point in time accounted for approximately 92% and 97% of the Company’s consolidated revenue for the six months ended June 30, 2022 and 2021, respectively. Revenue recognized over time was 8% and 3% of the Company’s consolidated revenue for the six months ended June 30, 2022 and 2021, respectively.

 

Nature of Products and Services

 

Hardware

 

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

 

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

 

12
 

 

Software

 

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

 

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

 

Services

 

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

 

Shipping and Handling

 

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

 

Significant Judgments

 

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

 

Contract Balances

 

The timing of revenue recognition may differ from the timing of invoicing to customers and these timing differences result in contract assets (unbilled revenue) or contract liabilities (deferred revenue) on the Company’s Consolidated Balance Sheet. The Company records unbilled revenue when revenue is recognized prior to invoicing, or deferred revenue when revenue is recognized subsequent to invoicing. Unbilled revenue was $87,000 and $292,000 as of June 30, 2022 and December 31, 2021, respectively, and recorded in prepaid expenses and other current assets. Deferred revenue was $132,000 and $408,000 as of June 30, 2022 and December 31, 2021, respectively. The decrease in deferred revenue from December 31, 2021 is due to recognition of revenue for certain CommAgility projects involving multiple performance obligations.

 

13
 

 

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 June 30, 2022   Six Months Ended June 30, 2022 
   Test and
Measurement
   Radio, Baseband, Software   Consolidated   Test and
Measurement
   Radio, Baseband, Software   Consolidated 
Total net revenues by revenue type                              
Signal generators and components  $3,574   $-   $3,574   $7,045   $-   $7,045 
Signal analyzers and power meters   1,411    -    1,411    3,505    -    3,505 
Signal processing hardware   -    149    149    -    560    560 
Software licenses   -    -    -    -    417    417 
Services   504    430    934    998    1,139    2,137 
Total net revenue  $5,489   $579   $6,068   $11,548   $2,116   $13,664 
                               
Total net revenues by geographic areas                              
Americas  $4,005   $379   $4,384   $8,086   $1,490   $9,576 
EMEA   868    124    992    1,500    471    1,971 
APAC   616    76    692    1,962    155    2,117 
Total net revenue  $5,489   $579   $6,068   $11,548   $2,116   $13,664 

 

                               
   Three Months Ended June 20, 2021   Six Months Ended June 30, 2021 
   Test and
Measurement
   Radio, Baseband, Software   Consolidated   Test and
Measurement
   Radio, Baseband, Software   Consolidated 
Total net revenues by revenue type                              
Signal generators and components  $3,188   $-   $3,188   $6,517   $-   $6,517 
Signal analyzers and power meters   1,838    -    1,838    3,396    -    3,396 
Signal processing hardware   -    1,530    1,530    -    3,013    3,013 
Software licenses   -    341    341    -    1,331    1,331 
Services   495    396    891    935    780    1,715 
Total net revenue  $5,521   $2,267   $7,788   $10,848   $5,124   $15,972 
                               
Total net revenues by geographic areas                              
Americas  $4,079   $831   $4,910   $7,769   $2,152   $9,921 
EMEA   735    -    735    1,498    1,497    2,995 
APAC   707    1,436    2,143    1,581    1,475    3,056 
Total net revenue  $5,521   $2,267   $7,788   $10,848   $5,124   $15,972 

 

14
 

 

NOTE 7 – Income Taxes

 

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

 

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

 

As of June 30, 2022, the Company’s net deferred tax asset of $2.9 million is net of a valuation allowance of approximately $2.8 million which is associated with the Company’s state net operating loss carryforward and a state research and development credit. The net deferred tax asset decreased approximately $2.7 million from December 31, 2021 due to the reduction in federal and New Jersey net operating loss carryforwards due to the taxable gain to be recognized on the Microlab divestiture. The Company expects to utilize in 2022 all of its federal net operating loss carryforwards and approximately one-half of its New Jersey state net operating loss carryforwards to offset the taxable gain recognized on the Microlab divestiture.

 

In accordance with Accounting Standards Update (“ASU”) 2019-12 the Company recorded a tax benefit from continuing operations of $286,000 and $1.1 million for the three and six months ended June 30, 2022, respectively. The Company recorded a tax provision of approximately $4.9 million related to income from discontinued operations for the six months ended June 30, 2022. The Company recorded a tax benefit from continuing operations of $179,000 and $323,000 for the three and six months ended June 30, 2021, respectively. The Company recorded a tax provision of approximately $0.6 million related to income from discontinued operations for the three and six months ended June 30, 2021.

 

NOTE 8 – Earnings (Loss) Per Share

 

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

 

15
 

 

                     
   For the Three Months   For the Six Months 
   Ended June 30,   Ended June 30, 
   2022   2021   2022   2021 
                 
Weighted average common shares outstanding   21,857,116    21,762,578    22,150,918    21,727,801 
Potentially dilutive equity awards   1,865,462    2,580,087    2,048,614    2,335,554 
Weighted average common shares outstanding, assuming dilution   23,722,578    24,342,665    24,199,531    24,063,355 

 

For the three and six months ended June 30, 2022, the weighted average number of options to purchase common stock not included in potentially dilutive equity awards because the effects are anti-dilutive, or the performance condition was not met was 2,168,571 and 1,374,254, respectively. The number of shares issuable under the terms of the Holzworth earnout, if all paid in shares of common stock, is 1,039,549 and is included in potentially dilutive equity awards in the chart above.

 

For the three and six months ended June 30, 2021, the weighted average number of options to purchase common stock not included in potentially dilutive equity awards because the effects are anti-dilutive, or the performance condition was not met was 1,205,000. The number of shares issuable under the terms of the Holzworth earnout, if all paid in shares of common stock, is 1,599,807 and is included in potentially dilutive equity awards in the chart above.

 

NOTE 9 – Inventories

 

Inventory carrying value is net of inventory reserves of $678,000 at June 30, 2022 and $681,000 at December 31, 2021.

 

           
Inventories consist of (in thousands):        
   June 30,
2022
   December 31,
2021
 
Raw materials  $3,660   $3,213 
Work-in-process   519    542 
Finished goods   1,068    1,333 
Total Inventory  $5,247   $5,088 

 

NOTE 10 – Accrued Expenses and Other Current Liabilities

 

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

 

16
 

 

           
   June 30,
2022
   December 31
2021
 
Holzworth earnout (Year 1 and Year 2)  $2,284   $2,942 
Payroll and related benefits   765    718 
Accrued income taxes   555    - 
Accrued commissions   415    465 
Accrued professional fees   395    524 
Goods received not invoiced   228    277 
Sales and use and VAT tax   120    276 
Warranty reserve   76    61 
Accrued bonus   -    590 
Holzworth deferred purchase price   -    250 
Other   404    573 
Total  $5,242   $6,676 

 

NOTE 11 - Accounting for Stock Based Compensation

 

The Company’s results for the three months ended June 30, 2022 and 2021 include $320,000 and $89,000, respectively, related to stock based compensation expense. The Company’s results for the six months ended June 30, 2022 and 2021 include $650,000 and $203,000, respectively related to stock based compensation expenses. 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 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 restricted stock awards, restricted 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. As of June 30, 2022, there are 423,750 shares available for grant under the 2021 Incentive Plan.

 

All service-based (time vesting) options granted have ten-year terms from the date of grant and typically vest annually and become fully exercisable after a maximum of five years. However, vesting conditions are determined on a grant by grant basis.

 

On January 6, 2022, the Compensation Committee of the Board of Directors approved the grant of restricted common stock awards to named executive officers Tim Whelan, Mike Kandell, Dan Monopoli and Alfred Rodriguez of 125,000, 75,000, 50,000 and 50,000 shares respectively which vest in equal annual installments over two years. If an executive’s service with the Company terminates before the restricted awards are fully vested, then the shares that are not then fully vested are forfeited and immediately returned to the Company. The grant date value per share was $2.11.

 

An employee grant of 20,000 shares was issued on June 16, 2022, with a grant date per share value of $1.28. The grant vests in equal installments over two years.

 

17
 

 

NOTE 12 – Reportable Segments

 

In March 2022, the Company reorganized into two segments – Test and Measurement (T&M) and Radio, Baseband and Software (RBS). The T&M segment is comprised of the Boonton, Noisecom and Holzworth brands. T&M is primarily engaged in supplying noise source components and instruments and electronic testing and measurement instruments to customers in the semiconductor, military, aerospace, medical and commercial communications industries.

 

The RBS segment is comprised of CommAgility and develops the software which enables specialized LTE and 5G deployments, applications and private network solutions including the LTE physical layer and stack software, for mobile network and related applications. RBS engineers work closely with customers to provide hardware and software solutions in specialized applications and use-cases in wireless baseband, private networks, and non-terrestrial (“NTN”) communications. Additionally, CommAgility licenses, implements and customizes 5G and LTE physical layer and stack software for private networks supporting satellite communications, the military and aerospace industries, offering our customers unique implementation capabilities built on 3rd Generation Partnership Project (“3GPP”) standards.

 

For internal reporting purposes, the Company’s chief operating decision maker makes financial decisions and allocates resources based on segment profit information obtained from the Company’s internal management systems. Segment profitability includes the direct expenses of each segment and certain corporate allocations for rent and insurance. Management does not include in its measures of segment profitability of certain corporate expenses such as information technology expenses, finance and accounting expenses, legal and professional fees, public company expenses and other discreet items that are not core to the measurement of segment management’s performance but rather are controlled at the corporate level.

 

Summarized financial information relating to the Company’s reportable segments is shown in the following table:

 

                                                             
   Three months ended   Three months ended   Six months ended   Six months ended 
   June 30, 2022   June 30, 2021   June 30, 2022   June 30, 2021 
   T&M   RBS   Total   T&M   RBS   Total   T&M   RBS   Total   T&M   RBS   Total 
Net revenues  $5,489   $579   $6,068   $5,521   $2,267   $7,788   $11,548   $2,116   $13,664   $10,848   $5,124   $15,972 
Cost of revenues   2,319    334    2,653    2,251    1,159    3,410    4,870    1,024    5,894    4,524    2,216    6,740 
Gross profit   3,170    245    3,415    3,270    1,108    4,378    6,678    1,092    7,770    6,324    2,908    9,232 
                                                             
Operating expenses   1,987    1,440    3,427    1,808    1,788    3,596    3,857    3,038    6,895    3,480    3,623    7,103 
                                                             
Segment profitability   1,183    (1,195)   (12)   1,462    (680)   782    2,821    (1,946)   875    2,844    (715)   2,129 
                                                             
                                                             
Corporate expenses             1,666              1,579              4,008              3,274 
Operating loss             (1,678)             (797)             (3,133)             (1,145)
                                                             
Other income/(expense)             32              2,028              (659)             2,055 
Interest expense             -              (285)             (177)             (582)
                                                             
Income/(loss) before taxes             (1,646)             946              (3,969)             328 
                                                             
Tax provision/(benefit)             (286)             (179)             (1,136)             (323)
Net income/(loss) from continuing operations             (1,360)             1,125              (2,833)             651 
                                                             
Net income from discontinued operations, net of tax             -              412              11,670              652 
Net income/(loss)            $(1,360)            $1,537             $8,837             $1,303 
                                                             
Depreciation and Amortization  $255   $63   $317   $225   $249   $473   $534   $217   $751   $448   $494   $942 

 

 

NOTE 13 – COMMITMENTS AND CONTINGENCIES

 

There have been no material changes in our commitments and contingencies and risks and uncertainties as of June 30, 2022, from that previously disclosed in our annual report on Form 10-K for the year ended December 31, 2021.

 

NOTE 14 – SHARE REPURCHASE PROGRAM

 

On May 4, 2022, the Board of Directors of the Company authorized up to $4 million for a share repurchase program for the Company’s outstanding stock which expires on December 31, 2022. During the three months ended June 30, 2022, the Company repurchased 1,683,160 shares of common stock for $2.5 million inclusive of commissions. These shares have been recorded as treasury stock on the Consolidated Balance Sheet.

 

NOTE 15 - SUBSEQUENT EVENTS

 

In accordance with the Membership Purchase Interest Agreement, the Company and RF Industries, Ltd settled the final purchase price of the transaction which was comprised primarily of a working capital adjustment. On August 1, 2022, the Company received $225,000 from RF Industries, Ltd. which represented the final purchase price adjustment and received $100,000 that was held in escrow pending finalization of the purchase price. These amounts will be recorded as additional gain on divestiture, net of expenses, within discontinued operations in the third quarter.

 

18
 

 

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, 2021.

 

RESULTS OF OPERATIONS

 

Three Months Ended June 30, 2022 Compared with Three Months Ended June 30, 2021

 

Net Revenues (in thousands)

 

   Three months ended June 30, 
   Revenue   % of Revenue   Change 
   2022   2021   2022   2021   Amount   Pct. 
Test and measurement  $5,489   $5,521    90.5%   70.9%  $(32)   -0.6%
Radio, baseband, software   579    2,267    9.5%   29.1%   (1,688)   -74.5%
Total net revenues  $6,068   $7,788    100.0%   100.0%  $(1,720)   -22.1%

 

Net consolidated revenues decreased 22.1% due primarily to lower sales of our digital signal processing cards and lower software sales at our RBS segment. The lower digital signal processing revenue is due to the reduction in use of our hardware in our formerly largest customer’s product. The lower software revenue is the result, in part, of more volatile quarter to quarter revenue recognition patterns due to the timing, delivery and complexity of RBS projects. T&M revenues were flat with the prior year and were partially impacted by supply chain constraints, Covid lockdowns in China and general economic uncertainties which are delaying capital expenditure decisions by our customers.

 

Gross Profit (in thousands)

 

   Three months ended June 30, 
   Gross Profit   Gross Profit %   Change 
   2022   2021   2022   2021   Amount   Pct. 
Test and measurement  $3,170   $3,270    57.8%   59.2%  $(100)   -3.0%
Radio, baseband, software   245    1,108    42.3%   48.9%   (863)   -77.9%
Total gross profit  $3,415   $4,378    56.3%   56.2%  $(963)   -22.0%

 

Consolidated gross profit declined 22.0% due to lower sales at our RBS segment. The T&M gross profit margin declined from the prior year due to product mix.

 

Operating Expenses (in thousands)

 

   Three months ended June 30, 
   Operating Expenses   % of Revenue   Change 
   2022   2021   2022   2021   Amount   Pct. 
Research and development  $1,126   $1,244    18.6%   16.0%  $(118)   -9.5%
Sales and marketing   1,261    1,144    20.8%   14.7%   117    10.2%
General and administrative   2,706    2,787    44.6%   35.8%   (81)   -2.9%
Total operating expenses  $5,093   $5,175    83.9%   66.4%  $(82)   -1.6%

 

19
 

 

Research and development expenses decreased 9.5% from the prior year due primarily to lower third party research and development expenses.

 

Sales and marketing expenses increased 10.2% due primarily to higher external commissions expense due to sales mix and increased sales and marketing travel and tradeshow expenses.

 

General and administrative expenses decreased 2.9% due primarily to lower intangible asset amortization expense as CommAgility intangible assets are fully amortized, lower headcount related expenses, and lower bad debt expense which were partially offset by higher stock compensation expense due to restricted share grants to employees and non-recurring merger, acquisition and divestiture expenses.

 

Gain/(Loss) on Extinguishment of Debt

 

The gain on extinguishment of debt in 2021 represents the forgiveness of our PPP Loan.

 

Other Income/(Expense)

 

Other income increased $49,000 primarily due to sublease income as a result of our sublease arrangement with RF Industries Ltd.

 

Interest Expense

 

Consolidated interest expense decreased $285,000 due to the termination of our Term Loan Facility and Credit Facility on March 1, 2022.

 

Taxes

 

Consolidated tax benefit increased $107,000 from the prior year period due to a higher estimated taxable loss from continuing operations before taxes.

 

Net loss from continuing operations

 

Consolidated net loss from continuing operations was $1.4 million for the three months ended June 30, 2022 as compared to net income of $1.1 million in the same period in the prior year due primarily to lower consolidated gross profit driven by lower RBS revenues and the gain on PPP loan forgiveness recognized in the prior year.

 

Net income from discontinued operations, net of tax

 

Net income from discontinued operations, net of tax in the three months ended June 30, 2021 is comprised of the results of Microlab of $964,000, net of tax provision of $552,000. There was no income from discontinued operations in the second quarter of 2022.

 

Six Months Ended June 30, 2022 Compared with Six Months Ended June 30, 2021

 

Net Revenues (in thousands)

 

   Six months ended June 30, 
   Revenue   % of Revenue   Change 
   2022   2021   2022   2021   Amount   Pct. 
Test and measurement  $11,548   $10,848    84.5%   67.9%  $700    6.5%
Radio, baseband, software   2,116    5,124    15.5%   32.1%   (3,008)   -58.7%
Total net revenues  $13,664   $15,972    100.0%   100.0%  $(2,308)   -14.5%

 

Net consolidated revenues decreased 14.5% due to lower sales of our digital signal processing cards and lower software sales at our RBS segment. The lower digital signal processing revenue is due to the reduction in use of our hardware in our formerly largest customer’s product. The lower software revenue is the result, in part, of more volatile quarter to quarter revenue recognition patterns due to the timing, delivery and complexity of RBS projects. This was partially offset by higher sales of customized noise sources at our T&M segment as compared to the prior year period.

 

20
 

 

Gross Profit (in thousands)

 

   Six months ended June 30, 
   Gross Profit   Gross Profit %   Change 
   2022   2021   2022   2021   Amount   Pct. 
Test and measurement  $6,678   $6,324    57.8%   58.3%  $354    5.6%
Radio, baseband, software   1,092    2,908    51.6%   56.8%   (1,816)   -62.4%
Total gross profit  $7,770   $9,232    56.9%   57.8%  $(1,462)   -15.8%

 

Consolidated gross profit declined 15.8% due to lower sales at our RBS segment. T&M gross profit increased 5.6% on higher volumes. T&M gross profit margin declined marginally due to product mix.

 

Operating Expenses (in thousands)

 

   Six months ended June 30, 
   Operating Expenses   % of Revenue   Change 
   2022   2021   2022   2021   Amount   Pct. 
Research and development  $2,285   $2,400    16.7%   15.0%  $(115)   -4.8%
Sales and marketing   2,520    2,339    18.4%   14.6%   181    7.7%
General and administrative   6,098    5,638    44.6%   35.3%   460    8.2%
Total operating expenses  $10,903   $10,377    79.8%   65.0%  $526    5.1%

 

Research and development decreased 4.8% due primarly to lower third party research and development expenses and lower headcount costs at our RBS segment due to allocations to customer projects.

 

Sales and marketing expenses increased 7.7% due to higher external commissions due to sales mix and increased sales and marketing travel and tradeshow expenses.

 

General and administrative expenses increased 8.2% due primarily to higher stock compensation expense due to restricted share awards to employees and higher non-recurring expenses most notably related to the Microlab divestiture in the first quarter only partially offset by lower intangible asset amortization expense as CommAgility intangible assets are fully amortized and lower headcount related expenses.

 

Gain/(loss) on Extinguishment of Debt

 

The gain on extinguishment of debt in 2021 represents the forgiveness of the PPP loan. The loss on extinguishment of debt in 2022 is related to the write off of unamortized debt costs associated with our Term Loan Facility with Muzinich BDC and Credit Facility with Bank of America N.A. which were repaid in full and terminated on March 1, 2022.

 

Other Income/(Expense)

 

Other income increased $123,000 primarily due to sublease income because of our sublease arrangement with RF Industries Ltd. as well as higher gains on sales of assets.

 

Interest Expense

 

Consolidated interest expense decreased $405,000 due primarily to the termination of our Term Loan Facility and Credit Facility on March 1, 2022.

 

Taxes

 

Consolidated tax benefit increased $813,000 from the prior year period due to a higher estimated taxable loss from continuing operations before taxes.

 

21
 

 

Net income/(loss) from continuing operations

 

Consolidated net loss from continuing operations for the first half of 2022 was $2.8 million as compared to net income of $651,000 for the same period in the prior year. The loss from continuing operations in 2022 is primarily the result of lower gross profit driven by lower RBS revenue and margin, higher operating expenses and a loss on extinguishment of debt. This was only partially offset by higher other income, lower interest expense and a higher tax benefit recognized in the first half of the year.

 

Net income from discontinued operations, net of tax

 

Net income from discontinued operations, net of tax in the first half of 2022 is comprised of the pre divestiture net income of Microlab of $158,000 and the net gain on sale of Microlab of approximately $16.4 million net of tax provision of approximately $4.9 million.

 

Net income from discontinued operations, net of tax in the first half of 2021 is comprised of the results of Microlab of $1.3 million net of tax provision of $647,000.

 

LIQUIDITY AND CAPITAL RESOURCES

 

On March 1, 2022, the Company completed the divestiture of Microlab and received net proceeds of $22.8 million, of which, the Company used approximately $4.1 million and $600,000 to repay in full and terminate the Muzinich Term Loan Facility and Bank of America Credit Facility, respectively. As of March 31, 2022, the Company’s only debt obligation was the CIBLS loan in the U.K. which has an outstanding principal balance of $329,000 as of March 31, 2022 and is more fully described in Note 4 of the consolidated financial statements. The Company repaid in full the CIBLS loan on May 30,2022 and as of June 30, 2022 had zero debt obligations.

 

As of June 30, 2022, our consolidated cash balance was approximately $13.3 million. We expect our cash balance and cash generated from operations will be sufficient to meet our liquidity needs for at least the next twelve months. Our ability to meet our cash requirements will depend on our ability to generate cash in the future, which is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control, including the fact that the Company will no longer benefit from the performance of the Microlab brand which historically accounted for a substantial portion of our consolidated revenue and that we will be entirely dependent on the RBS and T&M segments.

 

The Microlab divestiture will be treated as a sale of the assets and liabilities for U.S. federal and applicable state income tax purposes. The Company has approximately $14.9 million of U.S. federal net operating loss carryforwards and approximately $41.2 million of New Jersey state net operating loss carryforwards as of December 31, 2021. We expect to utilize in 2022 all of our federal net operating loss carryforwards and approximately 50% of our state net operating loss carryforwards to offset the taxable gain generated from the Microlab divestiture. Accordingly, in the future, the Company could be subject to cash income taxes which is expected to reduce our liquidity. Additionally, CommAgility benefits from a research and development deduction which significantly reduces the cash needed to pay taxes in the UK.

 

The Company currently is pursuing possible strategic opportunities, including potential divestitures, acquisitions, mergers, or other activities, which may require significant use of the Company’s capital resources. The Company may incur costs as a result of such activities and such activities may affect the Company’s liquidity in future periods.

 

Operating Activities

 

Cash used by operating activities increased $5.9 million from the prior year period due to the loss from operations in the current year as well as an increase in working capital of $2.9 million. The increase in working capital was due primarily to an increase in accounts receivable driven by lower accounts receivable balances at December 31, 2021 and an increase in inventory stocking levels of hard to procure components.

 

Investing Activities

 

Cash provided by investing activities increased $22.7 million from the prior year period due to the net proceeds received related to the Microlab divestiture of $22.8 million.

 

22
 

 

Financing Activities

 

Cash used by financing activities increased $7.0 million due primarily to the full repayment of the Term Loan Facility on March 1, 2022 and share repurchases of $2.5 million in the second quarter of 2022.

 

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.

 

Critical Accounting Policies

 

There have been no changes in our critical accounting policies or significant accounting estimates as disclosed in our 2021 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 and cash generated by operations will be sufficient to meet our liquidity needs for at least the next twelve months. Investors are cautioned that such forward-looking statements are not guarantees of future performance and involve a number of risks and uncertainties that could materially affect actual results, including, among others, the ongoing impact that the conflict in Ukraine and related sanctions have had and may continue to have on our business, supply chain, transportation costs, and our backlog; the impact that the evolving COVID-19 pandemic has had and may continue to have on our supply chain, human capital and the general economy in the future; the impact of inflation on our business and the economy in general, 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 which in some cases has been and may continue to be delayed because of the Ukraine crisis, COVID-19 and economic uncertainty in general ; the impact of the loss of any significant customers; the ability of our management to successfully implement our evolving business plan; the impact of competitive products and pricing; our abilities to protect our intellectual property rights and our ability to manage risks related to our information technology and cyber security as well as other risks and uncertainties set forth in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. These forward-looking statements speak only as of the date of this release and the Company does not undertake any obligation to update or revise any forward-looking information to reflect changes in assumptions, the occurrence of unanticipated events, or otherwise, except as required by law.

 

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 six months ended June 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, as described in our 2021 Annual Report on Form 10-K.

 

23
 

 

PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

 

No material changes in the quarter.

 

Item 1A. Risk Factors

 

There have been no 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, 2021.

 

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

 

Share repurchase activity during the 13 week period ended June 30, 2022, summarized on a trade-date basis, was as follows (in thousands, except per share amounts):

 

Period  Total Number of Shares Purchased (1)   Average Price Paid Per Share (2)   Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs   Approximate Dollar Value of Shares That May Yet Be Purchased Under the Program 
March 31, 2022 - April 30, 2022      $         $  
May 1, 2022 - May 31, 2022   1,683   $1.50    1,683   $1,525 
June 1, 2022 - June 30, 2022       $         $  
Total   1,683         1,683      

 

(1) The Board of Directors approved a share repurchase program on May 12, 2022 (the “Program”), authorizing the Company to purchase up to $4 million of its common shares as determined by management at its discretion. Share repurchases may be made in the open market or in privately negotiated transactions, including under plans complying with the provisions of Rule 10b5-1 and Rule 10b-18 of the Securities Exchange Act of 1934, as amended. The timing and volume of share repurchases are subject to market conditions, business conditions and applicable laws, and are at management’s discretion. The Program does not require the purchase of any minimum number of shares and may be suspended or discontinued at any time. The share repurchase authorization expires on December 31, 2022. See Note 14 in Part I, Item 1 of this Quarterly Report for additional information related to share repurchases.

 

(2) Average price paid per share includes costs associated with the repurchases.

 

Item 3. Defaults upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

None.

 

24
 

 

Item 6. Exhibits

 

Exhibit
Number
 Exhibit Description
    
3.1  Amended and Restated By-laws, as amended on April 7, 2020 (incorporated by reference to Exhibit 3.2 to our Quarterly Report on Form 10-Q filed with the SEC on May 13, 2020, Commission File No. 001-11916)
    
10.1  Membership Interest Purchase Agreement dated as of December 16, 2021 by and among RF Industries Ltd., Wireless Telecom Group, Inc. and Microlab/FXR LLC (incorporated by reference to Exhibit 10.1 to our Form 8-K filed with the SEC on December 20, 2021, Commission File No. 001-11916)
    
10.2  Amended and Restated Executive Employment Agreement by and between Wireless Telecom Group, Inc. and Timothy Whelan dated January 31, 2022 (incorporated by reference to Exhibit 10.43 to our Current Report on Form 10-K filed with the SEC on March 17, 2022, Commission File No. 001-11916)
    
10.3  Amended Employment Letter Agreement, dated January 31, 2022, between Wireless Telecom Group, Inc. and Michael Kandell (incorporated by reference to Exhibit 10.44 to our Current Report on Form 10-K filed with the SEC on March 17, 2022, Commission File No. 001-11916)
    
10.4  Amended Employment Letter Agreement, dated January 31, 2022, between Wireless Telecom Group, Inc. and Daniel Monopoli (incorporated by reference to Exhibit 10.45 to our Current Report on Form 10-K filed with the SEC on March 17, 2022, Commission File No. 001-11916)
    
10.5  Amended Employment Letter Agreement, dated January 31, 2022, between Wireless Telecom Group, Inc. and Alfred Rodriguez (incorporated by reference to Exhibit 10.44 to our Current Report on Form 10-K filed with the SEC on March 17, 2022, Commission File No. 001-11916)
    
10.6  Sublease Agreement dated as of December 16, 2021, by and between Boonton Electronics Corp. and RF Industries Ltd. (incorporated by reference to Exhibit 10.6 to our Current Report on Form 10-Q filed with the SEC on May 11, 2022, Commission File No. 001-11916)
    
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 six months ended June 30,2021, filed on August 9, 2021, formatted in 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**  Inline XBRL INSTANCE DOCUMENT
    
101.SCH**  Inline XBRL TAXONOMY EXTENSION SCHEMA DOCUMENT
    
101.CAL**  Inline XBRL TAXONOMY EXTENSION CALCULATION LINKBASE DOCUMENT
    
101.DEF**  Inline XBRL TAXONOMY EXTENSION DEFINITION LINKBASE DOCUMENT
    
101.LAB**  Inline XBRL TAXONOMY EXTENSION LABEL LINKBASE DOCUMENT
    
101.PRE**  Inline XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE DOCUMENT
    
104  Cover Page Interactive Data File (embedded within the Inline XBRL document)

 

** Furnished herewith.

 

25
 

 

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: August 9, 2022By:/s/ Timothy Whelan
  Timothy Whelan
  Chief Executive Officer

 

Dated: August 9, 2022By:/s/ Michael Kandell
  Michael Kandell
  Chief Financial Officer

 

26