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”), is pursuing strategic alternatives to accelerate the realization of value for our shareholders. On January
1, 2022, the Company was comprised of Wireless Telecom Group, Inc., doing business as, and operating under the trade name NoiseCom, Inc.,
and its wholly owned subsidiaries including Boonton Electronics Corporation, Microlab/FXR, Wireless Telecommunications Group Ltd., CommAgility
Limited and Holzworth Instrumentation, Inc. (NoiseCom, Inc., Boonton Electronics Corporation, Microlab/FXR LLC, CommAgility Limited Ltd.,
and Holzworth Instrumentation, Inc. are hereinafter referred to as “Noisecom”, “Boonton”, “Microlab”,
“CommAgility” and “Holzworth”, respectively). Our product groups were organized as follows: Radio Frequency Components
(“RFC”) was comprised of our Microlab brand; Radio, Baseband, Software (“RBS”) was comprised of our CommAgility
brand; and Test and Measurement (“T&M”) was comprised of our Boonton, Noisecom and Holzworth brands.
As
more fully described in Note 3 below, on March 1, 2022, the Company completed the sale of Microlab to RF Industries, Ltd and on December
30, 2022 completed the sale of CommAgility to E-Space Acquisitions, LLC. Subsequent to the divestitures of Microlab and CommAgility,
the Company is comprised of the T&M business which is made up of our Boonton, Noisecom and Holzworth brands. The T&M business
provides radio frequency (“RF”) and microwave test equipment and low phase noise RF synthesizers to equipment manufacturers,
aerospace and defense companies, military and government agencies, satellite communication companies, semiconductor companies and other
global technology companies.
Our
consolidated financial statements as of and for the three months ended March 31, 2023 include the accounts of Noiscom, Boonton and Holzworth
and have been prepared using accounting principles generally accepted in the United States (“U.S. GAAP”). In accordance with
applicable accounting guidance, the results of Microlab and CommAgility are presented as discontinued operations in the consolidated
financial statements for the three months ended March 31, 2022. 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 “first quarter(s)”
or “three months” indicate the Company’s fiscal periods ended March 31, 2023 and March 31, 2022, and references to
“year-end” indicate the fiscal year ended December 31, 2022.
Consolidated
Financial Statements
In
the opinion of management, the accompanying consolidated financial statements referred to above contain allnecessary 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, 2022. 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 months ended March 31, 2023 are not necessarily indicative of the results to be expected for the
full year ending December 31, 2023.
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.
Recent
inflationary pressures 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, 2022.
Concentration
Risk
Financial
instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents and
trade accounts receivable.
Credit
evaluations are performed on customers requiring credit over a certain amount. Credit risk is mitigated to a lesser extent through collateral
such as letters of credit, bank guarantees or payment terms like cash in advance.
One
customer accounted for 19.0% and 14.1% of consolidated revenue for the three months ended March 31, 2023 and 2022, respectively.
One
customer accounted for 15.4% and 16.5% of consolidated accounts receivable as of March 31, 2023 and December 31, 2022, respectively.
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.
Accounts
Receivable
Accounts
receivable are recorded and carried at the original invoiced amount less allowances for credits and for any potential uncollectible amounts
due to credit losses in accordance with ASU 2016-13 Financial Instruments – Credit Losses (Topic 326). We make estimates
of the expected credit and collectability trends for the allowance for credit losses based on our assessment of various factors, including
historical experience, the age of the accounts receivable balances, credit quality of our customers, current economic conditions, and
other factors that may affect our ability to collect from our customers. Expected credit losses are recorded as general and administrative
expenses on our condensed consolidated statements of operations. As of March 31, 2023 and December 31, 2022, the allowance for credit
losses was $100,000.
Segments
The
Company evaluates its financial reporting in accordance with ASC 280 Segment Reporting. As a result of the Microlab and CommAgility
divestitures and the reclassification of their results of operations to discontinued operations in accordance with ASC 205-20, the Company’s
results from continuing operations are considered one segment.
NOTE
2 – Accounting Pronouncements
Recently
Adopted Accounting Standards
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 adoption of the standard on January 1, 2023 did not have a material impact on our consolidated
financial statements.
NOTE
3 – Discontinued Operations
Microlab
On
December 16, 2021, the Company and its wholly owned subsidiary Microlab entered into a Membership Interest Purchase Agreement (the “Microlab
Purchase Agreement”) with RF Industries, Ltd., a Nevada corporation (the “RF Industries”) whereby RF Industries agreed
to purchase 100% of the membership interests in Microlab for a purchase price of $24,250,000, subject to certain adjustments as set forth
in the Microlab Purchase Agreement. The board of directors of each of the Company and the Buyer unanimously approved the Microlab Purchase
Agreement and the transactions contemplated thereby (collectively, the “Microlab Transaction”). On February 25, 2022, the
shareholders of the Company approved the transaction at a Special Meeting of Shareholders held virtually via live webcast and on March
1, 2022, the Microlab Transaction closed.
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 of approximately $1.1 million including fees to our advisors. In July 2022,
the Company received $225,000 in final purchase price adjustment primarily related to the working capital adjustment and on March 1,
2023 the Company received the indemnification holdback amount of $150,000. In total, the Company received net proceeds of approximately
$23.1 million related to the Microlab Transaction. In 2022 the Company used $4.2 million of the Microlab Transaction proceeds to repay
in full our outstanding term loan with Muzinich BDC and approximately $600,000 was used to repay in full our outstanding revolver balance
related to the Bank of America credit agreement. The Company terminated both the Muzinich term loan and Bank of America credit facility
as of the Microlab Transaction date. Additionally, concurrent with the closing, the Company entered into a sublease with RF Industries
for approximately one-half of the square footage of our corporate headquarters in Parsippany, NJ.
The
Transaction was treated as a sale of the assets and liabilities of Microlab to RF Industries for U.S. federal and applicable state income
tax purposes.
In
accordance with ASC 205-20 Discontinued Operations, the results of Microlab are presented as discontinued operations in the Consolidated
Statements of Operations and Comprehensive Income/(Loss) for the three months ended March 31, 2022 and, as such, have been excluded from
continuing operations.
The
following table summarizes the significant items included in income from discontinued operations for Microlab, net of tax in the Consolidated
Statement of Operations and Comprehensive Income/(Loss) for the three months ended March 31, 2022 (in thousands):
Schedule
of Discontinued Operations and Balance Sheet
| |
March 31,
2022 | |
Net revenues | |
$ | 2,477 | |
Cost of revenues | |
| 1,626 | |
Gross profit | |
| 851 | |
Operating expenses | |
| 693 | |
Gain
on divestiture, net of expenses | |
| 16,403 | |
Income from Discontinued Operations
before income taxes | |
| 16,561 | |
Income
tax expense | |
| 4,891 | |
Income
from Discontinued Operations, net of income taxes | |
$ | 11,670 | |
On
December 4, 2022, the Company, and its wholly owned subsidiary, Wireless Telecommunications Group, LTD, a company organized under the
laws of England and Wales (“Holdings”), which owns 100% of the outstanding securities of CommAgility, entered into a Securities
Purchase Agreement (the “CommAgility Purchase Agreement”) with E-Space Acquisitions LLC, a Delaware limited liability company
(“Buyer”), and eSpace Inc., a Delaware corporation, as guarantor. The CommAgility Purchase Agreement provided for the purchase
by the Buyer of 100% of the issued and outstanding equity interests of Holdings (the “Securities”) from the Company. The
board of directors or other governing body of each of the Company and the Buyer unanimously approved the CommAgility Purchase Agreement
and the transactions contemplated thereby (collectively, the “CommAgility Transaction”). Under the terms of the CommAgility
Purchase Agreement, the purchase price for the Securities was estimated to be approximately $14.5 million, inclusive of $13.8 million
in cash consideration and a $750,000 note payable, subject to agreed-upon reductions of $650,000.
The
CommAgility Transaction closed on December 30, 2022 and the Company received net proceeds of $12.2 million which is comprised of the
cash consideration of $13.8 million less direct expenses of approximately $1.6 million. The note payable of $750,000 was offset by agreed-upon
reductions of $650,000 for a net balance of approximately $100,000 which is due one year from the transaction close or upon a change
in control as defined in the CommAgility Purchase Agreement. The note receivable balance of $100,000 was further offset by the 2023 UK
transaction taxes of approximately $69,000 so the expected net proceeds of the note now is approximately $31,000.
In
accordance with ASC 205-20 Discontinued Operations, the results of CommAgility are presented as discontinued operations in the
Consolidated Statements of Operations and Comprehensive Income/(Loss) for the three months ended March 31, 2022 and, as such, have been
excluded from continuing operations.
The
following table summarizes the significant items included in income from discontinued operation for CommAgility, net of tax in the Consolidated
Statement of Operations and Comprehensive Income/(Loss) for the three months ended March 31, 2022 (in thousands):
Schedule
of Discontinued Operations and Balance Sheet
| |
March 31,
2022 | |
Net revenues | |
$ | 1,537 | |
Cost of revenues | |
| 690 | |
Gross profit | |
| 847 | |
Operating expenses | |
| 1,526 | |
Other income | |
| 6 | |
Gain
on divestiture, net of expenses | |
| - | |
Income from Discontinued Operations
before income taxes | |
| (673 | ) |
Income
tax (benefit) | |
| 4 | |
Income
from Discontinued Operations, net of income taxes | |
$ | (677 | ) |
The
cash flows related to discontinued operations have not been segregated and are included in the consolidated statements of cash flows
for the three months ended March 31, 2022. Depreciation and amortization expense in the three months ended March 31, 2022 for Microlab
was not material and for CommAgility was $154,000. Capital expenditures in the three months ended March 31, 2022 for Microlab was not
material and for CommAgility was $108,000.
NOTE
4 – 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 March 31, 2023 and December 31, 2022. 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).
Cash
paid for amounts included in the present value of operating lease liabilities was $169,000 and $156,000 during the three months ended
March 31, 2023 and 2022, respectively, and was included in operating cash flows.
Operating
lease costs for the three months ended March 31, 2023 and March 31, 2022 were $147,000.
The
following table presents information about the amount and timing of cash flows arising from the Company’s leases as of March 31,
2023:
Schedule of Maturity of Operating Lease Liabilities
(in
thousands) | |
March 31,
2023 | |
Maturity
of Lease Liabilities | |
| | |
Remainder of 2023 | |
$ | 116 | |
2024 | |
| 158 | |
2025 | |
| 163 | |
2026 | |
| 69 | |
Total undiscounted operating
lease payments | |
| 506 | |
Less:
imputed interest | |
| (44 | ) |
Present
value of operating lease liabilities | |
$ | 462 | |
| |
| | |
Balance
sheet classification | |
| | |
Current lease liabilities | |
$ | 132 | |
Long-term
lease liabilities | |
| 330 | |
Total
operating lease liabilities | |
$ | 462 | |
| |
| | |
Other information | |
| | |
Weighted-average remaining
term (months) for operating leases | |
| 41 | |
Weighted-average discount
rate for operating leases | |
| 5.88 | % |
On
March 31, 2023, the Company entered into the Sixth Amendment to the lease for our corporate headquarters and operating facility for our
Boonton and Noisecom brands in Parsippany, New Jersey. The term of the lease was extended for a period of twelve months, commencing April
1, 2023 and expiring on March 31, 2024 for a fixed monthly rent of $60,933. Due to the short term nature of this extension the lease
extension will not be recorded on the balance sheet.
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-terminated 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. On March 31, 2023 the sublease was extended for a period of four months at a fixed
monthly rent of $31,075.
NOTE
5 – 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).
Schedule
of Disaggregated Revenue
| |
Three
Months Ended
March
31, 2023 | | |
Three
Months Ended March
31, 2022 | |
Total net
revenues by revenue type | |
| | | |
| | |
Signal generators
and components | |
$ | 3,240 | | |
$ | 3,472 | |
Signal analyzers and power
meters | |
| 1,391 | | |
| 2,093 | |
Services | |
| 544 | | |
| 494 | |
Total
net revenue | |
$ | 5,175 | | |
$ | 6,059 | |
| |
| | | |
| | |
Total net
revenues by geographic areas | |
| | | |
| | |
Americas | |
$ | 4,041 | | |
$ | 4,081 | |
EMEA | |
| 565 | | |
| 632 | |
APAC | |
| 569 | | |
| 1,346 | |
Total
net revenue | |
$ | 5,175 | | |
$ | 6,059 | |
NOTE
6 – 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 California . The amount of deferred tax assets
considered realizable is subject to adjustment in future periods if estimates of future taxable income are changed.
As
of March 31, 2023, the Company’s net deferred tax asset of $3.1 million is net of a valuation allowance of approximately $3.1 million
which is associated with the Company’s state net operating loss carryforward and a state research and development credit.
The
Company recorded a tax benefit of $162,000 in the three months ended March 31, 2023 based on the estimated effective annual tax rate.
In accordance with Accounting Standards Update (“ASU”) 2019-12 the Company recorded a tax provision of approximately $4.9
million related to income from discontinued operations and a tax benefit of approximately $856,000 related to loss from continuing operations
for the three months ended March 31, 2022.
NOTE
7 – 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, 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.
Schedule of Weighted Average Common Shares Outstanding
| |
2023 | | |
2022 | |
| |
For the Three
Months | |
| |
Ended
March 31, | |
| |
2023 | | |
2022 | |
Weighted average common shares outstanding | |
| 21,363,015 | | |
| 22,603,330 | |
Potentially
dilutive equity awards | |
| 681,656 | | |
| 2,467,056 | |
Weighted average common
shares outstanding, assuming dilution | |
| 22,044,671 | | |
| 25,070,386 | |
For
the three months ended March 31, 2023, the weighted average number of option 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 895,000.
For
the three months ended March 31, 2022, the weighted average number of options to purchase common stock not included in potentially dilutive
equity awards because the effects are anti-dilutive, or the performance condition was not met was 1,320,000. The number of shares issuable
under the terms of the Holzworth earnout, if all paid in shares of common stock, was 1,340,637 and was included in potentially dilutive
equity awards in the chart above.
NOTE
8 – Inventories
Inventory
carrying value is net of inventory reserves of $503,000 at March 31, 2023 and $499,000 at December 31, 2022.
Schedule
of Inventory current
Inventories consist of (in thousands): | |
| | |
| |
| |
March
31, 2023 | | |
December
31, 2022 | |
Raw materials | |
$ | 3,875 | | |
$ | 3,450 | |
Work-in-process | |
| 765 | | |
| 602 | |
Finished
goods | |
| 1,568 | | |
| 1,035 | |
Total
Inventory | |
$ | 6,208 | | |
$ | 5,087 | |
NOTE
9 – Accrued Expenses and Other Current Liabilities
As
of March 31, 2023, and December 31, 2022 accrued expenses and other current liabilities consisted of the following (in thousands):
Schedule of Accrued Expenses and Other Current Liabilities
| |
March
31, 2023 | | |
December
31 2022 | |
Payroll and related
benefits | |
| 370 | | |
| 193 | |
Accrued severance | |
| 308 | | |
| - | |
Accrued bonus | |
| - | | |
| 625 | |
Goods received not invoiced | |
| 306 | | |
| 148 | |
Accrued commissions | |
| 317 | | |
| 461 | |
Accrued professional fees | |
| 369 | | |
| 795 | |
Sales and use tax | |
| 176 | | |
| 180 | |
Warranty reserve | |
| 76 | | |
| 76 | |
Other | |
| 276 | | |
| 215 | |
Total | |
$ | 2,198 | | |
$ | 2,693 | |
NOTE
10 – Accounting for Stock Based Compensation
The
Company’s results for the three months ended March 31, 2023 and 2022 include $116,000 and $330,000, 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
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 March 31, 2023, there are 378,125 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.
NOTE
11 – COMMITMENTS AND CONTINGENCIES
There
have been no material changes in our commitments and contingencies and risks and uncertainties as of March 31, 2023 from that previously
disclosed in our annual report on Form 10-K for the year ended December 31, 2022.
NOTE
12 – SUBSEQUENT EVENTS
There
were no subsequent events or transactions other than previously disclosed (See Note 4) requiring recognition or disclosure in the consolidated
financial statements, and the notes thereto, through the date the financial statements were issued.