NOTE
1 - DESCRIPTION OF COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Organization
and Basis of Presentation
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 2 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.
In
accordance with applicable accounting guidance, the results of Microlab and CommAgility 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 and CommAgility 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 and Holzworth.
The
accompanying consolidated financial statements 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.
Use
of Estimates
The
accompanying financial statements have been prepared in accordance with U.S. GAAP, which requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosures of contingent liabilities at the date of the financial statements,
as well as the reported amounts of revenues and expenses during the reporting period. We base our assumptions, judgements and estimates
on historical experience and various other factors that we believe to be reasonable under the circumstances. Accordingly, actual results
could differ from those estimates. The most significant estimates and assumptions include management’s analysis in support of inventory
valuation, accounts receivable valuation, valuation of deferred tax assets, returns reserves, warranty accruals, goodwill and intangible
assets, estimated fair values of stock options and vesting periods of performance-based stock options and restricted stock. At least
quarterly, we evaluate our assumptions, judgements and estimates, and make changes as deemed necessary.
Concentrations
of Credit Risk, Purchases and Fair Value
Financial
instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents and
trade accounts receivable.
Credit
evaluations are performed on customers requiring credit over a certain amount. Credit risk is mitigated to a lesser extent through collateral
such as letters of credit, bank guarantees or payment terms like cash in advance.
For
the years ended December 31, 2022 and December 31, 2021, one customer accounted for 15% and 13% of total consolidated revenues, respectively.
At December 31, 2022, one customer accounted for 17% of consolidated gross accounts receivable. At December 31, 2021, one customer accounted
for 11% of gross accounts receivable.
For
the year ended December 31, 2022, two suppliers accounted for approximately 33% of total consolidated inventory purchases. For the year
ended December 31, 2021, two suppliers accounted for approximately 37% of total consolidated inventory purchases.
Cash
and Cash Equivalents
Cash
and cash equivalents represent deposits in banks and highly liquid investments purchased with maturities of three months or less at the
date of purchase.
Accounts
Receivable and Allowance for Doubtful Accounts
Trade
accounts receivable are stated at the amount owed by the customer, net of allowances for doubtful accounts. Estimated allowances for
doubtful accounts are reviewed periodically taking into account the customer’s recent payment history, the customer’s current
financial statements and other information regarding the customer’s credit worthiness. Account balances are charged off against
the allowance when it is determined the receivable will not be recovered.
Inventories
Inventories
are stated at the lower of cost or net realizable value. Inventory cost is determined on an average cost basis. Net realizable value
is based upon an estimated average selling price reduced by estimated costs of completion, disposal and transportation. Reductions in
inventory valuation are included in cost of revenues in the accompanying Consolidated Statements of Operations and Comprehensive Income/Loss.
Finished goods and work-in-process include material, labor and overhead expenses.
The
Company reviews inventory for excess and obsolescence based on best estimates of future demand, product lifecycle status and product
development plans. The Company uses historical information along with these future estimates to reduce the inventory cost basis. Subsequent
changes in facts and circumstances do not result in the restoration or increase in that newly established cost basis.
Inventory
carrying value is net of inventory reserves of approximately $499,000 as of December 31, 2022 and $468,000 as of December 31, 2021.
SCHEDULE OF INVENTORY CURRENT
Inventories consist of (in thousands): | |
December 31, | | |
December 31, | |
| |
2022 | | |
2021 | |
Raw materials | |
$ | 3,450 | | |
$ | 2,684 | |
Work-in-process | |
| 553 | | |
| 492 | |
Finished goods | |
| 1,084 | | |
| 1,263 | |
Inventory net | |
$ | 5,087 | | |
$ | 4,439 | |
Prepaid
Expenses and Other Current Assets
Prepaid
expenses and other current assets generally consist of prepaid U.S. federal and state taxes, prepaid insurance, prepaid maintenance agreements
and the short-term portion of debt issuance costs. Prepaid U.S. federal and state taxes included in prepaid and other current assets
was $866,000 as of December 31, 2022.
Property,
Plant and Equipment
Property,
plant and equipment are reflected at cost, less accumulated depreciation. Upon application of acquisition accounting, property, plant
and equipment are measured at estimated fair value as of the acquisition date to establish a new historical cost basis.
Depreciation
and amortization are provided on a straight-line basis over the estimated useful lives of the assets. The estimated useful lives for
the property, plant and equipment are:
SCHEDULE OF PROPERTY PLANT AND EQUIPMENT ESTIMATED USEFUL LIVES
Machinery
and computer equipment/software |
3-8
years |
Furniture
and fixtures |
5-7
years |
Leasehold
improvements are amortized over the shorter of the remaining term of the lease or the estimated economic life of the improvement. Repairs
and maintenance are charged to operations as incurred; renewals and betterments are capitalized.
Business
Combinations
The
Company uses the acquisition method of accounting for business combinations which requires the tangible and intangible assets acquired
and liabilities assumed to be recorded at their respective fair market value as of the acquisition date. Goodwill represents the excess
of the consideration transferred over the fair value of the net assets acquired. The fair values of the assets acquired and liabilities
assumed are determined based upon the Company’s valuation and involves making significant estimates and assumptions based on facts
and circumstances that existed as of the acquisition date. The Company uses a measurement period following the acquisition date to gather
information that existed as of the acquisition date that is needed to determine the fair value of the assets acquired and liabilities
assumed. The measurement period ends once all information is obtained, but no later than one year from the acquisition date.
Goodwill
Goodwill
represents the excess of the aggregate purchase price over the fair value of the net assets acquired in a purchase business combination.
Goodwill is evaluated for impairment annually, or more frequently if events occur or circumstances change that would indicate that goodwill
might be impaired, by first performing a qualitative evaluation of events and circumstances impacting the reporting unit to determine
the likelihood of goodwill impairment. Based on that qualitative evaluation, if the Company determines it is more likely than not that
the fair value of a reporting unit exceeds its carrying amount, no further evaluation is necessary. Otherwise, we perform a quantitative
impairment test.
The
Company has one reporting unit with goodwill which is Holzworth. The Company’s qualitative assessment of Holzworth goodwill in
the fourth quarter of 2022 indicated no impairment.
Intangible
and Long-lived Assets
Intangible
assets include acquired technology, customer relationships and tradenames. Intangible assets with finite lives are amortized using the
straight-line method over the estimated economic lives of the assets, which range from ten to fourteen years. Long-lived assets, including
intangible assets with finite lives, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying
amount of such assets may not be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows
resulting from the use of the asset and its eventual disposition. Measurement of an impairment loss for long-lived assets that management
expects to hold and use is based on the estimated fair value of the asset. Long-lived assets to be disposed of are reported at the lower
of carrying amount or estimated fair value less costs to sell. The estimated useful lives of intangible and long-lived assets are based
on many factors including assumptions regarding the effects of obsolescence, demand, competition and other economic factors, expectations
regarding the future use of the asset, and our historical experience with similar assets. The assumptions used to determine the estimated
useful lives could change due to numerous factors including product demand, market conditions, technological developments, economic conditions
and competition.
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. In fiscal 2021, the Company’s term loan and revolving credit facility
yielded interest at a variable interest rate plus an applicable margin and, therefore, carrying amount approximated fair value.
Contingent
Consideration
A
portion of the Holzworth purchase consideration was contingent upon certain financial targets (“Holzworth earnout”) and required
the Company to estimate the fair value of the earnout using estimated gross revenues and Adjusted EBITDA and scenarios for earnout periods.
The liability was adjusted in 2021 and a loss on change in fair value of contingent consideration was recorded in the Consolidated Statement
of Operations and Comprehensive Income/(Loss). The estimate of this contingent consideration was considered a Level 3 fair value measurement.
As
of December 31, 2022, all Holzworth contingent consideration had been paid.
Foreign
Currency Translation
Assets
and liabilities of non-U.S. subsidiaries that operate in a local currency environment, where the local currency is the functional currency,
are translated from foreign currencies into U.S. dollars at period-end exchange rates while income and expenses are translated at the
weighted average spot rate for the periods presented. Translation gains or losses related to net assets located outside the U.S. are
shown as a component of accumulated other comprehensive income in the Consolidated Statements of Changes in Shareholders’ Equity.
Aggregate
foreign currency gains and losses, such as those resulting from the settlement of receivables or payables in a currency other than the
subsidiary’s functional currency, are recorded in the Consolidated Statements of Operations and Comprehensive Income/(Loss) (included
in other income/expense). Foreign currency transaction gains were $52,000 and $40,000 in fiscal 2022 and 2021, respectively.
Other
Comprehensive Income/(Loss)
Other
comprehensive income/(loss) is recorded directly to a separate section of shareholders’ equity in accumulated other comprehensive
income and includes unrealized gains and losses excluded from net income/(loss). These unrealized gains and losses consist of changes
in foreign currency translation.
Research
and Development Costs
Research
and development (R&D) costs are charged to operations when incurred. R&D costs include salaries and benefits, depreciation expense
on equipment used for R&D purposes and third-party material and consulting costs, if clearly related to an R&D activity. The
amounts charged to operations for R&D costs for the year ended December 31, 2022 and 2021 were $1.8 million and $1.7 million, respectively.
Advertising
Costs
Advertising
expenses are charged to operations during the year in which they are incurred and were $268,000 and $279,000 for the years ended December
31, 2022 and 2021, respectively.
Stock-Based
Compensation
The
Company follows the provisions of Accounting Standards Codification (“ASC”) 718, “Compensation – Stock Compensation”
which requires that compensation expense be recognized, based on the fair value of the equity awards on the date of grant. The fair value
of restricted share awards and restricted stock unit awards is determined using the market value of our common stock on the date of the
grant. The fair value of stock options at the date of grant are estimated using the Black-Scholes option pricing model. When performance-based
stock options are granted, the Company takes into consideration guidance under ASC 718 and SEC Staff Accounting Bulletin No. 107 (SAB
107) when determining assumptions. The expected option life is derived from assumed exercise rates based upon historical exercise patterns
and represents the period of time that options granted are expected to be outstanding. The expected volatility is based upon historical
volatility of our shares using daily price observations over an observation period that approximates the expected life of the options.
The risk-free rate is based on the U.S. Treasury yield curve rate in effect at the time of grant for periods similar to the expected
option life. The Company accounts for forfeitures for all equity awards when they occur.
Management
estimates are necessary in determining compensation expense for stock options with performance-based vesting criteria. Compensation expense
for this type of stock-based award is recognized over the period from the date the performance conditions are determined to be probable
of occurring through the implicit service period, which is the date the applicable conditions are expected to be met. If the performance
conditions are not considered probable of being achieved, no expense is recognized until such time as the performance conditions are
considered probable of being met, if ever. If the award is forfeited because the performance condition is not satisfied, previously recognized
compensation cost is reversed. Management evaluates performance conditions on a quarterly basis.
In
the fourth quarter of 2021, management deemed the revenue performance targets related to certain performance option grants dated April
7, 2020 and August 4, 2020 as not probable of being met. This was primarily due to the pending divestiture of Microlab and its related
revenues. Accordingly, the Company reversed $217,000 of stock compensation expense previously recognized related to these grants.
Income
Taxes
The
Company records deferred taxes in accordance with ASC 740, “Accounting for Income Taxes”. This ASC requires recognition of
deferred tax assets and liabilities for temporary differences between tax basis of assets and liabilities and the amounts at which they
are carried in the financial statements, based upon the enacted rates in effect for the year in which the differences are expected to
reverse. The Company establishes a valuation allowance when necessary to reduce deferred tax assets to the amount expected to be realized.
The
Company periodically assesses the value of its deferred tax asset, a majority of which has been generated by a history of net operating
losses and determines the necessity for a valuation allowance. The Company evaluates which portion, if any, will more likely than not
be realized by offsetting future taxable income, taking into consideration any limitations that may exist on its use of its net operating
loss carry-forwards.
Under
ASC 740, the Company must recognize and disclose uncertain tax positions only if it is more-likely-than-not the tax position will be
sustained on examination by the taxing authority, based on the technical merits of the position. The amounts recognized in the financial
statements attributable to such position, if any, are recorded if there is a greater than 50% likelihood of being realized upon the ultimate
resolution of the position. Based on the evaluations noted above, the Company has concluded that there are no significant uncertain tax
positions requiring recognition or disclosure in its consolidated financial statements.
Earnings/(Loss)
Per Common 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 and warrants are included in the diluted earnings per share calculation only when 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 NUMBER OF SHARES
| |
2022 | | |
2021 | |
| |
For the Years Ended December 31, | |
| |
2022 | | |
2021 | |
| |
| | |
| |
Weighted average common shares outstanding | |
| 21,701,831 | | |
| 22,049,636 | |
Potentially dilutive equity awards | |
| 838,055 | | |
| 2,247,470 | |
Weighted average common shares outstanding, assuming dilution | |
| 22,539,886 | | |
| 24,297,106 | |
The
weighted average number of options and warrants to purchase common stock not included in diluted loss per share because the effects are
anti-dilutive, or the performance condition was not met in 2022, was 1,785,548.
The
weighted average number of options and warrants to purchase common stock not included in diluted loss per share because the effects are
anti-dilutive, or the performance condition was not met in 2021, was 1,205,000. The estimated number of shares issuable under the terms
of the Holzworth earnout, if the balance of the earnout was paid in shares of common stock at December 31, 2021 was 1,340,637.
Recent
Accounting Pronouncements Adopted in 2022
There
were no material accounting pronouncement adoptions by the Company in fiscal year 2022.
Recent
Accounting Pronouncements Not Yet Adopted
In
June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326). ASU 2016-13 changes the impairment
model for most financial assets and will require the use of an “expected loss” model for instruments measured as amortized
cost. This pronouncement is effective for smaller 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. The adoption of this standard did
not have a material impact on our consolidated financial statements.
NOTE
2 – 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 “Buyer”) whereby the Buyer 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 (see Note 4). 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, Ltd 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, Ltd. 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) 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
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 twelve months ended December 31, 2022 and 2021 (in thousands):
SCHEDULE OF DISCONTINUED OPERATIONS AND BALANCE SHEET
| |
December 31, 2022 | | |
December 31, 2021 | |
| |
Twelve months ended | |
| |
December 31, 2022 | | |
December 31, 2021 | |
Net revenues | |
$ | 2,477 | | |
$ | 17,756 | |
Cost of revenues | |
| 1,626 | | |
| 10,259 | |
Gross profit | |
| 851 | | |
| 7,497 | |
Operating expenses | |
| 693 | | |
| 3,317 | |
Other expense | |
| | | |
| | |
Gain on divestiture, net of expenses | |
| 16,490 | | |
| - | |
Income from Discontinued Operations before income taxes | |
| 16,648 | | |
| 4,180 | |
Income tax expense | |
| 3,643 | | |
| 791 | |
Income from Discontinued Operations, net of income taxes | |
$ | 13,005 | | |
$ | 3,389 | |
The
following table summarizes the carrying value of the significant classes of assets and liabilities of Microlab classified as discontinued
operations as of December 31, 2021:
Current Assets | |
| | |
Accounts receivable, net | |
$ | 2,883 | |
Inventories, net | |
| 3,986 | |
Prepaid expenses and other current assets | |
| | |
Total current assets | |
| 6,869 | |
| |
| | |
Property, plant and equipment, net | |
| 479 | |
Goodwill | |
| 1,351 | |
Other intangible assets | |
| | |
Deferred tax asset | |
| 3,173 | |
Other non current assets | |
| 165 | |
Total non current assets | |
| 5,168 | |
| |
| | |
Total assets | |
$ | 12,037 | |
| |
| | |
Current liabilities | |
| | |
Accounts payable | |
$ | 783 | |
Accrued expenses and other current liabilities | |
| 1,182 | |
Short term debt | |
| | |
Deferred revenue | |
| | |
Deferred income taxes | |
| | |
| |
| | |
Total current liabilities | |
$ | 1,965 | |
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 has 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 has been 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 has been further offset
by the 2023 UK transaction taxes of approximately $69,000 and the expected net proceeds of the note 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, as such, have been excluded from continuing operations. Further, the Company reclassified
the assets and liabilities of CommAgility as assets and liabilities of discontinued operations in the Consolidated Balance Sheet as of
December 31, 2021.
The
following table summarizes the significant items included in income from discontinued operation for CommAgility, net of tax in the Consolidated
Statement of Operations for the twelve months ended December 31, 2022 and 2021 (in thousands):
SCHEDULE
OF DISCONTINUED OPERATIONS AND BALANCE SHEET
| |
December 31, 2022 | | |
December 31, 2021 | |
| |
Twelve months ended | |
| |
December 31, 2022 | | |
December 31, 2021 | |
Net revenues | |
$ | 5,009 | | |
$ | 8,813 | |
Cost of revenues | |
| 2,174 | | |
| 4,187 | |
Gross profit | |
| 2,835 | | |
| 4,626 | |
Operating expenses | |
| 5,874 | | |
| 6,734 | |
Other expense | |
| 162 | | |
| | |
Gain on divestiture, net of expenses | |
| 6,344 | | |
| - | |
Income from Discontinued Operations before income taxes | |
| 3,143 | | |
| (2,108 | ) |
Income tax (benefit) | |
| (900 | ) | |
| (911 | ) |
Income from Discontinued Operations, net of income taxes | |
$ | 4,043 | | |
$ | (1,197 | ) |
The
following table summarizes the carrying value of the significant classes of assets and liabilities of CommAgility classified as discontinued
operations as of December 31, 2021:
Current Assets | |
| | |
Accounts receivable, net | |
$ | 364 | |
Inventories, net | |
| 648 | |
Prepaid expenses and other current assets | |
| 1,295 | |
Total current assets | |
| 2,307 | |
Total current assets of discontinued operations | |
| 2,307 | |
| |
| | |
Property, plant and equipment, net | |
| 583 | |
Goodwill and intangible assets, net | |
| 4,108 | |
Other intangible assets | |
| 500 | |
Total non current assets | |
| 5,191 | |
Total non-current assets of discontinued operations | |
| 5,191 | |
| |
| | |
Total assets | |
$ | 7,497 | |
| |
| | |
Current liabilities | |
| | |
Accounts payable | |
$ | 883 | |
Accrued expenses and other current liabilities | |
| 794 | |
Short term debt | |
| 42 | |
Deferred revenue | |
| 384 | |
Deferred income taxes | |
| 228 | |
Total current liabilities | |
$ | 2,331 | |
| |
| | |
Long term liabilities | |
| | |
Long term debt | |
| 295 | |
Total non current liabilities | |
$ | 295 | |
Total non-current liabilities of discontinued operations | |
$ | 295 | |
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 two months ended March 1, 2022 was not material. Microlab depreciation
expense for the twelve months ended December 31, 2021 and included in the consolidated statement of cash flows was $254,000. CommAgility
depreciation expense for the twelve months ended December 31, 2022 and 2021 and included in the consolidated statement of cash flows
was $360,000 and $984,000, respectively. Microlab capital expenditures were not material in the two months ended March 1, 2022 and were
$97,000 for the twelve months ended December 31, 2021. CommAgility capital expenditures were $488,000 in fiscal 2022 and were $238,000
for the twelve months ended December 31, 2021.
NOTE
3 – ACQUISITION OF HOLZWORTH
On
February 7, 2020, the Company completed the acquisition of all of the outstanding shares of Holzworth.
The
acquisition has been accounted for under the acquisition method of accounting in accordance with ASC 805, Business Combinations.
Accounting for acquisitions requires us to recognize separately from goodwill, the assets acquired and the liabilities assumed at their
acquisition date fair values. Goodwill as of the acquisition date is measured as the excess of consideration transferred over the acquisition
date fair values of the assets acquired and the liabilities assumed.
The
total purchase price for Holzworth was $13.5 million of which $12.7 million was paid in cash. The cash portion of the purchase price
was comprised of cash at close, deferred purchase price, holdbacks net of working capital settlement and the cash portion of earnout.
Additionally, $773,000 of the purchase price was paid in shares of the Company’s common stock. The total number of shares of the
Company’s common stock issued as purchase price was 487,890. There are no additional earnout payments due for the Holzworth acquisition.
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 could draw up to a maximum of £250,000 for purposes of
supporting daily business cash flow. The CIBLS Loan was repayable in 48 consecutive equal monthly installments beginning in month 13
after the initial loan drawdown (12 month principal repayment holiday). Interest was payable monthly at the official bank rate of the
Bank of England plus an interest margin of 2.35% per annum. Interest payments began in month 13 after the initial loan drawdown. The
first twelve months of interest payments were paid by the U.K. government. The CIBLS Loan was 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 December 31, 2022, the Company has no outstanding debt obligations.
Issuance
of Stock Warrants
Pursuant
to the Term Loan Facility, the Company issued a Warrant, dated February 7, 2020 (the “Warrant”), to Muzinich. Under the Warrant,
Muzinich has the right to purchase 266,167 shares of common stock of the Company at an exercise price of $1.3923 per share (an aggregate
value of approximately $370,588), based on a 90-day volume weighted average price for shares of stock of the Company (the “Warrant
Stock”). The Warrant is exercisable for an indefinite period from the date of the Warrant and may be exercised on a cashless basis.
The number of shares of common stock deliverable upon exercise of the Warrant is subject to adjustment for subdivision or consolidation
of shares and other standard dilutive events. Additionally, the exercise price may be adjusted based on a formula in the event of a common
stock offering by the Company at an offering price below fair market value, as defined, and below exercise price. In connection with
the issuance of the Warrant, the Company granted Muzinich one demand registration right and piggyback registration rights with respect
to the Warrant Stock, subject to certain exceptions.
If
the Additional Acquisition (as defined in Term Loan Facility above) is consummated, the Company has agreed to issue to Muzinich
at the closing of the Additional Acquisition an additional Warrant for the right to purchase 367,564 shares of common stock of the Company
at an exercise price of $1.3923 per share (an aggregate value of approximately $511,765), based upon a 90-day volume weighted average
price for shares of stock of the Company as of February 7, 2020 (the “Additional Warrant”). The Additional Warrant will contain
the same terms and conditions as the Warrant, except that Muzinich will have only one demand registration right, subject to certain exceptions,
with respect to shares of common stock of the Company issued under the Warrant and the Additional Warrant. No further acquisitions were
undertaken under the Term Loan Facility and as such no additional warrants will be issued.
The
stock warrants issued to Muzinich are classified as equity. The fair value of the warrants, as calculated using the Black Scholes model
as of the issuance date, was approximately $150,000 and was recorded as a reduction to the carrying value of the debt. The significant
inputs included in the Black Scholes calculation were a risk-free rate of 1.41%, volatility of 48.7% and the stock price on date of grant
of $1.34.
NOTE
5 - EQUITY
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. The share repurchase program expired on December 31, 2022. During 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.
On
July 21, 2021, the Company entered into a Sales Agreement with B. Riley Securities, Inc. (the “Agent”), to issue and sell
through the Agent, shares of the Company’s common stock, having an aggregate offering price of up to $12,000,000. The Agent was
not required to sell any specific number of shares. Shares sold under the Sales Agreement were issued and sold pursuant to the Company’s
previously filed registration statement on Form S-3 (File No. 333-227051) filed with the Securities and Exchange Commission (the “Commission”)
on August 27, 2018 and declared effective on September 17, 2018. A prospectus supplement relating to the offering of the Shares was filed
with the Commission on July 21, 2021.
From
July 21, 2021 through August 6, 2021 the Agent sold 264,701 shares of the Company’s common stock for net proceeds of $739,000,
after deducting sales commissions paid to the Agent in accordance with the terms of the Sales Agreement and $563,000 after deducting
legal and other expenses.
The
registration statement pursuant to which the shares were sold expired on September 17, 2021 and was not renewed.
NOTE
6 - LEASES
The
Company’s lease agreements consist of building leases for its operating locations and office equipment leases for printers and
copiers with lease terms that range from less than 12 months to 8 years. At inception, the Company determines if an arrangement contains
a lease and whether that lease meets the classification criteria of a finance or operating lease. The Company’s leases for office
equipment such as printers and copiers contain lease and non-lease components (i.e. maintenance). The Company accounts for lease and
non-lease components of office equipment as a single lease component.
All
of the Company’s leases are operating leases and are presented as right of use lease asset, short term lease liability and long
term lease liability on the Consolidated Balance Sheets as of December 31, 2022 and 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).
Cash
paid for amounts included in the present value of operating lease liabilities was $637,000 and $618,000 during the twelve months ended
December 31, 2022 and 2021, respectively, and is included in operating cash flows.
Operating
lease costs were $988,000 and $934,000 during the twelve months ended December 31, 2022 and 2021, respectively. In 2022, the
Company recognized $304,000 in sublease income in connection with our sublease with Microlab which is recorded in other income on the
consolidate statement of operations and comprehensive income/(loss).
The
following table presents information about the amount and timing of cash flows arising from the Company’s operating leases as of
December 31, 2022.
SCHEDULE OF MATURITY OF OPERATING LEASE LIABILITIES
(in thousands) | |
December 31, 2022 | |
Maturity of Lease Liabilities | |
| | |
2023 | |
$ | 276 | |
2024 | |
| 158 | |
2025 | |
| 163 | |
2026 | |
| 69 | |
Total undiscounted operating lease payments | |
| 666 | |
Less: imputed interest | |
| (51 | ) |
Present Value of operating lease liabilities | |
$ | 615 | |
| |
| | |
Balance sheet classification | |
| | |
Current lease liabilities | |
$ | 251 | |
Long-term lease liabilities | |
| 364 | |
Total operating lease liabilities | |
$ | 615 | |
| |
| | |
Other information | |
| | |
Weighted-average remaining lease term (months) | |
| 34 | |
Weighted-average discount rate for operating leases | |
| 5.88 | % |
NOTE
7 – REVENUE
Revenue
is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration to
which the Company expects to be entitled in exchange for promised goods or services. The Company’s performance obligations are
satisfied at a point in time.
Nature
of Products and Services
Hardware
The
Company generally has one performance obligation in its arrangements involving the sales of our T&M products . 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 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 |
|
● |
when
the customer has accepted the asset |
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.
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
| |
Twelve Months Ended December 31, 2022 | | |
Twelve Months Ended December 31, 2021 | |
Total net revenues by revenue type | |
| | | |
| | |
Noise generators and components | |
| 13,785 | | |
| 13,744 | |
Power meters and analyzers | |
| 6,775 | | |
| 7,154 | |
Services | |
| 1,807 | | |
| 1,778 | |
Total net revenue | |
$ | 22,367 | | |
$ | 22,676 | |
| |
| | | |
| | |
Total net revenues by geographic areas | |
| | | |
| | |
Americas | |
$ | 16,177 | | |
$ | 16,354 | |
EMEA | |
| 2,828 | | |
| 2,508 | |
APAC | |
| 3,362 | | |
| 3,814 | |
Total net revenue | |
$ | 22,367 | | |
$ | 22,676 | |
Net
revenues are attributable to a geographic area based on the destination of the product shipment.
The
majority of shipments in the Americas are to customers located within the United States. For the years ended December 31, 2022 and 2021,
sales in the United States amounted to $15.9 million and $15.1 million, respectively.
For
the year ended December 31, 2022, shipments to the EMEA region were largely concentrated in Germany and Israel. Shipments to Germany
and Israel in 2022 amounted to $971,000 and $625,000, respectively. For the year ended December 31, 2021 shipments to the EMEA region
were largely concentrated in Germany and the U.K. Shipments to Germany and the U.K. in 2021 amounted to $846,000 and $473,000, respectively.
The
largest concentration of shipments in the APAC region were to China and Hong Kong, where shipments amounted to $840,000 and $492,000
for the year ended December 31, 2022, respectively, and $944,000 and $737,000 for the year ended December 31, 2021, respectively.
NOTE
8 - GOODWILL AND INTANGIBLE ASSETS
Goodwill
consists of $6.0 million related to the Holzworth acquisition.
Intangible
assets consist of the following (in thousands):
SCHEDULE
OF INTANGIBLE ASSETS
| |
December 31, 2022 | |
| |
Gross Carrying Amount | | |
Accumulated Amortization | | |
Net Carrying Amount | |
Customer relationships | |
$ | 2,310 | | |
$ | (1,123 | ) | |
$ | 1,187 | |
Proprietary technology | |
| 1,550 | | |
| (452 | ) | |
| 1,098 | |
Holzworth tradename | |
| 400 | | |
| (97 | ) | |
| 303 | |
Total | |
$ | 4,260 | | |
$ | (1,672 | ) | |
$ | 2,588 | |
| |
December 31, 2021 | |
| |
Gross Carrying Amount | | |
Accumulated Amortization | | |
Net Carrying Amount | |
Customer relationships | |
$ | 2,310 | | |
$ | (738 | ) | |
$ | 1,572 | |
Proprietary technology | |
| 1,550 | | |
| (297 | ) | |
| 1,253 | |
Holzworth tradename | |
| 400 | | |
| (64 | ) | |
| 336 | |
Total | |
$ | 4,258 | | |
$ | (1,099 | ) | |
$ | 3,161 | |
Amortization
of acquired intangible assets was $573,000 for each of the twelve months periods ended December 31, 2022 and 2021. Amortization of proprietary
technology is included in costs of revenues in the Consolidated Statements of Operations and Comprehensive Income/(Loss). Amortization
of all other acquired intangible assets is included in general and administrative expenses.
The
estimated future amortization expense related to intangible assets is as follows as of December 31, 2022 (in thousands):
SCHEDULE
OF INTANGIBLE ASSETS, FUTURE AMORTIZATION EXPENSE
| |
| | |
2023 | |
$ | 573 | |
2024 | |
| 573 | |
2025 | |
| 573 | |
2026 | |
| 220 | |
2027 | |
| 188 | |
Thereafter | |
| 461 | |
Total | |
$ | 2,588 | |
NOTE
9 - PROPERTY, PLANT AND EQUIPMENT
Property,
plant and equipment, consist of the following as of December 31 (in thousands):
SCHEDULE
OF PROPERTY, PLANT AND EQUIPMENT
| |
2022 | | |
2021 | |
Machinery & computer equipment/software | |
$ | 5,153 | | |
$ | 4,957 | |
Furniture & fixtures | |
| 419 | | |
| 413 | |
Leasehold improvements | |
| 1,348 | | |
| 1,165 | |
Gross property, plant and equipment | |
| 6,920 | | |
| 6,535 | |
| |
| | | |
| | |
Less: Accumulated depreciation | |
| 6,453 | | |
| 6,066 | |
Net property, plant and equipment | |
$ | 467 | | |
$ | 469 | |
Depreciation
expense of $400,000 and $340,000 was recorded for the years ended December 31, 2022 and 2021, respectively.
NOTE
10 - OTHER ASSETS
Other
assets consist
of the following as of December 31 (in thousands):
SCHEDULE
OF OTHER ASSETS
| |
2022 | | |
2021 | |
Product demo assets | |
$ | 139 | | |
$ | 188 | |
Security deposit | |
| 13 | | |
| 63 | |
Other | |
| 33 | | |
| 33 | |
Total | |
$ | 185 | | |
$ | 284 | |
Product
demo assets are net of accumulated amortization expense of $502,000 and $397,000 as of December 31, 2022 and 2021, respectively. Amortization
expense related to demo assets was $17,000 and $84,000 in 2022 and 2021, respectively.
NOTE
11 - ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued
expenses and other current liabilities consist of the following as of December 31 (in thousands):
SCHEDULE
OF ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
| |
2022 | | |
2021 | |
Holzworth earnout (Year 1 and Year 2) | |
$ | - | | |
$ | 2,942 | |
Goods received not invoiced | |
| 148 | | |
| 281 | |
Payroll and related benefits | |
| 193 | | |
| 427 | |
Accrued bonus | |
| 625 | | |
| 485 | |
Accrued commissions | |
| 461 | | |
| 439 | |
Accrued professional fees | |
| 795 | | |
| 456 | |
Sales and use tax | |
| 180 | | |
| 177 | |
Holzworth deferred purchase price | |
| - | | |
| 250 | |
Warranty reserve | |
| 76 | | |
| 61 | |
Other | |
| 215 | | |
| 318 | |
Total | |
$ | 2,693 | | |
$ | 5,836 | |
NOTE
12 - ACCOUNTING FOR STOCK BASED COMPENSATION
The
Company follows the provisions of ASC 718 Compensation-Stock Compensation. The Company’s results for the years ended December
31, 2022 and December 31, 2021 include stock based compensation expense totaling $1,018,000 and $474,000, respectively. Such amounts
have been included in the Consolidated Statement of Operations and Comprehensive Income/(Loss) within general and administrative expenses.
Incentive
Compensation Plan
In
2012, the Company’s Board of Directors and shareholders approved the 2012 Incentive Compensation Plan (the “Initial 2012
Plan”), which provides for the grant of equity, including restricted stock awards, restricted stock units, non-qualified stock
options and incentive stock options in compliance with the Internal Revenue Code of 1986, as amended, to employees, officers, directors,
consultants and advisors of the Company who are expected to contribute to the Company’s future growth and success. When originally
approved, the Initial 2012 Plan provided for the grant of awards relating to 2 million shares of common stock, plus those shares subject
to awards previously issued under the Company’s 2000 Stock Option Plan that expire, are canceled or are terminated after adoption
of the Initial 2012 Plan without having been exercised in full and would have been available for subsequent grants under the 2000 Stock
Option Plan. In June 2014, the Company’s shareholders approved the Amended and Restated 2012 Incentive Compensation Plan (the “2012
Plan”) allowing for an additional 1.6 million shares of the Company’s common stock to be available for future grants under
the 2012 Plan. The 2012 Plan provides that if awards are forfeited, expire or otherwise terminate without issuance of the shares underlying
the awards, or if the award does not result in issuance of all or part of the shares underlying the award, the unissued shares are again
available for awards under the 2012 Plan. As of December 31, 2021, there are no shares available for issuance under the 2012 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 stock awards, stock unit awards,
performance unit awards, non-qualified stock options, incentive stock options and cash awards, including dividend equivalent rights to
employees, officers, directors or other service providers of the Company who are expected to contribute to the Company’s future
growth and success. The 2021 Incentive Plan provides for the grant of awards relating to 1.5 million shares of common stock. As of December
31, 2022, 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. Performance-based options
granted have ten-year terms and vest and become fully exercisable when determinable performance targets are achieved. Performance targets
are approved by the Company’s compensation committee of the Board of Directors. Under the 2012 Plan and 2021 Incentive Plan, options
may be granted to purchase shares of the Company’s common stock exercisable only at prices equal to or above the fair market value
on the date of the grant.
The
following summarizes the components of stock-based compensation expense for the years ending December 31 (in thousands):
SCHEDULE
OF SHARE-BASED COMPENSATION EXPENSE
| |
2022 | | |
2021 | |
Service based restricted stock awards | |
$ | 815 | | |
$ | 154 | |
Service based restricted stock units | |
| 254 | | |
| 240 | |
Performance based stock options | |
| - | | |
| (89 | ) |
Service based stock options | |
| (51 | ) | |
| 11 | |
| |
$ | 1,018 | | |
$ | 316 | |
During
the twelve months ended December 31, 2022 the Company reversed $52,000 in share-based compensation expense related to unvested stock
options that were forfeited and $144,000 in share-based compensation related to unvested restricted stock awards that were forfeited
for employees exiting the Company.
As
of December 31, 2022, there were no unrecognized compensation costs related to unvested stock options, $205,000 of unrecognized compensation
costs related to unvested restricted stock awards which are expected to be recognized over 1 year and $66,000 of unrecognized compensation
costs related to unvested restricted stock units which are expected to be recognized over 7 months.
As
of December 31, 2021, $2,000 of unrecognized compensation costs related to unvested stock options is expected to be recognized over a
remaining weighted average period of 1.0 years, $451,000 of unrecognized compensation costs related to unvested restricted shares is
expected to be recognized over a remaining weighted average period of 1.8 years and $253,000 of unrecognized compensation costs related
to unvested restricted stock units is expected to be recognized over 6 months.
In
the fourth quarter 2021, management deemed the revenue performance targets related to certain performance option grants dated April 7,
2020 and August 4, 2020 as not probable of being met. This was primarily due to the pending divestiture of Microlab and its related revenues.
Accordingly, the Company reversed $217,000 of stock compensation expense previously recognized related to these grants.
Restricted
Common Stock Awards
A
summary of the status of the Company’s non-vested restricted common stock, as granted under the Company’s approved equity
compensation plans, as of December 31, 2022 and 2021, and changes during the twelve months ended December 31, 2022 and 2021, are presented
below:
SCHEDULE
OF NON-VESTED RESTRICTED STOCK UNITS ACTIVITY
| |
2022 | | |
2021 | |
Non-vested Restricted Shares | |
Number of Shares | | |
Weighted Average Grant Date Fair Value | | |
Number of Shares | | |
Weighted Average Grant Date Fair Value | |
| |
| | |
| | |
| | |
| |
Non-vested as of January 1 | |
| 357,336 | | |
$ | 1.84 | | |
| 200,670 | | |
$ | 1.52 | |
Granted | |
| 370,000 | | |
$ | 1.95 | | |
| 255,000 | | |
$ | 1.98 | |
Vested and issued | |
| (167,086 | ) | |
$ | 1.85 | | |
| (98,334 | ) | |
$ | 1.61 | |
Forfeited | |
| (163,750 | ) | |
$ | 1.70 | | |
| - | | |
| - | |
Non-vested as of December 31 | |
| 396,500 | | |
$ | 2.00 | | |
| 357,336 | | |
$ | 1.84 | |
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.
On
June 16, 2022 and July 5, 2022, two employees were granted restricted stock in the amounts of 20,000 and 50,000, respectively. Both grants
had a vesting term of two years and grant date per share value of $1.28 and $1.26, respectively. Both grants were forfeited prior to
vesting as both employees exited the Company. The shares are included in grants and forfeitures in the table above and the compensation
cost was reversed.
In
the fourth quarter 2021, the Company granted 23 employees restricted common stock awards that vest over 2 years subject to continued
employment through each vesting date. If an employee’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
following table summarizes the restricted common stock awards granted during the years ended December 31, 2022 and 2021 under the Company’s
approved equity compensation plans:
SCHEDULE
OF SHARE-BASED COMPENSATION, RESTRICTED STOCK AND RESTRICTED STOCK UNITS ACTIVITY
| |
| Number of Shares | | |
| Fair Market Value per Granted Share | | |
Vesting |
| |
Number of Shares | | |
Fair Market Value per Granted Share | | |
Vesting |
2022 | |
| | |
| | |
|
1/7/22 – Service grant – Employee | |
| 300,000 | | |
$ | 2.11 | | |
Annual vesting through January 2024 |
6/16/22 – Service grant – Employee | |
| 20,000 | | |
$ | 1.28 | | |
Annual vesting through June 2024 |
7/8/22 – Service grant – Employee | |
| 50,000 | | |
$ | 1.26 | | |
Annual vesting through July 2024 |
2021 | |
| | | |
| | | |
|
10/12/21 – Service grant - Employee | |
| 55,000 | | |
$ | 2.03 | | |
Annual vesting through October 2023 |
10/18/21 – Service grant - Employee | |
| 105,000 | | |
$ | 1.96 | | |
Annual vesting through October 2023 |
10/28/21 – Service grant - Employee | |
| 75,000 | | |
$ | 2.12 | | |
Annual vesting through October 2023 |
12/6/21 – Service grant - Employee | |
| 20,000 | | |
$ | 1.76 | | |
Annual vesting through December 2023 |
Restricted
Stock Units:
In
fiscal 2022 and fiscal 2021, the Company granted Restricted Stock Units (“RSU”) to each of our board members. Each RSU represents
the Company’s obligation to issue one share of the Company’s common stock subject to the RSU award agreement and the 2021
Inventive Plan and 2012 Plan, respectively. The RSUs vest on the day before the first anniversary of the grant date or, if earlier, the
effective date of a separation of service due to death or disability, provided the board member has rendered continuous service to the
Company as a member of the board of directors from grant date to vesting date. Once vested, the RSU will be settled by delivery of shares
to the board member no later than 30 days following: 1) the third anniversary of the grant date, 2) separation from service following,
or coincident with, a vesting date, or 3) a change in control.
A
summary of the status of the Company’s non-vested restricted stock units, as granted under the Company’s approved equity
compensation plans, as of December 31, 2022 and 2021, and changes during the twelve months ended December 31, 2022 and 2021, are presented
below:
Performance-Based
Stock Option Awards
On
August 4, 2020 the Company granted 150,000 performance-based stock options to our Chief Revenue Officer under the 2012 Plan.
On
April 7, 2020 the Company granted 970,000 performance-based stock options to various employees under the 2012 Plan.
The
performance options granted on both August 4 and April 7, 2020 vest when the Company achieves consolidated revenue targets as outlined
in the schedule below:
|
|
Consolidated
annualized gross revenues $55.0 million – 25% vesting |
|
|
|
|
|
Consolidated
annualized gross revenues $61.5 million – 50% vesting |
|
|
|
|
|
Consolidated
annualized gross revenues $69.0 million – 75% vesting |
|
|
|
|
|
Consolidated
annualized gross revenues $77.5 million – 100% vesting |
Consolidated
annualized gross revenues include revenue from Holzworth from acquisition date (February 7, 2020) forward, but do not include any additional
acquisitions from February 7, 2020 forward. Consolidated annualized gross revenues is calculated on a calendar year basis (i.e. twelve
months ended December 31).
In
accordance with ASC 718, compensation expense is recognized over the period from the date the performance conditions are determined
to be probable of occurring through the implicit service period, which is the date the applicable conditions are expected to be met.
If the performance conditions are not considered probable of being achieved, no expense is recognized until such time as the performance
conditions are considered probable of being met, if ever. If the award is forfeited because the performance condition is not satisfied,
previously recognized compensation cost is reversed. Management evaluates performance conditions on a quarterly basis. Prior to the fourth
quarter of 2021, the estimated implicit service period is April 2020 thru December 2025 for the April performance-based options and August
2020 thru December 2025 for the August performance-based options. In the fourth quarter of 2021 we deemed the performance conditions
related to these grants not probable of being met due to the pending Microlab divestiture and the resulting reduction of consolidated
revenue in the future. Accordingly, $217,000 of stock compensation expense was reversed in the fourth quarter of 2021.
A
summary of performance-based stock option activity, and related information for the years ended December 31, 2022 and December 31, 2021
follows:
SCHEDULE
OF STOCK OPTION ACTIVITY
| |
2022 | | |
2021 | |
| |
Options | | |
Weighted Average Exercise Price | | |
Options | | |
Weighted Average Exercise Price | |
Outstanding as of January 1 | |
| 1,205,000 | | |
$ | 1.52 | | |
| 1,205,000 | | |
$ | 1.52 | |
Granted | |
| - | | |
| - | | |
| - | | |
| - | |
Exercised | |
| - | | |
| - | | |
| - | | |
| - | |
Forfeited | |
| (425,000 | ) | |
$ | 1.52 | | |
| - | | |
| - | |
Expired | |
| - | | |
| - | | |
| - | | |
| - | |
Outstanding as of December 31 | |
| 780,000 | | |
$ | 1.46 | | |
| 1,205,000 | | |
$ | 1.52 | |
| |
| | | |
| | | |
| | | |
| | |
Exercisable at December 31 | |
| - | | |
| - | | |
| - | | |
| - | |
No
performance-based stock options were granted in 2022 or 2021.
As
of December 31, 2022, none of the performance-based stock options outstanding were exercisable as the performance conditions were not
met. The aggregate intrinsic value of performance-based stock options outstanding that were “in the money” (exercise price
was lower than market price) as of December 31, 2021 was $257,000 and the weighted average remaining life was 7 years.
As
of December 31, 2021, none of the performance-based stock options outstanding were exercisable as the performance conditions were not
met. The aggregate intrinsic value of performance-based stock options outstanding that were “in the money” (exercise price
was lower than market price) as of December 31, 2021 was $862,000 and the weighted average remaining life was 7.9 years.
The
range of exercise prices of outstanding performance-based options at December 31, 2022 is $1.12 to $1.83 with a weighted average exercise
price of $1.46 per share.
Service-Based
Stock Option Awards
A
summary of service-based stock option activity and related information for the years ended December 31, 2022 and 2021 follows:
SCHEDULE
OF STOCK OPTION ACTIVITY
| |
2022 | | |
2021 | |
| |
Options | | |
Weighted Average Exercise Price | | |
Options | | |
Weighted Average Exercise Price | |
Outstanding as of January 1 | |
| 1,785,000 | | |
$ | 1.52 | | |
| 1,925,000 | | |
$ | 1.52 | |
Granted | |
| - | | |
| - | | |
| - | | |
| - | |
Exercised | |
| (140,000 | ) | |
$ | 1.41 | | |
| (140,000 | ) | |
$ | 0.83 | |
Forfeited | |
| (140,000 | ) | |
$ | 1.62 | | |
| - | | |
| - | |
Expired | |
| - | | |
| - | | |
| - | | |
| - | |
Outstanding as of December 31 | |
| 1,505,000 | | |
$ | 1.53 | | |
| 1,785,000 | | |
$ | 1.52 | |
| |
| | | |
| | | |
| | | |
| | |
Exercisable at December 31 | |
| 1,505,000 | | |
$ | 1.53 | | |
| 1,785,000 | | |
$ | 1.53 | |
No
service-based stock options were granted in 2022 or 2021.
The
aggregate intrinsic value of exercisable and non-exercisable service-based stock options outstanding that were “in the money”
(exercise price was lower than the market price) as of December 31, 2021 was $408,000 and the weighted average remaining contractual
life was 4.0 years.
The
aggregate intrinsic value of exercisable and non-exercisable service-based stock options outstanding that were “in the money”
(exercise price was lower than the market price) as of December 31, 2021 was $1.2 million and the weighted average remaining contractual
life was 5.0 years.
The
range of exercise prices of outstanding service-based options at December 31, 2021 is $1.30 to $1.92 with a weighted average exercise
price of $1.53 per share.
NOTE
13 - SEGMENT AND RELATED INFORMATION
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
14 - RETIREMENT PLAN
The
Company has a 401(k) profit sharing plan covering all eligible U.S. employees. Company contributions to the plan for the years ended
December 31, 2022 and 2021 amounted to $187,000 and $88,000, respectively.
NOTE
15 - INCOME TAXES
The
components of income tax (benefit) related to net income/(loss) from operations are as follows (in thousands):
SCHEDULE
OF COMPONENTS OF INCOME TAX (BENEFIT)/EXPENSE
| |
2022 | | |
2021 | |
| |
Years Ended December 31, | |
| |
2022 | | |
2021 | |
Current: | |
| | | |
| | |
Federal | |
$ | (301 | ) | |
$ | (619 | ) |
Current Federal | |
$ | (301 | ) | |
$ | (619 | ) |
State | |
| (24 | ) | |
| 108 | |
Current State | |
| (24 | ) | |
| 108 | |
Deferred: | |
| | | |
| | |
Federal | |
| (430 | ) | |
| (35 | ) |
Deferred Federal | |
| (430 | ) | |
| (35 | ) |
State | |
| 24 | | |
| (8 | ) |
Deferred State | |
| 24 | | |
| (8 | ) |
Total | |
$ | (731 | ) | |
$ | (554 | ) |
The
following is a reconciliation of the maximum statutory federal tax rate to the Company’s effective tax relative to operations:
SCHEDULE
OF EFFECTIVE TAX RELATIVE OPERATIONS RECONCILIATION OF MAXIMUM STATUTORY FEDERAL TAX RATE
| |
2022 | | |
2021 | |
| |
Years Ended December 31, | |
| |
2022 | | |
2021 | |
| |
% of Pre Tax Earnings | | |
% of Pre Tax Earnings | |
Statutory federal income tax rate | |
| (21.0 | )% | |
| (21.0 | )% |
State income tax net of federal tax benefit | |
| 0.9 | | |
| 7.0 | |
Change in valuation allowance | |
| (0.9 | ) | |
| - | |
Gain on extinguishment of PPP Loan | |
| - | | |
| (34.5 | ) |
Permanent differences | |
| (0.2 | ) | |
| 3.7 | |
Other | |
| (1.7 | ) | |
| 0.3 | |
Total | |
| (22.9 | )% | |
| (44.5 | )% |
In
2022, there were no material differences between the statutory rate and the effective tax rate. In 2021, the difference between the statutory
and effective tax rate is due primarily to the gain on extinguishment of the Payroll Protection Program loan.
The
components of deferred income taxes are as follows (in thousands):
SCHEDULE
OF COMPONENTS DEFERRED INCOME TAXES
| |
2022 | | |
2021 | |
| |
Years Ended December 31, | |
| |
2022 | | |
2021 | |
Deferred tax assets: | |
| | | |
| | |
Net operating loss carryforwards | |
$ | 3,921 | | |
$ | 3,830 | |
Inventory | |
| 328 | | |
| 363 | |
Research and development credit | |
| 1,010 | | |
| 648 | |
Stock compensation | |
| 423 | | |
| 280 | |
Lease liability | |
| 163 | | |
| 357 | |
Goodwill and intangible assets | |
| 306 | | |
| 388 | |
Other | |
| 150 | | |
| 185 | |
Gross deferred tax assets | |
| 6,301 | | |
| 6,051 | |
Less valuation allowance | |
| (3,166 | ) | |
| (3,153 | ) |
Total deferred tax asset | |
$ | 3,135 | | |
$ | 2,898 | |
| |
| | | |
| | |
Deferred tax liabilities: | |
| | | |
| | |
Fixed assets | |
| (99 | ) | |
| (144 | ) |
Right of use asset | |
| (123 | ) | |
| (347 | ) |
Total deferred tax liability | |
$ | (222 | ) | |
$ | (491 | ) |
| |
| | | |
| | |
Net deferred tax asset | |
$ | 2,913 | | |
$ | 2,407 | |
The
Company recognized a net taxable gain in connection with the Microlab and CommAgility divestitures which resulted in utilization of a
portion of our federal and NJ state net operating loss carryforwards.
The
Company has domestic federal and state net operating loss carryforwards as of December 31, 2022 of approximately $5.2 million and $33.3
million, respectively, which begin to expire in 2029. $689,000 of the federal net operating loss carryforward have no expiration.
Realization
of the Company’s deferred tax assets is dependent upon the Company generating sufficient taxable income on a federal and N.J. basis
in future years to obtain benefit from the reversal of net deductible temporary differences and from utilization of net operating losses.
The Company’s valuation allowances of approximately $3.2 million as of December 31, 2022 and 2021, are associated with the Company’s
state net operating loss carryforward and a state research and development credit. 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 December 31, 2022, management believes
that it is more likely than not that the Company will fully realize the benefits of its deferred tax assets associated with its domestic
federal net operating loss carryforward.
The
Company does not have any material unrecognized tax positions and does not anticipate a significant increase or decrease in unrecognized
tax positions within the next twelve months.
NOTE
16 - COMMITMENTS AND CONTINGENCIES
Warranties
The
Company typically provides one to three year warranties on all of its products covering both parts and labor. The Company, at its option,
repairs or replaces products that are defective during the warranty period if the proper preventive maintenance procedures have been
followed by its customers.
Risks
and Uncertainties
Environmental
risks
As
a result of the Microlab divestiture, the Company filed a General Information Notice with the New Jersey Department of Environmental
Protection (“NJDEP”) for our corporate headquarters in Parsippany, N.J. in accordance with the New Jersey Industrial Site
Recovery Act (“ISRA”). Additionally, the Company engaged a Licensed Site Remediation Professional (“LSRP”) to
perform a Preliminary Assessment (“PA”) and Site Investigation (“SI”) in accordance with the provisions of ISRA.
In accordance with ISRA, in February 2022, the Company posted a $100,000 letter of credit with the NJDEP. The PA identified several areas
requiring further environmental investigation which were addressed as part of the SI report.
In
December 2022, the Company received an SI report from the LSRP. The SI report identified several areas requiring additional investigation
most notably elevated concentrations of hazardous substances in the groundwater that were above state and federal limits. The SI report
also stated that it appears the groundwater contamination predates our occupancy at our headquarters. We engaged our LSRP to perform
additional testing in the first quarter of 2023 to further refine the Company’s understanding of the contamination. As a result
of the testing performed in the first quarter of 2023, it is suspected that the groundwater contamination originated from an offsite
source. Further testing is being conducted to validate the findings.
As
the Company believes that hazardous substances in soil and groundwater at our Parsippany headquarters predate our occupancy and/or were
caused by unrelated third parties, we believe that others, and not the Company, should be responsible for the cost of remediation. However,
we cannot guarantee that we will be successful in absolving the Company of the remediation liability. Based on our reasonable position
that we did not cause the contamination we do not think our potential liability would be material.
In
fiscal 2022 the Company incurred approximately $140,000 in expenses related to testing and assessments associated with ISRA which are
recorded as general and administrative expenses in the Consolidated Statements of Operations and Comprehensive Income. As of December
31, 2022, the Company has not accrued a liability related to the estimated remediation expenses due to the fact that the Company does
not believe it should be ultimately responsible for the remediation.
General
operating risks
Recent
inflationary pressures have increased the cost of energy and raw materials and may adversely affect our results of operations. If inflation
continues to rise and further impact the cost of energy and raw materials, we may not be able to offset cost increases to our products
through price adjustments without negatively impacting consumer demand, which could adversely affect our sales and results of operations.
Proprietary
information and know-how are important to the Company’s commercial success. There can be no assurance that others will not either
develop independently the same or similar information or obtain and use proprietary information of the Company. Certain key employees
have signed confidentiality and non-compete agreements regarding the Company’s proprietary information.
The
Company believes that its products do not infringe the proprietary rights of third parties. There can be no assurance, however, that
third parties will not assert infringement claims in the future.
The
Company’s deferred tax asset is recorded at tax rates expected to be in existence when those assets are utilized. Should the tax
rates change materially in the future the amount of deferred tax asset could be materially impacted.