WTT Wireless Telecom Group Inc - 10-K

Item 1A. Risk Factors

Global Economic and Supply-Chain Risks

Adverse global economic conditions and the related impact on our supply chain and the markets where we do business could adversely affect our results of operations.

The uncertain state of the global economy (including the current conflict between Russia and Ukraine and related economic and other retaliatory measures taken by the United States, European Union and others) continues to impact businesses around the world. The conflict between Russia and Ukraine has led to and is expected to continue to lead to disruption, instability and volatility in global markets and industries. Our business has been and may continue to be negatively impacted by such conflict. The U.S. government and other governments in jurisdictions in which we operate have imposed severe sanctions and export controls against Russia and Russian interests and threatened additional sanctions and controls. Deteriorating economic conditions or financial uncertainty in any of the markets in which we sell our products could reduce business confidence and adversely impact spending patterns, and thereby could adversely affect our sales and results of operations. In challenging and uncertain economic environments such as the current one, we cannot predict whether or when such circumstances may improve or worsen, or what impact, if any, such circumstances could have on our business, financial condition and results of operations, or on the price of our common stock.

Our operations are dependent on the ability of suppliers to deliver quality components, devices and printed wiring assemblies in time to meet critical manufacturing and distribution schedules. If we experience any constrained supply of component parts due to global economic uncertainties, such constraints, if persistent, could adversely affect operating results until alternate sourcing can be developed. There could be an increased risk of supplier constraints in periods where we are increasing production volume to meet customer demands. Volatility in the prices of these component parts, an inability to secure enough components at reasonable prices to build new products in a timely manner in the quantities and configurations demanded or, conversely, a temporary oversupply of these parts, could adversely affect our future operating results.

Rising inflation may negatively impact our profit margins

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.

Strategic Risks

Our operating results and financial condition could be harmed if the markets into which we sell our products decline or do not grow as anticipated.

Visibility into our markets is limited. Our quarterly sales and operating results are highly dependent on the volume and timing of technology-related spending and orders received during the fiscal quarter, which are difficult to forecast and may be cancelled by our customers. In addition, our revenues and earnings forecasts for future fiscal quarters are often based on the expected seasonality or cyclicality of our markets. However, due to the uncertainties and volatile economic environment created by increased geopolitical tensions, including the war between Russia and Ukraine, the impact of inflation, the potential for future recession, and continued supply chain challenges, the markets we serve may experience increased volatility and may not experience the seasonality or cyclicality that we expect. Any decline in our customers’ markets would likely result in a reduction in demand for our products and services. If our customers’ markets decline, we may not be able to collect on outstanding amounts due to us. Such declines could harm our financial position, results of operations, cash flows and stock price, and could limit our profitability. In such an environment, pricing pressures could intensify. Since a significant portion of our operating expenses is relatively fixed in nature due to sales, R&D and manufacturing costs, if we were unable to respond quickly enough, these pricing pressures could further reduce our operating margins.

The cyclicality of our end-user markets could harm our financial results.

Many of the end markets we serve have historically been cyclical and have experienced periodic downturns. The factors leading to and the severity and length of a downturn are very difficult to predict and there can be no assurance that we will appropriately anticipate changes in the underlying end markets we serve or that any increased levels of business activity will continue as a trend into the future. If we fail to anticipate changes in the end markets we serve, our business, results of operations and financial condition could be materially adversely affected.

Our industry is highly competitive and if we are not able to successfully compete, we could lose market share and our revenues could decline.

We operate in industries characterized by aggressive competition, rapid technological change and evolving technology standards. Current and prospective customers for our products evaluate our capabilities against the merits of our direct competitors. We compete primarily on the basis of technology and performance.

We also compete on price. Our competitors may introduce products that are competitively priced, have increased performance or functionality or incorporate technological advances that we have not yet developed or implemented.

To remain competitive, we must continue to develop, market and sell new and enhanced products at competitive prices, which will require significant research and development expenditures. If we do not develop new and enhanced products or if we are not able to invest adequately in our research and development activities, our business, financial condition and results of operations could be negatively impacted.

Many of our competitors are substantially larger than we are, and have greater financial, technical, marketing and other resources than we have. Many of these large enterprises are in a better position to withstand any significant reduction in capital spending by customers in our markets. They often have broader product lines and market focus and may not be as susceptible to downturns in a single market. These competitors may also be able to bundle their products together to meet the needs of a particular customer and may be capable of delivering more complete solutions than we are able to provide. To the extent large enterprises that currently do not compete directly with us choose to enter our markets by acquisition or otherwise, competition would likely intensify.

We are exposed to risks associated with acquisitions and investments which could cause us to incur unanticipated costs and liabilities and harm our business and results of operations.

On February 7, 2020, we acquired Holzworth Instrumentation, Inc., a company based in Boulder, Colorado. Additionally, in the future we may make acquisitions of, or significant investments in, businesses with complementary products, services and/or technologies. The Holzworth acquisition and future acquisitions and investments involve numerous risks, including, but not limited to:

difficulties and increased costs in connection with integration of the personnel, operations, technologies and products of acquired businesses;

diversion of management’s attention from other operational matters;

the potential loss of key employees of acquired businesses;

lack of synergy, or the inability to realize expected synergies, resulting from the acquisition;

implementation or remediation of controls, procedures and policies of the acquired company;

failure to commercialize purchased technology;

liability for activities of the acquired company prior to the acquisition, including violations of law, commercial disputes, escheat and tax and other known and unknown liabilities; and

the impairment of acquired intangible assets and goodwill that could result in significant charges to operating results in future periods.

If we are unable to address these difficulties and challenges or other problems encountered in connection with any future acquisition or investment, we might not realize the anticipated benefits of that acquisition or investment and we could incur unanticipated costs, liabilities or otherwise suffer harm to our business generally. The difficulties and challenges of successful integration of any acquired company are increased when the integration involves companies with operations or material vendors outside the United States.

To the extent that we pay the consideration for any future acquisitions or investments in cash or any potential cash earn outs, it has reduced and may in the future reduce the amount of cash available to us for other purposes. Such payments also may increase our cash flow and liquidity risk. Future acquisitions or investments could also result in dilutive issuances of our equity securities or the incurrence of debt, contingent liabilities, amortization expenses or impairment charges against goodwill or intangible assets on our balance sheet, any of which could have a material adverse effect on our business, results of operations and financial condition.

Operational Risks

Failure to renegotiate the terms of our current lease for our corporate headquarters or find another location suitable for our operations could adversely impact our results of operations.

Our lease for our corporate headquarters and N.J operations in Parsippany expires on March 31, 2023. We are in negotiations with the landlord for an extension and are also exploring other locations to lease. Should we not come to terms with the landlord on an extension by the lease termination date we could incur charges above fair value for rent for industrial and office property which could have an adverse impact our results of operations.

The loss of key personnel could adversely affect our ability to remain competitive; our development of new and upgraded products could be adversely impacted by our inability to hire or retain personnel with appropriate technical abilities.

We believe that the continued service of our executive officers will be important to our future growth and competitiveness. However, other than the employment agreements we entered into with our named executive officers, Timothy Whelan, Mike Kandell, and Dan Monopoli, we currently do not have any other employment agreements with our management team. We cannot provide assurance that any key members of our management team will remain employed by us.

We believe our pay levels are competitive within the regions in which we operate. However, global labor shortages, inflationary pressure on wages, and increased global attrition have intensified competition for talent in most fields in which we operate, and it may become more difficult to retain key employees. If we fail to retain key personnel and are unable to hire highly qualified replacements, we may not be able to meet key objectives, such as launching effective product innovations and meeting financial goals, and maintain or expand our business.

Furthermore, our ability to research and develop new technologies and products, or upgraded versions of existing products, will depend, in part, on our ability to hire personnel with knowledge and skills that our current personnel do not have. If we are unable to hire or retain such qualified personnel, our revenues could be negatively impacted, and our business could suffer.

Our future research and development projects might not be successful.

The successful development of new products can be affected by many factors. Products that appear to be promising at their early phases of research and development may fail to be commercialized for various reasons. There is no assurance that any of our future research and development projects will be successful or completed within the anticipated timeframe or budget or that we will receive the necessary approvals from relevant authorities, customers, or prospective customers, for the production of these newly developed products, or that these newly developed products will achieve commercial success. Even if such products can be successfully commercialized, they may not achieve the level of market acceptance that we expect.

If our products do not perform as promised, we could experience increased costs, lower margins and harm to our reputation.

The failure of our products to perform as promised could result in increased costs, lower margins and harm to our reputation. We may not be able to anticipate all of the possible performance or reliability problems that could arise with our existing or new products, which could result in significant product liability or warranty claims. In addition, any defects found in our products could result in a loss of revenues or market share, failure to achieve market acceptance, injury to our reputation, indemnification claims, litigation, increased insurance costs and increased service costs, any of which could discourage customers from purchasing our products and materially harm our business.

Our business and operations could suffer in the event of security breaches.

Attempts by others to gain unauthorized access to information technology systems are becoming more sophisticated and are sometimes successful. These attempts, which might be related to industrial or other espionage, include covertly introducing malware to our computers and networks and impersonating authorized users, among others. We seek to detect and investigate all security incidents and to prevent their recurrence, but in some cases, we might be unaware of an incident or its magnitude and effects. The theft, unauthorized use or publication of our intellectual property and/or confidential business information could harm our competitive position, reduce the value of our investment in research and development and other strategic initiatives or otherwise adversely affect our business. To the extent that any security breach results in inappropriate disclosure of our customers’ or licensees’ confidential information, we may incur liability as a result. In addition, we might be required to devote significant additional resources to the security of our information technology systems.

We rely on our information technology systems to manage numerous aspects of our business and a disruption of these systems could adversely affect our business.

Our information technology, or IT, systems are an integral part of our business. We depend on our IT systems for scheduling, sales order entry, purchasing, materials management, accounting, and production functions. Our IT systems also allow us to ship products to our customers on a timely basis, maintain cost-effective operations and provide a high level of customer service. Some of our systems are not fully redundant, and our disaster recovery planning does not account for all eventualities. A serious disruption to our IT systems could significantly limit our ability to manage and operate our business efficiently, which in turn could have a material adverse effect on our business, results of operations and financial condition.

We rely on manufacturers’ representatives to sell our products to key large accounts and the loss of a key manufacturer’s representative could have a material impact on our revenues

Our products are sold through a small in-house direct sales force as well as a network of industry specific manufacturers’ representatives that have established relationships with our largest customers. Our arrangements with our manufacturers’ representatives generally can be canceled by either party with advance written notice. The loss of a manufacturer’s representative could result in a material decline in revenues.

Financial Risks

We incur significant costs as a result of operating as a public company, and our management devotes substantial time to compliance initiatives.

We have incurred and will continue to incur significant legal, accounting and other expenses as a public company, including costs resulting from public company reporting obligations under the Exchange Act and regulations regarding corporate governance practices. The listing requirements of the NYSE American require that we satisfy certain corporate governance requirements relating to director independence, distributing annual and interim reports, stockholder meetings, stockholder approvals and voting, and soliciting proxies. Our management and other personnel will need to devote a substantial amount of time to ensuring compliance with all of these requirements.

Our results of operations could be affected by changes in tax-related matters.

A number of factors could cause our tax rate to increase, including a change in the jurisdictions in which our profits are earned and taxed; a change in the mix of profits from those jurisdictions; changes in available tax credits; changes in applicable tax rates; changes in accounting principles. We have deferred tax assets on our balance sheet. Changes in applicable tax laws and regulations or in our business performance could affect our ability to realize those deferred tax assets, which could also affect our results of operations.

Our stock price is volatile and the trading volume in our common stock is less than that of other larger companies in the test and measurement industry.

The market price of our common stock has experienced significant volatility and may continue to be subject to rapid swings in the future. From January 1, 2015 to February 17, 2023, the trading prices of our stock have ranged from $0.71 to $4.07 per share. There are several factors which could affect the price of our common stock unrelated to our financial performance, including announcements of technological innovations for new commercial products by us or our competitors, developments concerning propriety rights, new or revised governmental regulation or general conditions in the market or for our products, and the entrance of additional competitors into our markets.

Although our common stock is listed for trading on the NYSE American, the trading volume in our common stock is less than that of other, larger companies in the test and measurement industry. Traditionally, the trading volume of our common stock has been limited. For example, for the 90 trading days ending on February 17, 2023, the average daily trading volume was approximately 22,000 shares per day and ranged from between 900 shares per day and approximately 109,000 shares per day. Furthermore, we only have 21,438,571 shares of common stock outstanding as of the date of this report. A public trading market having the desired characteristics of depth, liquidity and orderliness depends on the presence in the marketplace of willing buyers and sellers of our common stock at any given time. Because of our limited trading volume, holders of our common stock may not be able to sell quickly any significant number of shares, and any attempted sales of a large number of our shares will likely have a material adverse impact on the price of our common stock.

If securities or industry analysts do not publish research or reports about our business or if they issue an adverse or misleading opinion regarding our stock, our stock price and trading volume could decline.

The trading market for our common stock might be influenced by the research and reports that industry or securities analysts publish about us or our business. If any analysts issue an adverse or misleading opinion regarding us, our business model, products or stock performance, our stock price could decline.

Legal and Regulatory Risks

We could be subject to significant costs related to environmental contamination from past operations, and environmental contamination caused by ongoing operations could subject us to substantial liabilities in the future.

The Company’s operations are subject to various federal, state, local, and foreign environmental laws, ordinances and regulations that limit discharges into the environment, establish standards for the handling, generation, use, emission, release, discharge, treatment, storage and disposal of, or exposure to, hazardous materials, substances and waste, and require cleanup of contaminated soil and groundwater.

In connection with the Microlab divestiture the Company engaged an LSRP to perform a preliminary environmental assessment and site investigation in accordance with ISRA. The site investigation detected hazardous substances in the groundwater at our headquarter in Parsippany NJ. The Company believes the contamination predates our occupancy and, accordingly, remediation should not be the responsibility of the Company. 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.

The testing and use of electronic communications equipment and the accurate transmission of information entail a risk of product liability claims being asserted by customers and third parties.

Claims may be asserted against us by end-users of any of our products for liability due to a defective or malfunctioning device made by us, and we could be subject to corresponding litigation should one or more of our products fail to perform or meet certain minimum requirements. Such a claim and corresponding litigation could result in substantial costs, diversion of resources and management attention, termination of customer contracts and harm to our reputation.

We are subject to laws and regulations governing government contracts, and failure to address and comply with these laws and regulations could harm our business by leading to a reduction in revenue associated with these customers and subjecting us to civil and criminal penalties.

We have agreements relating to the sale of our products to U.S. government entities and, as a result, we are subject to various statutes and regulations that apply to companies doing business with the U.S. government. The laws governing government contracts differ from the laws governing private contracts. For example, many government contracts contain pricing terms and conditions that are not applicable to private contracts. We are also subject to investigation for compliance with the regulations governing government contracts. A failure to comply with these regulations might result in suspension of these contracts, or civil and criminal penalties.

Certain of our products and our business are subject to ITAR, Export Administration Regulations, Foreign Corrupt Practices Act and other U.S. and foreign government laws, regulations, policies and practices, and our failure to comply with such regulations could adversely affect our business, results of operations and financial condition.

Our international revenues, for which we also use foreign representatives and consultants, are subject to U.S. laws, regulations and policies, including the ITAR and the U.S. Foreign Corrupt Practices Act, or the FCPA, and other export laws and regulations, as well as foreign government laws, regulations and procurement policies and practices which may differ from the U.S. government regulations in this regard.

Compliance with the directives of the U.S. Department of State may result in substantial legal and other expenses and the diversion of management time. In the event that a determination is made that we or any entity we have acquired has violated the ITAR with respect to any matters, we may be subject to substantial monetary penalties that we are unable to quantify at this time, and/or suspension or revocation of our export privileges and criminal sanctions, which may have a material adverse effect on our business, results of operations and financial condition.

We can give no assurance that under either the ITAR or the EAR we will continue to be successful in obtaining the necessary licenses and authorizations or that certain revenues will not be prevented or delayed due to compliance issues related to the ITAR or the EAR.

We are also subject to, and must comply with, the FCPA and similar world-wide anti-corruption laws, including the U.K. Bribery Act of 2010. These acts generally prohibit both us and our third party intermediaries from making improper payments to foreign officials for the purpose of acquiring or retaining business or otherwise obtaining favorable treatment. We are required as well to maintain adequate record-keeping and internal accounting practices to fully and accurately reflect our transactions. We operate in many parts of the world that have experienced government corruption. In certain circumstances, the FCPA and our programs and policies may conflict with local customs and practices. If we or any of our local intermediaries have failed to comply with the requirements of the FCPA, governmental authorities in the United States could seek to impose severe criminal and civil penalties. The assertion of violations of the FCPA or other anti-corruption laws could disrupt our business and have a material adverse effect on our results of operations and financial condition.

We are subject to various other governmental regulations, compliance with which could cause us to incur significant expenses, and if we fail to maintain satisfactory compliance with certain regulations, we could be forced to recall products and cease their distribution, and we could be subject to civil or criminal penalties.

Our business is subject to various other significant international, federal, state and local regulations, including but not limited to health and safety, packaging, product content and labor regulations. These regulations are complex, change frequently and have tended to become more stringent over time. We may be required to incur significant expenses to comply with these regulations or to remedy violations of these regulations. Any failure by us to comply with applicable government regulations could also result in cessation of our operations or portions of our operations, product recalls or impositions of fines and restrictions on our ability to carry on or expand our operations.

Third parties could claim that we are infringing on their intellectual property rights which could result in substantial costs, diversion of significant managerial resources and significant harm to our reputation.

The industries in which our company operates are characterized by the existence of a large number of patents and frequent litigation based on allegations of patent infringement. From time to time, third parties may assert patent, copyright, trademark and other intellectual property rights to technologies in various jurisdictions that are important to our business. Defending claims, including claims without merit, requires allocation of resources, including personnel and capital, which could adversely impact our results of operations. A successful claim of infringement against us could result in our being required to pay significant damages, enter into costly license agreements, or stop the sale of certain products, which could adversely affect our net revenues, gross margins and expenses and harm our future prospects.

We use specialized technologies and know-how to design, develop and manufacture our products. Our inability to protect our intellectual property could hurt our competitive position, harm our reputation and adversely affect our results of operations.

We believe that our intellectual property, including its methodologies, is critical to our success and competitive position. We rely primarily on trade secret laws, as well as confidentiality agreements to establish and protect our proprietary rights. If we are unable to protect our intellectual property against unauthorized use by third parties, our reputation among existing and potential customers could be damaged and our competitive position adversely affected.

Attempts may be made to copy aspects of our products or to obtain and use information that we regard as proprietary. Accordingly, we may not be able to prevent misappropriation of our technology or deter others from developing similar technology. Our strategies to deter misappropriation could be undermined if:

the proprietary nature or protection of our methodologies is not recognized in the United States or foreign countries;

third parties misappropriate our proprietary methodologies and such misappropriation is not detected; and

competitors create applications similar to ours but which do not technically infringe on our legally protected rights.

If these risks materialize, we could be required to spend significant amounts to defend our rights and to divert critical managerial resources. In addition, our proprietary methodologies could decline in value or our rights to them could become unenforceable. If any of the foregoing were to occur, our business could be materially adversely affected.

Environmental and other disasters, such as flooding, large earthquakes, hurricanes, volcanic eruptions or nuclear or other disasters, or a combination thereof, may negatively impact our business.

Although we manufacture our products in New Jersey and Colorado, we ship our products globally. Environmental and other disasters could cause disruption to our supply chain or impede our ability to ship product to certain regions of the world. There can be no assurance that environmental and/or other such natural disasters will not have an adverse impact on our business in the future.

New Jersey corporate law may delay or prevent a transaction that stockholders would view as favorable.

We are subject to the New Jersey Shareholders’ Protection Act (the “Act”), which could delay or prevent a change of control of us. In general, the Act prevents a shareholder owning 10% or more of a New Jersey public corporation’s outstanding voting stock from engaging in business combinations with that corporation for five years following the date the shareholder acquired 10% or more of the corporation’s outstanding voting stock, unless board approval is obtained prior to the time that the shareholder reaches the 10% threshold.

Failure to maintain effective internal controls in accordance with Sarbanes-Oxley could have a material adverse effect on our business and common stock price.

As a public company with SEC reporting obligations, we are required to document and test our internal control procedures to satisfy the requirements of Section 404(a) of Sarbanes-Oxley, which require annual assessments by management of the effectiveness of our internal control over financial reporting. As a smaller reporting company, we are exempt from the auditor attestation requirement of Section 404(b) of Sarbanes-Oxley.

During the course of our assessment, we may identify deficiencies that we are unable to remediate in a timely manner. Testing and maintaining our internal control over financial reporting may also divert management’s attention from other matters that are important to the operation of our business. We may not be able to conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404(a) of Sarbanes-Oxley. If we conclude that our internal control over financial reporting is not effective, we cannot be certain as to the timing of completion of our evaluation, testing and remediation actions or its effect on our operations. Moreover, any material weaknesses or significant deficiencies in our internal control over financial reporting may impede our ability to file timely and accurate reports with the SEC. Any of the above could cause investors to lose confidence in our reported financial information or our common stock listing on the NYSE American exchange to be suspended or terminated, which could have a negative effect on the trading price of our common stock.

The Company is subject to compliance with the policies and procedures of the NYSE American Exchange with respect to continued listing on the stock exchange and our failure to maintain our listing would make trades in our securities difficult for shareholders.

In considering whether a security warrants continued trading and/or listing on the NYSE American Exchange, many factors are taken into account, such as the degree of investor interest in the company, its prospects for growth, the reputation of its management, the degree of commercial acceptance of its products, and whether its securities have suitable characteristics for auction market trading. Thus, any developments which substantially reduce the size of a company, the nature and scope of its operations, the value or amount of its securities available for the market, or the number of holders of its securities, might occasion a review of continued listing by the Exchange. Moreover, events such as the sale, destruction, loss or abandonment of a substantial portion of a company’s business, the inability to continue its business, steps towards liquidation, or repurchase or redemption of its securities, may also give rise to such a review. The loss of our listing on the Exchange could have a material adverse effect on our shareholders’ ability to sell our shares or for others to purchase our shares. This could have an adverse effect on the market price of our stock.

International Risks

The success of our ability to grow revenues and develop relationships in Europe and Asia may be limited by risks related to conducting business in European and Asian markets.

Part of our strategy is to increase revenues and build our relationships in European and Asian markets. Risks inherent in marketing, selling and developing relationships in European and Asian markets include those associated with:

economic conditions in European and Asian markets, including the impact of recessions in European and Asian economies and fluctuations in the relative values of the U.S. dollar, the Euro and Asian currencies;

taxes and fees imposed by European and Asian governments that may increase the cost of products and services;

greater difficulty in accounts receivable collection and longer collection periods;

seasonal reductions in business activities in some parts of the world;

laws and regulations imposed by individual countries and by the European Union, particularly with respect to intellectual property, license requirements and environmental requirements; and

political and economic instability, terrorism and war.

In addition, European and Asian intellectual property laws are different than and might not protect our proprietary rights to the same extent as do U.S. intellectual property laws, and we will have to ensure that our intellectual property is adequately protected in foreign jurisdictions and in the United States. If we do not adequately protect our intellectual property rights, competitors could use our proprietary technologies in non-protected jurisdictions and put us at a competitive disadvantage.

Forward-Looking Statements

The statements contained in this Annual Report on Form 10-K that are not historical facts, including, without limitation, the statements under “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Such forward-looking statements may be identified by, among other things, the use of forward-looking terminology such as “believes,” “expects,” “intends,” “plans,” “may,” “will,” “should,” “anticipates” or “continues” or the negative thereof of other variations thereon or comparable terminology, or by discussions of strategy that involves risks and uncertainties. These statements are based on the Company’s current expectations of future events and are subject to a number of risks and uncertainties that may cause the Company’s actual results to differ materially from those described in the forward-looking statements. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. The Company assumes no obligation to update any forward-looking statements as a result of new information or future events or developments.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

In 2021, the Company was comprised of five brands – Microlab, Boonton, Noisecom, CommAgility and Holzworth organized as three product groups. 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.

On March 1, 2022, we sold Microlab to RF Industries, Ltd and on December 30, 2022 we sold 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 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.

The Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations presented in this Annual Report on Form 10-K for the fiscal year ended 2022 exclude the results of Microlab and CommAgility for all periods presented. The results of Microlab and CommAgility have been recorded as discontinued operations in accordance with the applicable accounting guidance. Further, the assets and liabilities of Microlab and CommAgility have been reclassified as assets and liabilities of discontinued operations in the Consolidated Balance Sheet as of December 31, 2021.

Key 2022 Developments and Financial Results

In 2022, the Company disclosed that we were pursuing strategic alternatives in order to maximize value for our shareholders. During the year we completed two divestitures for total proceeds of approximately $35.3 million and repaid all outstanding debt and earnout obligations. As of December 31, 2022, we have approximately $20.7 million in cash. The remaining T&M business generated 57.4% gross margins in fiscal 2022 and ended the year with a backlog of $6.6 million, which was an increase of $1.1 million from the prior year. T&M revenue declined 1.4% from the prior year due primarily to general economic and global uncertainties which delayed capital expenditure decisions by our customers for our products. T&M second half bookings in 2022 increased from the first half of the year signaling a recovery in spend by our customers resulting in the higher backlog.

The Company continues to explore strategic alternatives for the remaining T&M business. We do not expect to comment further or update the market with any additional information on the process unless and until its Board of Directors has approved a specific transaction or otherwise deems disclosure appropriate or necessary. There can be no assurance that the evaluation of strategic alternatives will result in any strategic alternative transaction, or any assurance as to its outcome or timing.

The financial information presented herein includes: (i) Consolidated Balance Sheets as of December 31, 2022 and 2021; (ii) Consolidated Statements of Operations and Comprehensive Income/(Loss) for the years ended December 31, 2022 and 2021; (iii) Consolidated Statement of Changes in Shareholders’ Equity for the years ended December 31, 2022 and 2021; and (iv) Consolidated Statements of Cash Flows for the years ended December 31, 2021 and 2020.

Critical Accounting Policies

Management’s discussion and analysis of the financial condition and results of operations are based upon the consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amount of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amount of revenues and expenses for each period. The following represents a summary of the Company’s critical accounting policies, defined as those policies that the Company believes are: (a) the most important to the portrayal of our financial condition and results of operations, and (b) that require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effects of matters that are inherently uncertain. Estimates and assumptions are made by management to assess the overall likelihood that an accounting estimate or assumption may require adjustment. It is reasonably possible that these estimates may ultimately differ materially from actual results. See Note 1 in the Notes to the Consolidated Financial Statements included elsewhere in this Form 10-K for a description of all of our significant accounting policies.

Discontinued Operations

In accordance with Accounting Standards Codification (“ASC”) 205-20 Discontinued Operations , 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.

The Company evaluated the Microlab and CommAgility divestitures in accordance with ASC 205-20 and determined that both transactions represented a strategic shift, as defined, in the operations of the Company. Microlab and CommAgility were major discrete lines of business focused on RF passive conditioning and LTE software development, respectively. The remaining T&M business is focused on RF test equipment and phase noise analysis.

In accordance with ASC 205-20 no expenses that are expected to continue in the ongoing entity after divestiture are reported within continuing operations.

Revenue Recognition

Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606), (“Topic 606”) requires the Company to identify the performance obligations in our revenue arrangements – that is, those promised goods and services (or bundles of promised goods or services) that are distinct – and allocate the transaction price of the revenue arrangement to those performance obligations on the basis of estimated standalone selling prices (“SSP’s”).

Sales of our T&M products generally consist of one performance obligation which is satisfied upon shipment to the customer. When contract terms require transfer of control upon delivery at a customer’s location, revenue is recognized on the date of delivery.

Services arrangements involving repairs and calibrations of the Company’s products are generally considered a single performance obligation and revenue is recognized as the services are rendered.

Leases

We lease office space and certain equipment under non-cancelable lease agreements. We apply ASU No. 2016-02, Leases (Topic 842) to our lease arrangements. In accordance with Topic 842, we assess all arrangements that convey the right to control the use of property, plant and equipment, at inception, to determine if it is, or contains, a lease based on the unique facts and circumstances present in that arrangement. For those leases identified, we determine the lease classification, recognition, and measurement at the lease commencement date. For arrangements that contain a lease we: (i) identify lease and non-lease components; (ii) determine the consideration in the contract; (iii) determine whether the lease is an operating or financing lease; and (iv) recognize lease Right of Use (“ROU”) assets and corresponding lease liabilities. Lease liabilities are recorded based on the present value of lease payments over the expected lease term. The corresponding ROU asset is measured from the initial lease liability, adjusted by (i) accrued or prepaid rents; (ii) remaining unamortized initial direct costs and lease incentives; and (iii) any impairments of the ROU asset. The interest rate implicit in our lease contracts is typically not readily determinable and as such, we use our incremental borrowing rate based on the information available at the lease commencement date, which represents an internally developed rate that would be incurred to borrow, on a collateralized basis, over a similar term, an amount equal to the lease payments in a similar economic environment.

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.

Valuation of Goodwill

Goodwill represents the excess of the aggregate purchase price over the fair value of the net assets acquired in a purchase business combination. Goodwill is 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 we determine 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.

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 amount of deferred tax assets considered realizable is subject to adjustment in future periods if estimates of future taxable income are changed.

Uncertain tax positions

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

The Company has analyzed its filing positions in all of the jurisdictions where it is required to file income tax returns. As of December 31, 2022 and 2021, the Company has identified its federal tax return, the state tax returns in New Jersey, California and Colorado as “major” tax jurisdictions, as defined in ASC 740, in which it is required to file income tax returns. Based on the evaluations noted above, the Company has concluded that there are no significant uncertain tax positions requiring recognition or disclosure in its consolidated financial statements.

Based on a review of tax positions for all open years and contingencies as set out in the Company’s Notes to the consolidated financial statements, no significant reserves for uncertain income tax positions have been recorded pursuant to ASC 740 during the years ended December 31, 2022 and 2021, and the Company does not anticipate that it is reasonably possible that any material increase or decrease in its unrecognized tax benefits will occur within the next twelve months.

Stock-based compensation

The Company follows the provisions of ASC 718, Compensation - Stock Compensation which requires that compensation expense be recognized based on the fair value of 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 is estimated using the Black-Scholes option pricing model. When 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 date the applicable conditions are expected to be met. If the performance conditions are not considered probable of being achieved, no expense is recognized until such time as the performance conditions are considered probable of being met, if ever. Management evaluates whether performance conditions are probable of occurring on a quarterly basis.

Inventories and Inventory Valuation

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

Allowances for doubtful accounts

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

Warranties

The Company generally offers standard warranties against product defects. We estimate future warranty costs to be incurred based on historical warranty claims experience including estimates of material and labor costs over the warranty period.

Comparison of the results of operations for the year ended December 31, 2022 with the year ended December 31, 2021

Consolidated net revenue decreased from $22.7 million in fiscal year 2021 to $22.4 million in fiscal year 2022 or 1.4% due primarily to general negative economic and global uncertainties which caused delays in capital expenditure decisions by our customers resulting in lower sales of our products.

Consolidated gross profit decreased 1% from the prior year period due to lower revenues. Consolidated gross profit margin of 57% was consistent with the prior year.

Operating Expenses (in thousands)

Twelve months ended December 31

Operating Expenses

% of Revenue

Change

Amount

Pct.

Research and development

Sales and marketing

General and administrative

Loss on change in fair value of contingent consideration

Total operating expenses

Consolidated research and development expenses increased nominally from the prior year period due primarily to an increase in headcount expenses of approximately $100,000 and an increase in depreciation expense of approximately $20,000 only partially offset by a decrease in third-party research and development expenses of approximately $50,000.

Sales and marketing expenses were flat with the prior year period. External commissions expense increased approximately $190,000 from the prior year due a larger mix of commissionable sales. Higher external commissions expense was offset by a decrease in headcount related expenses due to lower sales headcount of approximately $113,000 and a decrease in third-party marketing spend of approximately $40,000.

General and administrative expenses increased $562,000 from the prior year due primarily to an increase in non-cash stock compensation expense of $700,000 due to restricted share awards to employees in fiscal year 2022 and an increase in non-recurring expenses of $200,000 associated with our strategic alternatives process. These increases were offset by various administrative expense reductions of approximately $300,000 in the following areas: third party legal and accounting expenses, investor relations, market research and consulting expenses and banking fees.

The loss on change in contingent consideration in 2021 relates to an adjustment to the Holzworth earnout liability. The Holzworth earnout liability was fully paid as of December 31, 2022.

(Loss)/Gain on Extinguishment of Debt

In 2022, the Company recorded a loss on extinguishment of the Muzinich term loan of $792,000 primarily related to the write off of deferred financing fees. In 2021, the Company recorded a $2.0 million gain on extinguishment of the Payroll Protection Program loan after we received notice that our loan was fully forgiven.

Other income/expense

Other income increased $304,000 from the prior year due primarily to sublease income related to the sublease of approximately 50% of our Parsippany, NJ location to RF Industries.

Interest Expense

Interest expense decreased $1.1 million due primarily to the termination of the Muzinich term loan on March 1, 2022 concurrent with the Microlab divestiture.

Tax

Tax benefit increased $177,000 from the prior year due to a higher taxable loss from the prior year.

Net (Loss) from Continuing Operations

Net loss from continuing operations increased $1.8 million due to lower gross profit caused by lower revenues, higher operating expenses due primarily to stock based compensation expense and expenses related to our strategic alternatives process and the loss on extinguishment of our debt. This was only partially offset by lower interest expense as compared to the prior year and a higher tax benefit.

Net Income from Discontinued Operations, net of tax

Net income from discontinued operations, net of tax in fiscal 2021 represents the net income of Microlab of $3.4 million and net loss of CommAgility of $(1.2) million.

Net income from discontinued operations, net of tax in fiscal 2022, represents the results of Microlab and CommAgility during the period of ownership in 2022 as well as the gain recognized on sale of each business. Microlab’s net income during 2022 was $158,000 and CommAgility’s net loss was $3.2 million. The Company recognized a gain on sale of Microlab of $16.5 million and a gain on sale of CommAgility of $6.3 million. The combined net income from discontinued operations was offset by a tax provision related to discontinued operations of $2.7 million.

Liquidity and Capital Resources

On December 16, 2021, the Company and its wholly owned subsidiary Microlab entered into the Microlab Purchase Agreement with 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 RF Industries unanimously approved the Microlab Transaction. On February 25, 2022, the shareholders of the Company approved the Microlab 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 adjustments 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 March 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.

On May 30, 2022, the Company repaid the previously outstanding Coronavirus Business Interruption Loan Agreement (“CIBLS Loan”) with Lloyds Bank PLC (“Lloyds”) in the amount of £250,000.

On December 4, 2022, the Company, and Holdings entered into the CommAgility Purchase Agreement with E-Space, and eSpace Inc., a Delaware corporation, as guarantor. The CommAgility Purchase Agreement provided for the purchase by the Buyer of 100% of 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 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.

The CommAgility Transaction and Microlab Transaction resulted in the net proceeds of approximately $35.3 million in 2022. As of December 31, 2022, the Company has a cash balance of $20.7 million with no debt or earnout liabilities. We expect our cash balance and cash generated by operations will be sufficient to meet our liquidity needs for the next twelve months. Our ability to meet our cash requirements will depend on our ability to generate cash in the future, which is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control.

The Microlab Transaction will be treated as a sale of the assets and liabilities of Microlab to RF Industries for U.S. federal and applicable state income tax purposes and will result in a net taxable gain. The CommAgility Transaction will be treated as a sale of stock for U.S. federal and applicable state income tax purposes and will result in a net taxable loss. We will utilize approximately $9.8 million of our federal net operating loss carryforwards and approximately $8.0 million of our New Jersey state net operating loss carryforwards to offset the net taxable gain generated from the 2022 divestitures. As of December 31, 2022, after utilization of the net operating loss carryforwards, the Company has $5.2 million in U.S. federal net operating loss carryforwards and $33.3 million in New Jersey state net operating loss carryforwards.

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

Sources and Uses of Cash

As of December 31, 2022, the Company’s consolidated cash balance was $20.7 million as compared to $4.5 million as of the prior year.

Our primary sources of cash were net proceeds of the Microlab Transaction and CommAgility Transaction which generated an aggregate amount of $35.3 million. Our primary uses of cash were the repayment of the Muzinich term loan of $4.4 million, acquisition of treasury stock of $2.5 million and final payment of contingent consideration and deferred purchase price related to the Holzworth acquisition $3.2 million, of which $1.4 million is classified within financing activities on the consolidated cash flow statement, $250,000 is classified within investing activities and $1.6 million is classified within operating activities. Additionally, working capital increased approximately $5.6 million due to higher accounts receivable related to timing of shipments at the end of the year, higher inventory balances to mitigate long lead times caused by supply chain disruption and estimated U.S. federal and state tax payments made during the year.

Operating Activities

Cash used by operating activities was $9.7 million in fiscal year 2022 as compared to cash provided by operating activities of $4.6 million in fiscal year 2021. The cash usage in fiscal year 2022 was due primarily to an increase in working capital due to higher accounts receivable caused by timing of shipments at the end of the year, higher inventory balances caused by higher levels of safety stock to mitigate long lead times, estimated U.S. federal and state tax payments made in fiscal year 2022 of approximately $900,000 and the Holzworth earnout payment of $1.6 million which is classified in operating activities.

Investing Activities

Cash provided by investing activities was $34.3 million in fiscal year 2022 due primarily to net cash proceeds of $35.3 million from the Microlab Transaction and CommAgility Transaction.

Financing Activities

Cash used by financing activities increased from $4.2 million in the prior year to $8.2 million in fiscal year 2022 due primarily to repurchases of our common stock of $2.5 million and final payment of the Holzworth earnout liability of $1.4 million.

Holzworth Deferred Purchase Price and Earnout

As of December 31, 2022 the Company had paid the final earnout and deferred purchase price liabilities related to the Holzworth acquisition. There are no remaining purchase price liabilities.

On August 27, 2018, the Company filed a shelf registration statement on Form S-3 which was declared effective on September 17, 2018. On July 21, 2021, the Company entered into an At Market Issuance Sales Agreement (the “Sales Agreement”) with B. Riley Securities, Inc. (the “Agent”) to issue and sell through the Agent, shares of the Company’s common stock, par value $0.01 per share, having an aggregate offering price of up to $12,000.000 (the “Shares”), as described in Note 5 – Equity. From July 21, 2021 through August 6, 2021, the Agent sold 254,701 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 $560,000 after deducting direct legal and accounting fees associated with the offering. The shelf registration statement expired on September 17, 2021 and was not renewed by the Company.

Purchase obligations consist of inventory that arises in the normal course of business operations. Future obligations and commitments as of December 31, 2022 consisted of the following:

Table of Contractual Obligations

Payments by year (in thousands)

Total

Thereafter

Facility leases

Operating and equipment leases

Purchase obligations

Off-Balance Sheet Arrangements

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

Recent Accounting Pronouncements Affecting the Company

A discussion of recent accounting pronouncements is included in Note 1 to the Consolidated Financial Statements.