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WTT > SEC Filings for WTT > Form 10-Q on 15-May-2013All Recent SEC Filings

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Form 10-Q for WIRELESS TELECOM GROUP INC


15-May-2013

Quarterly Report


ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

INTRODUCTION

Wireless Telecom Group, Inc., and its operating subsidiaries, (collectively, the "Company"), develop, manufacture and market a wide variety of electronic noise sources, electronic testing and measuring instruments including power meters, voltmeters and modulation meters and high-power passive microwave components for wireless products. The Company's products have historically been primarily used to test the performance and capability of cellular/PCS and satellite communication systems and to measure the power of RF and microwave systems. Other applications include radio, radar, wireless local area network (WLAN) and digital television.

The operating businesses of the Company are segregated into two reportable segments: (1) test and measurement and (2) network solutions. The test and measurement segment is comprised primarily of the Company's operations and the operations of its subsidiary, Boonton. The network solutions segment is comprised primarily of the operations of the Company's subsidiary, Microlab. Additional financial information on the Company's reportable segments as of March 31, 2013 and December 31, 2012, as well as for the three-months ended March 31, 2013 and 2012 is included in Note 8 to the Company's condensed consolidated financial statements.

The financial information presented herein includes:

(i) Condensed Consolidated Balance Sheets as of March 31, 2013 (unaudited) and as of December 31, 2012 (ii) Condensed Consolidated Statements of Operations for the three-month periods ended March 31, 2013 (unaudited) and 2012 (unaudited)
(iii) Condensed Consolidated Statements of Cash Flows for the three-month periods ended March 31, 2013 (unaudited) and 2012 (unaudited) and (iv) Condensed Consolidated Statement of Shareholders' Equity for the three-month period ended March 31, 2013 (unaudited).

FORWARD LOOKING STATEMENTS

The statements contained in this Quarterly Report on Form 10-Q 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 or other variations thereon or comparable terminology, or by discussions of strategy that involve risks and uncertainties. These statements are based on the Company's current expectations of future events and are subject to a number of risks and uncertainties that may cause the Company's actual results to differ materially from those described in the forward-looking statements. These risks and uncertainties include, but are not limited to, the ability of our management to successfully implement our business plan and strategy, product demand and development of competitive technologies in our market sector, the impact of competitive products and pricing, the loss of any significant customers, our abilities to protect our property rights, the effects of adoption of newly announced accounting standards, the effects of economic conditions and trade, legal and other economic risks, among others. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. These risks and uncertainties are disclosed from time to time in the Company's filings with the Securities and Exchange Commission, the Company's press releases and in oral statements made by or with the approval of authorized personnel. You should also consider carefully the statements under other sections of this Report and our Annual Report on Form 10-K for the year ended December 31, 2012, which address additional risks that could cause our actual results to differ from those set forth in any forward-looking statements. The Company's forward-looking statements speak only as of the date of this Report. The Company undertakes no obligation to publically update or review any forward-looking statements whether as a result of new information, future developments or otherwise.

CRITICAL ACCOUNTING POLICIES

Management's discussion and analysis of the financial condition and results of operations are based upon the Company's condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses for each period.

ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)

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 its 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.

Share-Based Compensation

The Company follows the provisions of Accounting Standards Codification (ASC) 718, "Share-Based Payment". The fair value of options at the date of grant was estimated using the Black-Scholes option pricing model. For any performance-based or service-based options granted, the Company takes into consideration guidance under ASC 718 and SEC Staff Accounting Bulletin No. 107 (SAB 107) when reviewing and updating 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 weekly price observations over an observation period of three years. 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 estimated forfeiture rate included in the option valuation is based on our past history of forfeitures. Due to the limited amount of forfeitures in the past, the Company's estimated forfeiture rate has been zero.

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.

Revenue Recognition

Revenue from product shipments, including shipping and handling fees, is recognized once delivery has occurred provided that persuasive evidence of an arrangement exists, the price is fixed or determinable, and collectability is reasonably assured. Delivery is considered to have occurred when title and risk of loss have transferred to the customer. Sales to international distributors are recognized in the same manner. If title does not pass until the product reaches the customer's delivery site, then recognition of revenue is deferred until that time. There are no formal sales incentives offered to any of the Company's customers. Volume discounts may be offered from time to time to customers purchasing large quantities on a per transaction basis. There are no material special post shipment obligations or acceptance provisions that exist with any sales arrangements.

Valuation of Inventory

Raw material inventories are stated at the lower of cost (first-in, first-out method) or market. Finished goods and work-in-process are valued at average cost of production, which includes material, labor and manufacturing expenses.

Allowance 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, its customers' payment history and aging of its accounts receivable balance. If the financial condition of any of its customers were to decline, additional allowances might be required.

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.

ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)

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.

Uncertain Tax Positions

Under ASC 740, the Company must recognize the tax benefit from an uncertain position 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 tax benefits recognized in the financial statements attributable to such position are measured based on the largest benefit that has 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 Federal and state jurisdictions where it is required to file income tax returns. As of March 31, 2013 and December 31, 2012, the Company has identified its Federal tax return and its state tax return in New Jersey as "major" tax jurisdictions, as defined, 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 condensed 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 condensed consolidated financial statements, no reserves for uncertain income tax positions have been recorded pursuant to ASC 740 during the periods ended March 31, 2013 and 2012, 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 twelve months.

RESULTS OF OPERATIONS

The following discussion of our financial condition and results of operations should be read in conjunction with our interim condensed consolidated financial statements and the notes to those statements included in Part I, Item I of this Quarterly Report on Form 10-Q and in conjunction with the consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2012.

For the three-months ended March 31, 2013 as compared to the corresponding period of the previous year, net consolidated sales decreased to approximately $6,797,000 from approximately $6,902,000, a decrease of approximately $105,000 or 1.5%. The decrease was primarily the result of weakened demand for the Company's test and measurement instruments, particularly for military applications. Despite these overall results, the Company continues to experience strong order activity in its network solutions segment due to commercial infrastructure development in support of the ongoing expansion and upgrades to distributed antenna systems ("DAS").

Net sales of the Company's network solutions products for the three-months ended March 31, 2013 were approximately $3,794,000 as compared to approximately $3,341,000 for the three-months ended March 31, 2012, an increase of approximately $453,000 or 13.6%. Net sales of network solutions products accounted for approximately 56% and 48% of net consolidated sales for the three-month periods ended March 31, 2013 and 2012, respectively. The increase in sales for the three-months ended March 31, 2013 for our network solutions segment was primarily due to the Company's ongoing participation in DAS deployments through supply of its passive microwave components.

Net sales of the Company's test and measurement products for the three-months ended March 31, 2013 were approximately $3,003,000 as compared to approximately $3,561,000 for the three-months ended March 31, 2012, a decrease of approximately $558,000 or 15.7%. Net sales of test and measurement products accounted for approximately 44% and 52% of net consolidated sales for the three-months ended March 31, 2013 and 2012, respectively. The decrease in sales for our test and measurement segment was primarily due to decreased volume in peak power meter orders as a result of the Company's completion of a large government contract in 2012.

Gross profit on net consolidated sales for the three-months ended March 31, 2013 was approximately $3,320,000 or 48.8% as compared to approximately $3,355,000 or 48.6% of net consolidated sales for the three-months ended March 31, 2012.

Gross profit margins are relatively unchanged for the three-months ended March 31, 2013 as compared to the same period of the previous year primarily due to relatively fixed manufacturing overhead costs being allocated to similar revenue volumes.

ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)

The Company's products consist of several models with varying degrees of capabilities which can be customized to meet particular customer requirements. They may be incorporated directly into the electronic equipment concerned or may be stand alone components or devices that are connected to, or used in conjunction with, such equipment from an external site, in the factory or in the field. Prices of products range from approximately $100 to $100,000 per unit, with most sales occurring between approximately $2,000 and $35,000 per unit. The Company can experience variations in gross profit based upon the mix of these products sold as well as variations due to revenue volume and economies of scale. The Company will continue to rigidly monitor costs associated with material acquisition, manufacturing and production.

Consolidated operating expenses for the three-months ended March 31, 2013 were approximately $3,076,000 or 45% of net consolidated sales as compared to approximately $2,804,000 or 41% of net consolidated sales for the three-months ended March 31, 2012. Consolidated operating expenses were higher for the three-months ended March 31, 2013 primarily due to an increase in consolidated general and administrative expenses of approximately $310,000 and an increase in consolidated research and development expenses of approximately $13,000, offset by a decrease in consolidated sales and marketing expenses of approximately $51,000.

The increase in consolidated general and administrative expenses for the three-months ended March 31, 2013 was primarily due to an increase in corporate legal and consulting fees of approximately $254,000 in connection with the ongoing exploration of strategic alternatives and an increase in non-cash stock based compensation charges of approximately $20,000 due to the amortization of outstanding restricted common stock. For the three-months ended March 31, 2013, consolidated research and development expenses increased primarily due to an increase in salaries in our network solutions segment of approximately $74,000, partially offset by a decrease in salaries in our test and measurement segment of approximately $48,000. The Company hired new engineering personnel in May 2012 and March 2013 in support of its growing network solutions segment. Consolidated sales and marketing expenses were lower for the three-months ended March 31, 2013 primarily due to a headcount reduction in our test and measurement segment of approximately $95,000, lower non-employee sales commissions in our test and measurement segment of approximately $79,000 and lower advertising and trade show expenses in both segments of approximately $28,000, partially offset by higher salaries expense of approximately $82,000 due to the hiring of sales and marketing personnel in support of our network solution segment coupled with higher non-employee sales commissions of approximately $59,000.

Interest expense, net of interest income derived from the Company's cash investment account, was relatively unchanged for the three-months ended March 31, 2013, as compared to the corresponding period of the previous year. Substantially all of the Company's cash is invested in money market funds.

Other income, net of other non-operating expense, increased by approximately $4,000 for the three-months ended March 31, 2013, as compared to the corresponding periods of the previous year. The increase was primarily due to slightly lower non-operating expense incurred during the three-months ended March 31, 2013 for services relating to the ground water testing being performed at the former site of the Company's subsidiary, Boonton. The Company has been testing the ground water at this site since 1982 in accordance with New Jersey state regulations. The Company is diligently pursuing efforts to satisfy the requirements of the original remediation plan, in effect since 1982, and receive a new determination from the NJDEP. Management continues to be encouraged by recent test results which support improvements in ground water conditions over time. Overall data from testing in March of 2013 indicates the continuation of a decreasing concentration trend at the site. The overall decrease supports the absence of a continuing source impacting ground water.

The Company believes that its current practice and plan of groundwater testing will continue until an official notification from NJDEP is obtained and the Company is released from further obligations. While management anticipates that the expenditures in connection with this site will not be substantial in future years, the Company could be subject to significant future liabilities and may incur significant future expenditures if any additional contamination is identified and the NJDEP requires additional remediation.

For the three-months ended March 31, 2013 and 2012, the Company realized a tax benefit of approximately $87,000 and $96,000, respectively. For both periods, the tax benefit was primarily due to a decrease in the Company's deferred tax asset valuation allowance, partially offset by a provision for state income taxes. The Company analyzes its deferred tax asset on a quarterly basis and adjusts the deferred tax asset valuation allowance based on its rolling five year projection of estimated taxable income.

ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)

For the three-months ended March 31, 2013, the Company realized net income of approximately $346,000 or $0.01 income per share on a basic and diluted basis, as compared to net income of approximately $656,000 or $0.03 income per share on a basic and diluted basis for the corresponding period of the previous year, a decrease of approximately $310,000, or $0.02 per diluted share. The decrease was primarily due to the analysis discussed above.

LIQUIDITY AND CAPITAL RESOURCES

The Company's working capital has increased by approximately $48,000 to approximately $26,564,000 at March 31, 2013, from approximately $26,516,000 at December 31, 2012. At March 31, 2013, the Company had a current ratio of 7.2 to 1, and a ratio of debt to tangible net worth of .12 to 1. At December 31, 2012, the Company had a current ratio of 6.0 to 1, and ratio of debt to tangible net worth of .15 to 1.

The Company had cash and cash equivalents of approximately $12,240,000 at March 31, 2013, compared to approximately $12,970,000 at December 31, 2012. During the three-months ended March 31, 2013, the Company repurchased 150,392 shares of its outstanding common stock at a cost of approximately $193,000. The Company believes its current level of cash and cash equivalents is sufficient to fund the current operating, investing and financing activities.

The Company expects to realize tax benefits in future periods due to the available net operating loss carryforwards resulting from the disposition of a former wholly-owned subsidiary in 2010. Accordingly, future taxable income is expected to be offset by the utilization of operating loss carryforwards and as a result, will increase the Company's liquidity as cash needed to pay Federal income taxes will be substantially reduced.

The Company used cash for operating activities of approximately $458,000 for the three-month period ending March 31, 2013. The primary use of this cash was due to a decrease in accounts payable, accrued expenses and other current liabilities and an increase in inventory, partially offset by a decrease in accounts receivable, a decrease in prepaid expenses and other assets and net income from operations.

The Company realized cash from operating activities of approximately $1,134,000 for the three-month period ending March 31, 2012. The primary source of this cash was due to net income from operations for the quarter, as well as, a decrease in accounts receivable, an increase in accounts payable, accrued expenses and other current liabilities and a decrease in prepaid expenses and other assets, partially offset by an increase in inventory.

The Company has historically been able to turn over its accounts receivable approximately every two months. This average collection period has been sufficient to provide the working capital and liquidity necessary to operate the Company.

The Company's inventory has increased by approximately $772,000 to approximately $9,062,000 at March 31, 2013, from approximately $8,290,000 at December 31, 2012. The Company has increased its inventory levels in order to meet strong demand for the Company's network solutions products, as evidenced by its increasing sales order backlog.

On July 26, 2012, the Company received notice that its lessee exercised its purchase option under an operating lease with the Company, dated November 17, 2000, to purchase the property owned by the Company and located in Mahwah, New Jersey (the "Mahwah Building"). The purchase price is $3,500,000 of which $350,000 was deposited by the buyer and is being held in escrow until the closing. The closing, which is scheduled to occur on or before August 1, 2013, is subject to customary closing conditions. As a result, as of March 31, 2013 and December 31, 2012, the Mahwah Building is included in Assets Held for Sale in the accompanying condensed consolidated balance sheets at a carrying value of $3,179,002. The Company expects to realize a gain on the sale of the property of approximately $400,000.

Additionally, the Company has a mortgage payable secured by the Mahwah Building. The terms of the mortgage require monthly payments of $23,750 applied to both principal and interest at the annual rate of 7.45%. The mortgage is scheduled to mature in August, 2013, and is expected to be repaid with the proceeds from the Mahwah Building sale in 2013.

Net cash used for investing activities for the three-months ended March 31, 2013 and 2012 was approximately $59,000 and approximately $90,000, respectively. The use of these funds was for capital expenditures.

ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)

Cash used for financing activities for the three-months ended March 31, 2013 and 2012 was approximately $212,000 and $169,000, respectively. The use of these funds was for the acquisition of treasury stock and periodic payments on a mortgage note.

The Company maintains a line of credit with its investment bank. The credit facility provides borrowing availability of up to 100% of the Company's money market account balance and 99% of the Company's short-term investment securities (U.S. Treasury bills) and, under the terms and conditions of the loan agreement, the facility is fully secured by our money fund account and short-term investment holdings held with the bank. Advances under the facility will bear interest at a variable rate equal to the London InterBank Offered Rate ("LIBOR") in effect at time of borrowing. Additionally, there is no annual fee and any amount outstanding under the loan facility may be paid at any time in whole or in part without penalty. As of March 31, 2013, the Company had no borrowings outstanding under the facility and approximately $4,500,000 of borrowing availability.

The Company actively pursues strategic opportunities including potential acquisitions, mergers, divestitures or other activities which may require the Company to use part or all of its cash reserves, enter into credit arrangements or issue shares of its common stock. Such activities may affect the Company's liquidity in future periods.

The Company believes that its financial resources from working capital are adequate to meet its current needs. However, should current global economic conditions deteriorate, additional working capital funding may be required which may be difficult to obtain due to restrictive credit markets.

OFF-BALANCE SHEET ARRANGEMENTS

The Company does not have any off-balance sheet arrangements.

INFLATION AND SEASONALITY

The Company does not anticipate that inflation will significantly impact its business or its results of operations nor does it believe that its business is seasonal.

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