The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the asset’s carrying amount may not be recoverable. The Company conducts its long-lived asset impairment analyses in accordance with ASC 360-10-15, “Impairment or Disposal of Long-Lived Assets.” ASC 360-10-15 requires the Company to groupgroups assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities and evaluate the asset group against the sum of the undiscounted future cash flows. If the undiscounted future cash flows do not indicate the carrying amount of the asset is recoverable, an impairment charge is measured as the amount by which the carrying amount of the asset group exceeds its fair value based on discounted cash flow analysis or appraisals.
On March 10, 2020, the Company entered into a loan agreement with its primary financial lender for $3.5 million, bearing interest at 6% per annum. The loan iswas payable in seven7 semi-annual installments of principal and interest with the first payment occurring June 30, 2020, and the final payment due June 30, 2023. Payment of the loan may be accelerated in the event of a default. The principal and interest payments correlate to the payment schedule for the promissory note with Leveling 8 (see Note 4).2020. In connection with the $1.7$1.5 million payment madereceived in the thirdfirst fiscal quarter of 2020 by Leveling 8 under2021 from the promissory note receivable, the Company paid down $1.6fully repaid the remaining $1.2 million of principal outstanding under this loan, for which $1.0 million was a prepayment against the loan. As a result, the balance under this loan is now $1.9 million and the final payment will be June 30, 2022. The loan is secured by substantially all of the assets of the Company, including, without limitation, the promissory note that the Company received in connection with the sale of its cable segment in 2019 to Leveling 8, Inc. (see Note 4).
The Company has a $4.0 million revolving line of credit agreement with its primary financial lender, which matures on December 17, 2020.2021. The line of credit requires quarterly interest payments based on the prevailing Wall Street Journal Prime Rate, floating (3.25% at June 30, 2020)2021), with the addition of a 4% floor rate and the interest rate is reset monthly.a fixed charge coverage ratio of 1.25 to be tested quarterly beginning June 30, 2021. At June 30, 2020,2021, there was $2.8 million
outstanding under the line of credit. Future borrowings under the line of credit are limited to the lesser of $4.0 million or the sum of 80% of eligible accounts receivable and 25%60% of eligible Telco segment inventory. Under these limitations, the Company’s total line of credit borrowing capacity was $3.1$4.0 million at June 30, 2020.
The carrying value of the Company’s variable-rate line of credit approximates its fair value since the interest rate fluctuates periodically based on a floating interest rate. The carrying value of the Company’s term debt approximates fair value.
Basic earnings per share are based on the sum of the average number of common shares outstanding and issuable, restricted and deferred shares. Diluted earnings per share include any dilutive effect of stock options and restricted stock. In computing the diluted weighted average shares, the average share price for the period is used in determining the number of shares assumed to be reacquired under the treasury stock method from the exercise of options.
Basic and diluted earnings per share for the three and nine months ended June 30, 2021 and 2020 and 2019 are:are (in thousands, except per share amounts):
The table below includes information related to stock options that were outstanding at the end of each respective three and nine-month periodsnine month period ended June 30, but have been excluded from the computation of weighted-average stock options for dilutive securities because their effect would be anti-dilutive. The stock options were anti-dilutive either due to the Company incurring a net loss for the periods presented or the exercise price exceeded the average market price per share of our common stock for the three and nine months ended June 30, 20202021 and 2019.2020.
The 2015 Incentive Stock Plan (the “Plan”) provides for awards of stock options and restricted stock to officers, directors, key employees and consultants. Under the Plan, option prices will be set by the Compensation Committee and may not be less than the fair market value of the stock on the grant date.
CompensationAt June 30, 2021, unrecognized compensation expense related to unvested stock options recorded for the nine months ended June 30, 2020 is as follows:
| | Nine Months
Ended
June 30, 2020
| |
Fiscal year 2017 grant | | $ | (5,652 | ) |
Fiscal year 2019 grants | | $ | (1,476 | ) |
The Company recordsnon-vested stock-based compensation expense over the vesting term of the related options. At June 30, 2020, compensation costs related to these unvested stock optionsawards not yet recognized in the consolidated condensed statements of operations was $7,202.$0.8 million. That cost is expected to be recognized over a period of 2.9 years.
Restricted StockNote 12 – Leases
Our Wireless segment has an operating lease for a building in Fridley, Minnesota for Fulton Technologies, Inc. As a result of the shareholders authorizing the additional shares being added to the Planclosing down and vacating Fulton Technologies, Inc.’s Minnesota office in March 2020, the Company granted restricted stock awards to its eligible board members for both the prior fiscal year and current fiscal year awards due to eligible board members. The shares granted totaled 237,014, which were valued at market value on the date of grant. The shares have varying vesting periods ranging from immediate to three years. The unamortized portion of the restricted stock is includedMay 2019, a third-party telecom company began subleasing this building in prepaid expenses on the Company’s consolidated condensed balance sheets.June 2019.
The Company granted restricted stock in October 2018 to its Chairman of the Board of Directors totaling 55,147 shares, which were valued at market value on the date of grant. The shares will vest 20% per year with the first installment vesting on the first anniversary of the grant date. The unamortized portion of the restricted stock is included in prepaid expenses on the Company’s consolidated condensed balance sheets.
Note 13 – Leases
Effective October 1, 2019, the Company adopted ASU 2016-02, Leases (Topic 842), utilizing the modified-retrospective transition approach. which is intended to improve financial reporting about leasing transactions. The standard requires the recognition of right-of-use assets and lease liabilities on the consolidated balance sheet and disclosure of key information about leasing arrangements. The Company elected to use the transition option that allows the Company to initially apply the new lease standard at the adoption date and recognize a cumulative-effect adjustment, if any, to the opening balance of retained earnings in the year of adoption. The adoption of ASC 842 did not result in any adjustments to retained earnings.
In accordance with ASC 842, the Company has made accounting policy elections (1) to not apply the new standard to lessee arrangements with a term of twelve months or less and (2) to combine lease and non-lease components. The non-lease components are not material and do not result in significant timing differences in the recognition of lease expense. As a result of adopting ASC 842, the Company recognized net operating lease right-of-use assets of $4.7 million and operating lease liabilities of $4.7 million on the effective date. In addition, as a result of adopting ASC 842, the Company recognized net financing lease assets of $0.6 million and financing lease liabilities of $0.6 million on the effective date that were previously accounted for as operating leases.
The Company categorizes leases at their inception as either operating or finance leases. The Company has operating and financing leases in place for various office and warehouse properties, vehicles and certain wireless services equipment. The leases have remaining lease terms of one year to [ten] years, some of which include the option to extend the lease terms. Operating leases are included in right-of-use operating lease assets, operating lease liabilities - current, and operating lease liabilities in the consolidated condensed balance sheets. Finance leases are included in net property and equipment, financing lease liabilities – current, and financing lease liabilities in the consolidated condensed balance sheets.
Leased assets represent the right to use an underlying asset for the lease term, and lease liabilities represent the obligation to make lease payments arising from the lease. Operating lease right-of-use assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. The Company uses a discount rate that approximates the rate of interest for a collateralized loan over a similar term as the discount
rate for present value of lease payments when the rate implicit in the contract is not readily determinable. Leases that have a term of twelve months or less upon commencement date are considered short-term in nature. Accordingly, short-term leases are not included in the consolidated condensed balance sheets and are expensed on a straight-line basis over the lease term, which commences on the date the Company has the right to control the property.
The CompanyOur Telco segment has an operating lease for a building in Jessup, Maryland for Nave Communications. As a result of moving Nave’s operations to Palco Telecom, a third-party logistics provider in Huntsville, Alabama, in fiscal year 2019,2020, Nave completely vacated the building in May 2020 and was subleasinghas subleased part of the building during certain periods of fiscal year 2020. As2021.
Rental payments received related to these subleases were recorded as a reduction to rent expense in our consolidated statements of operations for the three and six month periods ending June 30, 2020, the Company determined that the right of use asset associated with this lease may exceed its fair value. The Company performed an assessment of this right of use asset in accordance with ASC 360-10-152021 and determined that the carrying value was impaired based on a valuation appraisal performed by the Company using a forecasted debt free cash flow model. Therefore, Company recorded a $0.7 million impairment charge in the Telco segment as of June 30, 2020.
The components of lease expense were Rental payments received from subleased right-of-use assets is as follows:
| | Three Months ended June 30, 2020 | | | Nine Months ended June 30, 2020 | |
| | | | | | |
Operating lease cost: | | | | | | |
Operating lease cost | | $ | 296,677 | | | $ | 943,834 | |
Impairment of right of use asset | | | 660,242 | | | | 660,242 | |
Operating lease cost | | $ | 956,919 | | | $ | 1,604,076 | |
| | | | | | | | |
Finance lease cost: | | | | | | | | |
Amortization of right-of-use assets | | $ | 71,925 | | | $ | 198,289 | |
Interest on lease liabilities | | | 18,220 | | | | 43,182 | |
Total finance lease cost | | $ | 90,145 | | | $ | 241,471 | |
| | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | Three Months Ended June 30, | | Nine Months Ended June 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
Subleased rental receipts: | | | | | | | |
Wireless | $ | 46 | | | $ | 46 | | | $ | 137 | | | $ | 136 | |
Telco | 0 | | | 100 | | | 115 | | | 301 | |
Total subleased rental receipts | $ | 46 | | | $ | 146 | | | $ | 252 | | | $ | 437 | |
Supplemental cash flow information related to leases are as follows for the nine months ended:
| | June 30, 2020
| |
Cash paid for amounts included in the measurement of lease liabilities: | | | |
Operating cash flows from operating leases | | $ | 768,784 | |
Operating cash flows from finance leases | | $ | 43,182 | |
Financing cash flows from finance leases | | $ | 277,061 | |
| | | | |
Right-of-use assets obtained in exchange for lease obligations: | | | | |
Operating leases | | $ | 1,076,700 | |
Finance leases | | $ | 718,058 | |
Supplemental balance sheet information related to leases are as follows:
| | June 30, 2020
| |
Operating leases | | | |
Operating lease right-of-use assets | | $ | 4,158,786 | |
| | | | |
Operating lease obligations - current | | $ | 1,224,630 | |
Operating lease obligations | | | 3,809,803 | |
Total operating lease liabilities | | $ | 5,034,433 | |
| | | | |
Finance leases | | | | |
Property and equipment, gross | | $ | 1,462,865 | |
Accumulated depreciation | | | (210,253 | ) |
Property and equipment, net | | $ | 1,252,612 | |
| | | | |
Financing lease obligations - current | | $ | 328,151 | |
Financing lease obligations | | | 855,052 | |
Total finance lease liabilities | | $ | 1,183,203 | |
| | | | |
Weighted Average Remaining Lease Term | | | | |
Operating leases | | 3.94 years | |
Finance leases | | 3.98 years | |
Weighted Average Discount Rate | | | | |
Operating leases | | | 5.00 | % |
Finance leases | | | 4.96 | % |
Maturities of lease liabilities are as follows for the years ending September 30:
| | Operating
Leases
| | | Finance
Leases
| |
2020 | | $ | 355,239 | | | $ | 140,761 | |
2021 | | | 1,440,544 | | | | 314,093 | |
2022 | | | 1,468,081 | | | | 295,617 | |
2023 | | | 1,369,882 | | | | 281,636 | |
2024 | | | 802,026 | | | | 227,541 | |
Thereafter | | | 150,478 | | | | 44,334 | |
Total lease payments | | | 5,586,250 | | | | 1,303,982 | |
Less imputed interest | | | 555,817 | | | | 120,779 | |
Total | | $ | 5,034,433 | | | $ | 1,183,203 | |
Note 1413 – Segment Reporting
The Company is reporting its financial performance based on its external reporting segments: Wireless Infrastructure Services and Telecommunications. These reportable segments are described below.
Wireless Infrastructure Services (“Wireless”)
The Wireless segment provides turn-key wireless infrastructure services for the four major U.S. wireless carriers, communication tower companies, national integrators, and original equipment manufacturers that support these wireless carriers. These services primarily consist of the installation and upgrade of technology on cell sites and the construction of new small cells for 5G.
Telecommunications (“Telco”)
The Company’s Telco segment sells new and refurbished telecommunications networking equipment, including both central office and customer premise equipment, to its customer base of telecommunications providers, enterprise customers and resellers located primarily in North America. This segment also offers its customers repair and testing services for telecommunications networking equipment. In addition, this segment offers its customers decommissioning services for surplus and obsolete equipment, which it in turn processes through its recycling program.
The Company evaluates performance and allocates its resources based on operating income. The accounting policies of its reportable segments are the same as those described in the summary of significant accounting policies. Segment assets consist primarily of cash and cash equivalents, accounts receivable, inventory,inventories, property and equipment, goodwill and intangible assets.
| | Three Months Ended
| | | Nine Months Ended
| |
| | June 30, 2020
| | | June 30, 2019
| | | June 30, 2020
| | | June 30, 2019
| |
Sales | | | | | | | | | | | | |
Wireless | | $ | 5,123,175 | | | $ | 8,733,444 | | | $ | 16,592,907 | | | $ | 12,951,368 | |
Telco | | | 6,898,645 | | | | 8,825,871 | | | | 21,350,396 | | | | 24,307,984 | |
Total sales | | $ | 12,021,820 | | | $ | 17,559,315 | | | $ | 37,943,303 | | | $ | 37,259,352 | |
| | | | | | | | | | | | | | | | |
Gross profit | | | | | | | | | | | | | | | | |
Wireless | | $ | 2,251,153 | | | $ | 2,235,406 | | | $ | 4,298,915 | | | $ | 3,524,164 | |
Telco | | | 1,919,426 | | | | 2,351,999 | | | | 3,025,009 | | | | 6,263,146 | |
Total gross profit | | $ | 4,170,579 | | | $ | 4,587,405 | | | $ | 7,323,924 | | | $ | 9,787,310 | |
| | | | | | | | | | | | | | | | |
Loss from operations | | | | | | | | | | | | | | | | |
Wireless | | $ | (253,416 | ) | | $ | (454,672 | ) | | $ | (4,136,645 | ) | | $ | (1,568,255 | ) |
Telco | | | (896,561 | ) | | | 201,593 | | | | (13,483,096 | ) | | | (1,042,122 | ) |
Total loss from operations | | $ | (1,149,977 | ) | | $ | (253,079 | ) | | $ | (17,619,741 | ) | | $ | (2,610,377 | ) |
| | June 30, 2020
| | | September 30, 2019
| |
Segment assets | | | | | | |
Wireless | | $ | 5,082,120 | | | $ | 5,515,793 | |
Telco | | | 12,274,168 | | | | 22,619,565 | |
Non-allocated | | | 18,753,302 | | | | 8,692,986 | |
Total assets | | $ | 36,109,590 | | | $ | 36,828,344 | |
The Company changed the allocation of corporate general and administrative expenses between our reportable business segments. At September 30, 2020, the Company did not allocate the corporate general and administrative expenses to the reportable segments and listed those expenses separate from the operating results of those reportable segments. During fiscal 2021, the Company reviewed its reportable segments and its corporate general and administrative expenses and allocation methodology, which resulted in the Company allocating its corporate general and administrative expenses to the reportable segments. The prior period allocations have been adjusted to reflect the Company's current allocation methodology.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
(in thousands) | June 30, 2021 | | June 30, 2020 | | June 30, 2021 | | June 30, 2020 |
Sales | | | | | | | |
Wireless | $ | 4,136 | | | $ | 5,123 | | | $ | 13,716 | | | $ | 16,593 | |
Telco | 12,881 | | | 6,899 | | | 28,717 | | | 21,350 | |
Total sales | $ | 17,017 | | | $ | 12,022 | | | $ | 42,433 | | | $ | 37,943 | |
Gross profit | | | | | | | |
Wireless | $ | 1,233 | | | $ | 2,251 | | | $ | 4,370 | | | $ | 4,299 | |
Telco | 3,036 | | | 1,920 | | | 6,710 | | | 3,025 | |
Total gross profit (loss) | $ | 4,269 | | | $ | 4,171 | | | $ | 11,079 | | | $ | 7,324 | |
| | | | | | | |
Wireless | 30 | % | | 44 | % | | 32 | % | | 26 | % |
Telco | 24 | % | | 28 | % | | 23 | % | | 14 | % |
Total gross profit margin (loss) | 25 | % | | 35 | % | | 26 | % | | 19 | % |
| | | | | | | |
Gain (loss) from operations | | | | | | | |
Wireless | $ | (2,117) | | | $ | (75) | | | $ | (4,759) | | | $ | (3,310) | |
Telco | 16 | | | (1,067) | | | (2,303) | | | (14,274) | |
Total gain (loss) from operations | $ | (2,101) | | | $ | (1,142) | | | $ | (7,062) | | | $ | (17,584) | |
| | | | | | | | | | | |
(in thousands) | June 30, 2021 | | September 30, 2020 |
Segment assets | | | |
Wireless | $ | 5,645 | | | $ | 5,324 | |
Telco | 16,689 | | | 12,298 | |
Non-allocated | 6,664 | | | 14,881 | |
Total assets | $ | 28,998 | | | $ | 32,503 | |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Special Note on Forward-Looking Statements
Certain statements in Management's Discussion and Analysis (“MD&A”), other than purely historical information, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements generally are identified by the words “estimates,” “projects,” “believes,” “plans,” “intends,” “will likely result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. These statements are subject to a number of risks, uncertainties and developments beyond our control or foresight, including changes in the trends of the wireless infrastructure services industry, changes in the trends of the telecommunications industry, changes in our supplier agreements, technological developments, changes in the general economic environment, the potential impact of the novel strain of coronavirus (“COVID-19”) pandemic, the growth or formation of competitors, changes in governmental regulation or taxation, the potential forgiveness of any portion of the PPP Loan, changes in our personnel and other such factors. Our actual results, performance or achievements may differ significantly from the results, performance or achievements expressed or implied in the forward-looking statements. We do not undertake any obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events.
Overview
The following MD&A is intended to help the reader understand the results of operations, financial condition, and cash flows of the Company. MD&A is provided as a supplement to, and should be read in conjunction with the information presented elsewhere in this quarterly report on Form 10-Q and with the information presented in our annual report on Form 10-K for the year ended September 30, 2019,2020, which includes our audited consolidated financial statements and the accompanying notes to the consolidated financial statements.
The Company reports its financial performance based on two external reporting segments: Wireless and Telecommunications. These reportable segments are described below.
Wireless Infrastructure Services (“Wireless”)
The Company’s Wireless segment provides turn-key wireless infrastructure services for the four major U.S. wireless carriers, communication tower companies, national integrators, and original equipment manufacturers that support these wireless carriers. These services primarily consist of the installation and upgrade of technology on cell sites and the construction of new small cells for 5G.
Telecommunications (“Telco”)
The Company’s Telco segment sells new and refurbished telecommunications networking equipment, including both central office and customer premise equipment, to its customer base of telecommunications providers, enterprise customers and resellers located primarily in North America. This segment also offers its customers repair and testing services for telecommunications networking equipment. In addition, this segment offers its customers decommissioning services for surplus and obsolete equipment, which it in turn processes through its recycling program.
Recent Business Developments
Management Changes
Subsequent to June 30, 2020, we announced several management changes. First, Jarrod Watson was appointed as the Chief Financial Officer of the Company. Mr. Watson is filling the vacancy from the former chief financial officer who resigned earlier this fiscal year. Mr. Watson comes to our Company with more than 20 years of corporate
financial leadership, including multiple Fortune 500 organizations. Reginald Jaramillo was promoted to President of our Telco segment, replacing Don Kinison who recently left the Company. Mr. Jaramillo has 15 years of experience in the telecommunications industry working for companies such as Cox Communications, Time Warner Cable and Suddenlink Communications. Finally, Jimmy Taylor was named the President of the Wireless segment, where he had been serving in that capacity on an interim basis since February 2020.
COVID-19
On March 11, 2020, the World Health Organization declared the current outbreak of COVID-19 to be a global pandemic, and on March 13, 2020, the United States declared a national emergency. In response to these declarations and the rapid spread of COVID-19, federal, state and local governments have imposed varying degrees of restrictions on business and social activities to contain COVID-19, including quarantine and “stay-at-home” or “shelter-in-place” orders in markets where we operate. Despite these “stay-at-home” or “shelter-in-place”
orders, we are classified as an essential business due to the services and products we provide to the telecommunications industry. Therefore, we continue to operate in the markets we serve but mostwhile these orders were in place. Most of our back-office and administrative personnel were workingworked from home through June 30, 2020 while these orders were in place.place, these personnel began working in the office as restrictions were relaxed or lifted. Although we can continue to operate our businesses, our revenues have slowed, especially in our Wireless segment, due to the carriers slowing down various wireless tower projects. We have not experienced a material disruption in our supply chain to date; however, we expect COVID-19 could materially negatively affectdate.
With the supply chain, customer demand for our telecommunications products or further delay wireless carriers’ infrastructure build plans in the coming months as a resultpartial reopening of the disruptioneconomy the economic effects of the pandemic and uncertainty it is causing. There is considerable uncertainty regardingresulting societal changes remain unpredictable. Although we experienced increased revenues this quarter compared to recent quarters since the extent to which COVID-19 will continue to spreadpandemic began last year, there are a number of uncertainties that could impact our future results of operations, including the efficacy and widespread distribution of a vaccine, the return of major outdoor events during the summer and fall months, and the extent and duration of governmental and other measures implemented to try to slow the spreadimpact of COVID-19 such as large-scale travel banson the operating results and restrictions, border closures, quarantines, shelter-in-place orders and business and government shutdowns. Restrictions of this nature have caused, and may continue to cause, us, our subcontractors, suppliers and other business counterparties to experience operational delays.
In response to COVID-19, we have taken a variety of measures to ensure the availabilitycapital budgets of our critical infrastructure, promote the health and safety of our employees, and support the communities in which we operate. These measures include providing support for our customers as reflected in the FCC's "Keep Americans Connected" pledge, requiring work-from-home arrangements for a large portion of our workforce and imposing travel restrictions for our employees where practicable, canceling physical participation in meetings, events and conferences, and other modifications to our business practices. We will continue to actively monitor the situation and may take further actions as may be required by governmental authorities or that we determine are in the best interests of our employees, customers, business partners and stockholders.customers.
While we continue to assess the COVID-19 situation, the extent to which the COVID-19 pandemic may impact our business, operating results, financial condition, or liquidity in the future will depend on future developments, including the duration of the outbreak, travel restrictions, business and workforce disruptions, and the effectiveness of actions taken to contain and treat the virus.
Results of Operations
Comparison of Results of Operations for the Three Months Ended June 30, 20202021 and June 30, 2019
2020
Consolidated
Consolidated sales decreased $5.5revenues increased $5.0 million, or 32%42%, to $17.0 million for the three months ended June 30, 2021 from $12.0 million for the three months ended June 30, 2020 from $17.62020. The increase in sales was due to increased sales in the Telco segment of $6.0 million partially offset by a decrease in Wireless segment sales of $1.0 million.
Consolidated gross profit increased $0.1 million for the three months ended June 30, 2019. The decrease in sales was due2021 to declines in sales in the Wireless and Telco segments of $3.6$4.3 million and $1.9 million, respectively.
Consolidated gross profit decreased $0.4 millioncompared to $4.2 million for the three months ended June 30, 2020 from $4.6 million for the same period last year. The decreaseincreases in gross profit waswere due primarily to an increase in the Telco segment as theof $1.1 million, and a Wireless segment was essentially flat compared to the same period last year.
decrease of $1.0 million.
Consolidated operating expenses include indirect costs associated with operating our business. Indirect costs are costs that are not directly attributable to projects or products, which would includebusiness such as indirect personnel, costs, facility costs,
facilities, vehicles, insurance, communication, and business taxes, among other less significant cost categories.taxes. Operating expenses increased $0.4$0.5 million, or 24%26%, to $2.0$2.5 million for the three months ended June 30, 20202021 from $1.6$2.0 million for the same period last year. The increase in operating expenses waswere due to an increase in the Wireless segment of $0.6 million, partially offset by a decrease in the Telco segment.
segment of $0.1 million.
Consolidated selling, general and administrative ("SG&A") expenses include overhead, costs, which primarily consist of personnel, costs, insurance, professional services, communication, and communication, among other less significant cost categories. Selling, general and administrative expenses decreased $0.4SG&A expense increased $1.1 million, or 15%47%, to $2.4$3.6 million for the three months ended June 30, 20202021 from $2.8$2.4 million for the same period last year. The decrease in expenses was due toGeneral and administrative costs accounted for $0.4 million of the Wireless segment and Telco segmentincrease, while selling costs accounted for $0.7 million of $0.2 million and $0.2 million, respectively.
the increase.
Impairment of right of use assets for the three months ended June 30, 2020 was $0.7 million related to the impairment of a right of useimpairing an asset associated with a building lease in the Telco segment.
Depreciation and amortization expenses decreasedincreased $0.1 million, or 25%30%, to $0.3 million for the three months ended June 30, 20202021, from $0.4$0.2 million for the same period last year. The decrease was due primarily to a decrease in expenses to the Telco segment of $0.2 million, partially offset by an increase in expenses from the Wireless segment of $0.1 million.
Interest income primarily consists of interest earned on the promissory note from the sale of the cable business in June 2019.receivable. Interest income was $0.1 million for the three months ended June 30, 2020 and zero for the same period last year.
Income from equity method investment, which consists of activity relateddecreased to our investment in YKTG Solutions, for the three months ended June 30, 2020 was zero and $20$34 thousand for the three months ended June 30, 2019. The income for the three months ended June 30, 2019 consisted primarily of payments received under a loan to the former YKTG Solutions partners.
Other income and expense for the three months ended June 30, 2020 was essentially zero as2021 compared to income of $0.2 million$83 thousand for the same period last year. The income foryear, as the three months ended June 30, 2019 is primarily related to a gain on sales of assets of $0.3 million, partially offset by our factoring arrangements with our Wireless segment.
note receivable principal has decreased.
Interest expense for the three months ended June 30, 20202021 was $0.1 million$46 thousand as compared to $26$101 thousand for the same period last year. The expense for the three months ended June 30, 2020 was primarily related to interest expense on the revolving bank line of credit and the loan with our primary financial lender. The expense for the three months ended June 30, 2019
Income tax benefit was primarily related to interest expense from our revolving bank line of credit and from our deferred guaranteed payments related to the Triton Miami, Inc. acquisition.
The benefit for income taxes was $1.2 million for the three months ended June 30, 2020 compared to a benefit for income taxes of $42$23 thousand for the three months ended June 30, 2019.2021 and $1.2 million for the same period in 2020. Our effective tax rate during the three months ended June 30, 2021 was approximately 0% because increases in our valuation allowance offset against our deferred tax assets. As a result of the CARES Act, the Company can carryback net operating losses generated in 2018 through 2020 for a period of five years. As a result, the Company’s effective tax rate included an income tax benefit of $1.2 million recognized during the three months
ended June 30, 2020 related to tax losses generated during the fiscal year up to the amount that the Company estimates is realizable based upon taxable income in the carryback periods.
Segment Results
Wireless
Revenues for the Wireless segment decreased $3.6$1.0 million to $5.1$4.1 million for the three months ended June 30, 20202021 from $8.7$5.1 million for the same period of last year. Revenues for the three months ended June 30, 2020 continued to be negatively impacted due to both delays in infrastructure spending from the major U.S. carriers and circumstances related to the COVID-19 pandemic. However, we believe that the 5G rollout will gain momentum in the calendar year and that there is substantial and growing pent-upconstrained demand for 5G-related work on existing towers, new raw-land builds, and small cell networks. In addition, we have made and are continuing to make the necessary operational changesadjustments in order to be well positioned to secure an increased share of the 5G construction services work and to improve our operating cost efficiency and gross profit.
Gross profit was $2.2$1.3 million, or 44%30% for the three months ended June 30, 2020 and $2.22021 compared to $2.3 million, or 26%44%, for the three months ended June 30, 2019. Gross profit was essentially flat for three months ended June 30, 2020 as compared to the same period of last year despite decreased revenues for the three months ended June 30, 2020. The significant improvementdecrease in the gross profit percentage was driven by several factors includinga higher gross profit percentage for the three months ended June 30, 2020 due primarily to recognition of change order revenues where expenses had been incurred in prior quarters, operational improvements, and a higher mix of specialty service work. Management believes margins will continue to show improvement over prior quarters, but will be lower, on a percentage basis, than the three months ended June 30, 2020 due to $0.5 million of change order revenue recognized in the current quarter, where expenses were incurred in prior quarters.
Operating expenses were $1.2 million for both the three months ended June 30, 2020 and the three months ended June 30, 2019.
Selling, general and administrative expenses decreased $0.2increased $0.6 million to $1.1$1.8 million for the three months ended June 30, 20202021 from $1.3$1.2 million for the same period last year. This increase is primarily attributable to increased personnel costs as we prepare for the rollout of 5G-related work and increased rent expense.
Selling, general and administrative expenses increased $0.4 million to $1.4 million for the three months ended June 30, 2019. This decrease was due primarily to decreased payroll-related expenses2021 from $1.0 million for the three months ended June 30, 2020 compared to the prior year2020. This increase was due to cost controlling initiatives including headcount reductions for the three months ended June 30, 2020.
increased sales-related personnel costs. The corporate overhead allocation increased $0.2 million mainly as a result of increased employee stock-based compensation expenses and executive severance costs.
Depreciation and amortization expense increased $0.1 million towas $0.2 million for the three months ended June 30, 2020 from2021 compared to $0.1 million for the the same period last year.
Telco
SalesRevenues for the Telco segment decreased $1.9increased $6.0 million to $6.9$12.9 million for the three months ended June 30, 20202021 from $8.8$6.9 million for the same period last year. The decreaseincrease in revenues were related to increased sales for the Telco segmentof used and refurbished equipment.
Gross profit was due primarily to a decrease in equipment sales due to Triton Datacom of $2.2$3.0 million partially offset by an increase at Nave Communications of $0.3 million. The decrease in revenue at Triton Datacom was significantly impacted by the COVID-19 pandemic as many of its customers were closed duringfor the three months ended June 30, 2020.
Gross profit was2021 and $1.9 million for the three months ended June 30, 2020 and $2.32020. The increase in gross profit was due primarily increased revenues for the three months ended June 30, 2021.
Operating expenses decreased $0.1 million to $0.7 million for the three months ended June 30, 2019. The decreased gross profit was due primarily2021 compared to decreased revenues for$0.8 million the three months ended June 30, 2020.
OperatingSelling, general and administrative expenses increased $0.4$0.8 million to $0.8$2.2 million for the three months ended June 30, 20202021 from $0.4 million for the three months ended June 30, 2019. This increase was due primarily to increased personnel costs and operating charges from Palco Telecom, our third-party logistics provider in Huntsville, Alabama.
Selling, general and administrative expenses decreased $0.4 million to $1.3 million for the three months ended June 30, 2020 from $1.7$1.4 million for the same period last year. This decreaseincrease was due primarily to decreased personnelincreased sales commissions. In addition, the corporate allocation increased $0.2 million, which primarily related to increased employee stock-based compensation expenses and executive severance costs.
Impairment of right of use assets for the three months ended June 30, 2020 was $0.7 million related to the impairment of a right of use asset associated with a building lease in the Telco segment.
Depreciation and amortization expense decreased $0.2 million towas $0.1 million for the three months ended June 30, 2020 from $0.3 million for the same period last year. This decrease was due primarily to decreased amortization expense resulting from the impairment2021 and 2020.
Comparison of Results of Operations for the Nine Months Ended June 30, 20202021 and June 30, 20192020
Consolidated
Consolidated salesrevenues increased $0.6$4.5 million, or 2%12%, to $42.4 million for the nine months ended June 30, 2021 from $37.9 million for the nine months ended June 30, 2020 from $37.32020. The increase in revenue was primarily in the Telco segment, which increased $7.4 million, partially offset by a decrease of $2.9 million in the Wireless segment.
Consolidated gross profit increased $3.8 million, or 51%, to $11.1 million for the nine months ended June 30, 2019. The increase in sales was primarily in the Wireless segment, which increased $3.6 million, largely offset by a decrease in sales2021 from the Telco segment of $3.0 million.
Consolidated gross profit decreased $2.5 million, or 25%, to $7.3 million for the nine months ended June 30, 2020 from $9.8 million for the same period last year. The decreaseincrease in gross profit was due to an increase in the Telco segment of $3.3$3.7 million, partially offset byas well as an increase in the Wireless segment of $0.8$0.1 million.
Consolidated operating expenses include indirect costs associated with operating our business. Indirect costs are costs that are not directly attributable to projects or products, which would includebusiness such as indirect personnel costs, facility costs,facilities, vehicles, insurance, communication, and business taxes, among other less significant cost categories.costs. Operating expenses increased $2.4$0.4 million, or 59%7%, to $6.3$6.7 million for the nine months ended June 30, 20202021 from $3.9$6.3 million for the same period last year. The increase in operating expenses was due to an increase in the Wireless segment and Telco segment of $1.8 million and $0.6 million, respectively.
Consolidated selling, general and administrative expenses include overhead costs, which primarily consist of personnel, costs, insurance, professional services, and communication, among other less significant cost categories.costs. Selling, general and administrative expenses increased $0.7$2.4 million, or 10%30%, to $8.1$10.5 million for the nine months ended June 30, 20202021 from $7.4$8.1 million for the same period last year. This was due to anGeneral and administrative costs accounted for $1.2 million of the increase, in the Wireless segment ofwhile selling costs accounted for $1.3 million partially offset by a decrease inof the Telco segment of $0.6 million, respectively.
Impairment of right of use assetsincrease. Non-cash stock-based compensation expense accounted for the nine months ended June 30, 2020 was $0.7 million related toof the impairment of a right of use asset associated with a building lease in the Telco segment.increased general and administrative costs.
Impairment of intangibles including goodwill for the nine months ended June 30, 2020 was $8.7 million related to the write-off of goodwill and certain intangibles in the Telco segment.
Depreciation and amortization expenses increased $0.1decreased $0.3 million, or 16%25%, to $1.2$0.9 million for the nine months ended June 30, 20202021 from $1.1$1.2 million for the same period last year. The increasedecrease was due primarily to increased depreciationdecreased amortization expense resulting from the impairment of intangible assets in the Wireless segment of $0.3 million, partially offset by a decrease in the Telco segment of $0.1 million.nine months ended June 30, 2020.
Interest income primarily consists of interest earned on the promissory note from the sale of the cable business in June 2019. Interest income was $0.1 million for nine months ended June 30, 2021 and $0.3 million for the nine months ended June 30, 2020 and zero for the same period last year.2020.
Income from equity method investment, which consists of activity related to our investment in YKTG Solutions, for the nine months ended June 30, 2020 was $41 thousand and $75 thousand for the nine months ended June 30, 2019. The income consisted primarily of payments received under a loan to the former YKTG Solutions partners.
Other income and expense for the nine months ended June 30, 20202021 was an $86$61 thousand expense as compared to income of $118 thousand$0.1 million for the same period last year. The expense for the both the nine months ended June 30, 2021 and June 30, 2020 wasis primarily related to our factoring arrangements with our Wireless segment, partially offset by a gain on sales of assets of $36 thousand. The income for the nine months ended June 30, 2019 was primarily related to a gain on sales of assets of $0.3 million, partially offset by our factoring arrangements within our Wireless segment.
Interest expense for the nine months ended June 30, 20202021 was $0.2$0.1 million as compared to $69 thousand$0.2 million for the same period last year. TheInterest expense for the nine months ended June 30, 20202021 was primarily related to ourthe revolving bank line of credit and the loan with our primary financial lender.
The expenseprovision for income taxes was $23 thousand for the nine months ended June 30, 2019 was primarily related2021 compared to interest expense from our outstanding term loans that were extinguished in November 2018.
Thea benefit for income taxes wasof $1.2 million for the nine months ended June 30, 2020 compared to a benefit of $13 thousand for2020. Our effective tax rates during the nine months ended June 30, 2019.2021 was approximately 0% because of increases in our valuation allowance against our deferred tax assets. As a result of the CARES Act, the Company can carryback net operating losses generated in 2018 through 2020 for a period of five years. As a result, the Company’s effective tax rate included an income tax benefit of $1.2 million recognized during the nine months ended June 30, 2020 related to tax losses generated during the fiscal year up to the amount that the Company estimates is realizable based upon taxable income in the carryback periods.
Segment Results
Wireless
Revenues for the Wireless segment were $16.6$13.7 million for the nine months ended June 30, 20202021 and $13.0$16.6 million for the same period last year. The increasedecrease in revenue was primarily fromdue to a full nine months of COVID-19 related slow-down in activity included in the acquisition of Fulton Technologies, Inc. and its affiliate (“Fulton”) in January 2019.current year results.
Gross profit was $4.3$4.4 million, or 26%32% for the nine months ended June 30, 20202021 and $3.5$4.3 million, or 27%26%, for the nine months ended June 30, 2019. This2020. The increase in the gross profit percentage is due primarily to the timingimpact of the acquisition
structural operational changes and more effective customer sales change order processes in January 2019, partially offset by increased expenses of repositioning our Southern workforce to the Northplace during the nine months ended June 30, 2020.current fiscal year.
Operating expenses increased $1.8$0.3 million to $4.1$4.4 million for the nine months ended June 30, 20202021 from $2.4$4.1 million for the same period last year, duemainly as a result of lower vehicle and equipment costs as a result of decreased revenues. This increase is primarily attributable to increased personnel costs as we prepare for the timingrollout of the acquisition of Fulton in January 2019.5G-related work and increased rent expense.
Selling, general and administrative expenses increased $1.3 million to $3.8$4.3 million for the nine months ended June 30, 20202021 from $2.5 million for the nine months ended June 30, 2019 due primarily to the timing of the acquisition of Fulton in January 2019.
Depreciation and amortization expense was $0.5 million and $0.2 million for the nine months ended June 30, 2020 and June 30, 2019, respectively.
Telco
Sales for the Telco segment decreased $3.0 million to $21.3 million for the nine months ended June 30, 2020 from $24.3 million for the same period last year. The decrease in sales for the Telco segment was due to a decrease in equipment sales at both Triton Datacom and Nave Communications of $1.8 million and $1.2 million, respectively.
Gross profit was $3.0 million for the nine months ended June 30, 2020, mainly as a result of personnel costs. In addition, the corporate allocation increased $0.7 million, which primarily related to increased employee stock-based compensation expenses and 6.3executive severance costs.
Depreciation and amortization expense was consistent at $0.5 million for both the nine months ended June 30, 2021 and 2020.
Telco
Revenues for the Telco segment increased $7.4 million to $28.7 million for the nine months ended June 30, 2019.2021 from $21.4 million for the same period last year. The increase was mainly related to sales of used and refurbished equipment.
Gross profit was $6.7 million for the nine months ended June 30, 2021 compared to $3.0 million for nine months ended June 30, 2020. Gross profit for the nine months ended June 30, 2020 was impacted by an increase in2021 rebounded after taking a charge of $2.1 million for inventory obsolescence expense of $2.1 million and an increase in lower of cost or net realizable value expense of $0.2 million. The decrease in gross margin percentage was due primarily to the impact of these inventory adjustments in the nine months ended June 30, 2020.same period last year.
Operating expenses increased $0.6$1.2 million to $2.1$2.3 million for the nine months ended June 30, 20202021 from $1.5$2.1 million for the same period last year. This increase was due primarily to additional facilityincreased costs as a result of moving into Triton’s new facility in the first fiscal quarter of 2020from our third-party logistics provider due to revenue increases and additional personnel costs.severance costs for certain employees resulting from cost reduction activities.
Selling, general and administrative expenses decreased $0.6increased $1.2 million to $4.2$6.3 million for the nine months ended June 30, 20202021 from $4.8$5.1 million for the same period last year. This decreaseincrease was due to increased selling expenses of $0.8 million, partially offset by decreased general and administrative expenses of $0.2 million. In addition, the corporate allocation increased $0.6 million, which primarily related to decreased personnelincreased employee stock-based compensation expenses and executive severance costs.
Impairment of right of use assets for the nine months ended June 30, 2020 was $0.7 million related to the impairment of a right of use asset associated with a building lease in the Telco segment.
Impairment of intangibles including goodwill for the nine months ended June 30, 2020 was $8.7 million related to the write-off of goodwill and certain intangibles in the Telco segment.
Depreciation and amortization expense decreased $0.2$0.3 million to $0.7$0.4 million from $0.9$0.7 million for the nine months ended June 30, 2021 and 2020, and 2019, respectively. This decrease was due primarily to decreased amortization expenserespectively, resulting from the impairmentsignificant impairments of intangibles takenintangible assets in the three months ended March 31,second quarter of 2020.
Non-GAAP Financial Measure
Adjusted EBITDA is a supplemental, non-GAAP financial measure. EBITDA is defined as earnings before interest expense, income taxes, depreciation and amortization. Adjusted EBITDA as presented also excludes impairment charges for operating lease right of useright-of-use assets and intangible assets including goodwill, stockstock-based compensation expense, other income, other expense, interest income and income from equity method investment. Adjusted EBITDA is presented below because this metric is used by the financial community as a method of measuring our financial performance and of evaluating the market value of companies considered to be in similar businesses. Since Adjusted EBITDA is not a measure of performance calculated in accordance with GAAP, it should not be considered in isolation of, or as a substitute for, net earnings as an indicator of operating performance. Adjusted EBITDA, as calculated below, may not be comparable to similarly titled measures employed by other companies. In addition, Adjusted EBITDA is not necessarily a measure of our ability to fund our cash needs.
AThe following table provides a reconciliation by segment of loss from operations to Adjusted EBITDA for the three and nine monthsmonth periods ended June 30, follows:2021 and June 30, 2020, in thousands: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2021 | | Three Months Ended June 30, 2020 |
| Wireless | | Telco | | Total | | Wireless | | Telco | | Total |
Loss from operations | $ | (2,117) | | | $ | 16 | | | $ | (2,101) | | | $ | (75) | | | $ | (1,067) | | | $ | (1,142) | |
Impairment of right of use asset | — | | | — | | | — | | | — | | | 660 | | | 660 | |
| | | | | | | | | | | |
Depreciation and amortization expense | 185 | | | 129 | | | 314 | | | 145 | | | 97 | | | 242 | |
Stock based compensation expense | 136 | | | 143 | | | 279 | | | 24 | | | 37 | | | 61 | |
Adjusted EBITDA | $ | (1,796) | | | $ | 288 | | | $ | (1,508) | | | $ | 94 | | | $ | (273) | | | $ | (179) | |
| | | | | | | | | | | |
| Nine Months Ended June 30, 2021 | | Nine Months Ended June 30, 2020 |
| Wireless | | Telco | | Total | | Wireless | | Telco | | Total |
Loss from operations | $ | (4,759) | | | $ | (2,303) | | | $ | (7,062) | | | $ | (3,310) | | | $ | (14,274) | | | $ | (17,584) | |
Impairment of right of use asset | — | | | — | | | — | | | — | | | 660 | | | 660 | |
Impairment of intangibles including goodwill | — | | | — | | | — | | | — | | | 8,714 | | | 8,714 | |
Depreciation and amortization expense | 513 | | | 387 | | | 899 | | | 460 | | | 737 | | | 1,197 | |
Stock based compensation expense | 383 | | | 457 | | | 840 | | | 56 | | | 111 | | | 167 | |
Adjusted EBITDA | $ | (3,863) | | | $ | (1,459) | | | $ | (5,323) | | | $ | (2,794) | | | $ | (4,052) | | | $ | (6,846) | |
Due to rounding, numbers presented may not foot to the totals provided.
| | Three Months Ended June 30, 2020 | | | Three Months Ended June 30, 2019 | |
| | Wireless | | | Telco
| | | Total
| | | Wireless
| | | Telco
| | | Total
| |
Income (loss) from operations | | $ | (253,416 | ) | | $ | (896,561 | ) | | $ | (1,149,977 | ) | | $ | (454,672 | ) | | $ | 201,593 | | | $ | (253,079 | ) |
Impairment of right of use asset | | | ‒
| | | | 660,242 | | | | 660,242 | | | | ‒
| | | | ‒
| | | | ‒
| |
Impairment of intangibles including goodwill | | | ‒
| | | | ‒
| | | | ‒
| | | | ‒
| | | | ‒
| | | | ‒
| |
Depreciation and amortization expense | | | 143,245 | | | | 98,256 | | | | 241,501 | | | | 81,607 | | | | 300,958 | | | | 382,565 | |
Stock compensation expense | | | 25,577 | | | | 35,769 | | | | 61,346 | | | | 12,166 | | | | 34,436 | | | | 46,602 | |
Adjusted EBITDA | | $ | (84,594 | ) | | $ | (102,294 | ) | | $ | (186,888 | ) | | $ | (360,899 | ) | | $ | 536,987 | | | $ | 176,088 | |
| | Nine Months Ended June 30, 2020 | | | Nine Months Ended June 30, 2019 | |
| | Wireless
| | | Telco
| | | Total
| | | Wireless
| | | Telco
| | | Total
| |
Loss from operations | | $ | (4,136,645 | ) | | $ | (13,483,096 | ) | | $ | (17,619,741 | ) | | $ | (1,568,255 | ) | | $ | (1,042,122 | ) | | $ | (2,610,377 | ) |
Impairment of right of use asset | | | ‒
| | | | 660,242 | | | | 660,242 | | | | ‒
| | | | ‒
| | | | ‒
| |
Impairment of intangibles including goodwill | | | ‒
| | | | 8,714,306 | | | | 8,714,306 | | | | ‒
| | | | ‒
| | | | ‒
| |
Depreciation and amortization expense | | | 461,672 | | | | 735,188 | | | | 1,196,860 | | | | 172,240 | | | | 897,413 | | | | 1,069,653 | |
Stock compensation expense | | | 64,344 | | | | 103,061 | | | | 167,405 | | | | 31,628 | | | | 121,063 | | | | 152,691 | |
Adjusted EBITDA (a) | | $ | (3,610,629 | ) | | $ | (3,270,299 | ) | | $ | (6,880,928 | ) | | $ | (1,364,387 | ) | | $ | (23,646 | ) | | $ | (1,388,033 | ) |
(a)
| The Telco segment includes inventory-related non-cash adjustments of $2.3 million for the nine months ended June 30, 2020. |
Critical Accounting Policies
Note 1 toOur unaudited consolidated financial statements are impacted by the Consolidated Financial Statements in Form 10-K for fiscal 2019 includes aaccounting policies used and the estimates and assumptions made by management during their preparation. A complete summary of theour significant accounting policies or methods usedis included in the preparationNote 1- Basis of Presentation and Accounting Policies in our Consolidated Financial Statements. Some of those significant accounting policies or methods require us to make estimates and assumptions that affect the amounts
reported by us. We believe the following items require the most significant judgments and often involve complex estimates.
Form 10-K.
General
The preparation of financial statements in conformity with United States generally accepted accounting principles requires management to make estimates and assumptions 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 amounts of revenues and expenses during the reporting period. We base our estimates and judgments on historical experience, current market conditions, and various other factors we believe to be reasonable, under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.certain assets. Actual results could differ from these estimates under different assumptions or conditions. The most significant estimates and assumptions are discussed below.
Inventory Valuation
For our Telco segment, our position in the telecommunications industry requires us to carry relatively large inventory quantities relative to annual sales, but it also allows us to realize high overall gross profit margins on our sales. We market our products primarily to telecommunication providers, telecommunication resellers, and other users of telecommunication equipment who are seeking products for which manufacturers have discontinued production or cannot ship new equipment on a same-day basis, as well as providing used products as an alternative to new products from the manufacturer. Carrying these large inventory quantities represents our largest risk.
We are required to make judgments as to future demand requirements fromrisk for our customers. We regularly review the value of our inventory in detail with consideration given to rapidly changing technology which can significantly affect future customer demand. For individual inventory items, we may carry inventory quantities that are excessive relative to market potential, or we may not be able to recover our acquisition costs for sales that we do make. In order to address the risks associated with our investment in inventory, we review inventory quantities on hand and reduce the carrying value when the loss of usefulness of an item or other factors, such as obsolete and excess inventories, indicate that cost will not be recovered when an item is sold.
Telco segment.
Our inventories are all carried in the Telco segment and consist of new and used electronic components for the telecommunications industry. Inventory is stated at the lower of cost or net realizable value, with cost determined using the weighted-average method. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. At June 30, 2020,2021, we had total inventory, before the reserve for excess and obsolete inventories, of $9.3$8.8 million, consisting of $1.2$1.3 million in new products and $8.1$7.5 million in used or refurbished products.
We regularly review the value of our inventory in detail with consideration given to rapidly changing technology which can significantly affect future customer demand. For individual inventory items, we may carry inventory
quantities that are excessive relative to market potential, or we may not be able to recover our acquisition costs. In order to address the risks associated with our investment in inventory, we review inventory quantities on hand and reduce the carrying value for obsolete and excess inventories, when our analysis indicates that cost will not be recovered when an item is sold.
We identified certain inventory that more than likely will not be sold or that the cost will not be recovered when it is processed through itsour recycling program. Therefore, we have an obsolete and excess inventory reserve of $3.4$3.2 million at June 30, 2020.2021. If actual market conditions differ from those projected by management, this could have a material impact on our gross margin and inventory balances based on additional write-downs to net realizable value or a benefit from inventories previously written down.
Inbound freight charges are included in cost of sales. Purchasing and receiving costs, inspection costs, warehousing costs, internal transfer costs and other inventory expenditures are included in operating expenses, since the amounts involved are not considered a material component of cost of sales.
Accounts Receivable Valuation
Management judgments and estimates are made in connection with establishing the allowance for doubtful accounts. Specifically, we analyze the aging of accounts receivable balances, historical bad debts, customer concentrations, customer creditworthiness, current economic trends and changes in our customer payment terms. Significant changes in customer concentration or payment terms, deterioration of customer creditworthiness, or weakening in economic trends could have a significant impact on the collectability of receivables and our operating results. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, an
additional provision to the allowance for doubtful accounts may be required. The reserve for bad debts was $0.3 million at June 30, 2020 and $0.2 million at September 30, 2019. At June 30, 2020, accounts receivable, net of allowance for doubtful accounts, was $3.2 million.
expenses.
Intangibles
Intangible assets that have finite useful lives are amortized on a straight-line basis over their estimated useful lives ranging from 3 years to 10 years. Intangible assets are also tested for impairment when events and circumstances indicate that the carrying value may not be recoverable. Due to our continued operating losses and the uncertainties surrounding the COVID-19 pandemic on the overall economy and the resulting impact on our Company, we determined that there were indicators for us to test our intangible assets for impairment at March 31, 2020. It was determined that we needed to perform a specific fair value assessment for each of the intangible assets at both Nave and Triton as their individual undiscounted forecasted cash flows did not exceed their respective carrying values. We then performed a fair value assessment of each of the intangible assets and compared them to the individual carrying value amounts at March 31, 2020. As a result of this assessment, we recorded an impairment charge of $3.9 million related to the customer relationship intangibles in the Telco segment as of March 31, 2020. As of June 30, 2020,2021, there were no further indicators of impairment.
Goodwill
Goodwill represents the excess of purchase price of acquisitions over the acquisition date fair value of the net identifiable tangible and intangible assets acquired. Goodwill is not amortized and is tested at least annually for impairment. We perform our annual analysis during the fourth quarter of each fiscal year and in any other period in which indicators of impairment warrant additional analysis. Goodwill is evaluated for impairment by first comparing our estimate of the fair value of each reporting unit, with the reporting unit’s carrying value, including goodwill. Our reporting units for purposes of the goodwill impairment calculation are the Wireless segment, Nave and Triton.present.
Management utilizes a discounted cash flow analysis to determine the estimated fair value of each reporting unit. Significant judgments and assumptions including the discount rate, anticipated revenue growth rate, gross margins and operating expenses are inherent in these fair value estimates. As a result, actual results may differ from the estimates utilized in our discounted cash flow analysis. The use of alternate judgments and/or assumptions could result in the recognition of different levels of impairment charges in the financial statements.
Due to our continued operating losses and the uncertainties surrounding the COVID-19 pandemic on the overall economy and the resulting impact on our Company, we determined that there were indicators to warrant us to test goodwill for impairment at March 31, 2020. We calculated a fair value using the income approach of both Nave and Triton to determine if the fair value exceeded their respective carrying values. For both Nave and Triton, the fair value for each was less than their respective carrying values after considering the intangible asset impairment. Therefore, we recorded an impairment charge of $4.8 million in the Telco segment as of March 31, 2020, which fully impaired goodwill for the Telco segment. Although we do not anticipate a future impairment charge, certain events could occur that might adversely affect the reported value of the remaining goodwill in the Wireless segment. Such events could include, but are not limited to, economic or competitive conditions, a significant change in technology, the economic condition of the customers and industries we serve, and a material negative change in the relationships with one or more of our significant customers or equipment suppliers. If our judgments and assumptions change as a result of the occurrence of any of these events or other events that we do not currently anticipate, our expectations as to future results and our estimate of the implied fair value of the Wireless segment also may change.
Liquidity and Capital Resources
Cash Flows Used in Operating Activities
In fiscal year 2020, we have financed our operations primarily through financing activities by utilizing our line of credit, entering into an additional $3.5 million term loan from our primary financial lender, and receiving a $2.9 million SBA Payroll Protection Program (“PPP”) loan. During the nine months ended June 30, 2020, we2021, cash used $1.4 million of cash flows for operations. The cashin operations was $5.8 million. Cash flows from operations waswere negatively impacted by a net loss of $16.4
$7.1 million and net cash used by working capital of $0.3 million, which was partially offset by non-cash adjustments of $13.0 million and net cash provided by working capital of $2.0 million to reconcile net loss to net cash used in operating activities.
$1.7 million.
Cash Flows Used forProvided by Investing Activities
During the nine months ended June 30, 2020,2021, cash provided by investing activities was $1.7$1.8 million consistingwhich primarily consisted of $2.0$1.9 million of payments received under the promissory note related to the sale of the cable business in fiscal year 2019, partially offset by $0.5 million of purchases of property and equipment. Of the $2.0 million of payments received under the promissory note, $0.7 million was a prepayment.
receivable.
Cash Flows Used forin Financing Activities
During the nine months ended June 30, 2020,2021, cash provided byused in financing activities was $8.6$0.6 million, of which primarily$1.2 million related to net borrowingsrepayment of $2.8our promissory note payable and $0.4 million related to payments under our revolving credit agreement, proceeds,financing lease arrangements, partially offset by net of principal payments, from our note payable of $1.9 million, proceeds from the receipt of the PPP loan of $2.9 million, and proceeds from the sale of our common stock utilizing our shelf registration of $1.8$0.9 million. These were partially offset by the final guaranteed payment of $0.7 million to the Triton Miami, Inc. partners and payments under our financing lease arrangements of $0.3 million.
In March 2020, we entered into a loan agreement with our primary financial lender for $3.5 million, bearing interest at 6% per annum. The loan is payable in seven semi-annual installments of principal and interest with the first payment occurring on June 30, 2020, and the final payment due June 30, 2023. The principal and interest payments correlate to theour promissory note receivable with Leveling 8. We effectively monetized $3.5 million of the $5.8 million remaining balance of the promissory note resulting from the sale of our cable businesses in 2019 to Leveling 8 to assist us with working capital needs. receivable. In connection with a $1.7the $1.8 million payment madein payments received in the thirdfirst quarter of 2020 by Leveling 8 under the promissory note,2021, we paid down $1.6 million ofthe remaining outstanding principal under this loan, for which $1.0 million was a prepayment against the loan. As a result, the balance under this loan is now $1.9 million and the final payment will be June 30, 2022.
Our credit agreement containsThe Company has a $4.0 million revolving line of credit agreement with its primary financial lender, which matures on December 17, 2020.2021. The revolving line of credit requires quarterly interest payments based on the prevailing Wall Street Journal Prime Rate, floating (3.25% at June 30, 2020)2021), andwith the interestaddition of a 4% floor rate is reset monthly. The credit agreement provides that the Company maintainand a fixed charge coverage ratio (net cash flow to total fixed charges) of not less than 1.25 to 1.0.be tested quarterly beginning June 30, 2021. At June 30, 2021, there was $2.8 million outstanding under the line of credit. Future borrowings under the revolving line of credit are limited to the lesser of $4.0 million or the sum of 80% of eligible accounts receivable and 25%60% of eligible Telco segment inventory. Under these limitations, ourthe Company’s total available revolving line of credit borrowing basecapacity was $3.1$4.0 million at June 30, 2020.2021.
We believeThe line of credit agreement provides that it is probable that we will not be in compliance with ourthe Company maintain a fixed charge coverage ratio loan(net cash flow to total fixed charge) of not less than 1.25 to 1.0 to be tested quarterly beginning June 30, 2021. The Company was not in compliance with this covenant with ourat June 30, 2021. The Company notified its primary financial lender as of September 30, 2020. We would therefore need to seekthe covenant violation, and on August 4, 2021, the primary financial lender granted a waiver of the covenant violation
under the credit agreement. Although the covenant violation was waived at June 30, 2021, the Company believes it may again be out of compliance with this covenant violation. We have beenat September 30, 2021. If the Company is not in preliminary discussionscompliance with our primary financial lender, and we expect them to grant us a waiver for thisthe covenant violation. However,at September 30, 2021, it would result in an event of default, which if our primary financial lender does not grant the waiver, thiscured or waived, could result in ourthe lender accelerating the maturity of ourthe Company’s indebtedness or preventing access to additional funds under ourthe line of credit agreement, or requiring prepayment of our outstanding indebtedness under our March 10, 2020the loan agreement or the line of credit agreement.
On April 14, 2020, we received a the Company entered into an unsecured loan in the amount of $2.9 million ("PPP loanLoan") with our primary lender for $2.9 million, bearinglender. The PPP Loan matures on April 14, 2022, bears interest at 1% per annum, with monthly payments of principal and interest in the amount of $164,045 commencing on November 10,the date on which the amount of loan forgiveness is determined. On August 28, 2020, we submitted our application to our lender, requesting PPP Loan forgiveness of $2.9 million. Our lender reviewed our application and forwarded to the SBA for approval on September 27, 2020. The loan matures on April 10, 2022. We plan to useAs of the proceedsfiling of this Report, we have not received an approval or denial of our application for forgiveness from the PPP loan for payroll-related expenses, rent, and utility expenses in accordance withSBA; per the guidelines for the loan. We plan to apply for forgiveness of the PPP loan in accordance with the requirements and limitations under the CARESFlexibility Act, the PPP Flexibility Act and SBA regulations and requirements, and although no assurance can be given that all or any portiondate for commencement of the PPP loan will be forgiven, we believe that most of this loan will be forgiven.
Of the $6.4 million in proceeds received from the March 2020 loan and the PPP loan, we believe that most of the
payments for these loans willhas not have to be repaid using funds generated from our operations. The March 2020 loan will be paid by payments received from our promissory note with Leveling 8,yet occurred, and we anticipate that mosthave made no loan payments. The Company deferred $0.8 million of loan payments during the PPP loan will be forgiven.six months ended June 30, 2021.
In the third quarter of 2020, we utilizedWe continue to take actions to preserve and improve our recently filed shelf registration statement to raise additional cash by selling common shares utilizing an at the market offering under our equity distribution agreement with Northland Securities, Inc. (“Northland”). Under this program, we sold 573,199 shares for net proceeds of $2.1 million.
liquidity. We believe that our cash and cash equivalents and restricted cash of $10.5$3.7 million at June 30, 20202021 and our existing revolving bank line of credit will provide sufficient liquidity and capital resources to cover our operating losses and our additional working capital and debt payment needs. However, we will likely need to seek aan additional waiver forfrom our probableprimary financial lender if we are not in compliance with our covenant violation under our loan agreements withagreement again next quarter. Further, as discussed above, we received the PPP Loan in April 2020, which provided funding necessary to offset the immediate and anticipated impacts of COVID-19, and we are awaiting the final determination from the SBA on our primary financial lender.forgiveness application. In addition, there is still significant uncertainty surrounding the timing of the overall recovery of the economy and the timing of wireless infrastructure service opportunities for the upgrade to 5G. Therefore, depending on the timing of these factors and our primary financial lender granting us a waiver of the probableany future covenant violation,violations, there is still risk that we may not have sufficient cash and cash equivalents available for us to sustain our operations at our current level. If that were to occur, we would need to seek additional funding and further utilize our shelf registration that we have available to us in order to enhance our cash position and assist in our working capital needs.
In the nine months ended June 30, 2021, we utilized our recently filed shelf registration statement to raise additional cash by selling common shares utilizing an at the market offering under our equity distribution agreement with Northland Securities, Inc. (“Northland”). Under this program, we sold 245,973 shares for net proceeds of $0.9 million.
Item 4. Controls and Procedures.
We maintain disclosure controls and procedures that are designed to ensure the information we are required to disclose in the reports we file or submit under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Based on their evaluation as of June 30, 2020,2021, our Chief Executive Officer and interim Chief Financial Officer concluded that our disclosure controls and procedures are effective to accomplish their objectives and to ensure the information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and interim Chief Financial Officer as appropriate to allow timely decisions regarding required disclosure.
PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Securities and Use of Proceeds.
During the nine months ended June 30, 2021, the Company sold 245,973 shares of common stock under its registration statement on Form S-3 effective as of April 1, 2020 (333-236859). Gross proceeds from such sales during the quarter were $0.9 million and net proceeds were $0.9 million after the payment of approximately $31,313 in commissions to Northland Securities, Inc., the underwriter of the offering. Total gross proceeds to the Company from sales under such registration statement since its effective date are $3.1 million and total net proceeds to the Company are $3.0 million after the payment of $0.1 million in commissions to Northland. All sales have been made pursuant to the Prospectus Supplement filed with the Commission on April 24, 2020, under which the Company may sell up to $13,850,000 in common stock. All net proceeds to the Company from such sales have been used in accordance with the “Use of Proceeds” section of such Prospectus Supplement.
| | | | | | Exhibit No. | Description | | | | | | | 31.1 | | | | 31.2 | | | | 32.1 | | | | 32.2 | | | | 101.INS | XBRL Instance Document. | | | 101.SCH | XBRL Taxonomy Extension Schema. | | | 101.CAL | XBRL Taxonomy Extension Calculation Linkbase. | | | 101.DEF | XBRL Taxonomy Extension Definition Linkbase. | | | 101.LAB | XBRL Taxonomy Extension Label Linkbase. | | | 101.PRE | XBRL Taxonomy Extension Presentation Linkbase. | | | |
Exhibit No.
| Description |
| |
10.1 | Financial Institution Business Loan Agreement dated April 14, 2020 |
| |
31.1 | Certification
|
| |
31.2 | Certification of Chief Financial Officer under Section 302 of the Sarbanes Oxley Act of 2002. |
| |
32.1 | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| |
32.2 | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| |
101.INS | XBRL Instance Document. |
| |
101.SCH | XBRL Taxonomy Extension Schema. |
| |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase. |
| |
101.DEF | XBRL Taxonomy Extension Definition Linkbase. |
| |
101.LAB | XBRL Taxonomy Extension Label Linkbase. |
| |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | | |
| ADDVANTAGE TECHNOLOGIES GROUP, INC. (Registrant) |
Date: August 13, 2021 | |
| /s/ Joseph E. Hart |
| Joseph E. Hart, |
| President and Chief Executive Officer |
| (Principal Executive Officer) |
| |
Date: August 13, 2021 | |
| /s/ Michael G. Ramke |
| Michael G. Ramke |
| Interim Chief Financial Officer |
| (Principal Financial Officer) |
24
ADDVANTAGE TECHNOLOGIES GROUP, INC.
(Registrant)
Date: August 11, 2020
/s/ Joseph E. Hart
Joseph E. Hart,
President and Chief Executive Officer
(Principal Executive Officer)
Date: August 11, 2020 \
/s/ Jarrod M. Watson
Jarrod M. Watson,
Chief Financial Officer
(Principal Financial Officer)
Exhibit Index
The following documents are included as exhibits to this Form 10-Q:
Exhibit No.
| Description |
| |
10.1 | Financial Institution Business Loan Agreement dated April 14, 2020 |
| |
31.1 | Certification of Chief Executive Officer under Section 302 of the Sarbanes Oxley Act of 2002. |
| |
31.2 | Certification of Chief Financial Officer under Section 302 of the Sarbanes Oxley Act of 2002. |
| |
32.1 | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| |
32.2 | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| |
101.INS | XBRL Instance Document. |
| |
101.SCH | XBRL Taxonomy Extension Schema. |
| |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase. |
| |
101.DEF | XBRL Taxonomy Extension Definition Linkbase. |
| |
101.LAB | XBRL Taxonomy Extension Label Linkbase. |
| |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase. |
33