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5: EX-32.2 Certification -- §906 - SOA'02 HTML 17K
11: R1 Cover HTML 64K
12: R2 Consolidated Balance Sheets HTML 131K
13: R3 Consolidated Balance Sheets (Parentheticals) HTML 29K
14: R4 Consolidated Statements of Operations HTML 94K
15: R5 Consolidated Statements of Changes in HTML 55K
Shareholders' Equity
16: R6 Consolidated Statements of Cash Flows HTML 91K
17: R7 Basis of Presentation and Accounting Policies HTML 23K
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19: R9 Accounts Receivable Agreements HTML 20K
20: R10 Inventories HTML 24K
21: R11 Intangible Assets HTML 35K
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Stock
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(Policies)
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(Exact
name of registrant as specified in its charter)
iOklahoma
i73-1351610
(State
or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
i1430 Bradley Lane, Suite 196
iCarrollton,
iTexasi75007
(Address of principal executive office)
i(918)i251-9121
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
iYes ☒ No£
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
iYes ☒ No£
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,”“accelerated filer,”“smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yesi☐
NoS
Shares outstanding of the issuer's $.01 par value common stock as of September 27, 2022 were i14,043,642.
Inventories,
net of allowances of i3,567 and i3,476, respectively
i5,653
i5,922
Prepaid
expenses and other current assets
i1,371
i1,431
Total
current assets
i18,130
i19,796
Property
and equipment, at cost:
Machinery and equipment
i5,354
i4,973
Leasehold
improvements
i821
i813
Total
property and equipment, at cost
i6,175
i5,786
Less:
Accumulated depreciation
(i2,558)
(i2,293)
Net
property and equipment
i3,617
i3,493
Right-of-use
lease assets
i2,466
i2,730
Intangibles,
net of accumulated amortization
i1,027
i1,107
Goodwill
i58
i58
Other
assets
i128
i128
Total assets
$
i25,426
$
i27,312
Liabilities
and Shareholders’ Equity
Current liabilities:
Accounts payable
$
i6,812
$
i7,044
Accrued
expenses
i1,184
i1,581
Deferred
revenue
i207
i168
Bank
line of credit
i2,050
i2,050
Right-of-use
lease obligations, current
i1,177
i1,198
Finance
lease obligations, current
i652
i582
Other
current liabilities
i706
i692
Total current
liabilities
i12,788
i13,315
Right-of-use
lease obligations, long-term
i1,839
i2,141
Finance
lease obligations, long-term
i1,484
i1,429
Total
liabilities
i16,111
i16,885
Shareholders’
equity:
Common stock, $ii0.01/
par value; ii30,000,000/ shares authorized;
ii13,041,127/ shares issued and outstanding, and
ii12,610,229/ shares issued and outstanding, respectively
i130
i126
Paid
in capital
i335
(i578)
Retained
earnings
i8,850
i10,879
Total
shareholders’ equity
i9,315
i10,427
Total
liabilities and shareholders’ equity
$
i25,426
$
i27,312
See
notes to unaudited consolidated financial statements.
Notes to Unaudited Consolidated Financial Statements
Note 1 - iBasis
of Presentation and Accounting Policies
i
Basis of presentation
The consolidated financial statements include the accounts of ADDvantage Technologies Group, Inc. and its subsidiaries, all of which are wholly owned (collectively, the “Company”). Intercompany balances and transactions have been eliminated in consolidation. The Company’s reportable segments
are Wireless Infrastructure Services (“Wireless”) and Telecommunications (“Telco”).
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial statements and do not include all the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. However, the information furnished reflects all adjustments, which are, in the opinion of management, necessary in order to make the unaudited consolidated financial statements not misleading.
The Company’s business is subject to seasonal variations due to weather in the geographic areas where services are performed, as well as calendar events and national
holidays. Therefore, the results of operations for the three months ended December 31, 2021 and 2020, are not necessarily indicative of the results to be expected for the full fiscal year. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2021.
In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-13: “Financial Instruments – Credit Losses (Topic 326) – Measurement of Credit Losses on Financial Instruments.” This ASU requires entities to measure all expected credit losses for most financial assets held at the reporting date based on an expected loss model which includes
historical experience, current conditions, and reasonable and supportable forecasts. Upon adoption, entities will use forward-looking information to better form their credit loss estimates. This ASU also requires enhanced disclosures to help financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an entity’s portfolio. On November 15, 2019, the FASB delayed the effective date of the standard for companies that qualify under smaller reporting company reporting rules. As amended, the effective date of ASC Topic 326 was delayed until fiscal years beginning after December 15, 2022 for SEC filers that are eligible to be smaller reporting companies under the Securities and Exchange Commission definition. We are currently in the process of evaluating this new
standard update, however we do not anticipate the adoption will have a material impact on our results.
Note 2 – iRevenue Recognition
The Company’s principal sales are from Wireless services, sales of Telco equipment and Telco recycled equipment, primarily in the United
States. Sales to international customers in Central and South America totaled approximately $i1.1 million and $i0.3 million
for the three months ended December 31, 2021 and 2020, respectively.
The Company’s customers include wireless carriers, wireless equipment providers, multiple system operators, resellers and direct sales to end-user customers. Sales to two customers which individually accounted for 10% or greater of the Company's revenue totaled approximately i37%
and ii29/% of consolidated revenues for the three months ended December
31, 2021 and 2020, respectively.
Contract
assets and contract liabilities are included in Unbilled revenue and Deferred revenue, respectively, in the consolidated balance sheets. At December 31, 2021 and September 30, 2021, contract assets were $i2.2 million and $i2.5
million, respectively, and contract liabilities were $i0.2 million and $i0.2 million, respectively. The
Company recognized the entire $i0.2 million of contract revenue during the three months ended December 31, 2021 related to contract liabilities recorded in Deferred revenue at September 30, 2021.
Note
3 – iAccounts Receivable Agreements
The Company’s Fulton segment renewed its $i4.5 million
accounts receivable purchase facility (“Existing Facility”) with its primary financial lender, secured by the subsidiary’s accounts receivable excluding a major customer. This credit facility was increased by $i0.5 million in connection with the renewal. In connection with the renewal, the lender originated a new accounts receivable purchase facility (“New Facility”) with a total capacity of $i8.5 million
secured by receivables of a major customer that previously was collateralized under the Existing Facility. Under both facilities, the lender advances the Companyi90% of sold receivables and establishes a reserve of i10%
of the sold receivables until the Company collects the sold receivables. Under the Existing Facility, the lender charges a fee of i1.6% of sold receivables, and under the New Facility the lender charges a fee of i1.5%
of sold receivables. Both facilities have a fixed charge coverage ratio of i1.25x to be tested quarterly. Both the Existing Facility and the New Facility mature on December 17, 2022.
At December 31, 2021, the lender has a reserve against the sold receivables of $i0.6
million, which is reflected as restricted cash. For the receivables sold under the agreement with recourse, the agreement addresses events and conditions which may obligate the Company to immediately repay the institution the outstanding purchase price of the receivables sold. The total amount of receivables uncollected by the institution was $i4.3 million at December 31, 2021 for which there is a limit of $i13.0
million. Although the sale of receivables is with recourse, the Company did not record a recourse obligation at December 31, 2021 as the Company concluded that the sold receivables are collectible.
For the three months ended December 31, 2021 and 2020, the Company received proceeds from the sold receivables under all of the various agreements of $i7.8
million and $i5.0 million, respectively, and included the proceeds in net cash used in operating activities in the consolidated statements of cash flows. The Company recorded costs of $i0.1
million and $i43 thousand for the three months ended December 31, 2021 and 2020, respectively, in other expense in the consolidated statements of operations.
New equipment includes products purchased from manufacturers plus “surplus-new,” which are unused products purchased from other distributors or multiple system operators. Refurbished and used equipment include factory refurbished, Company refurbished and used products.
Note 5 – iIntangible Assets
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 groups 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.
i
Intangible
assets with their associated accumulated amortization and impairment at December 31, 2021 and September 30, 2021 are as follows, in thousands:
On December 28, 2021, the Company renewed its credit facility for its Nave and Triton subsidiaries with its primary financial lender by entering into a Business Loan Agreement and various ancillary debt and collateral agreements. The renewed Nave and Triton credit
facility is for a maximum of $i3.0 million and is secured by the Company’s Nave and Triton Subsidiaries’ accounts receivable and inventory. As renewed, the Nave and Triton credit facility has been reduced by $i1.0
million and requires quarterly interest payments based on the Wall Street Journal Prime Rate floating rate (i3.25% as of December 31, 2021) plus i0.75%,
and a fixed charge coverage ratio of i1.25x to be tested quarterly. The Company is required to pay a non-use fee equal to i25
basis points if the line of credit is not utilized. The Company may repay outstanding loans at any time without premium or penalty. The Nave and Triton credit facility matures on December 17, 2022.
At December 31, 2021, there was $i2.1 million outstanding under the line of credit. Future borrowings under the line of credit are limited to the lesser of $i3.0 million
or the sum of i80% of eligible accounts receivable and i50%
of eligible Telco segment inventory. Under these limitations, the Company’s total line of credit borrowing capacity was $i3.0 million at December 31, 2021.
As of December, 31, 2021, the Company was not in compliance with the fixed charge coverage ratio. The
Company notified its primary financial lender of the covenant violation, and on February 14, 2022, the lender granted a waiver of the covenant violation under the credit facility.
On March 17, 2022, the Company closed its $i3.0 million credit facility for its Nave and Triton subsidiaries
with its primary financial lender and replaced it with new accounts receivable purchase facilities with capacities of $i12.5 million for Nave and $i3.0 million
for Triton.
Note 7 – iEquity Distribution Agreement and Sale of Common Stock
On April
24, 2020, the Company entered into an Equity Distribution Agreement with Northland Securities, Inc., as agent (“Northland”), pursuant to which the Company may offer and sell, from time to time, through Northland, shares of the Company’s common stock, par value i0.01 per share, having an aggregate offering price of up
to i13.9 million ("Shares").
The offer and sale of the Shares will be made pursuant to a shelf registration statement on Form S-3 and the related prospectus filed by the Company with the Securities and Exchange Commission (the “SEC”) on March 3, 2020, as amended on March 23, 2020, and declared effective by the SEC on April
1, 2020.
Pursuant to the Sales Agreement, Northland may sell the Shares by any method permitted by law deemed to be an “at the market offering” as defined in Rule 415 of the Securities Act of 1933 (the “Securities Act”), including sales made by means of ordinary brokers’ transactions, including on The Nasdaq Global Market, at market prices or as otherwise agreed with Northland. Northland will use commercially reasonable efforts consistent with its normal trading and sales practices to sell the Shares from time to time, based upon instructions from the Company, including any price or size limits or other customary parameters or conditions the Company may impose. The Sales Agreement may be terminated without prior notice at any time prior to
the fulfillment if additional sales are deemed not warranted.
The Company will pay Northland a commission rate equal to an aggregate of i3.0% of the aggregate gross proceeds from each sale of Shares and have agreed to provide Northland with customary indemnification and contribution rights. The Company will also reimburse Northland for certain specified expenses in connection
with entering into the Sales Agreement. The Sales Agreement contains customary representations and warranties and conditions to the placements of the Shares pursuant thereto.
During the three months ended December 31, 2021, i320,787 Shares were sold by Northland on behalf of the Company with gross proceeds of $i0.7
million, and net proceeds after commissions and fees of $i0.6 million.
Note 8 – iEarnings
Per Share
i
Basic and diluted earnings per share for the three months ended December 31, 2021 and 2020, in thousands:
The table below includes information related to stock options that were outstanding at the end of each respective three-month period ended December 31, but have been excluded from the computation of weighted-average stock options for dilutive securities because their effect would be anti-dilutive.
Supplemental
noncash investing and financing activities:
Assets acquired under financing leases
$
i272
$
i34
Note
10 – iStock-Based Compensation
Plan Information
The 2015 Incentive Stock Plan (the “Plan”) provides for awards of stock options and restricted stock to officers, directors, key employees and consultants. At December 31, 2021, i2,100,415
shares of common stock were reserved for stock award grants under the Plan. Of these reserved shares, i221,029 shares were available for future grants.
Stock Options
As of September 30, 2021, there were i50,000
stock options with a weighted average exercise price of $i1.28 per share and an aggregate intrinsic value of $i54
thousand outstanding under the Plan. There were no stock options granted, exercised, expired or forfeited during the quarter ended December 31, 2021. As of December 31, 2021, i50,000 stock options remained outstanding and exercisable, with an average exercise price of $i1.28
per share and an aggregate intrinsic value of $i22 thousand.
Restricted stock awards
i
A
summary of the Company's non-vested restricted share awards at December 31, 2021 and changes during the quarter ended December 31, 2021 is presented in the following table (in thousands, except shares):
Expenses
related to stock-based compensation including restricted stock and stock option awards, were $ii0.3/ million
in each of the three month periods ended December 31, 2021 and 2020.
The Company did not recognize a tax benefit for compensation expense recognized during the three months ended December 31, 2021 and 2020.
At December 31, 2021, unrecognized compensation expense related to non-vested
stock-based compensation awards not yet recognized in the consolidated statements of operations was $i0.9 million. That cost is expected to be recognized over a period of i2.8
years.
Note 11 – iLeases
Our Wireless segment has an operating lease for a building in Fridley, Minnesota for Fulton Technologies, Inc. As a result of closing down and vacating Fulton Technologies, Inc.’s Minnesota office in May 2019, a third-party telecom company began subleasing this building in June 2019.
Our 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 2021, Nave completely vacated the building in May 2020 and has subleased part of the building during certain periods of fiscal year 2022.
Rental payments received related to these subleases were recorded as a reduction of rent expense in our consolidated statements of operations for the periods ending December 31, 2021 and 2020.
Note 12 – iSegment
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 Company's Wireless segment provides turn-key wireless infrastructure services for the ifour
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, property and equipment, goodwill and intangible assets. The Company allocates its corporate general and administrative expenses to the reportable segments.
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,”"anticipates,"“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, 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 Transition Report on Form 10-Q and with the information presented in our annual report on Form 10-K for the year ended
September 30, 2021, 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.
Recent
Business Developments
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 while these orders were in place. Most of our back-office and administrative personnel worked from home while these orders were in place, these personnel began working in the office as restrictions were relaxed or lifted. We have not experienced a material disruption in our supply chain to date.
With the partial reopening of the economy the economic effects of the pandemic and resulting societal changes remain unpredictable. Although we experienced increased revenues in recent quarters compared to prior year quarters since the pandemic began in 2020, 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 impact of COVID-19 on the operating results and capital budgets of our customers.
Change in Year End
In September 2022, our Board of Directors approved a change in our fiscal year end from September 30 to December 31, effective for the fiscal year beginning January 1, 2022. We believe that this change will provide greater alignment with our business cycle and financial reporting. As a result of the change in year end, this document reflects the Company's Transition Report on Form 10-Q for the period from October 1, 2021 through December 31, 2021. Our next fiscal year will run from January 1, 2022
through December 31, 2022.
Consolidated sales increased $6.0 million, or 47%, to $18.7 million for the three months ended December 31, 2021 from $12.7 million for the three months ended December 31, 2020. The increase was primarily due to a $1.9 million increase in Wireless revenue related to 5G
tower work, and an increase of $4.1 million in Telco revenue due to increased demand for refurbished telecommunications equipment sold by the Telco segment.
Consolidated gross profit was $4.6 million, or 25% gross margin, compared to gross profit of $3.6 million, or 28% gross margin, for the same period last year. The net changes in gross profit were due to higher overall sales in both the Wireless and Telco segments, and the decrease in gross margin as a percent of sales was due to investments made with a new wireless customer and the impact of the Company onboarding new crews in anticipation of near-term wireless revenue increases.
Consolidated operating expenses include indirect costs associated with operating our business. Indirect costs include indirect personnel costs, facility costs, vehicles,
insurance, communication, and business taxes, among other cost categories. Operating expenses increased $0.5 million to $2.5 million for the three months ended December 31, 2021 compared to $2.0 million the same period last year. The increase reflects the Company's investment in its regional growth strategy related to expected 5G infrastructure growth.
Consolidated selling, general and administrative ("SG&A") expenses include overhead costs, which consist of personnel costs, insurance, professional services, and communication, among other less significant cost categories. SG&A expense increased $0.5 million, or 15%, to $3.7 million for the three months ended December 31, 2021 from $3.2 million for the same period last year. The
increase in SG&A relates primarily to increased selling and commissions expenses to support higher revenues.
Segment Results
Wireless
Revenues for the Wireless segment increased $1.9 million to $7.1 million for the three months ended December 31, 2021 from $5.2 million for the same period of last year. The growth in revenues over the prior year relates to the pace of the 5G services activity now underway and we project further growth in the second half of the fiscal year.
Gross profit was $1.5 million, or 21% for the three months ended December 31, 2021 and $1.6 million, or 31%, for the three months ended December 31, 2020. The decrease in the
gross profit percentage was the result of new
business with a major customer at a lower margin level, along with continuing investment in our regional growth strategy associated with anticipated 5G infrastructure build outs, which includes the expansion and training of new wireless service crews.
Loss from operations was $2.3 million and $1.1 million for three months ended December 31, 2021 and 2020, respectively. The increase is mainly attributable to investment in our regional growth strategy associated with anticipated
5G infrastructure build outs.
Telco
Revenues for the Telco segment increased $4.1 million to $11.6 million for the three months ended December 31, 2021 from $7.5 million for the same period last year. The increase in revenues was related to increased sales of used and refurbished equipment as a result of continued global supply chain constraints.
Gross profit was $3.1 million for the three months ended December 31, 2021 and $2.0 million for the three months ended December 31, 2020. The increased gross profit was due primarily to increased revenues of $4.1 million.
Income from operations was $0.4 million for the three months ended December
31, 2021 compared to a loss of $0.8 million for the same period last year, primarily due to the reasons discussed above.
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 stock compensation expense, other income, other expense, and interest income. 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.
The following table provides a reconciliation by segment of income (loss) from operations to Adjusted EBITDA, in thousands:
Our unaudited consolidated financial statements are impacted by the accounting policies used and the estimates and assumptions made by management during their preparation. A complete summary of our significant accounting policies is included in Note 1- Basis of Presentation and Accounting Policies in our 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, which form the basis for making judgments about the carrying values of certain assets. Actual results could differ from these estimates under different assumptions or conditions. The most significant estimates and assumptions are discussed below.
For our Telco segment, our position in the telecommunications industry requires us to carry large inventory quantities relative to annual sales, but it also allows us to realize higher gross profit margins on our sales. We market our products primarily to telecommunication providers, 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 for our 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 December 31, 2021, we had total inventory, before the reserve for excess and obsolete inventories, of $9.2 million,
consisting of $1.4 million in new products and $7.8 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. Therefore, we have an obsolete and excess inventory reserve of $3.6 million at December 31,
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.
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. As of December 31,
2021, there were no indicators of impairment present.
Liquidity and Capital Resources
Cash Flows Used in Operating Activities
During the three months ended December 31, 2021, cash used in operations was $0.9 million. Cash flows from operations were negatively impacted by a net loss of $2.0 million, partially offset by net cash provided by working capital of $0.5 million and non-cash adjustments of $0.7 million.
Cash Flows Used in Investing Activities
During the three months ended December 31, 2021, cash used in investing activities
was $0.1 million, consisting of purchases of property and equipment.
Cash Flows Provided by Financing Activities
During the three months ended December 31, 2021, cash provided by financing activities was $0.5 million, primarily consisting of net proceeds from the sale of our common stock utilizing our shelf registration of $0.6 million, partially offset by payments on financing lease obligations of $0.1 million.
At December 31,
2021 we had cash and equivalents and restricted cash on hand of $2.4 million and availability under our bank line of credit of $1.0 million, for a total liquidity of $3.4 million.
On December 28, 2021, the Company signed amendments to its credit facilities with its primary financial lender for its Telco and Wireless business segments. In anticipation of significant growth in the Wireless segment to meet growing demand related to the 5G expansion, the Company signed an accounts receivable factoring line with its primary financial lender, increasing available borrowing capacity from $4.0 million to $13.0 million subject to available collateral. In addition, the
company renewed its line of credit, collateralized by receivables and inventory, for its Telco segment, with a total maximum available borrowing capacity of $3.0 million. The result of the new agreements raises the Company’s total borrowing capacity, subject to available collateral, from $8.0 million to $16.0 million.
We were not in compliance with a covenant on our credit facilities at December 31, 2021. We notified our primary financial lender of the covenant violation, and on February 14, 2022 the primary lender granted a waiver of the covenant violation. On March 17, 2022, the Company closed its $3.0 million
credit facility for its Nave and Triton subsidiaries with its primary financial lender and replaced it with new accounts receivable purchase facilities with capacities of $12.5 million for Nave and $3.0 million for Triton.
We entered into an Equity Distribution Agreement (the “Sales Agreement”) with Northland Securities, Inc., as agent (“Northland”), pursuant to which we may offer and sell, from time to time, through Northland, shares of our common stock, par value $0.01 per share, having an aggregate offering price of up to $13.9 million ("Shares"). The offer and sale of the Shares will be made pursuant to a shelf registration statement on Form S-3 and the related prospectus filed by us with the Securities and Exchange Commission (the "SEC") on March 3, 2020,
as amended on March 23, 2020, and declared effective by the SEC on April 1, 2020. We currently have approximately $10.1 million available to us to fund our working capital needs under the Sales Agreement. Based on our availability under our bank line of credit and our Sales Agreement, we believe we have sufficient liquidity and capital resources to cover our operating losses and our additional working capital and debt payment needs.
We continue to evaluate opportunities to expand our business through selective acquisitions and internal growth initiatives. Our capital investment decisions are determined by an analysis of the projected return on capital employed of each of those alternatives, which is substantially driven by the cost to acquire existing assets from a third party, the capital required to invest in new equipment
and the point in the 5G densification cycle. Based on these factors, we make capital investment decisions that we believe will support our long-term growth strategy. Depending on the timing and scope of these opportunities, we may need to seek additional funding to finance the necessary working capital for such opportunities.
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 December 31,
2021, our Chief Executive Officer and 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 Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Item
2. Unregistered Sales of Securities and Use of Proceeds.
During the quarter ended December 31, 2021, the Company sold 320,787 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 $0.7 million and net proceeds were $0.6 million after the payment of $20 thousand 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 $3.8 million and total net proceeds to the Company are $3.7 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 $13.9 million 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.
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.