(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.
iYesS 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).
iYesS 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).
Yes ☐ No i☒
Shares
outstanding of the issuer's $.01 par value common stock as of May 12, 2021 were i12,413,372.
Accounts receivable, net of allowances of $ii250/,
respectively
i4,617
i3,968
Unbilled
revenue
i643
i590
Promissory
note – current
i—
i1,400
Income
tax receivable
i1,249
i1,283
Inventories,
net of allowances of $i3,168 and $i3,054, respectively
i5,708
i5,576
Prepaid
expenses and other assets
i1,432
i884
Total
current assets
i18,887
i22,074
Property
and equipment, at cost
i4,661
i4,220
Less:
Accumulated depreciation
(i2,010)
(i1,586)
Net
property and equipment
i2,651
i2,634
Right-of-use
lease assets
i3,249
i3,758
Promissory
note – non current
i2,270
i2,375
Intangibles,
net of accumulated amortization
i1,266
i1,425
Goodwill
i58
i58
Other
assets
i177
i179
Total assets
$
i28,558
$
i32,503
Liabilities
and Shareholders’ Equity
Current liabilities:
Accounts payable
$
i4,353
$
i3,472
Accrued
expenses
i1,735
i1,319
Deferred
revenue
i67
i113
Bank
line of credit
i2,800
i2,800
Note
payable, current
i1,930
i1,709
Right-of-use
lease obligations – current
i1,241
i1,275
Financing
lease obligations – current
i355
i285
Other
current liabilities
i14
i41
Total current
liabilities
i12,495
i11,014
Financing
lease obligations - long-term
i883
i791
Right-of-use
lease obligations - long-term
i2,729
i3,310
Note
payable, less current portion
i986
i2,440
Other
liabilities
i—
i15
Total
liabilities
i17,093
i17,570
Shareholders’
equity:
Common stock, $ii0.01/
par value; ii30,000,000/ shares authorized; ii12,413,372/
shares issued and outstanding, and ii11,822,009/ shares
issued and outstanding, respectively
i124
i118
Paid in capital
(i1,023)
(i2,567)
Retained
earnings
i12,364
i17,382
Total
shareholders’ equity
i11,465
i14,933
Total
liabilities and shareholders’ equity
$
i28,558
$
i32,503
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 six months ended March 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, 2020.
iReclassification
Certain
prior period amounts have been reclassified to conform to current year presentation. These reclassifications had no effect on previously reported results of operations or retained earnings.
i
Recently Issued Accounting Standards
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 totaled approximately $i0.9 million and $i0.4
million for the three months ended March 31, 2021 and 2020, respectively and $i1.3 million and $i0.8
million for the six month period ended March 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 three customers which individually accounted 10% or greater of the Company's revenue totaled i39%
and sales to one customer comprised approximately i10% of consolidated revenues for the six months ended March 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 March 31, 2021 and September 30, 2020, contract assets were $i0.6 million and $i0.6
million, respectively, and contract liabilities were $i0.1 million and $i0.1 million, respectively. The
Company recognized $i0.1 million of contract revenue during the six months ended March 31, 2021 related to contract liabilities recorded in deferred revenue at September 30, 2020.
Note
3 – iAccounts Receivable Agreements
The Company’s Wireless segment has entered into various agreements, including one agreement with recourse, to sell certain receivables to unrelated third-party financial institutions. For the agreement with recourse, the Company is responsible for collecting payments on the sold receivables from its customers. Under this agreement, the third-party
financial institution advances the Companyi90% of the sold receivables and establishes a reserve of i10%
of the sold receivables until the Company collects the sold receivables. As the Company collects the sold receivables, the third-party financial institution will remit the remaining i10% to the Company. At March 31, 2021, the third-party financial institution has
a reserve of $i0.3 million, which is reflected as restricted cash, against the sold receivables of $i1.3 million. 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 $i1.3 million at March 31, 2021 for which there is a limit of $i4.0
million. Although the sale of receivables is with recourse, the Company did not record a recourse obligation at March 31, 2021 as the Company concluded that the sold receivables are collectible. The other agreements without recourse are under programs offered by certain customers in the Wireless segment.
For the six months ended March 31, 2021 and 2020, the Company received proceeds from the sold receivables under all of the various agreements of $i9.5
million and $i11.4 million, respectively, and included the proceeds in net cash used in operating activities in the Consolidated Statements of Cash Flows. The fees associated with selling these receivables ranged from i1.4%
to i2.3% of the gross receivables sold for the six months ended March 31, 2021 and 2020. The Company recorded costs of $ii0.1/
million and $ii0.2/ million for the three and six months ended March 31, 2021 and 2020,
respectively, in other expense in the consolidated statements of operations.
Note 4 – iPromissory Note Receivable
During the fiscal year ended 2019, the Company completed a sale of its former Cable TV reporting segment to Leveling 8, an entity owned
by a member of our board and significant shareholder, David Chymiak. Part of the consideration for the sale was a promissory note bearing interest of i6% received from Mr. Chymiak. Mr. Chymiak personally guaranteed the promissory note due to the Company and pledged certain assets to secure the payment of the promissory note, including substantially all of Mr. Chymiak’s Company common stock. During the six months ended ended March 31, 2021, the
Company received principal payments totaling $i1.5 million, of which approximately $i1.0
million was a prepayment. At March 31, 2021, there was $i2.3 million outstanding on the promissory note. The remaining promissory note becomes due in a final payment on June 29, 2024.
On March 10, 2020, the Company entered into a loan agreement with its primary financial lender for $i3.5
million to monetize a portion of this promissory note receivable. See Note 7 - Debt for disclosures related to the Company's promissory note payable.
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 6 – 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 March 31, 2021 and September 30, 2020 are as follows, in thousands:
On March 10, 2020, the Company entered into a loan agreement with its primary financial lender for $i3.5
million, bearing interest at i6% per annum. The loan was payable in iseven semi-annual installments of principal and interest with the first payment occurring June
30, 2020. In connection with the $i1.5 million payment received in the first fiscal quarter of 2021 from the promissory note receivable, the Company fully repaid the remaining $i1.2
million of principal outstanding under this loan.
Credit Agreement
The Company has a $i4.0 million revolving line of credit agreement with its primary financial lender, which matures on December 17, 2021. The line of credit requires quarterly interest payments based on the prevailing Wall Street Journal Prime Rate,
floating (i3.25% at March 31, 2021), with the addition of a i4% floor rate and a fixed charge coverage ratio of i1.25
to be tested quarterly beginning June 30, 2021. At March 31, 2021, there was $i2.8 million
outstanding under the line of credit. Future borrowings under the line of credit are limited to the lesser
of $i4.0 million or the sum of i80%
of eligible accounts receivable and i60% of eligible Telco segment inventory. Under these limitations, the Company’s total line of credit borrowing capacity was $i4.0
million at March 31, 2021.
Loan Covenant with Primary Financial Lender
The credit agreement provides that the Company maintain a fixed charge coverage ratio (net cash flow to total fixed charge) of not less than i1.25 to 1.0 to be tested quarterly beginning June 30, 2021. The
Company believes that it is probable that it will not be in compliance with this covenant as of the measurement date at June 30, 2021. The noncompliance with this covenant would result in an event of default, which if not cured or waived, could result in the lender accelerating the maturity of the Company’s indebtedness or preventing access to additional funds under the line of credit agreement, or requiring prepayment of outstanding indebtedness under the loan agreement or the line of credit agreement.
Paycheck Protection Program Loan
On April 14, 2020, the Company entered into an unsecured loan in the amount
of $i2.9 million ("PPP Loan") with its primary lender pursuant to the Paycheck Protection Program ("PPP") which is sponsored by the Small Business Administration (“SBA”), and is part of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), as amended by the Paycheck Protection Program Flexibility Act of 2020 (“Flexibility Act”). The PPP provides for loans to qualifying businesses, the proceeds of which may be used for payroll costs, rent, utilities, mortgage interest, and interest on other pre-existing indebtedness (the “Permissible
Expenses”). The PPP Loan, and accrued interest, may be forgiven partially or in full, if certain conditions are met, which includes if funds were expended for Permissible Expenses.
The PPP Loan matures on April 14, 2022, bears interest at i1% per annum, with monthly payments of principal and interest in the amount of $i164,045
commencing on the date on which the amount of loan forgiveness is determined by the SBA. The PPP Loan proceeds were used for Permissible Expenses. On August 28, 2020, we submitted our application to our lender, requesting PPP Loan forgiveness of $i2.9 million. Our lender reviewed our application for forgiveness and forwarded to the SBA on September 27, 2020 for approval. In the absence of an approval or denial of our application for forgiveness from the SBA, per the Flexibility
Act, the date for commencement of loan payments has not yet occurred, and we have made no loan payments.
While we believe we have met the eligibility requirements for the PPP Loan, and believe we have used the loan proceeds for Permissible Expenses, we can provide no assurances that we will receive full or partial forgiveness of the PPP Loan. Accordingly, we have recorded the full amount of the PPP Loan as debt, which is included in current and long-term debt, on our consolidated balance sheet at March 31, 2021.
Fair Value of Debt
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.
Note 8 – 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 $i13,850,000
("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
10
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 six months ended March 31, 2021, i245,973 shares were sold by Northland on behalf of the Company with gross proceeds of $i0.9
million, and net proceeds after commissions and fees of $i0.9 million.
Note 9 – iEarnings
Per Share
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. iBasic and diluted
earnings per share for the three and six months ended March 31, 2021 and 2020 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 six-month period ended March 31, but have been excluded from the computation of weighted-average stock options for dilutive securities because their effect would be anti-dilutive. iThe 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 six months ended March 31, 2021 and 2020.
The 2015 Incentive Stock Plan (the “Plan”) provides for awards of stock options and restricted stock to officers, directors, key employees and consultants. At March 31, 2021, i2,100,415
shares of common stock were reserved for stock award grants under the Plan. Of these reserved shares, i450,636 shares were available for future grants.
Stock Options
iA
summary of the status of the Company's stock options at March 31, 2021 and changes during the three months then ended is presented below:
iA summary of the Company's non-vested restricted share awards (RSA) at March 31, 2021 and changes during the quarter ended March 31, 2021 is presented in the following table (in thousands, except shares):
During
the three month period ended March 31, 2021 and 2020, expenses related to share-based arrangements including restricted stock and stock option awards, were $ii0.2/ million
and $ii0.1/ million,
respectively.
During the six month period ended March 31, 2021 and 2020, compensation expenses related to share-based arrangements including restricted stock and stock option awards, were $ii0.6/ million
and $ii0.1/ million
respectively.
The Company did not recognize a tax benefit for compensation expense recognized during the three and six month period ended March 31, 2021 and 2020.
At March 31, 2021, unrecognized compensation expense related to non-vested share-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 i2.75 years.
Note 12 – 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 2020, Nave completely vacated the building in May 2020 and has subleased part of the building during certain periods of fiscal year 2021.
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 March 31, 2021 and 2020. iRental payments received from subleased right-of-use assets is as follows:
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, inventories, property and equipment, goodwill and intangible assets.
iThe
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.
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, 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
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 most of our back-office and administrative personnel were working from home through March 31, 2021 while these orders were in place. 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.
With the partial reopening of the economy the economic effects of the pandemic and resulting societal changes remain unpredictable. 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.
Consolidated sales increased $0.7 million, or 6%, to $12.7 million for three months ended March 31, 2021 from $12.0 million for the three months ended March 31,
2020. The increase in sales was due to increased sales in the Telco segment of $1.0 million partially offset by a decrease in Wireless segment sales of $0.3 million.
Consolidated gross profit increased $3.6 million for three months ended March 31, 2021 to $3.2 million compared to a deficit of $0.4 million for the same period last year. The increases in gross profit were due to an increase in the Telco segment of $2.3 million, and a Wireless segment increase of $1.3 million.
Consolidated operating expenses include indirect costs associated with operating our business such as indirect personnel, facilities, vehicles, insurance, communication, and business taxes. Operating expenses remained consistent at approximately $2.2 million for the three months ended March 31, 2021 and $2.1
million the same period last year.
Consolidated selling, general and administrative ("SG&A") expenses include overhead, which consist of personnel, insurance, professional services, communication, and other cost categories. SG&A expense increased $0.9 million, or 30%, to $3.8 million for the three months ended March 31, 2021 from $2.9 million for the same period last year. The increase in SG&A relates to increased personnel costs such as non-cash stock compensation of $0.1 million, executive severance of $0.2 million, as well as computing and communications costs of approximately $0.2 million, and $0.4 million of increased selling costs compared to the same period last year.
Depreciation and amortization expenses decreased $0.2 million, or 40%, to $0.3 million for the three months ended March
31, 2021, from $0.5 million for the same period last year. The decrease was due primarily to a decrease in amortization expenses to the Telco segment of $0.2 million, as a result of intangible impairments taken in fiscal 2020.
Interest income primarily consists of interest earned on the promissory note receivable. Interest income has decreased to $33 thousand for the three months ended March 31, 2021 compared to $0.1 million for the same period last year, as the note receivable principal has decreased.
Interest expense for the three months ended March 31, 2021 was $42 thousand as compared to $59 thousand for the same period last year. The expense was related to interest expense on the revolving bank line of credit and the loan with our primary financial lender.
Income
tax expense was zero during the three months ended March 31, 2021 and the same period in 2020. Our effective tax rates during the three months ended March 31, 2021 and 2020 were approximately 0%, respectively because increases in our valuation allowance against our deferred tax assets.
Revenues for the Wireless segment decreased $0.3 million to $4.3 million for the three months ended March
31, 2021 from $4.7 million for the same period of last year. Revenues continued to be negatively impacted due to delays in infrastructure spending from the major U.S. carriers 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 constrained 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 changes in order to be well positioned to secure an increased share of the 5G construction services work.
Gross profit was $1.5 million, or 35% for the three months ended March 31, 2021 compared to $0.2 million, or 4%, for the three months ended March 31, 2020. The improvement in the gross profit percentage was driven by organizational
changes put into place to strengthen margins during the latter half of fiscal 2020.
Operating expenses were $1.4 million for each of the three months periods ended March 31, 2021 and 2020.
Selling, general and administrative expenses increased $0.2 million to $0.6 million for the three months ended March 31, 2021 from $0.4 million for the three months ended March 31, 2020. This increase was due to increased sales-related personnel costs. The corporate overhead allocation increased $0.3 million mainly as a result of the employee stock-based compensation plan and interest expense.
Depreciation and amortization expense was $0.2 million for the
three months ended March 31, 2021 and 2020.
Telco
Sales for the Telco segment increased $1.0 million to $8.3 million for the three months ended March 31, 2021 from $7.3 million for the same period last year. The increase in revenues were related to increased sales of used and refurbished equipment, coupled with decreased charges for returns during the quarter compared to the prior year quarter.
Gross profit was $1.7 million for the three months ended March 31, 2021 and a deficit of $0.6 million for the three months ended March 31, 2020. The increase was mainly related to a $2.1 million obsolescence
expense recorded in the prior year quarter.
Operating expenses increased $0.1 million to $0.8 million for the three months ended March 31, 2021 compared to $0.7 million the three months ended March 31, 2020. The increased operating expense was due to fees related to the utilization of a third-party logistics provider.
Selling, general and administrative expenses increased $0.2 million to $1.1 million for the three months ended March 31, 2021 from $0.9 million for the same period last year. This increase was due primarily to increased sales commissions. In addition, the corporate allocation increased $0.1 million, which related to the employee stock-compensation plan and executive severance costs.
Depreciation
and amortization expense decreased $0.2 million to $0.1 million for the three months ended March 31, 2021 from $0.3 million for the same period last year. This was due to decreased amortization expense resulting from the impairment of intangibles taken in the three months ended March 31, 2020.
Consolidated sales decreased $0.5 million, or 2%, to $25.4 million for the six months ended March 31, 2021 from $25.9 million for the six months ended
March 31, 2020. The decrease in sales was primarily in the Wireless segment, which decreased $1.9 million, partially offset by an increase in sales from the Telco segment of $1.4 million.
Consolidated gross profit increased $3.7 million, or 116%, to $6.8 million for the six months ended March 31, 2021 from $3.2 million for the same period last year. The increase in gross profit was due to an increase in the Telco segment of $2.6 million, as well as an increase in the Wireless segment of $1.1 million.
Consolidated
operating expenses include indirect costs associated with operating our business such as indirect personnel costs, facilities, vehicles, insurance, communication, and business taxes, among other costs. Operating expenses decreased $0.1 million, or 1%, to $4.2 million for the six months ended March 31, 2021 from $4.3 million for the same period last year.
Consolidated selling, general and administrative expenses include overhead costs, which primarily consist of personnel, insurance, professional services, and communication, among other costs. Selling, general and administrative expenses increased $1.3 million, or 23%, to $7.0 million for the six months ended March 31, 2021 from $5.7 million for the same period last year. General and administrative costs accounted for $0.7 million of the
increase, while selling costs accounted for $0.6 million of the increase. Non-cash share-based compensation accounted for $0.4 million of the increased G&A.
Depreciation and amortization expenses decreased $0.4 million, or 39%, to $0.6 million for the six months ended March 31, 2021 from $1.0 million for the same period last year. The decrease was due primarily to decreased amortization expense resulting from the impairment of intangible assets in the three months ended March 31, 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 six months ended March
31, 2021 and $0.2 million for the six months ended March 31, 2020.
Other expense for the six months ended March 31, 2021 was $27.4 thousand as compared to $0.1 million for the same period last year. The expense for the both the six months ended March 31, 2021 and March 31, 2020 is primarily related to our factoring arrangements with our Wireless segment.
Interest expense for the six months ended March 31, 2021 was $0.1 million as compared to $0.2 million for the same period last year. Interest expense for the six months ended March
31, 2021 was related to the revolving bank line of credit, the loan with our primary financial lender.
The provision for income taxes was zero for the six months ended March 31, 2021 compared to a benefit of $15 thousand for the six months ended March 31, 2020. Our effective tax rates during the six months ended March 31, 2021 and 2020 were approximately 0% because of increases in our valuation allowance against our deferred tax assets.
Segment Results
Wireless
Revenues
for the Wireless segment were $9.6 million for the six months ended March 31, 2021 and $11.5 million for the same period last year. The decrease in revenue was due to a full six months of COVID-19 related slow-down in activity included in the current year results.
Gross profit was $3.1 million, or 33% for the six months ended March 31, 2021 and $2.0 million, or 18%, for six months ended March 31, 2020. This increase is due primarily to the impact of structural operational changes and more effective customer sales change order processes in place during the current fiscal six month period.
Operating expenses decreased $0.3 million to $2.6 million for the six
months ended March 31, 2021 from $2.9 million for the same period last year, mainly as a result of lower vehicle and equipment costs as a result of decreased revenues.
Selling, general and administrative expenses increased $0.3 million to $1.3 million for the six months ended March 31, 2021 from $1.0 million for the six months ended March 31, 2020, mainly as a result of personnel costs.
Depreciation and amortization expense was consistent at $0.3 million for the each of the six month periods ended March 31, 2021 and March 31, 2020.
Sales for the Telco segment increased $1.4 million to $15.8 million for the six months ended March 31, 2021 from $14.5 million for the same period last year. The increase was mainly related to sales of used and refurbished equipment.
Gross profit was $3.7 million for the six months ended March 31, 2021 compared to $1.1 million for six months ended March 31, 2020. Gross profit for the six months ended March 31, 2021 rebounded after taking a charge of $2.1 million for inventory obsolescence expense in the same period last year.
Operating
expenses increased $0.2 million to $1.6 million for the six months ended March 31, 2021 from $1.4 million for the same period last year. This increase was due primarily to increased costs from our third-party logistics provider as revenue increases, and severance costs for certain employees resulting from cost reduction activities.
Selling, general and administrative expenses increased $0.1 million to $1.8 million for the six months ended March 31, 2021 from $1.8 million for the same period last year. This increase was due to increased selling costs of $0.3 million partially offset by decreased G&A costs of $0.2 million.
Depreciation and amortization expense decreased $0.4 million to $0.2 million from
$0.6 million for the six months ended March 31, 2021 and 2020, respectively, resulting from significant impairments of intangible assets in the 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-use assets and intangible assets including goodwill, stock 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.
The following table provides a reconciliation by segment of loss from operations to Adjusted EBITDA for the three and six month periods ended March 31, 2021 and March 31, 2020, 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.
Inventory Valuation
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 high 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 March 31, 2021, we had total inventory, before the reserve for excess and obsolete inventories, of $8.9 million, consisting of $1.3 million in new products and $7.6 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 our recycling program. Therefore, we have an obsolete and excess inventory reserve of $3.2 million at March 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 March 31, 2021, there were no indicators of impairment present.
During the six months ended March
31, 2021, cash used in operations was $4.1 million. Cash flows from operations were negatively impacted by a net loss of $5.0 million and net cash used by working capital of $0.2 million, which was partially offset by non-cash adjustments of $1.1 million.
Cash Flows Provided by Investing Activities
During the six months ended March 31, 2021, cash provided by investing activities was $1.4 million which consisted of $1.5 million of payments received under the promissory note receivable.
Cash Flows Used in Financing Activities
During the six months ended March 31, 2021, cash used in financing activities was $0.5 million, of which $1.2 million related to repayment of our promissory note payable,
partially offset by net proceeds from the sale of our common stock utilizing our shelf registration of $0.9 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 principal and interest payments correlate to our promissory note receivable with Leveling 8. We monetized $3.5 million of the $5.8 million remaining balance of the promissory note receivable. In connection with the $1.4 million in payments received in the first quarter of 2021, we paid down the remaining outstanding principal under this loan.
The Company has a $4.0 million revolving line of credit agreement with its primary financial lender, which matures on December 17, 2021. The line of credit
requires quarterly interest payments based on the prevailing Wall Street Journal Prime Rate, floating (3.25% at March 31, 2021), with the addition of a 4% floor rate and a fixed charge coverage ratio of 1.25 to be tested quarterly beginning June 30, 2021. At March 31, 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 60% of eligible Telco segment inventory. Under these limitations, the Company’s total line of credit borrowing capacity was $4.0 million at March 31, 2021.
On April
14, 2020, the Company entered into an unsecured loan in the amount of $2.9 million ("PPP Loan") with our primary lender. 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 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. As of the filing of this Report, we have not received an approval or denial of our application for forgiveness from the SBA; per the Flexibility Act, the date for commencement of loan
payments has not yet occurred, and we have made no loan payments. The Company deferred $0.8 million of loan payments during the six months ended March 31, 2021.
We continue to take actions to preserve and improve our liquidity. We believe that our cash and cash equivalents and restricted cash of $5.2 million at March 31, 2021 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 a waiver for our probable covenant violation under our loan agreements with our primary financial lender. 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 there is some uncertainty whether we will be granted forgiveness from the SBA. In addition, there is still 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 probable covenant violation, 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 six months ended March 31, 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 March 31, 2021, our Chief Executive Officer and Controller 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 Controller as appropriate to allow timely decisions regarding required disclosure.
Item 2. Unregistered Sales of Securities and Use of Proceeds.
During the six months ended March 31, 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.
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.
