ADDVANTAGE TECHNOLOGIES GROUP INC - Quarter Report: 2021 June (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
OR
FOR THE TRANSITION PERIOD FROM________________ TO ______________
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
Commission File number 1-10799
ADDvantage Technologies Group, Inc.
(Exact name of registrant as specified in its charter)
| Oklahoma | 73-1351610 | |||||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
| 1430 Bradley Lane, Suite 196 | ||
Carrollton, Texas 75007 | ||
| (Address of principal executive office) | ||
(918) 251-9121 | ||
| (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. | Yes S 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). | Yes S 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. | |||||
Large accelerated filer £ Accelerated filer £ Non-accelerated filer S Smaller reporting company ☒ Emerging growth company ☐ | |||||
| 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 ☒ | ||||
Shares outstanding of the issuer's $.01 par value common stock as of August 12, 2021 were 12,511,372.
1
ADDVANTAGE TECHNOLOGIES GROUP, INC.
Form 10-Q
For Period Ended June 30, 2021
| Page | ||||||||
June 30, 2021 and September 30, 2020 | ||||||||
Three and Nine Months Ended June 30, 2021 and 2020 | ||||||||
Three and Nine Months Ended June 30, 2021 and 2020 | ||||||||
Nine Months Ended June 30, 2021 and 2020 | ||||||||
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. | |||||||
| Exhibits | ||||||||
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
ADDvantage Technologies Group, Inc.
Consolidated Balance Sheets
(in thousands, except share amounts)
(Unaudited)
| June 30, 2021 | September 30, 2020 | ||||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 3,598 | $ | 8,265 | |||||||
| Restricted cash | 136 | 108 | |||||||||
Accounts receivable, net of allowances of $250, respectively | 8,347 | 3,968 | |||||||||
| Unbilled revenue | 863 | 590 | |||||||||
| Promissory note – current | — | 1,400 | |||||||||
| Income tax receivable | — | 1,283 | |||||||||
Inventories, net of allowances of $3,168 and $3,054, respectively | 5,611 | 5,576 | |||||||||
| Prepaid expenses and other assets | 1,163 | 884 | |||||||||
| Total current assets | 19,718 | 22,074 | |||||||||
| Machinery and equipment | 4,417 | 3,500 | |||||||||
| Leasehold improvements | 795 | 720 | |||||||||
| Property and equipment, at cost | 5,212 | 4,220 | |||||||||
| Less: Accumulated depreciation | (2,242) | (1,586) | |||||||||
| Net property and equipment | 2,970 | 2,634 | |||||||||
| Right-of-use lease assets | 2,991 | 3,758 | |||||||||
| Promissory note – non current | 1,865 | 2,375 | |||||||||
| Intangibles, net of accumulated amortization | 1,186 | 1,425 | |||||||||
| Goodwill | 58 | 58 | |||||||||
| Deferred income taxes | 28 | — | |||||||||
| Other assets | 182 | 179 | |||||||||
| Total assets | $ | 28,998 | $ | 32,503 | |||||||
| Liabilities and Shareholders’ Equity | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | 6,484 | $ | 3,472 | |||||||
| Accrued expenses | 1,809 | 1,319 | |||||||||
| Deferred revenue | 144 | 113 | |||||||||
| Bank line of credit | 2,800 | 2,800 | |||||||||
| Note payable, current | 1,927 | 1,709 | |||||||||
| Right-of-use lease obligations – current | 1,220 | 1,275 | |||||||||
| Financing lease obligations – current | 440 | 285 | |||||||||
| Other current liabilities | 15 | 41 | |||||||||
| Total current liabilities | 14,839 | 11,014 | |||||||||
| Financing lease obligations - long-term | 1,108 | 791 | |||||||||
| Right-of-use lease obligations - long-term | 2,436 | 3,310 | |||||||||
| Note payable, less current portion | 988 | 2,440 | |||||||||
| Other liabilities | 7 | 15 | |||||||||
| Total liabilities | 19,378 | 17,570 | |||||||||
| Shareholders’ equity: | |||||||||||
Common stock, $0.01 par value; 30,000,000 shares authorized; 12,511,372 shares issued and outstanding, and 11,822,009 shares issued and outstanding, respectively | 125 | 118 | |||||||||
| Paid in capital | (745) | (2,567) | |||||||||
| Retained earnings | 10,240 | 17,382 | |||||||||
| Total shareholders’ equity | 9,620 | 14,933 | |||||||||
| Total liabilities and shareholders’ equity | $ | 28,998 | $ | 32,503 | |||||||
See notes to unaudited consolidated financial statements.
3
ADDvantage Technologies Group, Inc.
Consolidated Statements of Operations
(in thousands, except share and per share amounts)
(Unaudited)
| Three Months Ended June 30, | Nine Months Ended June 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| $ | 17,017 | $ | 12,022 | $ | 42,433 | $ | 37,943 | ||||||||||||||||
| Cost of sales | 12,748 | 7,851 | 31,354 | 30,619 | |||||||||||||||||||
| Gross profit | 4,269 | 4,171 | 11,079 | 7,324 | |||||||||||||||||||
| Operating expenses | 2,508 | 1,998 | 6,733 | 6,276 | |||||||||||||||||||
| Selling, general and administrative expenses | 3,561 | 2,421 | 10,532 | 8,097 | |||||||||||||||||||
| Impairment of right of use asset | — | 660 | — | 660 | |||||||||||||||||||
| Impairment of intangibles including goodwill | — | — | — | 8,714 | |||||||||||||||||||
| Depreciation and amortization expense | 314 | 242 | 899 | 1,197 | |||||||||||||||||||
| Gain on disposal of assets | (13) | (8) | (23) | (36) | |||||||||||||||||||
| Loss from operations | (2,101) | (1,142) | (7,062) | (17,584) | |||||||||||||||||||
| Other income (expense): | |||||||||||||||||||||||
| Interest income | 34 | 83 | 115 | 259 | |||||||||||||||||||
| Income from equity method investment | — | — | — | 41 | |||||||||||||||||||
| Other expense, net | (34) | (37) | (61) | (123) | |||||||||||||||||||
| Interest expense | (46) | (101) | (156) | (184) | |||||||||||||||||||
| Total other income (expense), net | (46) | (55) | (102) | (7) | |||||||||||||||||||
| Loss before income taxes | (2,147) | (1,197) | (7,164) | (17,591) | |||||||||||||||||||
| Benefit for income taxes | (23) | (1,220) | (23) | (1,236) | |||||||||||||||||||
| Net income (loss) | $ | (2,124) | $ | 23 | $ | (7,141) | $ | (16,355) | |||||||||||||||
| Income (loss) per share: | |||||||||||||||||||||||
| Basic | $ | (0.17) | $ | — | $ | (0.58) | $ | (1.49) | |||||||||||||||
| Diluted | $ | (0.17) | $ | — | $ | (0.58) | $ | (1.49) | |||||||||||||||
| Shares used in per share calculation: | |||||||||||||||||||||||
| Basic | 12,495,438 | 11,079,580 | 12,352,960 | 10,955,235 | |||||||||||||||||||
| Diluted | 12,495,438 | 11,216,688 | 12,352,960 | 10,955,235 | |||||||||||||||||||
See notes to unaudited consolidated financial statements.
4
ADDvantage Technologies Group, Inc.
Consolidated Statements of Changes in Shareholders' Equity
(in thousands, except share amounts)
(Unaudited)
| Common Stock | Paid-in Capital | Retained Earnings | Treasury Stock | ||||||||||||||||||||||||||||||||
| Shares | Amount | Total | |||||||||||||||||||||||||||||||||
| Balance, September 30, 2020 | 11,822,009 | $ | 118 | $ | (2,567) | $ | 17,382 | $ | — | $ | 14,933 | ||||||||||||||||||||||||
| Net loss | — | — | — | (1,953) | — | (1,953) | |||||||||||||||||||||||||||||
| Issuance of common shares | 238,194 | 3 | 876 | — | — | 879 | |||||||||||||||||||||||||||||
| Restricted stock issuance | 306,390 | 3 | (3) | — | — | — | |||||||||||||||||||||||||||||
| Stock based compensation expense | — | — | 315 | — | — | 315 | |||||||||||||||||||||||||||||
| Balance, December 31, 2020 | 12,366,593 | $ | 124 | $ | (1,379) | $ | 15,429 | $ | — | $ | 14,174 | ||||||||||||||||||||||||
| Net loss | — | — | — | (3,064) | — | (3,064) | |||||||||||||||||||||||||||||
| Issuance of common shares | 7,779 | — | 21 | — | — | 21 | |||||||||||||||||||||||||||||
| Restricted stock issuance, net of forfeitures | (10,000) | (1) | — | — | — | (1) | |||||||||||||||||||||||||||||
| Stock option exercise | 49,000 | — | 89 | — | — | 89 | |||||||||||||||||||||||||||||
| Stock based compensation expense | — | — | 246 | — | — | 246 | |||||||||||||||||||||||||||||
| Balance, March 31, 2021 | 12,413,372 | $ | 124 | $ | (1,023) | $ | 12,364 | $ | — | $ | 11,466 | ||||||||||||||||||||||||
| Net loss | — | — | — | (2,124) | — | (2,124) | |||||||||||||||||||||||||||||
| Restricted stock issuance | 98,000 | 1 | (1) | — | — | — | |||||||||||||||||||||||||||||
| Stock based compensation expense | — | — | 279 | — | — | 279 | |||||||||||||||||||||||||||||
| Balance, June 30, 2021 | 12,511,372 | $ | 125 | $ | (745) | $ | 10,240 | $ | — | $ | 9,620 | ||||||||||||||||||||||||
| Common Stock | Paid-in Capital | Retained Earnings | Treasury Stock | ||||||||||||||||||||||||||||||||
| Shares | Amount | Total | |||||||||||||||||||||||||||||||||
| Balance, September 30, 2019 | 10,861,950 | $ | 109 | $ | (4,377) | $ | 34,715 | $ | (1,000) | $ | 29,447 | ||||||||||||||||||||||||
| Net loss | — | — | — | (1,718) | — | (1,718) | |||||||||||||||||||||||||||||
| Stock based compensation expense | — | — | 14 | — | — | 14 | |||||||||||||||||||||||||||||
| Balance, December 31, 2019 | 10,861,950 | $ | 109 | $ | (4,363) | $ | 32,997 | $ | (1,000) | $ | 27,743 | ||||||||||||||||||||||||
| Net loss | — | — | — | (14,661) | — | (14,661) | |||||||||||||||||||||||||||||
| Restricted stock issuance | — | — | 377 | — | — | 377 | |||||||||||||||||||||||||||||
| Stock option exercise | 110,000 | 1 | 172 | — | — | 173 | |||||||||||||||||||||||||||||
| Stock based compensation expense | — | — | 92 | — | — | 92 | |||||||||||||||||||||||||||||
| Balance, March 31, 2020 | 10,971,950 | $ | 109 | $ | (3,722) | $ | 18,336 | $ | (1,000) | $ | 13,724 | ||||||||||||||||||||||||
| Net income | — | — | — | 23 | — | 23 | |||||||||||||||||||||||||||||
| Utilization of treasury shares | (500,658) | (5) | (995) | — | 1,000 | — | |||||||||||||||||||||||||||||
| Issuance of shares | 573,199 | 6 | 2,103 | — | — | 2,109 | |||||||||||||||||||||||||||||
| Restricted stock issuance | 237,014 | 2 | 13 | — | — | 15 | |||||||||||||||||||||||||||||
| Stock option exercise | 13,334 | — | 24 | — | — | 24 | |||||||||||||||||||||||||||||
| Stock based compensation expense | — | — | (15) | — | — | (15) | |||||||||||||||||||||||||||||
| Balance, June 30, 2020 | 11,294,839 | $ | 113 | $ | (2,592) | $ | 18,360 | $ | — | $ | 15,881 | ||||||||||||||||||||||||
Due to rounding, numbers presented may not foot to the totals provided.
See notes to unaudited consolidated financial statements.
5
ADDvantage Technologies Group, Inc.
Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
| Nine Months Ended June 30, | |||||||||||
| 2021 | 2020 | ||||||||||
| Operating Activities: | |||||||||||
| Net loss | $ | (7,141) | $ | (16,355) | |||||||
| Adjustments to reconcile net loss from operations to net cash used in operating activities: | |||||||||||
| Depreciation | 661 | 590 | |||||||||
| Amortization | 239 | 607 | |||||||||
| Change in right-of-use assets and liabilities, net | (161) | — | |||||||||
| Impairment of right of use asset | — | 660 | |||||||||
| Impairment of intangibles including goodwill | — | 8,714 | |||||||||
| Provision for excess and obsolete inventories | 115 | 2,125 | |||||||||
| Stock based compensation expense | 840 | 167 | |||||||||
| Gain from disposal of property and equipment | (23) | (36) | |||||||||
| Gain from equity method investment | — | (41) | |||||||||
| Changes in assets and liabilities: | |||||||||||
| Accounts receivable | (4,379) | 1,662 | |||||||||
| Unbilled revenue | (274) | 2,014 | |||||||||
| Income tax receivable\payable | 1,255 | (14) | |||||||||
| Inventories | (150) | (464) | |||||||||
| Prepaid expenses and other assets | (269) | 97 | |||||||||
| Accounts payable | 3,012 | 56 | |||||||||
| Accrued expenses and other liabilities | 456 | (135) | |||||||||
| Deferred revenue | 31 | 144 | |||||||||
| Net cash used in operating activities | (5,788) | (1,429) | |||||||||
| Investing Activities: | |||||||||||
| Proceeds from promissory note receivable | 1,910 | 2,025 | |||||||||
| Loan repayment from equity method investee | — | 40 | |||||||||
| Purchases of property and equipment | (185) | (471) | |||||||||
| Disposals of property and equipment | 43 | 78 | |||||||||
| Net cash provided by investing activities | 1,768 | 1,672 | |||||||||
| Financing Activities: | |||||||||||
| Change in bank line of credit | — | 2,800 | |||||||||
| Proceeds from note payable | — | 6,374 | |||||||||
| Guaranteed payments for acquisition of business | — | (667) | |||||||||
| Payments on financing lease obligations | (359) | (277) | |||||||||
| Payments on notes payable | (1,249) | (1,622) | |||||||||
| Proceeds from sale of common stock | 900 | 1,829 | |||||||||
| Proceeds from stock options exercised | 89 | 197 | |||||||||
| Net cash provided by (used in) financing activities | (619) | 8,634 | |||||||||
| Net (decrease) increase in cash, cash equivalents and restricted cash | (4,639) | 8,877 | |||||||||
| Cash, cash equivalents and restricted cash at beginning of period | 8,373 | 1,594 | |||||||||
| Cash, cash equivalents and restricted cash at end of period | $ | 3,734 | $ | 10,471 | |||||||
See notes to unaudited consolidated financial statements.
6
ADDvantage Technologies Group, Inc.
Notes to Unaudited Consolidated Financial Statements
Note 1 - Basis of Presentation and Accounting Policies
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 nine months ended June 30, 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.
Reclassification
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.
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 – Revenue 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 $1.6 million and $0.7 million for the three months ended June 30, 2021 and 2020, respectively and $2.9 million and $1.5 million for the nine month period ended June 30, 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 for 10% or greater of the Company's revenue totaled 39% and sales to two customers comprised approximately 24% of consolidated revenues for the nine months ended June 30, 2021 and 2020, respectively.
7
Our sales by type were as follows, in thousands:
| Three Months Ended June 30, | Nine Months Ended June 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Wireless services sales | $ | 4,136 | $ | 5,123 | $ | 13,716 | $ | 16,593 | |||||||||||||||
| Equipment sales: | |||||||||||||||||||||||
| Telco | 12,826 | 6,148 | 28,289 | 19,912 | |||||||||||||||||||
| Intersegment | — | (23) | — | (23) | |||||||||||||||||||
| Telco repair sales | 1 | 33 | 14 | 49 | |||||||||||||||||||
| Telco recycle sales | 55 | 741 | 414 | 1,412 | |||||||||||||||||||
| Total sales | $ | 17,017 | $ | 12,022 | $ | 42,433 | $ | 37,943 | |||||||||||||||
Contract assets and contract liabilities are included in unbilled revenue and deferred revenue, respectively, in the consolidated balance sheets. At June 30, 2021 and September 30, 2020, contract assets were $0.9 million and $0.6 million, respectively, and contract liabilities were $0.1 million and $0.1 million, respectively. The Company recognized $0.1 million of contract revenue during the nine months ended June 30, 2021 related to contract liabilities recorded in deferred revenue at September 30, 2020.
Note 3 – Accounts 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 Company 90% of the sold receivables and establishes a reserve of 10% 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 10% to the Company. At June 30, 2021, the third-party financial institution has a reserve of $0.1 million, which is reflected as restricted cash, against the sold receivables of $0.9 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 $0.9 million at June 30, 2021 for which there is a limit of $4.0 million. Although the sale of receivables is with recourse, the Company did not record a recourse obligation at June 30, 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 nine months ended June 30, 2021 and 2020, the Company received proceeds from the sold receivables under all of the various agreements of $12.9 million and $15.9 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 0.7% to 2.4% of the gross receivables sold for the nine months ended June 30, 2021 and 2020. The Company recorded costs of $0.1 million and $0.2 million for the three and nine months ended June 30, 2021, respectively, and $0.1 million and $0.3 million for the three and nine months ended June 30, 2020, respectively, in other expense in the consolidated statements of operations.
Note 4 – Promissory Note Receivable
During 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 6% 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 nine months ended June 30, 2021, the Company received principal payments totaling $1.9 million, of which approximately $1.4 million was a prepayment. At June 30, 2021, there was $1.9 million outstanding on the promissory note. The remaining promissory note is 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 $3.5 million to monetize a portion of this promissory note receivable. See Note 7 - Debt for disclosures related to the Company's promissory note payable.
8
Note 5 – Inventories
Inventories, which are all within the Telco segment, at June 30, 2021 and September 30, 2020 are as follows, in thousands:
| June 30, 2021 | September 30, 2020 | ||||||||||
| New equipment | $ | 1,261 | $ | 1,311 | |||||||
| Refurbished and used equipment | 7,518 | 7,319 | |||||||||
| Allowance for excess and obsolete inventory | (3,168) | (3,054) | |||||||||
| Total inventories, net | $ | 5,611 | $ | 5,576 | |||||||
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 – Intangible 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.
Intangible assets with their associated accumulated amortization and impairment at June 30, 2021 and September 30, 2020 are as follows, in thousands:
| June 30, 2021 | |||||||||||||||||||||||
| Intangible assets: | Gross | Accumulated Amortization | Impairment | Net | |||||||||||||||||||
Customer relationships – 10 years | $ | 8,396 | $ | (4,141) | $ | (3,894) | $ | 361 | |||||||||||||||
Trade name – 10 years | 2,122 | (1,297) | — | 825 | |||||||||||||||||||
| Total intangible assets | $ | 10,518 | $ | (5,438) | $ | (3,894) | $ | 1,186 | |||||||||||||||
| September 30, 2020 | |||||||||||||||||||||||
| Intangible assets: | Gross | Accumulated Amortization | Impairment | Net | |||||||||||||||||||
Customer relationships – 10 years | $ | 8,396 | $ | (4,021) | $ | (3,894) | $ | 481 | |||||||||||||||
Trade name – 10 years | 2,122 | (1,178) | — | 944 | |||||||||||||||||||
Non-compete agreements – 3 years | 374 | (374) | — | — | |||||||||||||||||||
| Total intangible assets | $ | 10,892 | $ | (5,573) | $ | (3,894) | $ | 1,425 | |||||||||||||||
Note 7 – Debt
Loan Agreement
On March 10, 2020, the Company entered into a loan agreement with its primary financial lender for $3.5 million, bearing interest at 6% per annum. The loan was payable in seven semi-annual installments of principal and interest with the first payment occurring June 30, 2020. In connection with the $1.5 million payment received in the first fiscal quarter of 2021 from the promissory note receivable, the Company fully repaid the remaining $1.2 million of principal outstanding under this loan.
Credit Agreement
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 June 30, 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 June 30, 2021, there was $2.8 million
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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 June 30, 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 1.25 to 1.0 to be tested quarterly beginning June 30, 2021. The Company was not in compliance with this covenant at June 30, 2021. The Company notified its primary financial lender of the covenant violation, and on August 4, 2021, the primary financial lender granted a waiver of the covenant violation under the credit agreement. Although the covenant violation was waived at June 30, 2021, the Company believes it may again be out of compliance with this covenant at September 30, 2021. If the Company is not in compliance with the covenant at September 30, 2021, it 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 $2.9 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 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 by the SBA. On August 28, 2020, we submitted our application to our lender, requesting PPP Loan forgiveness of $2.9 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 June 30, 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 – Equity 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 0.01 per share, having an aggregate offering price of up to $13,850,000 ("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.
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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 3.0% 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 nine months ended June 30, 2021, 245,973 shares were sold by Northland on behalf of the Company with gross proceeds of $0.9 million, and net proceeds after commissions and fees of $0.9 million.
Note 9 – Earnings 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. Basic and diluted earnings per share for the three and nine months ended June 30, 2021 and 2020 are (in thousands, except per share amounts):
| Three Months Ended June 30, | Nine Months Ended June 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Net income (loss) attributable to common shareholders | $ | (2,124) | $ | 23 | (7,141) | (16,355) | |||||||||||||||||
| Basic weighted average shares | 12,495,438 | 11,079,580 | 12,352,960 | 10,955,235 | |||||||||||||||||||
| Effect of dilutive securities: | — | — | — | — | |||||||||||||||||||
| Stock options | — | 137,108 | — | — | |||||||||||||||||||
| Diluted weighted average shares | 12,495,438 | 11,216,688 | 12,352,960 | 10,955,235 | |||||||||||||||||||
| Income (loss) per common share: | |||||||||||||||||||||||
| Basic | $ | (0.17) | $ | — | $ | (0.58) | $ | (1.49) | |||||||||||||||
| Diluted | $ | (0.17) | $ | — | $ | (0.58) | $ | (1.49) | |||||||||||||||
The table below includes information related to stock options that were outstanding at the end of each respective three and nine month period ended June 30, but have been excluded from the computation of weighted-average stock options for dilutive securities because their effect would be anti-dilutive. The stock options were anti-dilutive either due to the Company incurring a net loss for the periods presented or the exercise price exceeded the average market price per share of our common stock for the three and nine months ended June 30, 2021 and 2020.
| Three Months Ended June 30, | Nine Months Ended June 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Stock options excluded | 50,000 | 150,000 | 50,000 | 480,000 | |||||||||||||||||||
| Weighted average exercise price of stock options | $ | 1.28 | $ | 2.96 | $ | 1.28 | $ | 1.89 | |||||||||||||||
| Average market price of common stock | $ | 2.35 | $ | 2.41 | $ | 2.61 | $ | 2.48 | |||||||||||||||
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Note 10 – Supplemental Cash Flow Information
| (in thousands) | Nine Months Ended June 30, | ||||||||||
| 2021 | 2020 | ||||||||||
| Supplemental cash flow information: | |||||||||||
| Cash paid for interest | $ | 106 | $ | 144 | |||||||
| Supplemental noncash investing and financing activities: | |||||||||||
| Assets acquired under financing leases | $ | 832 | $ | 454 | |||||||
Note 11 – Stock-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 June 30, 2021, 2,100,415 shares of common stock were reserved for stock award grants under the Plan. Of these reserved shares, 396,246 shares were available for future grants.
Stock Options
A summary of the status of the Company's stock options at June 30, 2021 and changes during the nine months ended June 30, 2021 is presented below:
| Wtd. Avg. Ex. Price | Shares | Aggregate Intrinsic Value (in thousands) | |||||||||||||||
| Outstanding at September 30, 2020 | $ | 1.55 | 100,000 | $ | 37 | ||||||||||||
| Exercised | 1.81 | (49,000) | 49 | ||||||||||||||
| Forfeited | 1.81 | (1,000) | — | ||||||||||||||
| Outstanding at June 30, 2021 | $ | 1.28 | 50,000 | $ | 69 | ||||||||||||
| Exercisable at June 30, 2021 | $ | 1.28 | 34,334 | $ | 44 | ||||||||||||
Restricted stock awards
A summary of the Company's non-vested restricted share awards (RSA) at June 30, 2021 and changes during the nine months ended June 30, 2021 is presented in the following table (in thousands, except shares):
| Shares | Fair Value | ||||||||||
| Non-vested at September 30, 2020 | 475,024 | $ | 1,058 | ||||||||
| Granted | 444,390 | 965 | |||||||||
| Vested | (228,358) | (455) | |||||||||
| Forfeited | (50,000) | (125) | |||||||||
| Non-vested at June 30, 2021 | 641,056 | $ | 1,443 | ||||||||
During the three month period ended June 30, 2021 and 2020, expenses (income) related to share-based arrangements including restricted stock and stock option awards, were $0.3 million and $(15) thousand, respectively.
During the nine month period ended June 30, 2021 and 2020, compensation expenses related to share-based arrangements including restricted stock and stock option awards, were $0.8 million and $0.1 million respectively.
The Company did not recognize a tax benefit for compensation expense recognized during the three and nine month period ended June 30, 2021 and 2020.
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At June 30, 2021, unrecognized compensation expense related to non-vested stock-based compensation awards not yet recognized in the consolidated statements of operations was $0.8 million. That cost is expected to be recognized over a period of 2.9 years.
Note 12 – Leases
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 June 30, 2021 and 2020. Rental payments received from subleased right-of-use assets is as follows:
| (in thousands) | Three Months Ended June 30, | Nine Months Ended June 30, | |||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Subleased rental receipts: | |||||||||||||||||||||||
| Wireless | $ | 46 | $ | 46 | $ | 137 | $ | 136 | |||||||||||||||
| Telco | — | 100 | 115 | 301 | |||||||||||||||||||
| Total subleased rental receipts | $ | 46 | $ | 146 | $ | 252 | $ | 437 | |||||||||||||||
Note 13 – Segment Reporting
The Company is reporting its financial performance based on its external reporting segments: Wireless Infrastructure Services and Telecommunications. These reportable segments are described below.
Wireless Infrastructure Services (“Wireless”)
The Wireless segment provides turn-key wireless infrastructure services for the four major U.S. wireless carriers, communication tower companies, national integrators, and original equipment manufacturers that support these wireless carriers. These services primarily consist of the installation and upgrade of technology on cell sites and the construction of new small cells for 5G.
Telecommunications (“Telco”)
The Company’s Telco segment sells new and refurbished telecommunications networking equipment, including both central office and customer premise equipment, to its customer base of telecommunications providers, enterprise customers and resellers located primarily in North America. This segment also offers its customers repair and testing services for telecommunications networking equipment. In addition, this segment offers its customers decommissioning services for surplus and obsolete equipment, which it in turn processes through its recycling program. The Company evaluates performance and allocates its resources based on operating income. The accounting policies of its reportable segments are the same as those described in the summary of significant accounting policies. Segment assets consist primarily of cash and cash equivalents, accounts receivable, inventories, property and equipment, goodwill and intangible assets.
The Company changed the allocation of corporate general and administrative expenses between our reportable business segments. At September 30, 2020, the Company did not allocate the corporate general and administrative expenses to the reportable segments and listed those expenses separate from the operating results of those reportable segments. During fiscal 2021, the Company reviewed its reportable segments and its corporate general and administrative expenses and allocation methodology, which resulted in the Company allocating its corporate general and administrative expenses to the reportable segments. The prior period allocations have been adjusted to reflect the Company's current allocation methodology.
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| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| (in thousands) | June 30, 2021 | June 30, 2020 | June 30, 2021 | June 30, 2020 | |||||||||||||||||||
| Sales | |||||||||||||||||||||||
| Wireless | $ | 4,136 | $ | 5,123 | $ | 13,716 | $ | 16,593 | |||||||||||||||
| Telco | 12,881 | 6,899 | 28,717 | 21,350 | |||||||||||||||||||
| Total sales | $ | 17,017 | $ | 12,022 | $ | 42,433 | $ | 37,943 | |||||||||||||||
| Gross profit | |||||||||||||||||||||||
| Wireless | $ | 1,233 | $ | 2,251 | $ | 4,370 | $ | 4,299 | |||||||||||||||
| Telco | 3,036 | 1,920 | 6,710 | 3,025 | |||||||||||||||||||
| Total gross profit (loss) | $ | 4,269 | $ | 4,171 | $ | 11,079 | $ | 7,324 | |||||||||||||||
| Wireless | 30 | % | 44 | % | 32 | % | 26 | % | |||||||||||||||
| Telco | 24 | % | 28 | % | 23 | % | 14 | % | |||||||||||||||
| Total gross profit margin (loss) | 25 | % | 35 | % | 26 | % | 19 | % | |||||||||||||||
| Gain (loss) from operations | |||||||||||||||||||||||
| Wireless | $ | (2,117) | $ | (75) | $ | (4,759) | $ | (3,310) | |||||||||||||||
| Telco | 16 | (1,067) | (2,303) | (14,274) | |||||||||||||||||||
| Total gain (loss) from operations | $ | (2,101) | $ | (1,142) | $ | (7,062) | $ | (17,584) | |||||||||||||||
| (in thousands) | June 30, 2021 | September 30, 2020 | |||||||||
| Segment assets | |||||||||||
| Wireless | $ | 5,645 | $ | 5,324 | |||||||
| Telco | 16,689 | 12,298 | |||||||||
| Non-allocated | 6,664 | 14,881 | |||||||||
| Total assets | $ | 28,998 | $ | 32,503 | |||||||
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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”
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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. 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. Although we experienced increased revenues this quarter compared to recent quarters since the pandemic began last year, there are a number of uncertainties that could impact our future results of operations, including the efficacy and widespread distribution of a vaccine, the return of major outdoor events during the summer and fall months, and the impact of COVID-19 on the operating results and capital budgets of our customers.
Results of Operations
Comparison of Results of Operations for the Three Months Ended June 30, 2021 and June 30, 2020
Consolidated
Consolidated revenues increased $5.0 million, or 42%, to $17.0 million for the three months ended June 30, 2021 from $12.0 million for the three months ended June 30, 2020. The increase in sales was due to increased sales in the Telco segment of $6.0 million partially offset by a decrease in Wireless segment sales of $1.0 million.
Consolidated gross profit increased $0.1 million for the three months ended June 30, 2021 to $4.3 million compared to $4.2 million for the same period last year. The increases in gross profit were due to an increase in the Telco segment of $1.1 million, and a Wireless segment decrease of $1.0 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 increased $0.5 million, or 26%, to $2.5 million for the three months ended June 30, 2021 from $2.0 million for the same period last year. The increase in operating expenses were due to an increase in the Wireless segment of $0.6 million, partially offset by a decrease in the Telco segment of $0.1 million.
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 $1.1 million, or 47%, to $3.6 million for the three months ended June 30, 2021 from $2.4 million for the same period last year. General and administrative costs accounted for $0.4 million of the increase, while selling costs accounted for $0.7 million of the increase.
Impairment of right of use assets for the three months ended June 30, 2020 was $0.7 million related to impairing an asset associated with a building lease in the Telco segment.
Depreciation and amortization expenses increased $0.1 million, or 30%, to $0.3 million for the three months ended June 30, 2021, from $0.2 million for the same period last year.
Interest income primarily consists of interest earned on the promissory note receivable. Interest income decreased to $34 thousand for the three months ended June 30, 2021 compared to $83 thousand for the same period last year, as the note receivable principal has decreased.
Interest expense for the three months ended June 30, 2021 was $46 thousand as compared to $101 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 benefit was $23 thousand for the three months ended June 30, 2021 and $1.2 million for the same period in 2020. Our effective tax rate during the three months ended June 30, 2021 was approximately 0% because increases in our valuation allowance offset against our deferred tax assets. As a result of the CARES Act, the Company can carryback net operating losses generated in 2018 through 2020 for a period of five years. As a result, the Company’s effective tax rate included an income tax benefit of $1.2 million recognized during the three months
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ended June 30, 2020 related to tax losses generated during the fiscal year up to the amount that the Company estimates is realizable based upon taxable income in the carryback periods.
Segment Results
Wireless
Revenues for the Wireless segment decreased $1.0 million to $4.1 million for the three months ended June 30, 2021 from $5.1 million for the same period of last year. Revenues continued to be negatively impacted due to both delays in infrastructure spending from the major U.S. carriers and circumstances related to the COVID-19 pandemic. However, we believe that the 5G rollout will gain momentum in the calendar year and that there is substantial 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 adjustments in order to be well positioned to secure 5G construction services work.
Gross profit was $1.3 million, or 30% for the three months ended June 30, 2021 compared to $2.3 million, or 44%, for the three months ended June 30, 2020. The decrease in the gross profit percentage was driven by a higher gross profit percentage for the three months ended June 30, 2020 due primarily to recognition of change order revenues where expenses had been incurred in prior quarters.
Operating expenses increased $0.6 million to $1.8 million for the three months ended June 30, 2021 from $1.2 million for the same period last year. This increase is primarily attributable to increased personnel costs as we prepare for the rollout of 5G-related work and increased rent expense.
Selling, general and administrative expenses increased $0.4 million to $1.4 million for the three months ended June 30, 2021 from $1.0 million for the three months ended June 30, 2020. This increase was due to increased sales-related personnel costs. The corporate overhead allocation increased $0.2 million mainly as a result of increased employee stock-based compensation expenses and executive severance costs.
Depreciation and amortization expense was $0.2 million for the three months ended June 30, 2021 compared to $0.1 million for the the same period last year.
Telco
Revenues for the Telco segment increased $6.0 million to $12.9 million for the three months ended June 30, 2021 from $6.9 million for the same period last year. The increase in revenues were related to increased sales of used and refurbished equipment.
Gross profit was $3.0 million for the three months ended June 30, 2021 and $1.9 million for the three months ended June 30, 2020. The increase in gross profit was due primarily increased revenues for the three months ended June 30, 2021.
Operating expenses decreased $0.1 million to $0.7 million for the three months ended June 30, 2021 compared to $0.8 million the three months ended June 30, 2020.
Selling, general and administrative expenses increased $0.8 million to $2.2 million for the three months ended June 30, 2021 from $1.4 million for the same period last year. This increase was due primarily to increased sales commissions. In addition, the corporate allocation increased $0.2 million, which primarily related to increased employee stock-based compensation expenses and executive severance costs.
Impairment of right of use assets for the three months ended June 30, 2020 was $0.7 million related to the impairment of a right of use asset associated with a building lease in the Telco segment.
Depreciation and amortization expense was $0.1 million for the three months ended June 30, 2021 and 2020.
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Comparison of Results of Operations for the Nine Months Ended June 30, 2021 and June 30, 2020
Consolidated
Consolidated revenues increased $4.5 million, or 12%, to $42.4 million for the nine months ended June 30, 2021 from $37.9 million for the nine months ended June 30, 2020. The increase in revenue was primarily in the Telco segment, which increased $7.4 million, partially offset by a decrease of $2.9 million in the Wireless segment.
Consolidated gross profit increased $3.8 million, or 51%, to $11.1 million for the nine months ended June 30, 2021 from $7.3 million for the same period last year. The increase in gross profit was due to an increase in the Telco segment of $3.7 million, as well as an increase in the Wireless segment of $0.1 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 increased $0.4 million, or 7%, to $6.7 million for the nine months ended June 30, 2021 from $6.3 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 $2.4 million, or 30%, to $10.5 million for the nine months ended June 30, 2021 from $8.1 million for the same period last year. General and administrative costs accounted for $1.2 million of the increase, while selling costs accounted for $1.3 million of the increase. Non-cash stock-based compensation expense accounted for $0.7 million of the increased general and administrative costs.
Depreciation and amortization expenses decreased $0.3 million, or 25%, to $0.9 million for the nine months ended June 30, 2021 from $1.2 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 nine months ended June 30, 2020.
Interest income primarily consists of interest earned on the promissory note from the sale of the cable business in June 2019. Interest income was $0.1 million for nine months ended June 30, 2021 and $0.3 million for the nine months ended June 30, 2020.
Other expense for the nine months ended June 30, 2021 was $61 thousand as compared to $0.1 million for the same period last year. The expense for the both the nine months ended June 30, 2021 and June 30, 2020 is primarily related to our factoring arrangements in our Wireless segment.
Interest expense for the nine months ended June 30, 2021 was $0.1 million as compared to $0.2 million for the same period last year. Interest expense for the nine months ended June 30, 2021 was related to the revolving bank line of credit and the loan with our primary financial lender.
The provision for income taxes was $23 thousand for the nine months ended June 30, 2021 compared to a benefit of $1.2 million for the nine months ended June 30, 2020. Our effective tax rates during the nine months ended June 30, 2021 was approximately 0% because of increases in our valuation allowance against our deferred tax assets. As a result of the CARES Act, the Company can carryback net operating losses generated in 2018 through 2020 for a period of five years. As a result, the Company’s effective tax rate included an income tax benefit of $1.2 million recognized during the nine months ended June 30, 2020 related to tax losses generated during the fiscal year up to the amount that the Company estimates is realizable based upon taxable income in the carryback periods.
Segment Results
Wireless
Revenues for the Wireless segment were $13.7 million for the nine months ended June 30, 2021 and $16.6 million for the same period last year. The decrease in revenue was due to a full nine months of COVID-19 related slow-down in activity included in the current year results.
Gross profit was $4.4 million, or 32% for the nine months ended June 30, 2021 and $4.3 million, or 26%, for the nine months ended June 30, 2020. The increase in the gross profit percentage is due primarily to the impact of
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structural operational changes and more effective customer sales change order processes in place during the current fiscal year.
Operating expenses increased $0.3 million to $4.4 million for the nine months ended June 30, 2021 from $4.1 million for the same period last year, mainly as a result of lower vehicle and equipment costs as a result of decreased revenues. This increase is primarily attributable to increased personnel costs as we prepare for the rollout of 5G-related work and increased rent expense.
Selling, general and administrative expenses increased $1.3 million to $4.3 million for the nine months ended June 30, 2021 from $3.0 million for the nine months ended June 30, 2020, mainly as a result of personnel costs. In addition, the corporate allocation increased $0.7 million, which primarily related to increased employee stock-based compensation expenses and executive severance costs.
Depreciation and amortization expense was consistent at $0.5 million for both the nine months ended June 30, 2021 and 2020.
Telco
Revenues for the Telco segment increased $7.4 million to $28.7 million for the nine months ended June 30, 2021 from $21.4 million for the same period last year. The increase was mainly related to sales of used and refurbished equipment.
Gross profit was $6.7 million for the nine months ended June 30, 2021 compared to $3.0 million for nine months ended June 30, 2020. Gross profit for the nine months ended June 30, 2021 rebounded after taking a charge of $2.1 million for inventory obsolescence expense in the same period last year.
Operating expenses increased $1.2 million to $2.3 million for the nine months ended June 30, 2021 from $2.1 million for the same period last year. This increase was due primarily to increased costs from our third-party logistics provider due to revenue increases and severance costs for certain employees resulting from cost reduction activities.
Selling, general and administrative expenses increased $1.2 million to $6.3 million for the nine months ended June 30, 2021 from $5.1 million for the same period last year. This increase was due to increased selling expenses of $0.8 million, partially offset by decreased general and administrative expenses of $0.2 million. In addition, the corporate allocation increased $0.6 million, which primarily related to increased employee stock-based compensation expenses and executive severance costs.
Depreciation and amortization expense decreased $0.3 million to $0.4 million from $0.7 million for the nine months ended June 30, 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-based compensation expense, other income, other expense, interest income and income from equity method investment. Adjusted EBITDA is presented below because this metric is used by the financial community as a method of measuring our financial performance and of evaluating the market value of companies considered to be in similar businesses. Since Adjusted EBITDA is not a measure of performance calculated in accordance with GAAP, it should not be considered in isolation of, or as a substitute for, net earnings as an indicator of operating performance. Adjusted EBITDA, as calculated below, may not be comparable to similarly titled measures employed by other companies. In addition, Adjusted EBITDA is not necessarily a measure of our ability to fund our cash needs.
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The following table provides a reconciliation by segment of loss from operations to Adjusted EBITDA for the three and nine month periods ended June 30, 2021 and June 30, 2020, in thousands:
Due to rounding, numbers presented may not foot to the totals provided.
| Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | ||||||||||||||||||||||||||||||||||
| Wireless | Telco | Total | Wireless | Telco | Total | ||||||||||||||||||||||||||||||
| Loss from operations | $ | (2,117) | $ | 16 | $ | (2,101) | $ | (75) | $ | (1,067) | $ | (1,142) | |||||||||||||||||||||||
| Impairment of right of use asset | — | — | — | — | 660 | 660 | |||||||||||||||||||||||||||||
| Depreciation and amortization expense | 185 | 129 | 314 | 145 | 97 | 242 | |||||||||||||||||||||||||||||
| Stock based compensation expense | 136 | 143 | 279 | 24 | 37 | 61 | |||||||||||||||||||||||||||||
| Adjusted EBITDA | $ | (1,796) | $ | 288 | $ | (1,508) | $ | 94 | $ | (273) | $ | (179) | |||||||||||||||||||||||
| Nine Months Ended June 30, 2021 | Nine Months Ended June 30, 2020 | ||||||||||||||||||||||||||||||||||
| Wireless | Telco | Total | Wireless | Telco | Total | ||||||||||||||||||||||||||||||
| Loss from operations | $ | (4,759) | $ | (2,303) | $ | (7,062) | $ | (3,310) | $ | (14,274) | $ | (17,584) | |||||||||||||||||||||||
| Impairment of right of use asset | — | — | — | — | 660 | 660 | |||||||||||||||||||||||||||||
| Impairment of intangibles including goodwill | — | — | — | — | 8,714 | 8,714 | |||||||||||||||||||||||||||||
| Depreciation and amortization expense | 513 | 387 | 899 | 460 | 737 | 1,197 | |||||||||||||||||||||||||||||
| Stock based compensation expense | 383 | 457 | 840 | 56 | 111 | 167 | |||||||||||||||||||||||||||||
| Adjusted EBITDA | $ | (3,863) | $ | (1,459) | $ | (5,323) | $ | (2,794) | $ | (4,052) | $ | (6,846) | |||||||||||||||||||||||
Critical Accounting Policies
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 June 30, 2021, we had total inventory, before the reserve for excess and obsolete inventories, of $8.8 million, consisting of $1.3 million in new products and $7.5 million in used or refurbished products.
We regularly review the value of our inventory in detail with consideration given to rapidly changing technology which can significantly affect future customer demand. For individual inventory items, we may carry inventory
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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 June 30, 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 June 30, 2021, there were no indicators of impairment present.
Liquidity and Capital Resources
Cash Flows Used in Operating Activities
During the nine months ended June 30, 2021, cash used in operations was $5.8 million. Cash flows from operations were negatively impacted by a net loss of $7.1 million and net cash used by working capital of $0.3 million, which was partially offset by non-cash adjustments of $1.7 million.
Cash Flows Provided by Investing Activities
During the nine months ended June 30, 2021, cash provided by investing activities was $1.8 million which primarily consisted of $1.9 million of payments received under the promissory note receivable.
Cash Flows Used in Financing Activities
During the nine months ended June 30, 2021, cash used in financing activities was $0.6 million, of which $1.2 million related to repayment of our promissory note payable and $0.4 million related to payments under our financing lease arrangements, 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 $1.8 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 June 30, 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 June 30, 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 June 30, 2021.
The line of credit agreement provides that the Company maintain a fixed charge coverage ratio (net cash flow to total fixed charge) of not less than 1.25 to 1.0 to be tested quarterly beginning June 30, 2021. The Company was not in compliance with this covenant at June 30, 2021. The Company notified its primary financial lender of the covenant violation, and on August 4, 2021, the primary financial lender granted a waiver of the covenant violation
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under the credit agreement. Although the covenant violation was waived at June 30, 2021, the Company believes it may again be out of compliance with this covenant at September 30, 2021. If the Company is not in compliance with the covenant at September 30, 2021, it 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.
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 June 30, 2021.
We continue to take actions to preserve and improve our liquidity. We believe that our cash and cash equivalents and restricted cash of $3.7 million at June 30, 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 need to seek an additional waiver from our primary financial lender if we are not in compliance with our covenant under our loan agreement again next quarter. Further, as discussed above, we received the PPP Loan in April 2020, which provided funding necessary to offset the immediate and anticipated impacts of COVID-19, and we are awaiting the final determination from the SBA on our forgiveness application. 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 any future covenant violations, there is still risk that we may not have sufficient cash and cash equivalents available for us to sustain our operations at our current level. If that were to occur, we would need to seek additional funding and further utilize our shelf registration that we have available to us in order to enhance our cash position and assist in our working capital needs.
In the nine months ended June 30, 2021, we utilized our recently filed shelf registration statement to raise additional cash by selling common shares utilizing an at the market offering under our equity distribution agreement with Northland Securities, Inc. (“Northland”). Under this program, we sold 245,973 shares for net proceeds of $0.9 million.
Item 4. Controls and Procedures.
We maintain disclosure controls and procedures that are designed to ensure the information we are required to disclose in the reports we file or submit under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Based on their evaluation as of June 30, 2021, our Chief Executive Officer and interim Chief Financial Officer concluded that our disclosure controls and procedures are effective to accomplish their objectives and to ensure the information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and interim Chief Financial Officer as appropriate to allow timely decisions regarding required disclosure.
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PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Securities and Use of Proceeds.
During the nine months ended June 30, 2021, the Company sold 245,973 shares of common stock under its registration statement on Form S-3 effective as of April 1, 2020 (333-236859). Gross proceeds from such sales during the quarter were $0.9 million and net proceeds were $0.9 million after the payment of approximately $31,313 in commissions to Northland Securities, Inc., the underwriter of the offering. Total gross proceeds to the Company from sales under such registration statement since its effective date are $3.1 million and total net proceeds to the Company are $3.0 million after the payment of $0.1 million in commissions to Northland. All sales have been made pursuant to the Prospectus Supplement filed with the Commission on April 24, 2020, under which the Company may sell up to $13,850,000 in common stock. All net proceeds to the Company from such sales have been used in accordance with the “Use of Proceeds” section of such Prospectus Supplement.
Item 6. Exhibits.
| Exhibit No. | Description | ||||
| 31.1 | |||||
| 31.2 | |||||
| 32.1 | |||||
| 32.2 | |||||
| 101.INS | XBRL Instance Document. | ||||
| 101.SCH | XBRL Taxonomy Extension Schema. | ||||
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase. | ||||
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase. | ||||
| 101.LAB | XBRL Taxonomy Extension Label Linkbase. | ||||
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase. | ||||
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
ADDVANTAGE TECHNOLOGIES GROUP, INC. (Registrant) | |||||
| Date: August 13, 2021 | |||||
| /s/ Joseph E. Hart | |||||
| Joseph E. Hart, | |||||
| President and Chief Executive Officer | |||||
| (Principal Executive Officer) | |||||
| Date: August 13, 2021 | |||||
| /s/ Michael G. Ramke | |||||
| Michael G. Ramke | |||||
| Interim Chief Financial Officer | |||||
| (Principal Financial Officer) | |||||
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