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

FOR THE QUARTERLY PERIOD ENDED December 31, 2017June 30, 2020

OR

☐□TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

            FOR THE TRANSITION PERIOD FROM________________ TO ______________

Commission File number 1‑10799

ADDvantage Technologies Group, Inc.
(Exact name of registrant as specified in its charter)

OKLAHOMA73‑1351610
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)

1221 E. Houston1430 Bradley Lane
Broken Arrow, Oklahoma 74012Carrollton, 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 ☒⌧    No  ☐□
  
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, 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 ☒⌧    No  ☐□
  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer” andfiler,” “smaller reporting company,” and “emerging growth company” in Rule12b-2Rule 12b-2 of the Exchange Act.
Large accelerated filer☐Accelerated □Accelerated filer ☐□
Non-accelerated filer☐ (do not check if a smaller reporting company) ⌧            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 JanuaryJuly 31, 20182020 were
10,225,995. 11,788,940.
 



ADDVANTAGE TECHNOLOGIES GROUP, INC.
Form 10-Q
For the Period Ended December 31, 2017June 30, 2020


 PART I.    FINANCIAL INFORMATION
  
Page
Item 1.Financial Statements. 
   
 Consolidated Condensed Balance Sheets (unaudited)
2
 December 31, 2017June 30, 2020 and September 30, 20172019 
   
 Consolidated Condensed Statements of Operations (unaudited)
4
 Three and Nine Months Ended December 31, 2017June 30, 2020 and 20162019
Consolidated Condensed Statements of Changes in Shareholders’ Equity (unaudited)
5
Three and Nine Months ended June 30, 2020 and 2019 
   
 
Consolidated Condensed Statements of Cash Flows (unaudited)
57
 ThreeNine Months Ended December 31, 2017June 30, 2020 and 20162019 
   
 Notes to Unaudited Consolidated Condensed Financial Statements
68
   
Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations.
 
1420
   
Item 4.
Controls and Procedures.
1930
   
 PART II -II.   OTHER INFORMATION
   
Item 6.Exhibits.
2031
   
 SIGNATURES 







      



1



1
PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements.

ADDVANTAGE TECHNOLOGIES GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)


  
June 30,
2020
  
September 30,
2019
 
Assets      
Current assets:
      
Cash and cash equivalents 
$
10,365,744
  
$
1,242,143
 
Restricted cash  
105,117
   
351,909
 
Accounts receivable, net of allowance for doubtful accounts of
$250,000 and $150,000, respectively
  
3,164,893
   
4,826,716
 
Unbilled revenue  
677,702
   
2,691,232
 
Promissory note – current  
1,400,000
   
1,400,000
 
Income tax receivable  
34,915
   
21,350
 
Inventories, net of allowance for excess and obsolete
inventory of $3,400,000 and $1,275,000, respectively
  
5,964,490
   
7,625,573
 
Prepaid expenses  
1,013,645
   
543,762
 
Other assets  
289,300
   
262,462
 
Total current assets
  
23,015,806
   
18,965,147
 
         
Property and equipment, at cost:
        
Machinery and equipment  
3,503,199
   
2,475,545
 
Leasehold improvements  
846,783
   
190,984
 
Total property and equipment, at cost
  
4,349,982
   
2,666,529
 
Less: Accumulated depreciation
  
(1,326,477
)
  
(835,424
)
Net property and equipment
  
3,023,505
   
1,831,105
 
         
Right-of-use operating lease assets
  
4,158,786
   ‒
 
Promissory note – noncurrent
  
2,950,000
   
4,975,000
 
Intangibles, net of accumulated amortization
  
1,504,773
   
6,002,998
 
Goodwill
  
57,554
   
4,877,739
 
Deferred income taxes
  
1,220,564
   ‒
 
Other assets
  
178,602
   
176,355
 
         
Total assets
 
$
36,109,590
  
$
36,828,344
 












See notes to unaudited consolidated condensed financial statements.
2
ADDVANTAGE TECHNOLOGIES GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)


  
December 31,
2017
  
September 30,
2017
 
Assets      
Current assets:      
Cash and cash equivalents $414,891  $3,972,723 
Accounts receivable, net of allowance for doubtful accounts of
$150,000
  
5,299,536
   
5,567,005
 
Income tax receivable  244,510   247,186 
Inventories, net of allowance for excess and obsolete        
inventory of $3,100,389 and $2,939,289, respectively  22,406,750   22,333,820 
Prepaid expenses  233,627   298,152 
Total current assets  28,599,314   32,418,886 
         
Property and equipment, at cost:        
Land and buildings  7,211,190   7,218,678 
Machinery and equipment  3,961,764   3,995,668 
Leasehold improvements  200,617   202,017 
Total property and equipment, at cost  11,373,571   11,416,363 
Less: Accumulated depreciation  (5,467,393)  (5,395,791)
Net property and equipment  5,906,178   6,020,572 
         
Investment in and loans to equity method investee  140,045   98,704 
Intangibles, net of accumulated amortization  8,234,176   8,547,487 
Goodwill  5,970,244   5,970,244 
Deferred income taxes  1,308,000   1,653,000 
Other assets  135,462   138,712 
         
Total assets $50,293,419  $54,847,605 
  
June 30,
2020
  
September 30,
2019
 
Liabilities and Shareholders’ Equity      
Current liabilities:
      
Accounts payable 
$
4,786,788
  
$
4,730,537
 
Accrued expenses  
1,415,792
   
1,617,911
 
Deferred revenue  
241,452
   
97,478
 
Bank line of credit  
2,800,000
   ‒
 
Note payable – current  
2,580,652
   ‒
 
Operating lease obligations – current  
1,224,630
   ‒
 
Financing lease obligations – current  
328,151
   ‒
 
Other current liabilities  ‒
   
757,867
 
Total current liabilities
  
13,377,465
   
7,203,793
 
         
Note payable  
2,171,680
   ‒
 
Operating lease obligations  
3,809,803
   ‒
 
Financing lease obligations  
855,052
   ‒
 
Other liabilities  
15,000
   
177,951
 
Total liabilities
  
20,229,000
   
7,381,744
 
         
Shareholders’ equity:
        
Common stock, $.01 par value; 30,000,000 shares authorized; 11,294,839 and 10,861,950 shares issued, respectively; 
   11,294,839 and 10,361,292 shares outstanding, respectively
  
112,950
   
108,620
 
Paid in capital  
(2,592,034
)
  
(4,377,103
)
Retained earnings  
18,359,674
   
34,715,097
 
Total shareholders’ equity before treasury stock  
15,880,590
   
30,446,614
 
         
Less: Treasury stock, 0 and 500,658 shares, respectively, at cost  ‒
   
(1,000,014
)
Total shareholders’ equity
  
15,880,590
   
29,446,600
 
         
Total liabilities and shareholders’ equity
 
$
36,109,590
  
$
36,828,344
 

















See notes to unaudited consolidated condensed financial statements.
3

ADDVANTAGE TECHNOLOGIES GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)


  Three Months Ended June 30,  Nine Months Ended June 30, 
  2020
  2019
  2020
  2019
 
Sales
 
$
12,021,820
  
$
17,559,315
  
$
37,943,303
  
$
37,259,352
 
Cost of sales
  
7,851,241
   
12,971,910
   
30,619,379
   
27,472,042
 
Gross profit
  
4,170,579
   
4,587,405
   
7,323,924
   
9,787,310
 
Operating expenses
  
1,998,184
   
1,611,751
   
6,276,442
   
3,943,026
 
Selling, general and administrative expenses  
2,420,629
   
2,846,168
   
8,095,815
   
7,385,008
 
Impairment of right of use asset  
660,242
   ‒
   
660,242
   ‒
 
Impairment of intangibles including goodwill  ‒
   ‒
   
8,714,306
   ‒
 
Depreciation and amortization expense  
241,501
   
382,565
   
1,196,860
   
1,069,653
 
Loss from operations
  
(1,149,977
)
  
(253,079
)
  
(17,619,741
)
  
(2,610,377
)
Other income (expense):
                
Interest income  
83,544
   ‒
   
258,847
   ‒
 
Income from equity method investment  ‒
   
20,005
   
40,500
   
75,005
 
Other income (expense)  
(29,454
)
  
158,739
   
(86,588
)
  
118,319
 
Interest expense  
(101,327
)
  
(25,860
)
  
(184,005
)
  
(68,612
)
Total other income (expense), net
  
(47,237
)
  
152,884
   
28,754
   
124,712
 
                 
Loss before income taxes
  
(1,197,214
)
  
(100,195
)
  
(17,590,987
)
  
(2,485,665
)
Benefit for income taxes
  
(1,220,564
)
  
(42,000
)
  
(1,235,564
)
  
(13,000
)
Income (loss) from continuing operations
  
23,350
   
(58,195
)
  
(16,355,423
)
  
(2,472,665
)
                 
Loss from discontinued operations, net of tax  ‒
   
(1,426,970
)
  ‒
   
(1,267,344
)
                 
Net income (loss)
 
$
23,350
  
$
(1,485,165
)
 
$
(16,355,423
)
 
$
(3,740,009
)
                 
Income (loss) per share:
                
Basic                
Continuing operations 
$
0.00
  
$
(0.00
)
 
$
(1.49
)
 
$
(0.24
)
Discontinued operations  ‒
   
(0.14
)
  ‒
   
(0.12
)
Net income (loss) 
$
0.00
  
$
(0.14
)
 
$
(1.49
)
 
$
(0.36
)
Diluted                
Continuing operations 
$
0.00
  
$
(0.00
)
 
$
(1.49
)
 
$
(0.24
)
Discontinued operations  ‒
   
(0.14
)
  ‒
   
(0.12
)
Net income (loss) 
$
0.00
  
$
(0.14
)
 
$
(1.49
)
 
$
(0.36
)
Shares used in per share calculation:
                
Basic  
11,079,580
   
10,361,292
   
10,955,235
   
10,361,292
 
Diluted  
11,216,688
   
10,361,292
   
10,955,235
   
10,361,292
 








See notes to unaudited consolidated condensed financial statements.
24
ADDVANTAGE TECHNOLOGIES GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETSSTATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(UNAUDITED)


  
December 31,
2017
  
September 30,
2017
 
Liabilities and Shareholders’ Equity      
Current liabilities:      
Accounts payable $3,478,894  $3,392,725 
Accrued expenses  1,163,451   1,406,722 
Notes payable – current portion  1,519,492   4,189,605 
Other current liabilities  643,746   664,325 
Total current liabilities  6,805,583   9,653,377 
         
Notes payable, less current portion  1,708,622   2,094,246 
Other liabilities  775,465   1,401,799 
Total liabilities  9,289,670   13,149,422 
         
Shareholders’ equity:        
Common stock, $.01 par value; 30,000,000 shares authorized; 
  10,726,653 shares issued; and 10,225,995 shares
  outstanding
  
107,267
   
107,267
 
Paid in capital  (4,734,138)  (4,746,466)
Retained earnings  46,630,634   47,337,396 
Total shareholders’ equity before treasury stock  42,003,763   42,698,197 
         
Less: Treasury stock, 500,658 shares, at cost  (1,000,014)  (1,000,014)
Total shareholders’ equity  41,003,749   41,698,183 
         
Total liabilities and shareholders’ equity $50,293,419  $54,847,605 
                   
                   
  Common Stock  Paid-in  Retained  Treasury    
  Shares  Amount  Capital  Earnings  Stock  Total 
Balance, September 30, 2019
  
10,861,950
  
$
108,620
  
$
(4,377,103
)
 
$
34,715,097
  
$
(1,000,014
)
 
$
29,446,600
 
                         
Net loss
  
–
   
–
   
–
   
(1,717,692
)
  
–
   
(1,717,692
)
Share based compensation expense
  
–
   
–
   
13,890
   
–
   
–
   
13,890
 
                         
Balance, December 31, 2019
  
10,861,950
  
$
108,620
  
$
(4,363,213
)
 
$
32,997,405
  
$
(1,000,014
)
 
$
27,742,798
 
                         
Net loss
  
–
   
–
   
–
   
(14,661,081
)
  
–
   
(14,661,081
)
Restricted stock issuance
  
–
   
–
   
475,618
   
–
   
–
   
475,618
 
Stock option exercise
  
110,000
   
1,100
   
171,833
   
–
   
–
   
172,933
 
Share based compensation expense
  
–
   
–
   
(6,364
)
  
–
   
–
   
(6,364
)
                         
Balance, March 31, 2020
  
10,971,950
  
$
109,720
  
$
(3,722,126
)
 
$
18,336,324
  
$
(1,000,014
)
 
$
13,723,904
 
                         
Net income
  
–
   
–
   
–
   
23,350
   
–
   
23,350
 
Utilization of treasury shares
  
(500,658
)
  
(5,006
)
  
(995,008
)
  
–
   
1,000,014
   
–
 
Issuance of shares
  
573,199
   
5,732
   
2,103,125
   
–
   
–
   
2,108,857
 
Restricted stock issuance
  
237,014
   
2,370
   
12,630
   
–
   
–
   
15,000
 
Stock option exercise
  
13,334
   
134
   
24,001
   
–
   
–
   
24,135
 
Share based compensation expense
  
–
   
–
   
(14,656
)
  
–
   
–
   
(14,656
)
                         
Balance, June 30, 2020
  
11,294,839
  
$
112,950
  
$
(2,592,034
)
 
$
18,359,674
  
$
–
  
$
15,880,590
 









See notes to unaudited consolidated condensed financial statements.

5
  Common Stock  Paid-in  Retained  Treasury    
  Shares  Amount  Capital  Earnings  Stock  Total 
Balance, September 30, 2018
  
10,806,803
  
$
108,068
  
$
(4,598,343
)
 
$
40,017,540
  
$
(1,000,014
)
 
$
34,527,251
 
                         
Net loss
  
–
   
–
   
–
   
(1,038,981
)
  
–
   
(1,038,981
)
Restricted stock issuance
  
55,147
   
552
   
74,448
   
–
   
–
   
75,000
 
Share based compensation expense
  
–
   
–
   
28,070
   
–
   
–
   
28,070
 
                         
Balance, December 31, 2018
  
10,861,950
  
$
108,620
  
$
(4,495,825
)
 
$
38,978,559
  
$
(1,000,014
)
 
$
33,591,340
 
                         
Net loss
  
–
   
–
   
–
   
(1,215,863
)
  
–
   
(1,215,863
)
Share based compensation expense
  
–
   
–
   
33,019
   
–
   
–
   
33,019
 
                         
Balance, March 31, 2019
  
10,861,950
  
$
108,620
  
$
(4,462,806
)
 
$
37,762,696
  
$
(1,000,014
)
 
$
32,408,496
 
                         
Net loss
  
–
   
–
   
–
   
(1,485,165
)
  
–
   
(1,485,165
)
Share based compensation expense
  
–
   
–
   
42,852
   
–
   
–
   
42,852
 
                         
Balance, June 30, 2019
  
10,861,950
  
$
108,620
  
$
(4,419,954
)
 
$
36,277,531
  
$
(1,000,014
)
 
$
30,966,183
 


















See notes to unaudited consolidated condensed financial statements.

36
ADDVANTAGE TECHNOLOGIES GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)


  Three Months Ended December 31, 
  2017  2016 
Sales $12,284,765  $12,095,826 
Cost of sales  8,903,610   8,072,197 
Gross profit  3,381,155   4,023,629 
Operating, selling, general and administrative expenses  3,646,823   3,596,824 
Income (loss) from operations  (265,668)  426,805 
Interest expense  96,094   96,644 
Income (loss) before income taxes  (361,762)  330,161 
Provision for income taxes  345,000   113,000 
         
Net income (loss) $(706,762) $217,161 
         
Earnings (loss) per share:        
Basic $(0.07) $0.02 
Diluted $(0.07) $0.02 
Shares used in per share calculation:        
Basic  10,225,995   10,134,235 
Diluted  10,225,995   10,134,559 































See notes to unaudited consolidated condensed financial statements.

4
ADDVANTAGE TECHNOLOGIES GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)


  Three Months Ended December 31, 
  2017  2016 
Operating Activities      
Net income (loss) $(706,762) $217,161 
Adjustments to reconcile net income (loss) to net cash        
provided by (used in) operating activities:        
Depreciation  98,143   103,787 
Amortization  313,311   311,986 
Provision for excess and obsolete inventories  161,100   166,620 
Charge for lower of cost or net realizable value for
inventories
  
11,528
   
33,447
 
Gain on disposal of property and equipment  (6,862)  – 
Deferred income tax provision (benefit)  345,000   (4,000)
Share based compensation expense  38,578   41,884 
Changes in assets and liabilities:        
 Accounts receivable
  267,469   195,077 
 Income tax receivable\payable
  2,676   119,346 
Inventories  (245,558)  650,191 
Prepaid expenses  38,275   29,060 
Other assets  3,250   (424)
Accounts payable  86,169   179,651 
Accrued expenses  (243,271)  (278,607)
Other liabilities  20,087   26,092 
Net cash provided by operating activities  183,133   1,791,271 
         
Investing Activities        
Acquisition of net operating assets  –   (6,643,540)
Guaranteed payments for acquisition of business  (667,000)  – 
Loan repayment from (investment in and loans to) equity method investee  (41,341)  970,500 
Purchases of property and equipment  –   (69,833)
Disposals of property and equipment  23,113   – 
Net cash used in investing activities  (685,228)  (5,742,873)
         
Financing Activities        
Proceeds from notes payable  –   4,000,000 
Debt issuance costs  –   (15,394)
Payments on notes payable  (3,055,737)  (437,793)
Net cash provided by (used in) financing activities  (3,055,737)  3,546,813 
         
Net decrease in cash and cash equivalents  (3,557,832)  (404,789)
Cash and cash equivalents at beginning of period  3,972,723   4,508,126 
Cash and cash equivalents at end of period $414,891  $4,103,337 
         
Supplemental cash flow information:        
Cash paid for interest $118,292  $63,161 
         
Supplemental noncash investing activities:        
Deferred guaranteed payments for acquisition of business $–  $(1,897,372)

  Nine Months Ended June 30, 
  2020
  2019
 
Operating Activities      
Net loss
 
$
(16,355,423
)
 
$
(3,740,009
)
Net loss from discontinued operations
  ‒
   
(1,267,344
)
Net loss from continuing operations
  
(16,355,423
)
  
(2,472,665
)
Adjustments to reconcile net loss from continuing operations to net cash
used in operating activities:
        
Depreciation  
589,866
   
257,128
 
Amortization  
606,994
   
812,525
 
Impairment of right of use asset  
660,242
   ‒
 
Impairment of intangibles including goodwill  
8,714,306
   ‒
 
Provision for excess and obsolete inventories  
2,125,000
   
77,889
 
Share based compensation expense  
167,405
   
152,691
 
Gain from disposal of property and equipment  
(36,286
)
  
(250,877
)
 Gain from equity method investment
  
(40,500
)
  
(75,005
)
Deferred income taxes  
(1,220,564
)
  ‒
 
 Changes in assets and liabilities:
        
 Accounts receivable
  
1,661,823
   
(2,074,342
)
 Unbilled revenue
  
2,013,531
   
(1,793,065
)
Income tax receivable\payable  
(13,565
)
  
4,476
 
Inventories  
(463,917
)
  
(1,799,042
)
Prepaid expenses and other assets  
97,118
   
(395,726
)
Accounts payable  
56,251
   
2,306,092
 
Accrued expenses and other liabilities  
(135,416
)
  
455,426
 
Deferred revenue  
143,974
   ‒
 
Net cash used in operating activities – continuing operations
  
(1,429,161
)
  
(4,794,495
)
Net cash provided by operating activities – discontinued operations
  ‒
   
1,179,876
 
Net cash used in operating activities
  
(1,429,161
)
  
(3,614,619
)
         
Investing Activities        
Proceeds from promissory note receivable  
2,025,000
   ‒
 
Acquisition of net operating assets of a business  ‒
   
(1,264,058
)
Loan repayment from equity method investee  
40,500
   
124,005
 
Purchases of property and equipment  
(471,226
)
  
(457,225
)
Disposals of property and equipment
  
77,505
   
452,244
 
Net cash provided by (used in) investing activities – continuing operations
  
1,671,779
   
(1,145,034
)
Net cash provided by investing activities – discontinued operations
  ‒
   
7,075,000
 
Net cash provided by investing activities
  
1,671,779
   
5,929,966
 
         
Financing Activities        
Change in bank line of credit
  
2,800,000
   ‒
 
Proceeds from note payable
  
6,373,929
   ‒
 
Guaranteed payments for acquisition of business
  
(667,000
)
  
(667,000
)
Payments on financing lease obligations
  
(277,061
)
  ‒
 
Payments on notes payable
  
(1,621,597
)
  
(1,246,279
)
Proceeds from sale of common stock
  
1,828,852
   ‒
 
Proceeds from stock options exercised
  
197,068
   ‒
 
Net cash provided by (used in) financing activities – continuing operations
  
8,634,191
   
(1,913,279
)
Net cash used in financing activities – discontinued operations
      
(597,906
)
Net cash provided by (used in) financing activities
  
8,634,191
   
(2,511,185
)
         
Net increase (decrease) in cash and cash equivalents and restricted cash
  
8,876,809
   
(195,838
)
Cash and cash equivalents and restricted cash at beginning of period
  
1,594,052
   
3,129,280
 
Cash and cash equivalents and restricted cash at end of period
 
$
10,470,861
  
$
2,933,442
 
         
Supplemental cash flow information:
        
Cash paid for interest 
$
244,995
  
$
109,106
 
Cash paid for income taxes 
$
‒
  
$
‒
 
Non-cash financing activities:
        
Proceeds from sale of common stock receivable 
$
280,005
  
$
‒
 
See notes to unaudited consolidated condensed financial statements.


57
ADDVANTAGE TECHNOLOGIES GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

Note 1 - Basis of Presentation and Accounting Policies

Basis of presentation

The unaudited consolidated condensed financial statements include the accounts of ADDvantage Technologies Group, Inc. and its subsidiaries, all of which are wholly owned (collectively, the “Company” or “we”).  Intercompany balances and transactions have been eliminated in consolidation.  The Company’s reportable segments are Cable TelevisionWireless Infrastructure Services (“Cable TV”Wireless”) and Telecommunications (“Telco”).

The accompanying unaudited consolidated condensed 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, consisting only of normal recurring items which are, in the opinion of management, necessary in order to make the unaudited consolidated condensed financial statements not misleading.  The Company’s business is subject to certain seasonal variations due to weather in the geographic areas that services are performed, and to a certain extent due to calendar events and national holidays. Therefore, the results of operations for the nine months ended June 30, 2020 and 2019, are not necessarily indicative of the results to be expected for the full fiscal year.  It is suggested that these unaudited consolidated condensed financial statements 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, 2017.2019.

Reclassification

The Company changed its presentation of cost of sales and operating, selling, general and administrative expenses on the unaudited consolidated condensed statements of operations.  During fiscal year 2020, the Company reviewed its financial reporting of expenses in connection with its current operating segments in order to enhance the usefulness of the presentation of the Company’s expenses. Based on that review, the Company reclassified certain expenses into operating expenses for presentation purposes.  Operating expenses include the indirect costs associated with operating our businesses.  Indirect costs are costs that are not directly attributable to projects or products, which would include indirect personnel costs, facility costs, vehicles, insurance, communication, and business taxes, among other less significant cost categories.  These costs were previously recorded in either costs of sales or operating, selling, general and administrative expenses in prior periods.  Additionally, the Company reclassified depreciation and amortization from operating, selling, general and administrative expenses into its own financial statement line item in the unaudited consolidated condensed statements of operations.  Selling, general and administrative expenses include overhead costs, which primarily consist of personnel costs, insurance, professional services, and communication, among other less significant cost categories. The prior period has been reclassified to conform with the current period’s presentation of costs of sales, operating expenses, selling, general and administrative expenses, and depreciation and amortization.  These reclassifications had no effect on previously reported results of operations or retained earnings.

Recently Issued Accounting Standards

In May 2014, the FASB issued ASU No. 2014-09: “Revenue from Contracts with Customers (Topic 606)”. This guidance was issued to clarify the principles for recognizing revenue and develop a common revenue standard for U.S. GAAP and International Financial Reporting Standards (“IFRS”). In addition, in August 2015, the FASB issued ASU No. 2015-14: “Revenue from Contracts with Customers (Topic 606).  This update was issued to defer the effective date of ASU No. 2014-09 by one year.  Therefore, the effective date of ASU No. 2014-09 is for annual reporting periods beginning after December 15, 2017.  Based on management’s assessment of ASU No. 2014-09, management does not expect that ASU No. 2014-09 will have a material impact on the Company’s consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02: “Leases (Topic 842)” which is intended to improve financial reporting about leasing transactions.  This ASU will require organizations (“lessees”) that lease assets with lease terms of more than twelve months to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases.  Organizations that own the assets leased by lessees (“lessors”) will remain largely unchanged from current GAAP.  In addition, this ASU will require disclosures to help investors and other financial statement users better understand the amount, timing and uncertainty of cash flows arising from leases.  The guidance is effective for annual periods beginning after December 15, 2018 and early adoption is permitted.  Based on management’s initial assessment, ASU No. 2016-02 will have a material impact on the Company’s consolidated financial statements.  The Company is a lessee on certain leases that will need to be reported as right of use assets and liabilities at an estimated amount of $3 million on the Company’s consolidated financial statements on the date of adoption.

In March 2016, the FASB issued ASU No. 2016-09: “Compensation – Stock Compensation (Topic 718)” which is intended to improve employee share-based payment accounting.  This ASU identifies areas for simplification involving several aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, an option to recognize gross stock compensation expense with actual forfeitures recognized as they occur, as well as certain classifications on the statement of cash flows.  The guidance is effective for annual periods beginning after December 15, 2016 and interim periods within those annual periods.  Early adoption is permitted.  Management has determined that ASU No. 2016-09 will not have a material impact on the Company’s consolidated financial statements.  The Company does not currently have excess tax benefits or deficiencies from stock compensation expense.  The Company adopted ASU No. 2016-09 on October 1, 2017.

In June 2016, the FASB issued 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

6
conditions, and reasonable and supportable forecasts.  Entities will now 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.  ASU 2016-13 is effective for annual periods beginning after December 15, 2019, including interim periods within those fiscal periods.  Entities may adopt earlier as of the fiscal year beginning after December 15, 2018, including interim periods within those fiscal years.  We are currently in the process of evaluating this new standard update.

In August 2016, the FASB issued ASU 2016-15: “Statement of Cash Flows (Topic 230) – Classification of Certain Cash Receipts and Cash Payments.”  This ASU addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice.  The amendments in this ASU are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years.  Early adoption is permitted.  Based on management’s initial assessment of ASU No. 2016-15, the cash flows associated with guaranteed payments for acquisition of businesses will be reported as a financing activity in the Statement of Cash Flows, as opposed to an investing activity where it is currently reported.
8

In January 2017, the FASB issued ASU 2017-04: “Intangibles – Goodwill and Other (Topic 350) – Simplifying the Test for Goodwill Impairment.”  This ASU eliminates the second step in the goodwill impairment test which requires an entity to determine the implied fair value of the reporting unit’s goodwill.  Instead, an entity should recognize an impairment loss if the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, with the impairment loss not to exceed the amount of goodwill allocated to the reporting unit. This ASU is effective for annual and interim goodwill impairment tests conducted in fiscal years beginning after December 15, 2019, with early adoption permitted.  The Company is currently evaluating methodology changes that may be required in performing its annual goodwill impairment assessment in connection with this ASU and any impact that these changes may have on the Company’s financial statements.

Reclassification

Certain prior period amounts have been reclassified to conform to the current year presentation.  These reclassifications had no effect on previously reported results of operations or retained earnings.

Note 2 – InventoriesRevenue Recognition
Inventories at December 31, 2017
The Company’s principal sales are from Wireless services, sales of Telco equipment and Telco recycled equipment. Sales are primarily to customers in the United States. International sales are made by the Telco segment to a customer in Asia for its recycling program and, to a substantially lesser extent, other international regions for equipment sales that utilize the same technology, which totaled approximately $0.7 million and $0.6 million for the three months ended June 30, 2020 and 2019, respectively, and $1.5 million and $1.6 million for the nine months ended June 30, 2020 and 2019, respectively.

The Company’s customers include wireless carriers, wireless equipment providers, multiple system operators, resellers and direct sales to end-user customers.  Sales to the Company’s largest customer totaled approximately 14% of consolidated revenues for the nine months ended June 30, 2020.

Our sales by type were as follows:

  Three Months Ended June 30,
  Nine Months Ended June 30, 
  2020
  2019
  2020
  2019
 
             
Wireless services sales
 
$
5,123,176
  
$
8,733,444
  
$
16,592,907
  
$
12,951,368
 
Equipment sales:
                
Telco  
6,147,676
   
7,989,318
   
19,912,137
   
22,876,047
 
 Intersegment
  
(23,033
)
  
(5,305
)
  
(23,033
)
  
(49,452
)
Telco repair sales  
33,236
   
31,142
   
49,438
   
36,542
 
Telco recycle sales  
740,765
   
810,716
   
1,411,854
   
1,444,847
 
Total sales
 
$
12,021,820
  
$
17,559,315
  
$
37,943,303
  
$
37,259,352
 

The timing of revenue recognition from the wireless segment results in contract assets and contract liabilities.  Generally, billing occurs subsequent to revenue recognition, resulting in contract assets.  However, the Company sometimes receives advances or deposits from customers before revenue is recognized, resulting in contract liabilities.  Contract assets and contract liabilities are included in Unbilled revenue and Deferred revenue, respectively, in the consolidated condensed balance sheets. At June 30, 2020 and September 30, 20172019, contract assets were $0.7 million and $2.7 million, respectively, and contract liabilities were $0.2 million and $0.1 million, respectively. The Company recognized the entire $0.1 million of contract revenue during the nine months ended June 30, 2020 related to contract liabilities recorded in Deferred revenue at September 30, 2019.

For the three months ended June 30, 2020, the Company recognized $0.5 million of revenue in its Wireless segment associated with adjustments to constrained variable consideration from change orders related to several projects for which the costs had been recognized in prior quarters.

Note 3 – Accounts Receivable Agreements

The Company’s Wireless segment has entered into various agreements, 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, 2020, the third-party financial institution has a reserve against the sold receivables of $0.1 million, which is reflected as restricted cash.  For the receivables sold under the agreement with recourse, the agreement addresses events and conditions which may obligate the Company to immediately repay the institution the outstanding purchase price of the receivables sold.  The total amount of receivables uncollected by the institution was $0.5 million at June 30, 2020 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, 2020 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.

9
For the nine months ended June 30, 2020 and 2019, the Company received proceeds from the sold receivables under all of the various agreements of $15.9 million and $9.9 million, respectively, and included the proceeds in net cash used in operating activities in the Consolidated Condensed Statements of Cash Flows.  The fees associated with selling these receivables ranged from 1.0% to 1.8% of the gross receivables sold for the nine months ended June 30, 2020 and 2019.  The Company recorded costs of $0.1 million and $0.3 million for the three and nine months ended June 30, 2020, respectively, and $0.1 million and $0.2 million for the three and nine months ended June 30, 2019, in other expense in the Consolidated Condensed Statements of Operations.

The Company accounts for these transactions in accordance with ASC 860, “Transfers and Servicing” (“ASC 860”).  ASC 860 allows for the ownership transfer of accounts receivable to qualify for sale treatment when the appropriate criteria is met, which permits the Company to present the balances sold under the program to be excluded from accounts receivable, net on the consolidated condensed balance sheets.  Receivables are considered sold when they are transferred beyond the reach of the Company and its creditors, the purchaser has the right to pledge or exchange the receivables and the Company has surrendered control over the transferred receivables.

Note 4 – Promissory Note

The Company completed a sale of its former Cable TV reporting segment on June 30, 2019.  In the first quarter of 2020, Leveling 8 Inc. (“Leveling 8”) paid the Company the first installment of $0.7 million, including interest of $0.1 million, under the promissory note as part of the sale of the Cable TV segment to Leveling 8.  In the third quarter of 2020, Leveling 8 made another payment of $1.7 million ($1.4 million related to principal), which will lower the $2.5 million balloon payment due upon the maturity of the note as $0.7 million of this payment was a prepayment against the promissory note.  David Chymiak, a director and substantial shareholder of the Company, personally guaranteed the promissory note due to the Company and pledged certain assets (directly and indirectly owned) to secure the payment of the promissory note, including substantially all of David Chymiak’s Company common stock.  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 (see Note 8).

The remaining promissory note will be paid in semi-annual installments over five years including interest of 6% as follows at June 30, 2020:

Fiscal year 2021
 
$
1,400,000
 
Fiscal year 2022
  
940,000
 
Fiscal year 2023
  
940,000
 
Fiscal year 2024
  
1,725,754
 
Total proceeds
  
5,005,754
 
Less:  interest to be paid
  
(655,754
)
Promissory note principal balance
 
$
4,350,000
 

Note 5 – Inventories

Inventories, which are all within the Telco segment, at June 30, 2020 and September 30, 2019 are as follows:

  
December 31,
2017
  
September 30,
2017
 
New:      
Cable TV $13,667,532  $14,014,188 
Telco  1,225,888   990,218 
Refurbished and used:        
Cable TV  3,217,494   3,197,426 
Telco  7,396,225   7,071,277 
Allowance for excess and obsolete inventory:        
Cable TV  (2,450,000)  (2,300,000)
Telco  (650,389)  (639,289)
         
  $22,406,750  $22,333,820 
  
June 30,
2020
  
September 30,
2019
 
       
New equipment 
$
1,174,899
  
$
1,496,145
 
Refurbished and used equipment  
8,189,591
   
7,404,428
 
Allowance for excess and obsolete inventory  
(3,400,000
)
  
(1,275,000
)
         
Total inventories, net 
$
5,964,490
  
$
7,625,573
 

10
New inventoryequipment includes products purchased from the manufacturers plus “surplus-new”, which are unused products purchased from other distributors or multiple system operators.  Refurbished inventoryand used equipment includes factory refurbished, Company refurbished and used products.  Generally, the Company does not refurbish its used inventory until there is a sale of that product or to keep a certain quantity on hand.

7
The Company regularly reviews the Cable TV segment inventory quantities on hand, and an adjustment to cost is recognized when the loss of usefulness of an item or other factors, such as obsolete and excess inventories, indicate that cost will not be recovered when an item is sold.  The Company recorded charges in the Cable TV segment to allow for obsolete inventory, which increased the cost of sales $0.2 million during the three months ended December 31, 2017 and 2016.

For theThe Telco segment any obsolete or excess telecommunications inventory is generally processed through its recycling program when it is identified.  However, the Telco segment has identified certain inventory that more than likely will not be sold or that the cost will not be recovered when it is sold, and had not yet been processed through its recycling program.program and recorded a $2.1 million expense in cost of sales to increase the allowance for excess and obsolete inventory during the nine months ended June 30, 2020.  Therefore, the Company has a $0.7$3.4 million reserveand a $1.3 million allowance at December 31, 2017.  We also reviewed the cost of inventories against estimated net realizable valueJune 30, 2020 and recorded a lower of cost or net realizable value charge for the three months ended December 31, 2017 and December 31, 2016 of $12 thousand and $33 thousand, respectively, for inventories that have a cost in excess of estimated net realizable value.September 30, 2019, respectively.

Note 36 – 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 conducts its long-lived asset impairment analyses in accordance with ASC 360-10-15, “Impairment or Disposal of Long-Lived Assets.”  ASC 360-10-15 requires the Company to group 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.

As of March 31, 2020, the Company determined that changes in the economy related to the COVID-19 pandemic and the continued losses experienced in the Telco segment may cause the carrying amounts of its intangible assets to exceed their fair values.  The Company performed an assessment of its intangible assets and determined that the carrying value of its customer relationships were in fact impaired based on valuation appraisals performed by the Company using a multi-period excess earnings model.  Therefore, the Company recorded a $3.9 million impairment charge in the Telco segment as of March 31, 2020. As of June 30, 2020, no further indicators of potential impairment were present.

Intangible assets with their associated accumulated amortization amountsand impairment at December 31, 2017June 30, 2020 and September 30, 20172019 are as follows:

 December 31, 2017  June 30, 2020
 
 
 
Gross
  
Accumulated
Amortization
  
 
Net
  
Gross
  
Accumulated
Amortization
  
Impairment

  
Net

 
Intangible assets:                     
Customer relationships – 10 years $8,152,000  $(2,102,491) $6,049,509  
$
8,396,000
  
$
(3,991,306
)
 
$
(3,894,121
)
 
$
510,573
 
Technology – 7 years  1,303,000   (713,545)  589,455 
Trade name – 10 years  2,119,000   (595,455)  1,523,545  
2,119,000
  
(1,124,800
)
 ‒
  
994,200
 
Non-compete agreements – 3 years  374,000   (302,333)  71,667   
374,000
   
(374,000
)
  ‒
   ‒
 
                        
Total intangible assets $11,948,000  $(3,713,824) $8,234,176  
$
10,889,000
  
$
(5,490,106
)
 
$
(3,894,121
)
 
$
1,504,773
 

 September 30, 2017  
September 30, 2019
 
 
 
Gross
  
Accumulated
Amortization
  
 
Net
  
Gross
  
Accumulated
Amortization
  
Net
 
Intangible assets:                  
Customer relationships – 10 years $8,152,000  $(1,898,691) $6,253,309  
$
8,396,000
  
$
(3,547,389
)
 
$
4,848,611
 
Technology – 7 years  1,303,000   (667,009)  635,991 
Trade name – 10 years  2,119,000   (542,480)  1,576,520  
2,119,000
  
(966,280
)
 
1,152,720
 
Non-compete agreements – 3 years  374,000   (292,333)  81,667   
374,000
   
(372,333
)
  
1,667
 
                     
Total intangible assets $11,948,000  $(3,400,513) $8,547,487  
$
10,889,000
  
$
(4,886,002
)
 
$
6,002,998
 
                     

Note 47 – Income TaxesGoodwill

The Tax Cuts and Jobs Act was enacted on December 22, 2017.  OneCompany tests goodwill at least annually for impairment. The Company tests more frequently if indicators are present or changes in circumstances suggest that impairment may exist. These indicators include, among others,
11
declines in sales, earnings or cash flows, or the development of a material adverse change in the provisions of this legislation was that it reducedbusiness climate. The Company assesses goodwill for impairment at the corporate income tax ratesreporting unit level, which is defined as an operating segment or one level below an operating segment.  The reporting units for the Company from 34% to 21% effective beginning January 1, 2018.  Sinceare its two operating segments.

As of March 31, 2020, indicators were present, which indicated that the Company’sCompany should test for impairment of goodwill.  These indicators included reduced revenues in the current fiscal year begins on October 1, this results inand the overall impact of the business climate as a blended rate for 2018result of 24.3%.  Due to this legislation,the COVID-19 pandemic.  While the Company is deemed an essential service during the COVID-19 pandemic and has remeasured its deferred tax balances atremained in operation, it has seen a reduced revenue stream in the reduced enacted tax ratescurrent year.  Therefore, the Company performed a goodwill impairment analysis as well as utilizedof March 31, 2020.  This analysis forecasted the lower anticipated effective income tax rate for first quarter results.  The provision recorded relateddebt free cash flows of the segment, on a discounted basis, to estimate the fair value of the segment compared to the remeasurementcarrying value of the Company’s deferred tax balances was $0.4 million.  The accounting forsegment. For the effectsTelco segment, the carrying value exceeded the estimated fair value of the rate change onsegment by more than the deferred tax balances is completecarrying amount of goodwill recorded in the segment.  Therefore, the Company fully impaired the goodwill balance in the Telco segment and no provisional amounts were recorded for the new legislation.an impairment charge of $4.8 million as of March 31, 2020.

8
Note 58 – Notes Payable and Line of Credit

Notes PayableLoan 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 is payable in seven semi-annual installments of principal and interest with the first payment occurring June 30, 2020, and the final payment due June 30, 2023.   Payment of the loan may be accelerated in the event of a default.  The principal and interest payments correlate to the payment schedule for the promissory note with Leveling 8 (see Note 4).  In connection with the $1.7 million payment made in the third quarter of 2020 by Leveling 8 under the promissory note, the Company paid down $1.6 million of principal under this loan, for which $1.0 million was a prepayment against the loan. As a result, the balance under this loan is now $1.9 million and the final payment will be June 30, 2022. The loan is secured by substantially all of the assets of the Company, including, without limitation, the promissory note that the Company received in connection with the sale of its cable segment in 2019 to Leveling 8, Inc. (see Note 4).

Credit Agreement

The Company has an Amended and Restated Revolving Credit and Term Loan Agreement (“Credit and Term Loan Agreement”)a $4.0 million revolving line of credit agreement with its primary financial lender.  Revolvinglender, which matures on December 17, 2020.  The line of credit requires quarterly interest payments based on the prevailing Wall Street Journal Prime Rate (3.25% at June 30, 2020), and term loans createdthe interest rate is reset monthly.  At June 30, 2020, there was $2.8 million outstanding under the Credit and Term Loan Agreementline of credit. Future borrowings under the line of credit are collateralized by inventory,limited to the lesser of $4.0 million or the sum of 80% of eligible accounts receivable equipment and fixtures, general intangibles25% of eligible Telco segment inventory. Under these limitations, the Company’s total line of credit borrowing capacity was $3.1 million at June 30, 2020.

Loan Covenant with Primary Financial Lender

Both the March 10, 2020 loan agreement and a mortgage on certain property.  Among other financial covenants, the Credit and Term Loan Agreement providesline of credit agreement provide that the Company maintain a fixed charge coverage ratio (net cash flow to total fixed charges)charge) of not less than 1.25 to 1.0 and a leverage ratio (total funded debt to EBITDA) ofmeasured annually.  The Company believes that it is probable that it will not more than 2.50 to 1.0.  Both financial covenants are determined quarterly.  At December 31, 2017, we werebe in compliance with our financial covenants.this covenant as of the measurement date of September 30, 2020. 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.
At December 31, 2017,
Paycheck Protection Program Loan

On April 14, 2020, the Company has two term loans outstandingreceived a SBA Payroll Protection Program (“PPP”) loan pursuant to the Paycheck Protection Program under the CreditCoronavirus Aid, Relief, and Term Loan Agreement.Economic Security Act (“CARES Act”), with its primary lender for $2.9 million.  The first outstanding termPPP loan has an outstanding balance of $0.7 millionbears interest at December 31, 2017 and is due on November 30, 2021,1% per annum, with monthly principal payments of $15,334 plus accrued interest.  The interest rate is the prevailing 30-day LIBOR rate plus 1.4% (2.78% at December 31, 2017) and is reset monthly.

The second outstanding term loan has an outstanding balance of $2.4 million at December 31, 2017 and is due October 14, 2019, with monthly principal and interest paymentsin the amount of $118,809.$164,045 commencing on November 10, 2020, and matures on April 10, 2022.  The interest rate onPaycheck Protection Program provides that the termPPP loan is a fixed interest rate of 4.40%.may be partially or fully forgiven if the funds are used for certain qualifying expenses as described in the CARES Act.  The Company intends to use the proceeds from the PPP loan for

12
On December 6, 2017,
qualifying expenses and to apply for forgiveness in accordance with the terms in the CARES Act.  While the Company extinguished oneplans to apply for forgiveness of its previous term loans by paying the outstanding balance of $2.7 million plus a prepayment penalty of $25,000.

Line of Credit

The Company has a $7.0 million Revolving Line of Credit (“Line of Credit”)PPP loan in accordance with the requirements and limitations under the CreditCARES Act, the PPP Flexibility Act and Term Loan Agreement.  On March 31, 2017, the Company executed the Eighth Amendment under the CreditSBA regulations and Term Loan Agreement.  This amendment extended the Line of Credit maturity to March 30, 2018, while other termsrequirements, no assurance can be given that all or any portion of the Line of Credit remained essentially the same.  At December 31, 2017, the Company had no balance outstanding under the Line of Credit.  The Line of Credit requires quarterly interest payments based on the prevailing 30-day LIBOR rate plus 2.75% (4.31% at December 31, 2017), and the interest rate is reset monthly.  Any future borrowings under the Line of Credit are due on March 30, 2018.  Future borrowings under the Line of Credit are limited to the lesser of $7.0 million or the net balance of 80% of qualified accounts receivable plus 50% of qualified inventory.  Under these limitations, the Company’s total available Line of Credit borrowing base was $7.0 million at December 31, 2017.PPP loan will be forgiven.

Fair Value of Debt

FASB ASC 820, Fair Value Measurements and Disclosures, defines fair value, establishes a consistent framework for measuring fair value and establishes a fair value hierarchy based on the observability of inputs used to measure fair value.  The three levels of the fair value hierarchy are as follows:

·Level 1 – Quoted prices for identical assets in active markets or liabilities that we have the ability to access. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.
·Level 2 – Inputs are other than quoted prices in active markets included in Level 1 that are either directly or indirectly observable. These inputs are either directly observable in the marketplace or indirectly observable through corroboration with market data for substantially the full contractual term of the asset or liability being measured.
·Level 3 – Inputs that are not observable for which there is little, if any, market activity for the asset or liability being measured. These inputs reflect management’s best estimate of the assumptions market participants would use in determining fair value.

The Company has determined the carrying value of itsthe Company’s variable-rate term loanline of credit approximates its fair value since the interest rate fluctuates periodically based on a floating interest rate.

9

The Company has determined the fair value of its fixed-rate term loan utilizing the Level 2 hierarchy as the fair value can be estimated from broker quotes corroborated by other market data.  These broker quotes are based on observable market interest rates at which loans with similar terms and maturities could currently be executed.  The Company then estimated the fair value of the fixed-rate term loans using cash flows discounted at the current market interest rate obtained.  The faircarrying value of the Company’s second outstanding fixedterm debt approximates fair value.

Note 9 – Equity Distribution Agreement and Sale of Common Stock
On April 24, 2020, the Company entered into an Equity Distribution Agreement (the “Sales 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 (the “Common Stock”), having an aggregate offering price of up to $13,850,000 (the “Shares”).

The offer and sale of the Shares will be made pursuant to a shelf registration statement on Form S-3 and the related prospectus filed by the Company with the Securities and Exchange Commission (the “SEC”) on March 3, 2020, as amended on March 23, 2020, and declared effective by the SEC on April 1, 2020.

Pursuant to the Sales Agreement, Northland may sell the Shares by any method permitted by law deemed to be an “at the market offering” as defined in Rule 415 of the Securities Act of 1933 (the “Securities Act”), including sales made by means of ordinary brokers’ transactions, including on The Nasdaq Global Market, at market prices or as otherwise agreed with Northland. Northland will use commercially reasonable efforts consistent with its normal trading and sales practices to sell the Shares from time to time, based upon instructions from the Company, including any price or size limits or other customary parameters or conditions the Company may impose. The sales agreement may be terminated without prior notice at any time prior to the fulfillment of the Sales Agreement if additional sales are deemed not warranted.

The Company will pay Northland a commission rate loan was $2.5equal 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 three months ended June 30, 2020, 573,199 shares were sold by Northland on behalf of the Company with gross proceeds of $2.2 million, and net proceeds after commissions and fees of $2.1 million. Of the 573,199 shares sold, 80,043 shares were sold by June 30, 2020, but were settled in July 2020, resulting in a receivable of $0.3 million net of commissions and fees, which is reflected in Other current assets.

Note 10 – Income Taxes

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 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.  Therefore, as of December 31, 2017.June 30, 2020, the Company recorded $1.2 million of deferred tax assets and recorded a benefit for income taxes.  The
13
Company continues to provide a valuation allowance of $9.4 million for all deferred taxes where the Company believes it is more likely than not that those deferred taxes will not be realized.

Note 611 – 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 December 31, 2017June 30, 2020 and 20162019 are:

 
Three Months Ended
December 31,
  
Three Months Ended
June 30,
  
Nine Months Ended
June 30,
 
 2017  2016  2020
  2019
  2020
  2019
 
Income (loss) from continuing operations 
$
23,350
  
$
(58,195
)
 
$
(16,355,423
)
 
$
(2,472,665
)
Discontinued operations, net of tax  ‒
   
(1,426,970
)
  ‒
   
(1,267,344
)
Net income (loss) attributable to
common shareholders
 $(706,762) $217,161  
$
23,350
  
$
(1,485,165
)
 
$
(16,355,423
)
 
$
(3,740,009
)
                    
Basic weighted average shares  10,225,995   10,134,235  
11,079,580
  
10,361,292
  
10,955,235
  
10,361,292
 
Effect of dilutive securities:                    
Stock options  –   324   
137,108
   ‒
   ‒
   ‒
 
Diluted weighted average shares  10,225,995   10,134,559   
11,216,688
   
10,361,292
   
10,955,235
   
10,361,292
 
                    
Earnings (loss) per common share:                    
Basic $(0.07) $0.02 
Diluted $(0.07) $0.02 
Basic:            
Continuing operations 
$
0.00
  
$
(0.00
)
 
$
(1.49
)
 
$
(0.24
)
Discontinued operations  ‒
   
(0.14
)
  ‒
   
(0.12
)
Net income (loss) 
$
0.00
  
$
(0.14
)
 
$
(1.49
)
 
$
(0.36
)
Diluted:            
Continuing operations 
$
0.00
  
$
(0.00
)
 
$
(1.49
)
 
$
(0.24
)
Discontinued operations  ‒
   
(0.14
)
  ‒
   
(0.12
)
Net income (loss) 
$
0.00
  
$
(0.14
)
 
$
(1.49
)
 
$
(0.36
)

The table below includes information related to stock options that were outstanding at the end of each respective three-month periodthree and nine-month periods ended December 31,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 optionCompany incurring a net loss for the periods presented or the exercise price exceedingexceeded the average market price per share of our common stock for the three and nine months ended December 31, or their effect would be anti-dilutive.June 30, 2020 and 2019.

 
Three Months Ended
December 31,
  
Three Months Ended
June 30,
  
Nine Months Ended
June 30,
 
 2017  2016  2020
  2019
  2020
  2019
 
Stock options excluded  700,000   520,000  
150,000
  
770,000
  
480,000
  
770,000
 
Weighted average exercise price of                    
stock options $2.54  $2.83  
$
2.96
  
$
1.73
  
$
1.89
  
$
1.73
 
Average market price of common stock $1.46  $1.76  
$
2.41
  
$
1.38
  
$
2.48
  
$
1.37
 

14
Note 712 – 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.  Under the Plan, option prices will be set by the Compensation Committee and may not be less than the fair market value of the stock on the grant date.

In March 2020, at the Company’s annual meeting of shareholders, the shareholders authorized an additional 1,000,000 shares of common stock be added to the Plan.  At December 31, 2017, 1,100,415June 30, 2020, 2,100,415 shares of common stock were reserved for stock award grants under the Plan.  Of these reserved shares, 212,451936,806 shares were available for future grants.

10
Stock Options

All share-based payments to employees, including grants of employee stock options, are recognized in the financial statements based on their grant date fair value over the requisite service period.  Compensation expense for share-based awards is included in the operating expenses and  selling, general and administrative expense sectionexpenses sections of the Company’s consolidated condensed statements of income.operations.

Stock options are valued at the date of the award, which does not precede the approval date, and compensation cost is recognized on a straight-line basis over the vesting period.  Stock options granted to employees generally become exercisable over a three, four or five-year period from the date of grant and generally expire ten years after the date of grant.  Stock options granted to the Board of Directors generally become exercisable on the date of grant and generally expire ten years after the grant.

A summary of the status of the Company's stock options at December 31, 2017June 30, 2020 and changes during the threenine months then ended is presented below:

 
 
Shares
  
Wtd. Avg.
Ex. Price
  
Shares
  
Wtd. Avg.
Ex. Price
  Aggregate Intrinsic Value 
Outstanding at September 30, 2017  700,000  $2.54 
Outstanding at September 30, 2019  
770,000
  
$
1.73
  
$
352,700
 
Granted  –   –  ‒
  ‒
  ‒
 
Exercised  –   –   
(123,334
)
 
$
1.20
  
$
304,568
 
Expired  –   –   
–
   
–
   
–
 
Forfeited  –   –   
(166,666
)
 
$
1.35
  
$
347,999
 
Outstanding at December 31, 2017  700,000  $2.54 
Outstanding at June 30, 2020  
480,000
  
$
1.89
  
$
742,800
 
                    
Exercisable at December 31, 2017  526,667  $2.78 
Exercisable at June 30, 2020  
376,667
  
$
1.99
  
$
546,101
 

No nonqualified stock options were granted for the threenine months ended December 31, 2017.June 30, 2020.  The Company estimates the fair value of the options granted using the Black-Scholes option valuation model.  The Company estimates the expected term of options granted based on the historical grants and exercises of the Company’s options.  The Company estimates the volatility of its common stock at the date of the grant based on both the historical volatility as well as the implied volatility on its common stock.  The Company bases the risk-free rate that is used in the Black-Scholes option valuation model on the implied yield in effect at the time of the option grant on U.S. Treasury zero-coupon issues with equivalent expected term.  The Company has never paid cash dividends on its common stock and does not anticipate paying cash dividends in the foreseeable future.  Consequently, the Company uses an expected dividend yield of zero in the Black-Scholes option valuation model.  The Company amortizes the resulting fair value of the options ratably over the vesting period of the awards.  The Company uses historical data to estimate the pre-vesting optionrecognizes forfeitures and records share-based expense only for those awards that are expected to vest.as they occur.

15

Compensation expense related to unvested stock options recorded for the threenine months ended December 31, 2017June 30, 2020 is as follows:

 Three Months Ended  
Nine Months
Ended
June 30, 2020
 
 December 31, 2017 
Fiscal year 2016 grant $1,789 
Fiscal year 2017 grant $10,539  
$
(5,652
)
Fiscal year 2019 grants 
$
(1,476
)

The Company records compensation expense over the vesting term of the related options.  At December 31, 2017,June 30, 2020, compensation costs related to these unvested stock options not yet recognized in the consolidated condensed statements of operations was $62,657.$7,202.

11
Restricted Stock

TheAs a result of the shareholders authorizing the additional shares being added to the Plan in March 2020, the Company granted restricted stock in March 2017awards to its Board of Directorseligible board members for both the prior fiscal year and a Company officer totaling 58,009current fiscal year awards due to eligible board members.  The shares granted totaled 237,014, which were valued at market value on the date of grant.  The shares are being held by the Company for 12 months and will be deliveredhave varying vesting periods ranging from immediate to the directors at the end of the 12 month holding period.  The fair value of these shares at issuance totaled $105,000, which is being amortized over the 12 month holding period as compensation expense.three years.  The unamortized portion of the restricted stock is included in prepaid expenses on the Company’s consolidated condensed balance sheets.

The Company granted restricted stock in October 2018 to its Chairman of the Board of Directors totaling 55,147 shares, which were valued at market value on the date of grant.  The shares will vest 20% per year with the first installment vesting on the first anniversary of the grant date.  The unamortized portion of the restricted stock is included in prepaid expenses on the Company’s consolidated condensed balance sheets.

Note 13 – Leases

Effective October 1, 2019, the Company adopted ASU 2016-02, Leases (Topic 842), utilizing the modified-retrospective transition approach. which is intended to improve financial reporting about leasing transactions. The standard requires the recognition of right-of-use assets and lease liabilities on the consolidated balance sheet and disclosure of key information about leasing arrangements.  The Company elected to use the transition option that allows the Company to initially apply the new lease standard at the adoption date and recognize a cumulative-effect adjustment, if any, to the opening balance of retained earnings in the year of adoption.  The adoption of ASC 842 did not result in any adjustments to retained earnings.

In accordance with ASC 842, the Company has made accounting policy elections (1) to not apply the new standard to lessee arrangements with a term of twelve months or less and (2) to combine lease and non-lease components.  The non-lease components are not material and do not result in significant timing differences in the recognition of lease expense.  As a result of adopting ASC 842, the Company recognized net operating lease right-of-use assets of $4.7 million and operating lease liabilities of $4.7 million on the effective date.  In addition, as a result of adopting ASC 842, the Company recognized net financing lease assets of $0.6 million and financing lease liabilities of $0.6 million on the effective date that were previously accounted for as operating leases.

The Company categorizes leases at their inception as either operating or finance leases. The Company has operating and financing leases in place for various office and warehouse properties, vehicles and certain wireless services equipment.  The leases have remaining lease terms of one year to [ten] years, some of which include the option to extend the lease terms.  Operating leases are included in right-of-use operating lease assets, operating lease liabilities - current, and operating lease liabilities in the consolidated condensed balance sheets.  Finance leases are included in net property and equipment, financing lease liabilities – current, and financing lease liabilities in the consolidated condensed balance sheets.

Leased assets represent the right to use an underlying asset for the lease term, and lease liabilities represent the obligation to make lease payments arising from the lease.  Operating lease right-of-use assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term.  The Company uses a discount rate that approximates the rate of interest for a collateralized loan over a similar term as the discount
16
rate for present value of lease payments when the rate implicit in the contract is not readily determinable.  Leases that have a term of twelve months or less upon commencement date are considered short-term in nature.  Accordingly, short-term leases are not included in the consolidated condensed balance sheets and are expensed on a straight-line basis over the lease term, which commences on the date the Company has the right to control the property.

The Company has an operating lease for a building in Jessup, Maryland for Nave Communications.  As a result of moving Nave’s operations to Palco Telecom, a third-party logistics provider in Huntsville, Alabama, in fiscal year 2019, Nave completely vacated the building in May 2020 and was subleasing part of the building during fiscal year 2020.  As of June 30, 2020, the Company determined that the right of use asset associated with this lease may exceed its fair value.  The Company performed an assessment of this right of use asset in accordance with ASC 360-10-15 and determined that the carrying value was impaired based on a valuation appraisal performed by the Company using a forecasted debt free cash flow model.  Therefore, Company recorded a $0.7 million impairment charge in the Telco segment as of June 30, 2020.

The components of lease expense were as follows:

  Three Months ended June 30, 2020  Nine Months ended June 30, 2020 
       
Operating lease cost:      
Operating lease cost 
$
296,677
  
$
943,834
 
Impairment of right of use asset  
660,242
   
660,242
 
Operating lease cost 
$
956,919
  
$
1,604,076
 
         
Finance lease cost:        
Amortization of right-of-use assets 
$
71,925
  
$
198,289
 
Interest on lease liabilities  
18,220
   
43,182
 
Total finance lease cost 
$
90,145
  
$
241,471
 

Supplemental cash flow information related to leases are as follows for the nine months ended:

  June 30, 2020
 
Cash paid for amounts included in the measurement of lease liabilities:   
Operating cash flows from operating leases 
$
768,784
 
 Operating cash flows from finance leases
 
$
43,182
 
Financing cash flows from finance leases 
$
277,061
 
     
Right-of-use assets obtained in exchange for lease obligations:    
Operating leases 
$
1,076,700
 
Finance leases 
$
718,058
 

17

Supplemental balance sheet information related to leases are as follows:

  June 30, 2020
 
Operating leases   
Operating lease right-of-use assets 
$
4,158,786
 
     
 Operating lease obligations - current
 
$
1,224,630
 
 Operating lease obligations
  
3,809,803
 
Total operating lease liabilities 
$
5,034,433
 
     
Finance leases    
Property and equipment, gross 
$
1,462,865
 
Accumulated depreciation  
(210,253
)
Property and equipment, net 
$
1,252,612
 
     
Financing lease obligations - current 
$
328,151
 
Financing lease obligations  
855,052
 
Total finance lease liabilities 
$
1,183,203
 
     
Weighted Average Remaining Lease Term    
Operating leases 3.94 years 
Finance leases 3.98 years 
Weighted Average Discount Rate    
Operating leases  
5.00
%
Finance leases  
4.96
%

Maturities of lease liabilities are as follows for the years ending September 30:

  
Operating
Leases
  
Finance
Leases
 
2020 
$
355,239
  
$
140,761
 
2021  
1,440,544
   
314,093
 
2022  
1,468,081
   
295,617
 
2023  
1,369,882
   
281,636
 
2024  
802,026
   
227,541
 
Thereafter  
150,478
   
44,334
 
Total lease payments  
5,586,250
   
1,303,982
 
Less imputed interest  
555,817
   
120,779
 
Total 
$
5,034,433
  
$
1,183,203
 

Note 814 – Segment Reporting

The Company is reporting its financial performance based on its external reporting segments: Cable TelevisionWireless Infrastructure Services and Telecommunications.  These reportable segments are described below.

Cable Television
18

Wireless Infrastructure Services (“Cable TV”Wireless”)

The Company’s Cable TVWireless segment sellsprovides 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 surplus and re-manufactured cable television equipment throughout North America, Central America, South America and, to a substantially lesser extent, other international regions that utilize the same technology.  In addition, this segment repairs cable television equipmentsmall cells for various cable companies.5G.

Telecommunications (“Telco”)

The Company’s Telco segment sells new and usedrefurbished telecommunications networking equipment, including both central office and customer premise equipment, to its customer base of telecommunications providers, enterprise customers and resellers located primarily in North America.  This segment also offers its customers repair and testing services for telecommunications networking equipment.  In addition, this segment offers its customers decommissioning services for surplus and obsolete equipment, which it in turn processes through its recycling program.

The Company evaluates performance and allocates its resources based on operating income.  The accounting policies of its reportable segments are the same as those described in the summary of significant accounting policies.

Segment assets consist primarily of cash and cash equivalents, accounts receivable, inventory, property and equipment, goodwill and intangible assets.
  Three Months Ended
  Nine Months Ended
 
  June 30, 2020
  June 30, 2019
  June 30, 2020
  June 30, 2019
 
Sales            
Wireless
 
$
5,123,175
  
$
8,733,444
  
$
16,592,907
  
$
12,951,368
 
Telco
  
6,898,645
   
8,825,871
   
21,350,396
   
24,307,984
 
Total sales 
$
12,021,820
  
$
17,559,315
  
$
37,943,303
  
$
37,259,352
 
                 
Gross profit                
Wireless
 
$
2,251,153
  
$
2,235,406
  
$
4,298,915
  
$
3,524,164
 
Telco
  
1,919,426
   
2,351,999
   
3,025,009
   
6,263,146
 
Total gross profit 
$
4,170,579
  
$
4,587,405
  
$
7,323,924
  
$
9,787,310
 
                 
Loss from operations                
Wireless
 
$
(253,416
)
 
$
(454,672
)
 
$
(4,136,645
)
 
$
(1,568,255
)
Telco
  
(896,561
)
  
201,593
   
(13,483,096
)
  
(1,042,122
)
Total loss from operations 
$
(1,149,977
)
 
$
(253,079
)
 
$
(17,619,741
)
 
$
(2,610,377
)

  Three Months Ended 
  
December 31,
2017
  
December 31,
2016
 
Sales      
Cable TV $5,826,405  $6,574,824 
Telco  6,458,540   5,539,977 
Intersegment  (180)  (18,975)
Total sales $12,284,765  $12,095,826 
         
Gross profit        
Cable TV $1,201,127  $2,400,342 
Telco  2,180,028   1,623,287 
Total gross profit $3,381,155  $4,023,629 
         
Operating income (loss)        
Cable TV $(188,500) $908,982 
Telco  (77,168)  (482,177)
Total operating income (loss) $(265,668) $426,805 
         
  June 30, 2020
  September 30, 2019
 
Segment assets      
Wireless
 
$
5,082,120
  
$
5,515,793
 
Telco
  
12,274,168
   
22,619,565
 
Non-allocated
  
18,753,302
   
8,692,986
 
Total assets 
$
36,109,590
  
$
36,828,344
 



1219

  
December 31,
2017
  
September 30,
2017
 
Segment assets      
Cable TV $23,806,802  $24,116,395 
Telco  23,635,818   24,135,091 
Non-allocated  2,850,799   6,596,119 
Total assets $50,293,419  $54,847,605 


13

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 cable televisionwireless infrastructure services industry, changes in the trends of the telecommunications industry, changes in our supplier agreements, technological developments, changes in the general economic environment, generally,the potential impact of the novel strain of coronavirus (“COVID-19”) pandemic, the growth or formation of competitors, changes in governmental regulation or taxation, changes in our personnel and other such factors.  Our actual results, performance or achievements may differ significantly from the results, performance or achievementachievements 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, 2017,2019, which includes our audited consolidated financial statements and the accompanying notes to the consolidated financial statements.

The Company is reportingreports its financial performance based on itstwo external reporting segments: Cable TelevisionWireless and Telecommunications.  These reportable segments are described below.

Cable TelevisionWireless Infrastructure Services (“Cable TV”Wireless”)

The Company’s Cable TVWireless segment sellsprovides 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 surplus and re-manufactured cable television equipment throughout North America, Central America and South America.  In addition, this segment also repairs cable television equipmentsmall cells for various cable companies.5G.

Telecommunications (“Telco”)

The Company’s Telco segment sells new and usedrefurbished telecommunications networking equipment, including both central office and customer premise equipment, to its customer base of telecommunications providers, enterprise customers and resellers located primarily in North America.  This segment also offers its customers repair and testing services for telecommunications networking equipment.  In addition, this segment offers its customers decommissioning services for surplus and obsolete equipment, which it in turn processes through its recycling program.

Recent Business Developments

Management Changes

Subsequent to June 30, 2020, we announced several management changes.  First, Jarrod Watson was appointed as the Chief Financial Officer of the Company.  Mr. Watson is filling the vacancy from the former chief financial officer who resigned earlier this fiscal year.  Mr. Watson comes to our Company with more than 20 years of corporate
20
financial leadership, including multiple Fortune 500 organizations.  Reginald Jaramillo was promoted to President of our Telco segment, replacing Don Kinison who recently left the Company.  Mr. Jaramillo has 15 years of experience in the telecommunications industry working for companies such as Cox Communications, Time Warner Cable and Suddenlink Communications.  Finally, Jimmy Taylor was named the President of the Wireless segment, where he had been serving in that capacity on an interim basis since February 2020.

COVID-19

On March 11, 2020, the World Health Organization declared the current outbreak of COVID-19 to be a global pandemic, and on March 13, 2020, the United States declared a national emergency. In response to these declarations and the rapid spread of COVID-19, federal, state and local governments have imposed varying degrees of restrictions on business and social activities to contain COVID-19, including quarantine and “stay-at-home” or “shelter-in-place” orders in markets where we operate. Despite these “stay-at-home” or “shelter-in-place” orders, we are classified as an essential business due to the services and products we provide to the telecommunications industry.  Therefore, we continue to operate in the markets we serve, but most of our back-office and administrative personnel were working from home through June 30, 2020 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; however, we expect COVID-19 could materially negatively affect the supply chain, customer demand for our telecommunications products or further delay wireless carriers’ infrastructure build plans in the coming months as a result of the disruption and uncertainty it is causing.  There is considerable uncertainty regarding the extent to which COVID-19 will continue to spread and the extent and duration of governmental and other measures implemented to try to slow the spread of COVID-19, such as large-scale travel bans and restrictions, border closures, quarantines, shelter-in-place orders and business and government shutdowns. Restrictions of this nature have caused, and may continue to cause, us, our subcontractors, suppliers and other business counterparties to experience operational delays.

In response to COVID-19, we have taken a variety of measures to ensure the availability of our critical infrastructure, promote the health and safety of our employees, and support the communities in which we operate. These measures include providing support for our customers as reflected in the FCC's "Keep Americans Connected" pledge, requiring work-from-home arrangements for a large portion of our workforce and imposing travel restrictions for our employees where practicable, canceling physical participation in meetings, events and conferences, and other modifications to our business practices. We will continue to actively monitor the situation and may take further actions as may be required by governmental authorities or that we determine are in the best interests of our employees, customers, business partners and stockholders.

While we continue to assess the COVID-19 situation, the extent to which the COVID-19 pandemic may impact our business, operating results, financial condition, or liquidity in the future will depend on future developments, including the duration of the outbreak, travel restrictions, business and workforce disruptions, and the effectiveness of actions taken to contain and treat the virus.

Results of Operations

Comparison of Results of Operations for the Three Months Ended December 31, 2017June 30, 2020 and December 31, 2016June 30, 2019

Consolidated

Consolidated sales increased $0.2decreased $5.5 million, before the impact of intercompany sales, or 2%32%, to $12.3$12.0 million for the three months ended December 31, 2017June 30, 2020 from $12.1$17.6 million for the three months ended December 31, 2016.June 30, 2019.  The increasedecrease in sales was due to declines in sales in the Wireless and Telco segmentsegments of $1.0$3.6 million partially offset by a decrease in the Cable TV segment of $0.8 million.  and $1.9 million, respectively.

Consolidated gross profit decreased $0.6$0.4 million or 16%, to $3.4$4.2 million for the three months ended

14
December 31, 2017 June 30, 2020 from $4.0$4.6 million for the same period last year.  The decrease in gross profit was in the Cable TV segment of $1.1 million, partially offset by an increase indue primarily to the Telco segment of $0.5 million.as the Wireless segment was essentially flat compared to the same period last year.

Consolidated operating selling, general and administrative expenses include allindirect costs associated with operating our business.  Indirect costs are costs that are not directly attributable to projects or products, which would include indirect personnel costs, which include fringe benefits,facility costs,
21
vehicles, insurance, communication, and business taxes, as well as occupancy, communication and professional services, among other less significant cost categories.  Operating selling, general and administrative expenses remained flat at $3.6increased $0.4 million, or 24%, to $2.0 million for the three months ended December 31, 2017 compared toJune 30, 2020 from $1.6 million the same period last year.  ThisThe increase in operating expenses was due to an increase of $0.2 million in the Telco segment, offset by a decrease in the Cable TV segment of $0.1 million.segment.

Interest expense remained flat at $0.1Consolidated selling, general and administrative expenses include overhead costs, which primarily consist of personnel costs, insurance, professional services, and communication, among other less significant cost categories.  Selling, general and administrative expenses decreased $0.4 million, or 15%, to $2.4 million for the three months ended December 31, 2017 and 2016.

The provision for income taxes was $0.3 million for the three months ended December 31, 2017June 30, 2020 from a provision for income taxes of $0.1 million for the three months ended December 31, 2016.  The increase in the tax provision was due primarily to the Tax Cuts and Jobs Act enacted on December 22, 2017.  One of the provisions of this legislation was to reduce the corporate income tax rates effective beginning January 1, 2018.  As a result of the reduced corporate income tax rate, the Company remeasured its deferred tax balances at the reduced corporate income tax rate, which resulted in income tax expense of $0.4 million.  The Company estimates that its effective income tax rate for the remaining quarters of fiscal year 2018 will be approximately 27% as a result of the legislation.

Segment Results

Cable TV

Sales for the Cable TV segment decreased $0.8 million to $5.8 million for the three months ended December 31, 2017 from $6.6$2.8 million for the same period last year.  The decrease in salesexpenses was due to a decrease in refurbished equipment salesthe Wireless segment and repair service revenue of $0.5 million each, partially offset by an increase in new equipment revenueTelco segment of $0.2 million.  The decrease in the refurbished equipment sales was due primarily to an overall decrease in demandmillion and $0.2 million, respectively.

Impairment of right of use assets for the three months ended December 31, 2017 as compared to last year. The decrease in repair service revenueJune 30, 2020 was due primarily$0.7 million related to the lossimpairment of a significant repair customerright of use asset associated with a building lease in the quarter.  As a result of this loss, the Company has closed two of its repair facilities and laid off personnel at its remaining repair facilities.Telco segment.

Gross margin was 21%Depreciation and amortization expenses decreased $0.1 million, or 25%, to $0.3 million for the three months ended December 31, 2017 compared to 37%June 30, 2020 from $0.4 million for the same period last year.  The decrease in gross margin was due primarily to a significantdecrease in expenses to the Telco segment of $0.2 million, partially offset by an increase in volume for a new equipment sales customer with low margins.expenses from the Wireless segment of $0.1 million.

Operating, selling, general and administrative expenses decreasedInterest 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 to $1.4 million for the three months ended December 31, 2017June 30, 2020 and zero for the same period last year.

Income from $1.5equity method investment, which consists of activity related to our investment in YKTG Solutions, for the three months ended June 30, 2020 was zero and $20 thousand for the three months ended June 30, 2019.  The income for the three months ended June 30, 2019 consisted primarily of payments received under a loan to the former YKTG Solutions partners.

Other income and expense for the three months ended June 30, 2020 was essentially zero as compared to income of $0.2 million for the same period last year.  The income for the three months ended June 30, 2019 is primarily related to a gain on sales of assets of $0.3 million, partially offset by our factoring arrangements with our Wireless segment.

Interest expense for the three months ended June 30, 2020 was $0.1 million as compared to $26 thousand for the same period last year.  The expense for the three months ended June 30, 2020 was primarily related to interest expense on the revolving bank line of credit and the loan with our primary financial lender.  The expense for the three months ended June 30, 2019 was primarily related to interest expense from our revolving bank line of credit and from our deferred guaranteed payments related to the Triton Miami, Inc. acquisition.

The benefit for income taxes was $1.2 million for the three months ended June 30, 2020 compared to a benefit for income taxes of $42 thousand for the three months ended June 30, 2019. As a result of the CARES Act, the Company can carryback net operating losses generated in 2018 through 2020 for a period of five years.  As a result, the Company’s effective tax rate included an income tax benefit of $1.2 million recognized during the three months ended June 30, 2020 related to tax losses generated during the fiscal year up to the amount that the Company estimates is realizable based upon taxable income in the carryback periods.

Segment Results

Wireless

Revenues for the Wireless segment decreased $3.6 million to $5.1 million for the three months ended June 30, 2020 from $8.7 million for the same period of last year. Revenues for the three months ended June 30, 2020 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 and growing pent-up 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 and to improve our operating cost efficiency and gross profit.

22
Gross profit was $2.2 million, or 44% for the three months ended June 30, 2020 and $2.2 million, or 26%, for the three months ended June 30, 2019. Gross profit was essentially flat for three months ended June 30, 2020 as compared to the same period of last year despite decreased revenues for the three months ended June 30, 2020. The significant improvement in the gross profit percentage was driven by several factors including recognition of change order revenues, where expenses had been incurred in prior quarters, operational improvements, and a higher mix of specialty service work. Management believes margins will continue to show improvement over prior quarters, but will be lower, on a percentage basis, than the three months ended June 30, 2020 due to $0.5 million of change order revenue recognized in the current quarter, where expenses were incurred in prior quarters.

Operating expenses were $1.2 million for both the three months ended June 30, 2020 and the three months ended June 30, 2019.

Selling, general and administrative expenses decreased $0.2 million to $1.1 million for the three months ended June 30, 2020 from $1.3 million for the three months ended June 30, 2019.  This decrease was due primarily to decreased payroll-related expenses for the three months ended June 30, 2020 compared to the prior year due to cost controlling initiatives including headcount reductions for the three months ended June 30, 2020.

Depreciation and amortization expense increased $0.1 million to $0.2 million for the three months ended June 30, 2020 from $0.1 million for the same period last year.

Telco

Sales for the Telco segment increased $1.0decreased $1.9 million to $6.5$6.9 million for the three months ended DecemberJune 30, 2020 from $8.8 million for the same period last year.  The decrease in sales for the Telco segment was due primarily to a decrease in equipment sales due to Triton Datacom of $2.2 million, partially offset by an increase at Nave Communications of $0.3 million.  The decrease in revenue at Triton Datacom was significantly impacted by the COVID-19 pandemic as many of its customers were closed during the three months ended June 30, 2020.

Gross profit was $1.9 million for the three months ended June 30, 2020 and $2.3 million for the three months ended June 30, 2019.  The decreased gross profit was due primarily to decreased revenues for the three months ended June 30, 2020.

Operating expenses increased $0.4 million to $0.8 million for the three months ended June 30, 2020 from $0.4 million for the three months ended June 30, 2019.  This increase was due primarily to increased personnel costs and operating charges from Palco Telecom, our third-party logistics provider in Huntsville, Alabama.

Selling, general and administrative expenses decreased $0.4 million to $1.3 million for the three months ended June 30, 2020 from $1.7 million for the same period last year.  This decrease was due primarily to decreased personnel costs.

Impairment of right of use assets for the three months ended June 30, 2020 was $0.7 million related to the impairment of a right of use asset associated with a building lease in the Telco segment.

Depreciation and amortization expense decreased $0.2 million to $0.1 million for the three months ended June 30, 2020 from $0.3 million for the same period last year.  This decrease was due primarily to decreased amortization expense resulting from the impairment of intangibles taken in the three months ended March 31, 20172020.

Comparison of Results of Operations for the Nine Months Ended June 30, 2020 and June 30, 2019

Consolidated

Consolidated sales increased $0.6 million, or 2%, to $37.9 million for the nine months ended June 30, 2020 from $5.5$37.3 million for the nine months ended June 30, 2019.  The increase in sales was primarily in the Wireless segment, which increased $3.6 million, largely offset by a decrease in sales from the Telco segment of $3.0 million.

23
Consolidated gross profit decreased $2.5 million, or 25%, to $7.3 million for the nine months ended June 30, 2020 from $9.8 million for the same period last year.  The decrease in gross profit was due to the Telco segment of $3.3 million, partially offset by an increase in the Wireless segment of $0.8 million.

Consolidated operating expenses include indirect costs associated with operating our business.  Indirect costs are costs that are not directly attributable to projects or products, which would include indirect personnel costs, facility costs, vehicles, insurance, communication, and business taxes, among other less significant cost categories.  Operating expenses increased $2.4 million, or 59%, to $6.3 million for the nine months ended June 30, 2020 from $3.9 million the same period last year.  The increase in operating expenses was due to an increase in the Wireless segment and Telco segment of $1.8 million and $0.6 million, respectively.

Consolidated selling, general and administrative expenses include overhead costs, which primarily consist of personnel costs, insurance, professional services, and communication, among other less significant cost categories.  Selling, general and administrative expenses increased $0.7 million, or 10%, to $8.1 million for the nine months ended June 30, 2020 from $7.4 million for the same period last year.  This was due to an increase in the Wireless segment of $1.3 million, partially offset by a decrease in the Telco segment of $0.6 million, respectively.

Impairment of right of use assets for the nine months ended June 30, 2020 was $0.7 million related to the impairment of a right of use asset associated with a building lease in the Telco segment.

Impairment of intangibles including goodwill for the nine months ended June 30, 2020 was $8.7 million related to the write-off of goodwill and certain intangibles in the Telco segment.

Depreciation and amortization expenses increased $0.1 million, or 16%, to $1.2 million for the nine months ended June 30, 2020 from $1.1 million for the same period last year.  The increase was due to increased depreciation expense in the Wireless segment of $0.3 million, partially offset by a decrease in the Telco segment of $0.1 million.

Interest income primarily consists of interest earned on the promissory note from the sale of the cable business in June 2019.  Interest income was $0.3 million for the nine months ended June 30, 2020 and zero for the same period last year.

Income from equity method investment, which consists of activity related to our investment in YKTG Solutions, for the nine months ended June 30, 2020 was $41 thousand and $75 thousand for the nine months ended June 30, 2019.  The income consisted primarily of payments received under a loan to the former YKTG Solutions partners.

Other income and expense for the nine months ended June 30, 2020 was an $86 thousand expense as compared to income of $118 thousand for the same period last year.  The expense for the nine months ended June 30, 2020 was primarily related to our factoring arrangements with our Wireless segment, partially offset by a gain on sales of assets of $36 thousand.  The income for the nine months ended June 30, 2019 was primarily related to a gain on sales of assets of $0.3 million, partially offset by our factoring arrangements with our Wireless segment.

Interest expense for the nine months ended June 30, 2020 was $0.2 million as compared to $69 thousand for the same period last year.  The expense for the nine months ended June 30, 2020 was primarily related to our revolving bank line of credit and loan with our primary financial lender.  The expense for the nine months ended June 30, 2019 was primarily related to interest expense from our outstanding term loans that were extinguished in November 2018.

The benefit for income taxes was $1.2 million for the nine months ended June 30, 2020 compared to a benefit of $13 thousand for the nine months ended June 30, 2019.  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.

24
Segment Results

Wireless

Revenues for the Wireless segment were $16.6 million for the nine months ended June 30, 2020 and $13.0 million for the same period last year.  The increase in revenue was primarily from the acquisition of Fulton Technologies, Inc. and its affiliate (“Fulton”) in January 2019.

Gross profit was $4.3 million, or 26% for the nine months ended June 30, 2020 and $3.5 million, or 27%, for the nine months ended June 30, 2019. This increase is due primarily to the timing of the acquisition of Fulton in January 2019, partially offset by increased expenses of repositioning our Southern workforce to the North during the nine months ended June 30, 2020.

Operating expenses increased $1.8 million to $4.1 million for the nine months ended June 30, 2020 from $2.4 million for the same period last year due primarily to the timing of the acquisition of Fulton in January 2019.

Selling, general and administrative expenses increased $1.3 million to $3.8 million for the nine months ended June 30, 2020 from $2.5 million for the nine months ended June 30, 2019 due primarily to the timing of the acquisition of Fulton in January 2019.

Depreciation and amortization expense was $0.5 million and $0.2 million for the nine months ended June 30, 2020 and June 30, 2019, respectively.

Telco

Sales for the Telco segment decreased $3.0 million to $21.3 million for the nine months ended June 30, 2020 from $24.3 million for the same period last year.  The decrease in sales for the Telco segment was due to an increasea decrease in equipment sales at both Triton Datacom and recycling revenueNave Communications of $0.7$1.8 million and $0.3$1.2 million, respectively.  The increase in Telco equipment sales was primarily due to Triton Datacom, which offset the continued lower equipment sales from Nave Communications.  The Company is continuing to address the lower equipment sales at Nave Communications by restructuring and expanding its sales force, targeting a broader end-user customer base, increasing its sales to the reseller market and expanding the capacity of its recycling program.

Gross marginprofit was 34%$3.0 million for the threenine months ended December 31, 2017June 30, 2020 and 29%6.3 million for the threenine months ended December 31, 2016.  TheJune 30, 2019.  Gross profit for the nine months ended June 30, 2020 was impacted by an increase in inventory obsolescence expense of $2.1 million and an increase in lower of cost or net realizable value expense of $0.2 million.  The decrease in gross margin percentage was due primarily to higher gross margins from equipment sales to end-user customers and our recycling program.the impact of these inventory adjustments in the nine months ended June 30, 2020.

Operating selling, general and administrative expenses increased $0.1$0.6 million to $2.2$2.1 million for the threenine months ended December 31, 2017June 30, 2020 from $2.1$1.5 million for the same period last year.  This increase was due primarily to earn-outadditional facility costs as a result of moving into Triton’s new facility in the first fiscal quarter of 2020 and additional personnel costs.

Selling, general and administrative expenses decreased $0.6 million to $4.2 million for the nine months ended June 30, 2020 from $4.8 million for the same period last year.  This decrease was due primarily to decreased personnel costs.

Impairment of right of use assets for the nine months ended June 30, 2020 was $0.7 million related to the Triton Miami, Inc. acquisitionimpairment of $0.1 million.a right of use asset associated with a building lease in the Telco segment.

Impairment of intangibles including goodwill for the nine months ended June 30, 2020 was $8.7 million related to the write-off of goodwill and certain intangibles in the Telco segment.

Depreciation and amortization expense decreased $0.2 million to $0.7 million from $0.9 million for the nine months ended June 30, 2020 and 2019, respectively. This decrease was due primarily to decreased amortization expense resulting from the impairment of intangibles taken in the three months ended March 31, 2020.


1525
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.

A reconciliation by segment of operating incomeloss from operations to Adjusted EBITDA for the three and nine months ended June 30, follows:

  Three Months Ended December 31, 2017  Three Months Ended December 31, 2016 
  Cable TV  Telco  Total  Cable TV  Telco  Total 
Income (loss) from
operations
 $(188,500) $(77,168) $(265,668) $908,982  $(482,177) $426,805 
Depreciation  66,948   31,195   98,143   73,245   30,542   103,787 
Amortization  −   313,311   313,311   −   311,986   311,986 
Adjusted EBITDA (a)
 $(121,552) $267,338  $145,786  $982,227  $(139,649) $842,578 
  Three Months Ended June 30, 2020  Three Months Ended June 30, 2019 
  
Wireless
  Telco
  Total
  Wireless
  Telco
  Total
 
Income (loss) from
operations
 
$
(253,416
)
 
$
(896,561
)
 
$
(1,149,977
)
 
$
(454,672
)
 
$
201,593
  
$
(253,079
)
Impairment of right of use asset  ‒
   
660,242
   
660,242
   ‒
   ‒
   ‒
 
Impairment of intangibles including goodwill
  ‒
   ‒
   ‒
   ‒
   ‒
   ‒
 
Depreciation and amortization expense  
143,245
   
98,256
   
241,501
   
81,607
   
300,958
   
382,565
 
Stock compensation expense  
25,577
   
35,769
   
61,346
   
12,166
   
34,436
   
46,602
 
Adjusted EBITDA 
$
(84,594
)
 
$
(102,294
)
 
$
(186,888
)
 
$
(360,899
)
 
$
536,987
  
$
176,088
 


  Nine Months Ended June 30, 2020  Nine Months Ended June 30, 2019 
  Wireless
  Telco
  Total
  Wireless
  Telco
  Total
 
Loss from operations
 
$
(4,136,645
)
 
$
(13,483,096
)
 
$
(17,619,741
)
 
$
(1,568,255
)
 
$
(1,042,122
)
 
$
(2,610,377
)
Impairment of right of use asset  ‒
   
660,242
   
660,242
   ‒
   ‒
   ‒
 
Impairment of intangibles including goodwill  ‒
   
8,714,306
   
8,714,306
   ‒
   ‒
   ‒
 
Depreciation and amortization expense  
461,672
   
735,188
   
1,196,860
   
172,240
   
897,413
   
1,069,653
 
Stock compensation expense  
64,344
   
103,061
   
167,405
   
31,628
   
121,063
   
152,691
 
Adjusted EBITDA (a) 
$
(3,610,629
)
 
$
(3,270,299
)
 
$
(6,880,928
)
 
$
(1,364,387
)
 
$
(23,646
)
 
$
(1,388,033
)

(a)
The Telco segment includes earn-out expensesinventory-related non-cash adjustments of $0.1$2.3 million for the threenine months ended December 31, 2017 and acquisition-related costs of $0.2 million for the three months ended December 31, 2016 related to the acquisition of Triton Miami, Inc.June 30, 2020.

Critical Accounting Policies

Note 1 to the Consolidated Financial Statements in Form 10-K for fiscal 20172019 includes a summary of the significant accounting policies or methods used in the preparation of our Consolidated Financial Statements.  Some of those significant accounting policies or methods require us to make estimates and assumptions that affect the amounts
26
reported by us.  We believe the following items require the most significant judgments and often involve complex estimates.

General

The preparation of financial statements in conformity with United States generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  We base our estimates and judgments on historical experience, current market conditions, and various other factors we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.  Actual results could differ from these estimates under different assumptions or conditions.  The most significant estimates and assumptions are discussed below.

Inventory Valuation

OurFor our Telco segment, our position in the telecommunications industry requires us to carry relatively large inventory quantities relative to annual sales, but it also allows us to realize high overall gross profit margins on our sales.  We market our products primarily to MSOs, telecommunication providers, telecommunication resellers, and other users of cable television and telecommunication equipment who are seeking products for which manufacturers have discontinued production or cannot ship new equipment on a same-day basis as well as providing used products as an alternative to new products from the manufacturer.  Carrying these large inventory quantities represents our largest risk.

We are required to make judgments as to future demand requirements from our customers.  We regularly review the value of our inventory in detail with consideration given to rapidly changing technology which can significantly affect

16
future customer demand.  For individual inventory items, we may carry inventory quantities that are excessive relative to market potential, or we may not be able to recover our acquisition costs for sales that we do make.  In order to address the risks associated with our investment in inventory, we review inventory quantities on hand and reduce the carrying value when the loss of usefulness of an item or other factors, such as obsolete and excess inventories, indicate that cost will not be recovered when an item is sold.

Our inventories are all carried in the Telco segment and consist of new and used electronic components for the cable television and telecommunications industries.industry.  Inventory is stated at the lower of cost or net realizable value, with cost determined using the weighted-average method.  Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.  At December 31, 2017,June 30, 2020, we had total inventory, before the reserve for excess and obsolete inventories, of $25.5$9.3 million, consisting of $14.8$1.2 million in new products and $10.7$8.1 million in used or refurbished products.

For the Cable TV segment, our reserve at December 31, 2017 for excess and obsolete inventory was $2.5 million, which reflects an increase of $0.2 million to reflect deterioration in the market demand of that inventory.  If actual market conditions are less favorable than those projected by management, and our estimates prove to be inaccurate, we could be required to increase our inventory reserve and our gross margins could be materially adversely affected.

For the Telco segment, any obsolete and excess telecommunications inventory is generally processed through its recycling program when it is identified.  However, the Telco segmentWe identified certain inventory that more than likely will not be sold or that the cost will not be recovered when it is sold, and had not yet been processed through its recycling program.  Therefore, we have aan obsolete and excess inventory reserve of $0.7$3.4 million at December 31, 2017.  In the three months ended December 31, 2017, we increased the reserve, by $11 thousand.  We also reviewed the cost of inventories against estimated market value and recorded a lower of cost or net realizable value write-off of $12 thousand for inventories that have a cost in excess of estimated net realizable value.June 30, 2020.  If actual market conditions differ from those projected by management, this could have a material impact on our gross margin and inventory balances based on additional write-downs to net realizable value or a benefit from inventories previously written down.

Inbound freight charges are included in cost of sales.  Purchasing and receiving costs, inspection costs, warehousing costs, internal transfer costs and other inventory expenditures are included in operating expenses, since the amounts involved are not considered material.a material component of cost of sales.

Accounts Receivable Valuation

Management judgments and estimates are made in connection with establishing the allowance for doubtful accounts. Specifically, we analyze the aging of accounts receivable balances, historical bad debts, customer concentrations, customer credit-worthiness,creditworthiness, current economic trends and changes in our customer payment terms.  Significant changes in customer concentration or payment terms, deterioration of customer credit-worthiness,creditworthiness, or weakening in economic trends could have a significant impact on the collectability of receivables and our operating results.  If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, an
27
additional provision to the allowance for doubtful accounts may be required.  The reserve for bad debts was $0.3 million at June 30, 2020 and $0.2 million at December 31, 2017 and September 30, 2017.2019.   At December 31, 2017,June 30, 2020, accounts receivable, net of allowance for doubtful accounts, was $5.3$3.2 million.

Intangibles

Intangible assets that have finite useful lives are amortized on a straight-line basis over their estimated useful lives ranging from 3 years to 10 years. Intangible assets are also tested for impairment when events and circumstances indicate that the carrying value may not be recoverable. Due to our continued operating losses and the uncertainties surrounding the COVID-19 pandemic on the overall economy and the resulting impact on our Company, we determined that there were indicators for us to test our intangible assets for impairment at March 31, 2020.  It was determined that we needed to perform a specific fair value assessment for each of the intangible assets at both Nave and Triton as their individual undiscounted forecasted cash flows did not exceed their respective carrying values.  We then performed a fair value assessment of each of the intangible assets and compared them to the individual carrying value amounts at March 31, 2020. As a result of this assessment, we recorded an impairment charge of $3.9 million related to the customer relationship intangibles in the Telco segment as of March 31, 2020. As of June 30, 2020, there were no further indicators of impairment.

Goodwill

Goodwill represents the excess of purchase price of acquisitions over the acquisition date fair value of the net identifiable tangible and intangible assets of businesses acquired.  Goodwill is not amortized and is tested at least annually for impairment.  We perform our annual analysis during the fourth quarter of each fiscal year and in any other period in which indicators of impairment warrant additional analysis.  Goodwill is evaluated for impairment by first comparing our estimate of the fair value of each reporting unit, or operating segment, with the reporting unit’s carrying value, including goodwill.  Our reporting units for purposes of the goodwill impairment calculation are the Cable TV operatingWireless segment, Nave and the Telco operating segment.Triton.

Management utilizes a discounted cash flow analysis to determine the estimated fair value of each reporting unit.  Significant judgments and assumptions including the discount rate, anticipated revenue growth rate, gross margins

17
and operating expenses are inherent in these fair value estimates.  As a result, actual results may differ from the estimates utilized in our discounted cash flow analysis.  The use of alternate judgments and/or assumptions could result in the recognition of different levels of impairment charges in the financial statements.  If

Due to our continued operating losses and the carrying value of one ofuncertainties surrounding the reporting units exceeds itsCOVID-19 pandemic on the overall economy and the resulting impact on our Company, we determined that there were indicators to warrant us to test goodwill for impairment at March 31, 2020. We calculated a fair value a computationusing the income approach of both Nave and Triton to determine if the implied fair value of goodwill would then be compared to its relatedexceeded their respective carrying value. Ifvalues.  For both Nave and Triton, the carrying value of the reporting unit’s goodwill exceeds the implied fair value of goodwill, an impairment loss would be recognized infor each was less than their respective carrying values after considering the amount of the excess.  Ifintangible asset impairment.  Therefore, we recorded an impairment charge is incurred, it would negatively impact our results of operations and financial position.

We performed our annual impairment test for both reporting units in the fourth quarter of 2017 and determined that the fair value of our reporting units exceeded their carrying values.  Therefore, no impairment existed as of September 30, 2017.

We did not record a goodwill impairment for either of our two reporting units in the three year period ended September 30, 2017.  However, we are implementing strategic plans to help prevent impairment charges in the future, which include the restructuring and expansion of the sales organization$4.8 million in the Telco segment to increaseas of March 31, 2020, which fully impaired goodwill for the volume of sales activity, and reducing inventory levels in both the Cable TV and Telco segments.segment.  Although we do not anticipate a future impairment charge, certain events could occur that might adversely affect the reported value of goodwill.the remaining goodwill in the Wireless segment.  Such events could include, but are not limited to, economic or competitive conditions, a significant change in technology, the economic condition of the customers and industries we serve, a significant decline in the real estate markets we operate in,and a material negative change in the relationships with one or more of our significant customers or equipment suppliers, failure to successfully implement our plan to restructure and expand the Telco sales organization, and failure to reduce inventory levels within the Cable TV or Telco segments.suppliers.  If our judgments and assumptions change as a result of the occurrence of any of these events or other events that we do not currently anticipate, our expectations as to future results and our estimate of the implied fair value of each reporting unitthe Wireless segment also may change.

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.

Liquidity and Capital Resources

Cash Flows Provided byUsed in Operating Activities

We financeIn fiscal year 2020, we have financed our operations primarily through cash flows providedfinancing activities by operations, and we have a bankutilizing our line of credit, of up to $7.0 million.entering into an additional $3.5 million term loan from our primary financial lender, and receiving a $2.9 million SBA Payroll Protection Program (“PPP”) loan.  During the threenine months ended December 31, 2017,June 30, 2020, we generated $0.2used $1.4 million of cash flows fromfor operations.  The cash flows from operations was favorably impacted by $0.3 million from a net decrease in accounts receivable.  The cash flows operations was negatively impacted by $0.2 million from a net increaseloss of $16.4
28
million, which was partially offset by non-cash adjustments of $13.0 million and net cash provided by working capital of $2.0 million to reconcile net loss to net cash used in inventory and $0.2 million from a net decrease in accrued expenses, which primarily resulted from the first annual payment of the earn-out related to the acquisition of Triton Miami, Inc.operating activities.

Cash Flows Used for Investing Activities

During the threenine months ended December 31, 2017,June 30, 2020, cash used inprovided by investing activities was $0.7$1.7 million, whichconsisting primarily related to guaranteedof $2.0 million of payments received under the promissory note related to the acquisitionsale of Triton Miami, Inc.the cable business in fiscal year 2019, partially offset by $0.5 million of purchases of property and equipment.  Of the $2.0 million of payments received under the promissory note, $0.7 million.million was a prepayment.

Cash Flows Used for Financing Activities

During the threenine months ended December 31, 2017, we madeJune 30, 2020, cash provided by financing activities was $8.6 million, which primarily related to net borrowings of $2.8 million under our revolving credit agreement, proceeds, net of principal payments, from our note payable of $3.1$1.9 million, onproceeds from the receipt of the PPP loan of $2.9 million, and proceeds from the sale of our term loanscommon stock utilizing our shelf registration of $1.8 million.  These were partially offset by the final guaranteed payment of $0.7 million to the Triton Miami, Inc. partners and payments under our Credit and Term Loan Agreement with our primary lender.  On December 6, 2017, as partfinancing lease arrangements of our overall plan to become compliant with our financial covenants$0.3 million.

In March 2020, we entered into a loan agreement with our primary financial lender we extinguished onefor $3.5 million, bearing interest at 6% per annum.  The loan is payable in seven semi-annual installments of principal and interest with the first payment occurring on June 30, 2020, and the final payment due June 30, 2023.  The principal and interest payments correlate to the promissory note with Leveling 8.  We effectively monetized $3.5 million of the $5.8 million remaining balance of the promissory note resulting from the sale of our term loanscable businesses in 2019 to Leveling 8 to assist us with working capital needs. In connection with a $1.7 million payment made in the third quarter of 2020 by payingLeveling 8 under the outstanding balancepromissory note, we paid down $1.6 million of $2.7principal under this loan, for which $1.0 million pluswas a prepayment penalty of $25,000.against the loan. As a result, the balance under this loan is now $1.9 million and the final payment will be June 30, 2022.

Our credit agreement contains a $4.0 million revolving line of credit, which matures on December 17, 2020.  The revolving line of credit requires quarterly interest payments based on the prevailing Wall Street Journal Prime Rate (3.25% at June 30, 2020), and the interest rate is reset monthly. The credit agreement provides that the Company maintain a fixed charge coverage ratio (net cash flow to total fixed charges) of not less than 1.25 to 1.0.  Future borrowings under the revolving line of credit are limited to the lesser of $4.0 million or the sum of 80% of eligible accounts receivable and 25% of eligible inventory.  Under these limitations, our total available revolving line of credit borrowing base was $3.1 million at June 30, 2020.

We believe that it is probable that we werewill not be in compliance with our fixed charge coverage ratio loan covenant with our primary financial covenants at December 31, 2017.

18

Our first remaining term loan requires monthly paymentslender as of $15,334 plus accrued interest through November 2021.  Our second remaining term loan isSeptember 30, 2020.  We would therefore need to seek a three year term loanwaiver of this covenant violation.  We have been in preliminary discussions with monthly principalour primary financial lender, and interest paymentswe expect them to grant us a waiver for this covenant violation.  However, if our primary financial lender does not grant the waiver, this could result in our lender accelerating the maturity of $118,809 through October 2019.  The interest rate is a fixed rate of 4.40%.

At December 31, 2017, there was not a balance outstandingour indebtedness or preventing access to additional funds under our line of credit.  The lessercredit agreement, or requiring prepayment of $7.0 millionour outstanding indebtedness under our March 10, 2020 loan agreement or the totalline of 80%credit agreement.

On April 14, 2020, we received a PPP loan with our primary lender for $2.9 million, bearing interest at 1% per annum, with monthly payments of principal and interest in the amount of $164,045 commencing on November 10, 2020.  The loan matures on April 10, 2022.  We plan to use the proceeds from the PPP loan for payroll-related expenses, rent, and utility expenses in accordance with the guidelines for the loan.  We plan to apply for forgiveness of the qualified accounts receivable plus 50% of qualified inventory is available to usPPP loan in accordance with the requirements and limitations under the revolving credit facility ($7.0CARES Act, the PPP Flexibility Act and SBA regulations and requirements, and although no assurance can be given that all or any portion of the PPP loan will be forgiven, we believe that most of this loan will be forgiven.

Of the $6.4 million in proceeds received from the March 2020 loan and the PPP loan, we believe that most of the
29
payments for these loans will not have to be repaid using funds generated from our operations. The March 2020 loan will be paid by payments received from our promissory note with Leveling 8, and we anticipate that most of the PPP loan will be forgiven.

In the third quarter of 2020, we utilized our recently filed shelf registration statement to raise additional cash by selling common shares utilizing an at September 30, 2017)the market offering under our equity distribution agreement with Northland Securities, Inc. (“Northland”).  Any future borrowings under the revolving credit facility are due at maturity on March 30, 2018,Under this program, we sold 573,199 shares for which the Company expects to renew the revolving credit facility for at least one year.net proceeds of $2.1 million.

We believe that our cash and cash equivalents and restricted cash of $0.4$10.5 million at December 31, 2017, cash flow from operationsJune 30, 2020 and our existing revolving bank line of credit will provide sufficient liquidity and capital resources to meetcover 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.  In addition, there is still significant uncertainty surrounding the timing of the overall recovery of the economy and the timing of wireless infrastructure service opportunities for the upgrade to 5G.  Therefore, depending on the timing of these factors and our primary financial lender granting us a waiver of the 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.

Item 4.  Controls and Procedures.

We maintain disclosure controls and procedures that are designed to ensure the information we are required to disclose in the reports we file or submit under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission.  Based on their evaluation as of December 31, 2017,June 30, 2020, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective to accomplish their objectives and to ensure the information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

1930


PART IIII.   OTHER INFORMATION


Item 6.  Exhibits.
  
Exhibit No.
Description
10.1Financial Institution Business Loan Agreement dated April 14, 2020
  
31.1Certification of Chief Executive Officer under Section 302 of the Sarbanes Oxley Act of 2002.
  
31.2Certification of Chief Financial Officer under Section 302 of the Sarbanes Oxley Act of 2002.
  
32.1Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  
32.2Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  
101.INSXBRL Instance Document.
  
101.SCHXBRL Taxonomy Extension Schema.
  
101.CALXBRL Taxonomy Extension Calculation Linkbase.
  
101.DEFXBRL Taxonomy Extension Definition Linkbase.
  
101.LABXBRL Taxonomy Extension Label Linkbase.
  
101.PREXBRL Taxonomy Extension Presentation Linkbase.



2031

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:  February 13, 2018               August 11, 2020 
/s/ David L. HumphreyJoseph E. Hart
David L. Humphrey,Joseph E. Hart,
President and Chief Executive Officer
(Principal Executive Officer)


Date:  February 13, 2018               August 11, 2020 \
/s/ Scott A. FrancisJarrod M. Watson
Scott A. Francis,Jarrod M. Watson,
Chief Financial Officer
(Principal Financial Officer)



2132


Exhibit Index

The following documents are included as exhibits to this Form 10-Q:

Exhibit No.
Description
10.1Financial Institution Business Loan Agreement dated April 14, 2020
  
31.1Certification of Chief Executive Officer under Section 302 of the Sarbanes Oxley Act of 2002.
  
31.2Certification of Chief Financial Officer under Section 302 of the Sarbanes Oxley Act of 2002.
  
32.1Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  
32.2Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  
101.INSXBRL Instance Document.
  
101.SCHXBRL Taxonomy Extension Schema.
  
101.CALXBRL Taxonomy Extension Calculation Linkbase.
  
101.DEFXBRL Taxonomy Extension Definition Linkbase.
  
101.LABXBRL Taxonomy Extension Label Linkbase.
  
101.PREXBRL Taxonomy Extension Presentation Linkbase.






















2233