WASHINGTON, D.C. 20549
ADDvantage Technologies Group, Inc.
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Shares outstanding of the issuer's $.01 par value common stock as of January 31, 2018 were
10,225,995.
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| | 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, the potential forgiveness of any portion of the PPP Loan, changes in our personnel and other such factors. Our actual results, performance or achievements may differ significantly from the results, performance or 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, 2017,2020, 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
COVID-19
On March 11, 2020, the World Health Organization declared the current outbreak of COVID-19 to be a global pandemic, and on March 13, 2020, the United States declared a national emergency. In response to these declarations and the rapid spread of COVID-19, federal, state and local governments have imposed varying degrees of restrictions on business and social activities to contain COVID-19, including quarantine and “stay-at-home” or “shelter-in-place” orders in markets where we operate. Despite these “stay-at-home” or “shelter-in-place”
orders, we are classified as an essential business due to the services and products we provide to the telecommunications industry. Therefore, we continue to operate in the markets we serve while these orders were in place. Most of our back-office and administrative personnel worked from home while these orders were in place, these personnel began working in the office as restrictions were relaxed or lifted. Although we can continue to operate our businesses, our revenues have slowed, especially in our Wireless segment, due to the carriers slowing down various wireless tower projects. We have not experienced a material disruption in our supply chain to date.
With the partial reopening of the economy the economic effects of the pandemic and resulting societal changes remain unpredictable. Although we experienced increased revenues this quarter compared to recent quarters since the pandemic began last year, there are a number of uncertainties that could impact our future results of operations, including the efficacy and widespread distribution of a vaccine, the return of major outdoor events during the summer and fall months, and the impact of COVID-19 on the operating results and capital budgets of our customers.
Results of Operations
Comparison of Results of Operations for the Three Months Ended December 31, 2017June 30, 2021 and December 31, 2016
June 30, 2020
Consolidated
Consolidated salesrevenues increased $0.2$5.0 million, before the impact of intercompany sales, or 2%42%, to $12.3$17.0 million for the three months ended December 31, 2017June 30, 2021 from $12.1$12.0 million for the three months ended December 31, 2016.June 30, 2020. The increase in sales was due to increased sales in the Telco segment of $6.0 million partially offset by a decrease in Wireless segment sales of $1.0 million.
Consolidated gross profit increased $0.1 million for the three months ended June 30, 2021 to $4.3 million compared to $4.2 million for the same period last year. The increases in gross profit were due to an increase in the Telco segment of $1.1 million, and a Wireless segment decrease of $1.0 million.
Consolidated operating expenses include indirect costs associated with operating our business such as indirect personnel, facilities, vehicles, insurance, communication, and business taxes. Operating expenses increased $0.5 million, or 26%, to $2.5 million for the three months ended June 30, 2021 from $2.0 million for the same period last year. The increase in operating expenses were due to an increase in the Wireless segment of $0.6 million, partially offset by a decrease in the Cable TVTelco segment of $0.8$0.1 million.
Consolidated gross profit decreased $0.6selling, general and administrative ("SG&A") expenses include overhead, which consist of personnel, insurance, professional services, communication, and other cost categories. SG&A expense increased $1.1 million, or 16%47%, to $3.4$3.6 million for the three months ended June 30, 2021 from $2.4 million for the same period last year. General and administrative costs accounted for $0.4 million of the increase, while selling costs accounted for $0.7 million of the increase.
Impairment of right of use assets for the three months ended June 30, 2020 was $0.7 million related to impairing an asset associated with a building lease in the Telco segment.
Depreciation and amortization expenses increased $0.1 million, or 30%, to $0.3 million for the three months ended June 30, 2021, from $0.2 million for the same period last year.
Interest income primarily consists of interest earned on the promissory note receivable. Interest income decreased to $34 thousand for the three months ended June 30, 2021 compared to $83 thousand for the same period last year, as the note receivable principal has decreased.
Interest expense for the three months ended June 30, 2021 was $46 thousand as compared to $101 thousand for the same period last year. The expense was related to interest expense on the revolving bank line of credit and the loan with our primary financial lender.
Income tax benefit was $23 thousand for the three months ended June 30, 2021 and $1.2 million for the same period in 2020. Our effective tax rate during the three months ended June 30, 2021 was approximately 0% because increases in our valuation allowance offset against our deferred tax assets. As a result of the CARES Act, the Company can carryback net operating losses generated in 2018 through 2020 for a period of five years. As a result, the Company’s effective tax rate included an income tax benefit of $1.2 million recognized during the three months
14ended June 30, 2020 related to tax losses generated during the fiscal year up to the amount that the Company estimates is realizable based upon taxable income in the carryback periods.
Segment Results
Wireless
Revenues for the Wireless segment decreased $1.0 million to $4.1 million for the three months ended June 30, 2021 from $5.1 million for the same period of last year. Revenues continued to be negatively impacted due to both delays in infrastructure spending from the major U.S. carriers and circumstances related to the COVID-19 pandemic. However, we believe that the 5G rollout will gain momentum in the calendar year and that there is substantial constrained demand for 5G-related work on existing towers, new raw-land builds, and small cell networks. In addition, we have made and are continuing to make the necessary operational adjustments in order to be well positioned to secure 5G construction services work.
Gross profit was $1.3 million, or 30% for the three months ended June 30, 2021 compared to $2.3 million, or 44%, for the three months ended June 30, 2020. The decrease in the gross profit percentage was driven by a higher gross profit percentage for the three months ended June 30, 2020 due primarily to recognition of change order revenues where expenses had been incurred in prior quarters.
Operating expenses increased $0.6 million to $1.8 million for the three months ended June 30, 2021 from $1.2 million for the same period last year. This increase is primarily attributable to increased personnel costs as we prepare for the rollout of 5G-related work and increased rent expense.
Selling, general and administrative expenses increased $0.4 million to $1.4 million for the three months ended June 30, 2021 from $1.0 million for the three months ended June 30, 2020. This increase was due to increased sales-related personnel costs. The corporate overhead allocation increased $0.2 million mainly as a result of increased employee stock-based compensation expenses and executive severance costs.
Depreciation and amortization expense was $0.2 million for the three months ended June 30, 2021 compared to $0.1 million for the the same period last year.
Telco
Revenues for the Telco segment increased $6.0 million to $12.9 million for the three months ended June 30, 2021 from $6.9 million for the same period last year. The increase in revenues were related to increased sales of used and refurbished equipment.
Gross profit was $3.0 million for the three months ended June 30, 2021 and $1.9 million for the three months ended June 30, 2020. The increase in gross profit was due primarily increased revenues for the three months ended June 30, 2021.
Operating expenses decreased $0.1 million to $0.7 million for the three months ended June 30, 2021 compared to $0.8 million the three months ended June 30, 2020.
Selling, general and administrative expenses increased $0.8 million to $2.2 million for the three months ended June 30, 2021 from $1.4 million for the same period last year. This increase was due primarily to increased sales commissions. In addition, the corporate allocation increased $0.2 million, which primarily related to increased employee stock-based compensation expenses and executive severance costs.
Impairment of right of use assets for the three months ended June 30, 2020 was $0.7 million related to the impairment of a right of use asset associated with a building lease in the Telco segment.
Depreciation and amortization expense was $0.1 million for the three months ended June 30, 2021 and 2020.
Comparison of Results of Operations for the Nine Months Ended June 30, 2021 and June 30, 2020
December 31, 2017
Consolidated
Consolidated revenues increased $4.5 million, or 12%, to $42.4 million for the nine months ended June 30, 2021 from $4.0$37.9 million for the nine months ended June 30, 2020. The increase in revenue was primarily in the Telco segment, which increased $7.4 million, partially offset by a decrease of $2.9 million in the Wireless segment.
Consolidated gross profit increased $3.8 million, or 51%, to $11.1 million for the nine months ended June 30, 2021 from $7.3 million for the same period last year. The increase in gross profit was due to an increase in the Telco segment of $3.7 million, as well as an increase in the Wireless segment of $0.1 million.
Consolidated operating expenses include indirect costs associated with operating our business such as indirect personnel costs, facilities, vehicles, insurance, communication, and business taxes, among other costs. Operating expenses increased $0.4 million, or 7%, to $6.7 million for the nine months ended June 30, 2021 from $6.3 million for the same period last year.
Consolidated selling, general and administrative expenses include overhead costs, which primarily consist of personnel, insurance, professional services, and communication, among other costs. Selling, general and administrative expenses increased $2.4 million, or 30%, to $10.5 million for the nine months ended June 30, 2021 from $8.1 million for the same period last year. General and administrative costs accounted for $1.2 million of the increase, while selling costs accounted for $1.3 million of the increase. Non-cash stock-based compensation expense accounted for $0.7 million of the increased general and administrative costs.
Depreciation and amortization expenses decreased $0.3 million, or 25%, to $0.9 million for the nine months ended June 30, 2021 from $1.2 million for the same period last year. The decrease was due primarily to decreased amortization expense resulting from the impairment of intangible assets in the nine months ended June 30, 2020.
Interest income primarily consists of interest earned on the promissory note from the sale of the cable business in June 2019. Interest income was $0.1 million for nine months ended June 30, 2021 and $0.3 million for the nine months ended June 30, 2020.
Other expense for the nine months ended June 30, 2021 was $61 thousand as compared to $0.1 million for the same period last year. The expense for the both the nine months ended June 30, 2021 and June 30, 2020 is primarily related to our factoring arrangements in our Wireless segment.
Interest expense for the nine months ended June 30, 2021 was $0.1 million as compared to $0.2 million for the same period last year. Interest expense for the nine months ended June 30, 2021 was related to the revolving bank line of credit and the loan with our primary financial lender.
The provision for income taxes was $23 thousand for the nine months ended June 30, 2021 compared to a benefit of $1.2 million for the nine months ended June 30, 2020. Our effective tax rates during the nine months ended June 30, 2021 was approximately 0% because of increases in our valuation allowance against our deferred tax assets. As a result of the CARES Act, the Company can carryback net operating losses generated in 2018 through 2020 for a period of five years. As a result, the Company’s effective tax rate included an income tax benefit of $1.2 million recognized during the nine months ended June 30, 2020 related to tax losses generated during the fiscal year up to the amount that the Company estimates is realizable based upon taxable income in the carryback periods.
Segment Results
Wireless
Revenues for the Wireless segment were $13.7 million for the nine months ended June 30, 2021 and $16.6 million for the same period last year. The decrease in gross profit was in the Cable TV segment of $1.1 million, partially offset by an increase in the Telco segment of $0.5 million.
Consolidated operating, selling, general and administrative expenses include all personnel costs, which include fringe benefits, insurance 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 $3.6 million for the three months ended December 31, 2017 compared to the same period last year. Thisrevenue was due to an increasea full nine months of $0.2 millionCOVID-19 related slow-down in activity included in the Telco segment, offset by a decrease in the Cable TV segment of $0.1 million.current year results.
Interest expense remained flat at $0.1Gross profit was $4.4 million, or 32% for the threenine months ended December 31, 2017June 30, 2021 and 2016.
The provision for income taxes was $0.3$4.3 million, or 26%, for the threenine months ended December 31, 2017 from a provision for income taxes of $0.1 million for the three months ended December 31, 2016.June 30, 2020. The increase in the tax provision wasgross profit percentage is due primarily to the Tax Cutsimpact of
structural operational changes and Jobs Act enacted on December 22, 2017. One ofmore effective customer sales change order processes in place during 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 ofcurrent fiscal year 2018 will be approximately 27% as a result of the legislation.year.
Segment Results
Cable TV
Sales for the Cable TV segment decreased $0.8Operating expenses increased $0.3 million to $5.8$4.4 million for the threenine months ended December 31, 2017June 30, 2021 from $6.6$4.1 million for the same period last year. The decrease in sales was due to a decrease in refurbished equipment sales and repair service revenue of $0.5 million each, partially offset by an increase in new equipment revenue of $0.2 million. The decrease in the refurbished equipment sales was due primarily to an overall decrease in demand for the three months ended December 31, 2017year, mainly as compared to last year. The decrease in repair service revenue was due primarily to the loss of a significant repair customer in the quarter. As a result of this loss, the Company has closed twolower vehicle and equipment costs as a result of its repair facilities and laid offdecreased revenues. This increase is primarily attributable to increased personnel at its remaining repair facilities.
Gross margin was 21%costs as we prepare for the three months ended December 31, 2017 compared to 37% for the same period last year. The decrease in gross margin was due primarily to a significant increase in volume for a new equipment sales customer with low margins.rollout of 5G-related work and increased rent expense.
Operating, selling,Selling, general and administrative expenses decreased $0.1increased $1.3 million to $1.4$4.3 million for the threenine months ended December 31, 2017June 30, 2021 from $1.5$3.0 million for the same period last year.nine months ended June 30, 2020, mainly as a result of personnel costs. In addition, the corporate allocation increased $0.7 million, which primarily related to increased employee stock-based compensation expenses and executive severance costs.
Depreciation and amortization expense was consistent at $0.5 million for both the nine months ended June 30, 2021 and 2020.
Telco
SalesRevenues for the Telco segment increased $1.0$7.4 million to $6.5$28.7 million for the threenine months ended December 31, 2017June 30, 2021 from $5.5$21.4 million for the same period last year. The increase inwas mainly related to sales for the Telco segment was due to an increase in equipment salesof used and recycling revenue of $0.7 million and $0.3 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.refurbished equipment.
Gross marginprofit was 34% for the three months ended December 31, 2017 and 29% for the three months ended December 31, 2016. The increase in gross margin was due primarily to higher gross margins from equipment sales to end-user customers and our recycling program.
Operating, selling, general and administrative expenses increased $0.1 million to $2.2$6.7 million for the threenine months ended December 31, 2017June 30, 2021 compared to $3.0 million for nine months ended June 30, 2020. Gross profit for the nine months ended June 30, 2021 rebounded after taking a charge of $2.1 million for inventory obsolescence expense in the same period last year.
Operating expenses increased $1.2 million to $2.3 million for the nine months ended June 30, 2021 from $2.1 million for the same period last year. This increase was due primarily to earn-outincreased costs from our third-party logistics provider due to revenue increases and severance costs for certain employees resulting from cost reduction activities.
Selling, general and administrative expenses increased $1.2 million to $6.3 million for the nine months ended June 30, 2021 from $5.1 million for the same period last year. This increase was due to increased selling expenses of $0.8 million, partially offset by decreased general and administrative expenses of $0.2 million. In addition, the corporate allocation increased $0.6 million, which primarily related to increased employee stock-based compensation expenses and executive severance costs.
Depreciation and amortization expense decreased $0.3 million to $0.4 million from $0.7 million for the Triton Miami, Inc. acquisitionnine months ended June 30, 2021 and 2020, respectively, resulting from significant impairments of $0.1 million.intangible assets in the second quarter of 2020.
Non-GAAP Financial Measure
Adjusted EBITDA is a supplemental, non-GAAP financial measure. EBITDA is defined as earnings before interest expense, income taxes, depreciation and amortization. Adjusted EBITDA as presented also excludes impairment charges for operating lease right-of-use assets and intangible assets including goodwill, stock-based compensation expense, other income, other expense, interest income and income from equity method investment. Adjusted EBITDA is presented below because this metric is used by the financial community as a method of measuring our financial performance and of evaluating the market value of companies considered to be in similar businesses. Since Adjusted EBITDA is not a measure of performance calculated in accordance with GAAP, it should not be considered in isolation of, or as a substitute for, net earnings as an indicator of operating performance. Adjusted EBITDA, as calculated below, may not be comparable to similarly titled measures employed by other companies. In addition, Adjusted EBITDA is not necessarily a measure of our ability to fund our cash needs.
AThe following table provides a reconciliation by segment of operating incomeloss from operations to Adjusted EBITDA follows:for the three and nine month periods ended June 30, 2021 and June 30, 2020, in thousands: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2021 | | Three Months Ended June 30, 2020 |
| Wireless | | Telco | | Total | | Wireless | | Telco | | Total |
Loss from operations | $ | (2,117) | | | $ | 16 | | | $ | (2,101) | | | $ | (75) | | | $ | (1,067) | | | $ | (1,142) | |
Impairment of right of use asset | — | | | — | | | — | | | — | | | 660 | | | 660 | |
| | | | | | | | | | | |
Depreciation and amortization expense | 185 | | | 129 | | | 314 | | | 145 | | | 97 | | | 242 | |
Stock based compensation expense | 136 | | | 143 | | | 279 | | | 24 | | | 37 | | | 61 | |
Adjusted EBITDA | $ | (1,796) | | | $ | 288 | | | $ | (1,508) | | | $ | 94 | | | $ | (273) | | | $ | (179) | |
| | | | | | | | | | | |
| Nine Months Ended June 30, 2021 | | Nine Months Ended June 30, 2020 |
| Wireless | | Telco | | Total | | Wireless | | Telco | | Total |
Loss from operations | $ | (4,759) | | | $ | (2,303) | | | $ | (7,062) | | | $ | (3,310) | | | $ | (14,274) | | | $ | (17,584) | |
Impairment of right of use asset | — | | | — | | | — | | | — | | | 660 | | | 660 | |
Impairment of intangibles including goodwill | — | | | — | | | — | | | — | | | 8,714 | | | 8,714 | |
Depreciation and amortization expense | 513 | | | 387 | | | 899 | | | 460 | | | 737 | | | 1,197 | |
Stock based compensation expense | 383 | | | 457 | | | 840 | | | 56 | | | 111 | | | 167 | |
Adjusted EBITDA | $ | (3,863) | | | $ | (1,459) | | | $ | (5,323) | | | $ | (2,794) | | | $ | (4,052) | | | $ | (6,846) | |
Due to rounding, numbers presented may not foot to the totals provided.
| | Three Months Ended 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 | |
(a) | The Telco segment includes earn-out expenses of $0.1 million for the three 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. |
Critical Accounting Policies
Note 1 toOur unaudited consolidated financial statements are impacted by the Consolidated Financial Statements in Form 10-K for fiscal 2017 includes aaccounting policies used and the estimates and assumptions made by management during their preparation. A complete summary of theour significant accounting policies or methods usedis included in the preparationNote 1- Basis of Presentation and Accounting Policies in our Consolidated Financial Statements. Some of those significant accounting policies or methods require us to make estimates and assumptions that affect the amounts reported by us. We believe the following items require the most significant judgments and often involve complex estimates.
Form 10-K.
General
The preparation of financial statements in conformity with United States generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We base our estimates and judgments on historical experience, current market conditions, and various other factors we believe to be reasonable, under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.certain assets. Actual results could differ from these estimates under different assumptions or conditions. The most significant estimates and assumptions are discussed below.
Inventory Valuation
OurFor our Telco segment, our position in the telecommunications industry requires us to carry large inventory quantities relative to annual sales, but it also allows us to realize high overall gross profit margins on our sales. We market our products primarily to MSOs, telecommunication providers, 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 fromrisk for our customers. We regularly review the value of our inventory in detail with consideration given to rapidly changing technology which can significantly affect
future customer demand. For individual inventory items, we may carry inventory quantities that are excessive relative to market potential, or we may not be able to recover our acquisition costs for sales that we do make. In order to address the risks associated with our investment in inventory, we review inventory quantities on hand and reduce the carrying value when the loss of usefulness of an item or other factors, such as obsolete and excess inventories, indicate that cost will not be recovered when an item is sold.
Telco segment.
Our inventories are all carried in the Telco segment and consist of new and used electronic components for the 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, 2021, we had total inventory, before the reserve for excess and obsolete inventories, of $25.5$8.8 million, consisting of $14.8$1.3 million in new products and $10.7$7.5 million in used or refurbished products.
ForWe regularly review the Cable TV segment, our reserve at December 31, 2017 for excess and obsolete inventory was $2.5 million, which reflects an increasevalue 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 reservein detail with consideration given to rapidly changing technology which can significantly affect future customer demand. For individual inventory items, we may carry inventory
quantities that are excessive relative to market potential, or we may not be able to recover our acquisition costs. In order to address the risks associated with our investment in inventory, we review inventory quantities on hand and our gross margins could be materially adversely affected.
Forreduce the Telco segment, anycarrying value for obsolete and excess telecommunications inventoryinventories, when our analysis indicates that cost will not be recovered when an item is generally processed through its recycling program when it is identified. However, the Telco segmentsold.
We 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 itsour recycling program. Therefore, we have aan obsolete and excess inventory reserve of $0.7$3.2 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, 2021. If actual market conditions differ from those projected by management, this could have a material impact on our gross margin and inventory balances based on additional write-downs to net realizable value or a benefit from inventories previously written down.
Inbound freight charges are included in cost of sales. Purchasing and receiving costs, inspection costs, warehousing costs, internal transfer costs and other inventory expenditures are included in operating expenses, since the amounts involved are not considered material.
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, current economic trends and changes in our customer payment terms. Significant changes in customer concentration or payment terms, deterioration of customer credit-worthiness, or weakening in economic trends could have a significant impact on the collectability of receivables and our operating results. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, an additional provision to the allowance for doubtful accounts may be required. The reserve for bad debts was $0.2 million at December 31, 2017 and September 30, 2017. At December 31, 2017, accounts receivable, net of allowance for doubtful accounts, was $5.3 million.
Goodwill
Goodwill represents the excess of purchase price of acquisitions over the acquisition date fair value of the net 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 operating segment and the Telco operating segment.
Management utilizes a discounted cash flow analysis to determine the estimated fair value of each reporting unit. Significant judgments and assumptions including the discount rate, anticipated revenue growth rate, gross margins
and operating expenses are inherent in these fair value estimates. As a result, actual results may differ from the estimates utilized in our discounted cash flow analysis. The use of alternate judgments and/or assumptions could result in the recognition of different levels of impairment charges in the financial statements. If the carrying value of one of the reporting units exceeds its fair value, a computation of the implied fair value of goodwill would then be compared to its related carrying value. If the carrying value of the reporting unit’s goodwill exceeds the implied fair value of goodwill, an impairment loss would be recognized in the amount of the excess. If 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 in the Telco segment to increase the volume of sales activity, and reducing inventory levels in both the Cable TV and Telco segments. Although we do not anticipate a future impairment charge, certain events could occur that might adversely affect the reported value of goodwill. 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, 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. 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 unit also may change.
expenses.
Intangibles
Intangible assets that have finite useful lives are amortized on a straight-line basis over their estimated useful lives ranging from 3 years to 10 years. Intangible assets are also tested for impairment when events and circumstances indicate that the carrying value may not be recoverable. As of June 30, 2021, there were no indicators of impairment present.
Liquidity and Capital Resources
Cash Flows Used in Operating Activities
During the nine months ended June 30, 2021, cash used in operations was $5.8 million. Cash flows from operations were negatively impacted by a net loss of $7.1 million and net cash used by working capital of $0.3 million, which was partially offset by non-cash adjustments of $1.7 million.
Cash Flows Provided by OperatingInvesting Activities
We finance our operations primarily throughDuring the nine months ended June 30, 2021, cash flows provided by operations, and we have a bank lineinvesting activities was $1.8 million which primarily consisted of credit of up to $7.0 million. During the three months ended December 31, 2017, we generated $0.2$1.9 million of cash flows from operations. The cash flows from operations was favorably impacted by $0.3 million from a net decrease in accountspayments received under the promissory note receivable. The cash flows operations was negatively impacted by $0.2 million from a net increase 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.
Cash Flows Used for Investingin Financing Activities
During the threenine months ended December 31, 2017,June 30, 2021, cash used in investingfinancing activities was $0.7$0.6 million, of which primarily$1.2 million related to guaranteed paymentsrepayment of our promissory note payable and $0.4 million related to the acquisition of Triton Miami, Inc. of $0.7 million.
Cash Flows Used for Financing Activities
During the three months ended December 31, 2017, we made principal payments of $3.1 million on our term loans under our Credit and Term Loan Agreement with our primary lender. On December 6, 2017, as partfinancing lease arrangements, partially offset by net proceeds from the sale of our overall plan to become compliant withcommon stock utilizing our financial covenantsshelf registration of $0.9 million.
In March 2020, we entered into a loan agreement with our primary financial lender we extinguished one of our term loans by paying the outstanding balance of $2.7for $3.5 million, plus a prepayment penalty of $25,000. As a result, we were in compliance with our financial covenantsbearing interest at December 31, 2017.
Our first remaining term loan requires monthly payments of $15,334 plus accrued interest through November 2021. Our second remaining term loan is a three year term loan with monthly6% per annum. The principal and interest payments correlate to our promissory note receivable with Leveling 8. We monetized $3.5 million of $118,809 through October 2019. the $5.8 million remaining balance of the promissory note receivable. In connection with the $1.8 million in payments received in the first quarter of 2021, we paid down the remaining outstanding principal under this loan.
The Company has a $4.0 million revolving line of credit agreement with its primary financial lender, which matures on December 17, 2021. The line of credit requires quarterly interest payments based on the prevailing Wall Street Journal Prime Rate, floating (3.25% at June 30, 2021), with the addition of a 4% floor rate isand a fixed ratecharge coverage ratio of 4.40%.
1.25 to be tested quarterly beginning June 30, 2021. At December 31, 2017,June 30, 2021, there was not a balance$2.8 million outstanding under ourthe line of credit. TheFuture borrowings under the line of credit are limited to the lesser of $7.0$4.0 million or the totalsum of 80% of the qualifiedeligible accounts receivable plus 50%and 60% of qualified inventory is availableeligible Telco segment inventory. Under these limitations, the Company’s total line of credit borrowing capacity was $4.0 million at June 30, 2021.
The line of credit agreement provides that the Company maintain a fixed charge coverage ratio (net cash flow to us total fixed charge) of not less than 1.25 to 1.0 to be tested quarterly beginning June 30, 2021. The Company was not in compliance with this covenant at June 30, 2021. The Company notified its primary financial lender of the covenant violation, and on August 4, 2021, the primary financial lender granted a waiver of the covenant violation
under the revolving credit facility ($7.0 millionagreement. Although the covenant violation was waived at June 30, 2021, the Company believes it may again be out of compliance with this covenant at September 30, 2017). Any future borrowings2021. If the Company is not in compliance with the covenant at September 30, 2021, it would result in an event of default, which if not cured or waived, could result in the lender accelerating the maturity of the Company’s indebtedness or preventing access to additional funds under the revolvingline of credit facility are dueagreement, or requiring prepayment of outstanding indebtedness under the loan agreement or the line of credit agreement.
On April 14, 2020, the Company entered into an unsecured loan in the amount of $2.9 million ("PPP Loan") with our primary lender. The PPP Loan matures on April 14, 2022, bears interest at maturity1% per annum, with monthly payments of principal and interest in the amount of $164,045 commencing on March 30, 2018, forthe date on which the amount of loan forgiveness is determined. On August 28, 2020, we submitted our application to our lender, requesting PPP Loan forgiveness of $2.9 million. Our lender reviewed our application and forwarded to the SBA for approval on September 27, 2020. As of the filing of this Report, we have not received an approval or denial of our application for forgiveness from the SBA; per the Flexibility Act, the date for commencement of loan payments has not yet occurred, and we have made no loan payments. The Company expectsdeferred $0.8 million of loan payments during the six months ended June 30, 2021.
We continue to renew the revolving credit facility for at least one year.
take actions to preserve and improve our liquidity. We believe that our cash and cash equivalents and restricted cash of $0.4$3.7 million at December 31, 2017, cash flow from operationsJune 30, 2021 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 need to seek an additional waiver from our primary financial lender if we are not in compliance with our covenant under our loan agreement again next quarter. Further, as discussed above, we received the PPP Loan in April 2020, which provided funding necessary to offset the immediate and anticipated impacts of COVID-19, and we are awaiting the final determination from the SBA on our forgiveness application. In addition, there is still uncertainty surrounding the timing of the overall recovery of the economy and the timing of wireless infrastructure service opportunities for the upgrade to 5G. Therefore, depending on the timing of these factors and our primary financial lender granting us a waiver of any future covenant violations, there is still risk that we may not have sufficient cash and cash equivalents available for us to sustain our operations at our current level. If that were to occur, we would need to seek additional funding and further utilize our shelf registration that we have available to us in order to enhance our cash position and assist in our working capital needs.
In the nine months ended June 30, 2021, we utilized our recently filed shelf registration statement to raise additional cash by selling common shares utilizing an at the market offering under our equity distribution agreement with Northland Securities, Inc. (“Northland”). Under this program, we sold 245,973 shares for net proceeds of $0.9 million.
Item 4. Controls and Procedures.
We maintain disclosure controls and procedures that are designed to ensure the information we are required to disclose in the reports we file or submit under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Based on their evaluation as of December 31, 2017,June 30, 2021, our Chief Executive Officer and interim Chief Financial Officer concluded that our disclosure controls and procedures are effective to accomplish their objectives and to ensure the information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and interim Chief Financial Officer as appropriate to allow timely decisions regarding required disclosure.
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PART IIII. OTHER INFORMATION
Item 2. Unregistered Sales of Securities and Use of Proceeds.
During the nine months ended June 30, 2021, the Company sold 245,973 shares of common stock under its registration statement on Form S-3 effective as of April 1, 2020 (333-236859). Gross proceeds from such sales during the quarter were $0.9 million and net proceeds were $0.9 million after the payment of approximately $31,313 in commissions to Northland Securities, Inc., the underwriter of the offering. Total gross proceeds to the Company from sales under such registration statement since its effective date are $3.1 million and total net proceeds to the Company are $3.0 million after the payment of $0.1 million in commissions to Northland. All sales have been made pursuant to the Prospectus Supplement filed with the Commission on April 24, 2020, under which the Company may sell up to $13,850,000 in common stock. All net proceeds to the Company from such sales have been used in accordance with the “Use of Proceeds” section of such Prospectus Supplement.
Item 6. Exhibits. | | | | | | Exhibit No. | Description | Exhibit No. | Description | | | 31.1 | | 31.1 | | | | 31.2 | | | | 32.1 | | | | 32.2 | | | | 101.INS | XBRL Instance Document. | | | 101.SCH | XBRL Taxonomy Extension Schema. | | | 101.CAL | XBRL Taxonomy Extension Calculation Linkbase. | | | 101.DEF | XBRL Taxonomy Extension Definition Linkbase. | | | 101.LAB | XBRL Taxonomy Extension Label Linkbase. | | | 101.PRE | XBRL Taxonomy Extension Presentation Linkbase. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
ADDVANTAGE TECHNOLOGIES GROUP, INC.
(Registrant)
Date: February 13, 2018 /s/ David L. Humphrey
David L. Humphrey,
President and Chief Executive Officer
(Principal Executive Officer)
Date: February 13, 2018 /s/ Scott A. Francis
Scott A. Francis,
Chief Financial Officer
(Principal Financial Officer)
Exhibit Index
The following documents are included as exhibits to this Form 10-Q:
Exhibit No. | Description | | | | | | ADDVANTAGE TECHNOLOGIES GROUP, INC. (Registrant) | 31.1Date: August 13, 2021 | Certification of | | /s/ Joseph E. Hart | | Joseph E. Hart, | | President and Chief Executive Officer under Section 302 of the Sarbanes Oxley Act of 2002. | | (Principal Executive Officer) | 31.2 | Certification of | Date: August 13, 2021 | | | /s/ Michael G. Ramke | | Michael G. Ramke | | Interim Chief Financial Officer under Section 302 of the Sarbanes Oxley Act of 2002. | | | 32.1 | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | | | 32.2 | Certification of Chief(Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | | | 101.INS | XBRL Instance Document. | | | 101.SCH | XBRL Taxonomy Extension Schema. | | | 101.CAL | XBRL Taxonomy Extension Calculation Linkbase. | | | 101.DEF | XBRL Taxonomy Extension Definition Linkbase. | | | 101.LAB | XBRL Taxonomy Extension Label Linkbase. | | | 101.PRE | XBRL Taxonomy Extension Presentation Linkbase.Officer) |
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