Company Quick10K Filing
ADDvantage
Price1.55 EPS-1
Shares10 P/E-3
MCap16 P/FCF-3
Net Debt-2 EBIT-5
TEV14 TEV/EBIT-3
TTM 2019-09-30, in MM, except price, ratios
10-Q 2020-06-30 Filed 2020-08-11
10-Q 2020-05-13 Filed 2020-05-14
10-Q 2019-12-31 Filed 2020-02-13
10-K 2019-09-30 Filed 2019-12-17
10-Q 2019-06-30 Filed 2019-08-13
10-Q 2019-03-31 Filed 2019-05-14
10-Q 2018-12-31 Filed 2019-02-12
10-K 2018-09-30 Filed 2018-12-28
10-Q 2018-06-30 Filed 2018-08-14
10-Q 2018-03-31 Filed 2018-05-15
10-Q 2017-12-31 Filed 2018-02-13
10-K 2017-09-30 Filed 2017-12-14
10-Q 2017-06-30 Filed 2017-08-14
10-Q 2017-03-31 Filed 2017-05-15
10-Q 2017-02-14 Filed 2017-02-14
10-K 2016-09-30 Filed 2016-12-13
10-Q 2016-06-30 Filed 2016-08-09
10-Q 2016-03-31 Filed 2016-05-10
10-Q 2015-12-31 Filed 2016-02-09
10-K 2015-09-30 Filed 2015-12-15
10-Q 2015-06-30 Filed 2015-08-11
10-Q 2015-03-31 Filed 2015-05-12
10-Q 2014-12-31 Filed 2015-02-10
10-K 2014-09-30 Filed 2014-12-09
10-Q 2014-06-30 Filed 2014-08-12
10-Q 2014-03-31 Filed 2014-05-14
10-Q 2013-12-31 Filed 2014-02-13
10-K 2013-09-30 Filed 2013-12-10
10-Q 2013-06-30 Filed 2013-08-13
10-Q 2013-03-31 Filed 2013-05-14
10-Q 2012-12-31 Filed 2013-02-12
10-K 2012-09-30 Filed 2012-12-11
10-Q 2012-06-30 Filed 2012-08-07
10-Q 2012-03-31 Filed 2012-05-08
10-Q 2011-12-31 Filed 2012-02-14
10-K 2011-09-30 Filed 2011-12-15
10-Q 2011-06-30 Filed 2011-08-09
10-Q 2011-03-31 Filed 2011-05-10
10-Q 2010-12-31 Filed 2011-02-08
10-K 2010-09-30 Filed 2010-12-14
10-Q 2010-08-10 Filed 2010-08-10
10-Q 2010-05-12 Filed 2010-05-12
10-Q 2009-12-31 Filed 2010-02-12
8-K 2020-09-01 Regulation FD, Exhibits
8-K 2020-08-24 Other Events, Exhibits
8-K 2020-08-11 Earnings, Regulation FD, Exhibits
8-K 2020-07-28 Earnings, Regulation FD, Exhibits
8-K 2020-07-20 Officers, Other Events, Exhibits
8-K 2020-07-16 Officers, Other Events, Exhibits
8-K 2020-05-14
8-K 2020-05-06
8-K 2020-04-29
8-K 2020-04-10
8-K 2020-03-27
8-K 2020-03-18
8-K 2020-03-10
8-K 2020-02-27
8-K 2020-02-20
8-K 2020-02-13
8-K 2020-02-03
8-K 2019-12-17
8-K 2019-12-02
8-K 2019-09-04
8-K 2019-08-13
8-K 2019-07-30
8-K 2019-07-11
8-K 2019-07-01
8-K 2019-05-29
8-K 2019-05-15
8-K 2019-05-14
8-K 2019-05-02
8-K 2019-04-30
8-K 2019-04-22
8-K 2019-03-22
8-K 2019-03-18
8-K 2019-03-01
8-K 2019-02-27
8-K 2019-02-12
8-K 2019-01-29
8-K 2019-01-04
8-K 2018-12-28
8-K 2018-12-27
8-K 2018-12-26
8-K 2018-12-19
8-K 2018-12-17
8-K 2018-12-17
8-K 2018-12-06
8-K 2018-11-29
8-K 2018-10-09
8-K 2018-10-08
8-K 2018-09-07
8-K 2018-08-14
8-K 2018-07-31
8-K 2018-07-03
8-K 2018-05-31
8-K 2018-05-15
8-K 2018-05-01
8-K 2018-03-07
8-K 2018-02-13
8-K 2018-01-30
8-K 2015-08-11
8-K 2015-08-06
8-K 2015-07-28
8-K 2015-07-22
8-K 2015-06-30
8-K 2015-06-22
8-K 2015-05-12
8-K 2015-04-28
8-K 2015-03-04
8-K 2015-02-10
8-K 2015-01-27

AEY 10Q Quarterly Report

Part I. Financial Information
Item 1. Financial Statements.
Note 1 - Basis of Presentation and Accounting Policies
Note 2 - Revenue Recognition
Note 3 - Accounts Receivable Agreements
Note 4 - Promissory Note
Note 5 - Inventories
Note 6 - Intangible Assets
Note 7 - Goodwill
Note 8 - Notes Payable and Line of Credit
Note 9 - Equity Distribution Agreement and Sale of Common Stock
Note 10 - Income Taxes
Note 11 - Earnings per Share
Note 12 - Stock - Based Compensation
Note 13 - Leases
Note 14 - Segment Reporting
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Item 4. Controls and Procedures.
Part II. Other Information
EX-10.1 loan_agreement.htm
EX-31.1 exhibit31_1.htm
EX-31.2 exhibit31_2.htm
EX-32.1 exhibit32_1.htm
EX-32.2 exhibit32_2.htm

ADDvantage Earnings 2020-06-30

Balance SheetIncome StatementCash Flow
604836241202012201420172020
Assets, Equity
20151172-12012201420172020
Rev, G Profit, Net Income
4.91.9-1.1-4.0-7.0-10.02012201420172020
Ops, Inv, Fin

10-Q 1 q32020_10-q.htm ADDVANTAGE TECHNOLOGIES GROUP Q3 2020 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)
⌧ 
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED June 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)

OKLAHOMA
73‑1351610
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)

1430 Bradley Lane
Carrollton, Texas 75007
(Address of principal executive office)
(918) 251-9121
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
 
 
Yes ⌧    No  □
   
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 
 
 
Yes ⌧    No  □
   
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer □Accelerated filer 
Non-accelerated filer ⌧            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 July 31, 2020 were 11,788,940.
 

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


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







      






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)


   
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.
4

ADDVANTAGE TECHNOLOGIES GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(UNAUDITED)

                                     
                                     
   
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.
6

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

7

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 Wireless Infrastructure Services (“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, 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, 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 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 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.  We are currently in the process of evaluating this new standard update.

8


Note 2 – Revenue Recognition

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, 2019, 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:

   
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 equipment includes products purchased from manufacturers plus “surplus-new”, which are unused products purchased from other distributors or multiple system operators.  Refurbished and used equipment includes factory refurbished, Company refurbished and used products.

The Telco segment identified certain inventory that more than likely will not be sold or that the cost will not be recovered when it is processed through its recycling 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 $3.4 million and a $1.3 million allowance at June 30, 2020 and September 30, 2019, respectively.

Note 6 – Intangible Assets

The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the asset’s carrying amount may not be recoverable. The Company 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 and impairment at June 30, 2020 and September 30, 2019 are as follows:

    June 30, 2020
 
   
Gross
   
Accumulated
Amortization
   
Impairment

   
Net

 
Intangible assets:
                       
Customer relationships – 10 years
 
$
8,396,000
   
$
(3,991,306
)
 
$
(3,894,121
)
 
$
510,573
 
Trade name – 10 years
   
2,119,000
     
(1,124,800
)
   
     
994,200
 
Non-compete agreements – 3 years
   
374,000
     
(374,000
)
   
     
 
                                 
Total intangible assets
 
$
10,889,000
   
$
(5,490,106
)
 
$
(3,894,121
)
 
$
1,504,773
 

   
September 30, 2019
 
   
Gross
   
Accumulated
Amortization
   
Net
 
Intangible assets:
                 
Customer relationships – 10 years
 
$
8,396,000
   
$
(3,547,389
)
 
$
4,848,611
 
Trade name – 10 years
   
2,119,000
     
(966,280
)
   
1,152,720
 
Non-compete agreements – 3 years
   
374,000
     
(372,333
)
   
1,667
 
                         
Total intangible assets
 
$
10,889,000
   
$
(4,886,002
)
 
$
6,002,998
 
                         

Note 7 – Goodwill

The Company 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 business climate. The Company assesses goodwill for impairment at the reporting unit level, which is defined as an operating segment or one level below an operating segment.  The reporting units for the Company are its two operating segments.

As of March 31, 2020, indicators were present, which indicated that the Company should test for impairment of goodwill.  These indicators included reduced revenues in the current fiscal year and the overall impact of the business climate as a result of the COVID-19 pandemic.  While the Company is deemed an essential service during the COVID-19 pandemic and has remained in operation, it has seen a reduced revenue stream in the current year.  Therefore, the Company performed a goodwill impairment analysis as of March 31, 2020.  This analysis forecasted the debt free cash flows of the segment, on a discounted basis, to estimate the fair value of the segment compared to the carrying value of the segment. For the Telco segment, the carrying value exceeded the estimated fair value of the segment by more than the carrying amount of goodwill recorded in the segment.  Therefore, the Company fully impaired the goodwill balance in the Telco segment and recorded an impairment charge of $4.8 million as of March 31, 2020.

Note 8 – Notes Payable and Line of Credit

Loan Agreement

On March 10, 2020, the Company entered into a loan agreement with its primary financial lender for $3.5 million, bearing interest at 6% per annum.  The loan 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 a $4.0 million revolving line of credit agreement with its primary financial lender, 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 the interest rate is reset monthly.  At June 30, 2020, there was $2.8 million outstanding under the line of credit. Future borrowings under the line of credit are limited to the lesser of $4.0 million or the sum of 80% of eligible accounts receivable and 25% 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 line of credit agreement provide that the Company maintain a fixed charge coverage ratio (net cash flow to total fixed charge) of not less than 1.25 to 1.0 measured annually.  The Company believes that it is probable that it will not be in compliance with 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.

Paycheck Protection Program Loan

On April 14, 2020, the Company received a SBA Payroll Protection Program (“PPP”) loan pursuant to the Paycheck Protection Program under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), with its primary lender for $2.9 million.  The PPP loan bears interest at 1% per annum, with monthly payments of principal and interest in the amount of $164,045 commencing on November 10, 2020, and matures on April 10, 2022.  The Paycheck Protection Program provides that the PPP loan 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

qualifying expenses and to apply for forgiveness in accordance with the terms in the CARES Act.  While the Company plans to apply for forgiveness of the PPP loan in accordance with the requirements and limitations under the CARES Act, the PPP Flexibility Act and SBA regulations and requirements, no assurance can be given that all or any portion of the PPP loan will be forgiven.

Fair Value of Debt

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

Note 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 equal to an aggregate of 3.0% of the aggregate gross proceeds from each sale of Shares and have agreed to provide Northland with customary indemnification and contribution rights. The Company will also reimburse Northland for certain specified expenses in connection with entering into the Sales Agreement. The Sales Agreement contains customary representations and warranties and conditions to the placements of the Shares pursuant thereto.

During the 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 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 11 – Earnings Per Share
Basic earnings per share are based on the sum of the average number of common shares outstanding and issuable, restricted and deferred shares.  Diluted earnings per share include any dilutive effect of stock options and restricted stock.  In computing the diluted weighted average shares, the average share price for the period is used in determining the number of shares assumed to be reacquired under the treasury stock method from the exercise of options.

Basic and diluted earnings per share for the three and nine months ended June 30, 2020 and 2019 are:

   
Three Months Ended
June 30,
   
Nine Months Ended
June 30,
 
    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
 
$
23,350
   
$
(1,485,165
)
 
$
(16,355,423
)
 
$
(3,740,009
)
                                 
Basic weighted average shares
   
11,079,580
     
10,361,292
     
10,955,235
     
10,361,292
 
Effect of dilutive securities:
                               
Stock options
   
137,108
     
     
     
 
Diluted weighted average shares
   
11,216,688
     
10,361,292
     
10,955,235
     
10,361,292
 
                                 
Earnings (loss) per common 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
)

The table below includes information related to stock options that were outstanding at the end of each respective three and nine-month periods ended June 30, but have been excluded from the computation of weighted-average stock options for dilutive securities because their effect would be anti-dilutive. The stock options were anti-dilutive either due to the Company incurring a net loss for the periods presented or the exercise price exceeded the average market price per share of our common stock for the three and nine months ended June 30, 2020 and 2019.

   
Three Months Ended
June 30,
   
Nine Months Ended
June 30,
 
    2020
    2019
    2020
    2019
 
Stock options excluded
   
150,000
     
770,000
     
480,000
     
770,000
 
Weighted average exercise price of
                               
stock options
 
$
2.96
   
$
1.73
   
$
1.89
   
$
1.73
 
Average market price of common stock
 
$
2.41
   
$
1.38
   
$
2.48
   
$
1.37
 

14

Note 12 – 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 June 30, 2020, 2,100,415 shares of common stock were reserved for stock award grants under the Plan.  Of these reserved shares, 936,806 shares were available for future grants.

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 expenses sections of the Company’s consolidated condensed statements of 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 June 30, 2020 and changes during the nine months then ended is presented below:

   
Shares
   
Wtd. Avg.
Ex. Price
   
Aggregate Intrinsic Value
 
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 June 30, 2020
   
480,000
   
$
1.89
   
$
742,800
 
                         
Exercisable at June 30, 2020
   
376,667
   
$
1.99
   
$
546,101
 

No nonqualified stock options were granted for the nine months ended 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 recognizes forfeitures as they occur.

15


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

   
Nine Months
Ended
June 30, 2020
 
Fiscal year 2017 grant
 
$
(5,652
)
Fiscal year 2019 grants
 
$
(1,476
)

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

Restricted Stock

As a result of the shareholders authorizing the additional shares being added to the Plan in March 2020, the Company granted restricted stock awards to its eligible board members for both the prior fiscal year and current 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 have varying vesting periods ranging from immediate to 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 14 – Segment Reporting

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

18


Wireless Infrastructure Services (“Wireless”)

The Wireless segment provides turn-key wireless infrastructure services for the four major U.S. wireless carriers, communication tower companies, national integrators, and original equipment manufacturers that support these wireless carriers.  These services primarily consist of the installation and upgrade of technology on cell sites and the construction of new small cells for 5G.

Telecommunications (“Telco”)

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

The Company evaluates performance and allocates its resources based on operating income.  The accounting policies of its reportable segments are the same as those described in the summary of significant accounting policies.  Segment assets consist primarily of cash and cash equivalents, accounts receivable, 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
)

    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
 


19

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Special Note on Forward-Looking Statements

Certain statements in Management's Discussion and Analysis (“MD&A”), other than purely historical information, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements generally are identified by the words “estimates,” “projects,” “believes,” “plans,” “intends,” “will likely result,” and similar expressions.  Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. These statements are subject to a number of risks, uncertainties and developments beyond our control or foresight, including changes in the trends of the wireless infrastructure services industry, changes in the trends of the telecommunications industry, changes in our supplier agreements, technological developments, changes in the general economic environment, the potential impact of the novel strain of coronavirus (“COVID-19”) pandemic, the growth or formation of competitors, changes in governmental regulation or taxation, changes in our personnel and other such factors.  Our actual results, performance or achievements may differ significantly from the results, performance or achievements expressed or implied in the forward-looking statements.  We do not undertake any obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events.

Overview

The following MD&A is intended to help the reader understand the results of operations, financial condition, and cash flows of the Company.  MD&A is provided as a supplement to, and should be read in conjunction with the information presented elsewhere in this quarterly report on Form 10-Q and with the information presented in our annual report on Form 10-K for the year ended September 30, 2019, which includes our audited consolidated financial statements and the accompanying notes to the consolidated financial statements.

The Company reports its financial performance based on two external reporting segments: Wireless and Telecommunications.  These reportable segments are described below.

Wireless Infrastructure Services (“Wireless”)

The Company’s Wireless segment provides turn-key wireless infrastructure services for the four major U.S. wireless carriers, communication tower companies, national integrators, and original equipment manufacturers that support these wireless carriers.  These services primarily consist of the installation and upgrade of technology on cell sites and the construction of new small cells for 5G.

Telecommunications (“Telco”)

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

Recent Business Developments

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 June 30, 2020 and June 30, 2019

Consolidated

Consolidated sales decreased $5.5 million, or 32%, to $12.0 million for the three months ended June 30, 2020 from $17.6 million for the three months ended June 30, 2019.  The decrease in sales was due to declines in sales in the Wireless and Telco segments of $3.6 million and $1.9 million, respectively.

Consolidated gross profit decreased $0.4 million to $4.2 million for the three months ended June 30, 2020 from $4.6 million for the same period last year.  The decrease in gross profit was due primarily to the Telco segment as the Wireless segment was essentially flat compared to the same period last year.

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,
21

vehicles, insurance, communication, and business taxes, among other less significant cost categories.  Operating expenses increased $0.4 million, or 24%, to $2.0 million for the three months ended June 30, 2020 from $1.6 million the same period last year.  The increase in operating expenses was due to the Telco segment.

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 decreased $0.4 million, or 15%, to $2.4 million for the three months ended June 30, 2020 from $2.8 million for the same period last year.  The decrease in expenses was due to the Wireless segment and Telco segment of $0.2 million and $0.2 million, respectively.

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 expenses decreased $0.1 million, or 25%, to $0.3 million for the three months ended June 30, 2020 from $0.4 million for the same period last year.  The decrease was due primarily to a decrease in expenses to the Telco segment of $0.2 million, partially offset by an increase in expenses from the Wireless 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 $0.1 million for the three 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 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 decreased $1.9 million to $6.9 million for the three months ended June 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, 2020.

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 $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.

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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.

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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 a decrease in equipment sales at both Triton Datacom and Nave Communications of $1.8 million and $1.2 million, respectively.

Gross profit was $3.0 million for the nine months ended June 30, 2020 and 6.3 million for the nine months ended June 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 the impact of these inventory adjustments in the nine months ended June 30, 2020.

Operating expenses increased $0.6 million to $2.1 million for the nine months ended June 30, 2020 from $1.5 million for the same period last year.  This increase was due primarily to additional 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 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 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.

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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 loss from operations to Adjusted EBITDA for the three and nine months ended June 30, follows:

   
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 inventory-related non-cash adjustments of $2.3 million for the nine months ended June 30, 2020.

Critical Accounting Policies

Note 1 to the Consolidated Financial Statements in Form 10-K for fiscal 2019 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
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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

For 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 telecommunication providers, telecommunication resellers, and other users of telecommunication equipment who are seeking products for which manufacturers have discontinued production or cannot ship new equipment on a same-day basis as well as providing used products as an alternative to new products from the manufacturer.  Carrying these large inventory quantities represents our largest risk.

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 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 telecommunications industry.  Inventory is stated at the lower of cost or net realizable value, with cost determined using the weighted-average method.  Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.  At June 30, 2020, we had total inventory, before the reserve for excess and obsolete inventories, of $9.3 million, consisting of $1.2 million in new products and $8.1 million in used or refurbished products.

We identified certain inventory that more than likely will not be sold or that the cost will not be recovered when it is processed through its recycling program.  Therefore, we have an obsolete and excess inventory reserve of $3.4 million at 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 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 creditworthiness, current economic trends and changes in our customer payment terms.  Significant changes in customer concentration or payment terms, deterioration of customer 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
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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 September 30, 2019.   At June 30, 2020, accounts receivable, net of allowance for doubtful accounts, was $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 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, with the reporting unit’s carrying value, including goodwill.  Our reporting units for purposes of the goodwill impairment calculation are the Wireless segment, Nave and 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 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.

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 to warrant us to test goodwill for impairment at March 31, 2020. We calculated a fair value using the income approach of both Nave and Triton to determine if the fair value exceeded their respective carrying values.  For both Nave and Triton, the fair value for each was less than their respective carrying values after considering the intangible asset impairment.  Therefore, we recorded an impairment charge of $4.8 million in the Telco segment as of March 31, 2020, which fully impaired goodwill for the Telco segment.  Although we do not anticipate a future impairment charge, certain events could occur that might adversely affect the reported value of 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, and a material negative change in the relationships with one or more of our significant customers or equipment 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 the Wireless segment also may change.

Liquidity and Capital Resources

Cash Flows Used in Operating Activities

In fiscal year 2020, we have financed our operations primarily through financing activities by utilizing our line of credit, 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 nine months ended June 30, 2020, we used $1.4 million of cash flows for operations.  The cash flows from operations was negatively impacted by a net loss 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 operating activities.

Cash Flows Used for Investing Activities

During the nine months ended June 30, 2020, cash provided by investing activities was $1.7 million, consisting primarily of $2.0 million of payments received under the promissory note related to the sale of 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 was a prepayment.

Cash Flows Used for Financing Activities

During the nine months ended June 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 $1.9 million, proceeds from the receipt of the PPP loan of $2.9 million, and proceeds from the sale of our common 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 financing lease arrangements of $0.3 million.

In March 2020, we entered into a loan agreement with our primary financial lender for $3.5 million, bearing interest at 6% per annum.  The 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 cable 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 Leveling 8 under the promissory note, we 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.

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 will not be in compliance with our fixed charge coverage ratio loan covenant with our primary financial lender as of September 30, 2020.  We would therefore need to seek a waiver of this covenant violation.  We have been in preliminary discussions with our primary financial lender, and we 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 our indebtedness or preventing access to additional funds under our line of credit agreement, or requiring prepayment of our outstanding indebtedness under our March 10, 2020 loan agreement or the line of 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 PPP loan in accordance with the requirements and limitations under the CARES 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
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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 the market offering under our equity distribution agreement with Northland Securities, Inc. (“Northland”).  Under this program, we sold 573,199 shares for net proceeds of $2.1 million.

We believe that our cash and cash equivalents and restricted cash of $10.5 million at June 30, 2020 and our existing revolving bank line of credit will provide sufficient liquidity and capital resources to cover our operating losses and our additional working capital and debt payment needs.  However, we will likely need to seek a waiver for our probable covenant violation under our loan agreements with our primary financial lender.  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 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.
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PART II.   OTHER INFORMATION