Certain statements in Management's Discussion and Analysis ("MD&A"), other than
purely historical information, including estimates, projections, statements
relating to our business plans, objectives and expected operating results, and
the assumptions upon which those statements are based, are "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). These
forward-looking statements generally are identified by the words "estimates,"
"projects," "believes," "plans," "intends," "will likely result," and similar
expressions. Forward-looking statements are based on current expectations and
assumptions that are subject to risks and uncertainties which may cause actual
results to differ materially from the forward-looking statements. These
statements are subject to a number of risks, uncertainties and developments
beyond our control or foresight, including changes in the trends of the cable
television industry, changes in the trends of the telecommunications industry,
changes in our supplier agreements, technological developments, changes in the
general economic environment, 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.
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, 2018, which includes our audited consolidated financial statements
and the accompanying notes to the consolidated financial statements.
The Company is reporting its financial performance based on its external
reporting segments: Cable Television and Telecommunications. These reportable
segments are described below.
Cable Television ("Cable TV")
The Company's Cable TV segment sells new, surplus and re-manufactured cable
television equipment throughout North America, Central America and South
America. In addition, this segment also repairs cable television equipment for
various cable companies.
The Company's Telco segment sells new and used 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. In addition, this segment offers
its customers decommissioning services for surplus and obsolete equipment, which
it in turn processes through its recycling program.
Purchase of Net Assets of Fulton Technologies, Inc. and Mill City
On December 27, 2018, we entered into a purchase agreement to acquire
substantially all of the net assets of Fulton Technologies, Inc. ("Fulton") and
Mill City Communications, Inc. ("Mill City"). We closed on this agreement on
January 4, 2019. These companies provide turn-key wireless infrastructure
services for the four major U.S. wireless carriers, 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. Pursuing an acquisition
strategy rather than organically building this service offering eliminates the
need to invest a significant amount of time launching the business and provides
the additional benefit of established and experienced operational teams, as well
as pre-existing revenue streams from the major customers in the industry. We
anticipate that the purchase price plus integration costs of Fulton and Mill
City would be similar to those we would
have incurred to launch this services platform organically. This acquisition is
part of the overall growth strategy that will further diversify the Company into
the broader telecommunications industry by providing wireless infrastructure
services to the wireless telecommunications market.
The purchase price for the net assets of Fulton and Mill City was $1.7 million
in cash, subject to a working capital adjustment. A deposit of $500,000 was
paid on December 27, 2018 in connection with signing the purchase agreement.
Results of Operations
Comparison of Results of Operations for the Three Months Ended December 31, 2018
and December 31, 2017
Consolidated sales decreased $1.0 million before the impact of intercompany
sales, or 8%, to $11.3 million for the three months ended December 31, 2018 from
$12.3 million for the three months ended December 31, 2017. The decrease in
sales was in the Cable TV segment of $1.4 million, partially offset by an
increase in the Telco segment of $0.4 million. Consolidated gross profit
decreased $0.6 million, or 16%, to $2.8 million for the three months ended
December 31, 2018 from $3.4 million for the same period last year. The decrease
in gross profit was in the Cable TV segment and Telco segment of $0.1 million
and $0.5 million, respectively.
Consolidated operating, selling, general and administrative expenses include all
personnel costs, which include fringe benefits, insurance and business taxes, as
well as occupancy, communication and professional services, among other less
significant cost categories. Operating, selling, general and administrative
expenses increased $0.2 million, or 4%, to $3.8 million for the three months
ended December 31, 2018 from $3.6 million the same period last year. This was
due to an increase in the Telco segment of $0.2 million.
Interest expense decreased $80 thousand, to $20 thousand, for the three months
ended December 31, 2018 from $0.1 million for the same period last year
primarily related to the impact of paying off our two term loans in November
The provision for income taxes was $0.1 million for the three months ended
December 31, 2018 from a provision for income taxes of $0.3 million for the
three months ended December 31, 2017. The decrease in the tax provision was due
primarily to the valuation allowance netting the deferred tax assets to zero.
Sales for the Cable TV segment decreased $1.4 million to $4.4 million for the
three months ended December 31, 2018 from $5.8 million for the same period last
year. The decrease in sales was due to a decrease in equipment sales and repair
service revenue of $1.1 million and $0.3 million, respectively. The decrease in
the equipment sales was due primarily to an overall decrease in demand for the
three months ended December 31, 2018 as compared to last year. The decrease in
repair service revenue was due primarily to the closing of a repair facility in
Gross margin was 25% for the three months ended December 31, 2018 compared to
21% for the same period last year. The increase in gross margin in 2019 was due
primarily to a significant decrease in volume from a new equipment sales
customer with low margins.
Operating, selling, general and administrative expenses remained flat at $1.4
million for the three months ended December 31, 2018 and for the same period
Sales for the Telco segment increased $0.4 million to $6.9 million for the three
months ended December 31, 2018 from $6.5 million for the same period last year.
The increase in sales for the Telco segment was due to an increase in equipment
sales of $0.9 million, partially offset by a decrease in recycling revenue of
$0.5 million. The increase in Telco equipment sales was due to Nave
Communications of $0.7 million and Triton Datacom of $0.2 million. The decrease
in recycling revenue was due primarily to higher revenue in the prior year due
to the timing of recycling shipments.
Gross margin was 25% for the three months ended December 31, 2018 and 34% for
the three months ended December 31, 2017. The decrease in gross margin was due
primarily to lower gross margins from equipment sales primarily resulting from
an increase in sales of new equipment which generally yields lower margins than
used equipment sales. In addition, our margin was also impacted by lower
margins from our recycling program as a result of lower revenues to cover our
fixed costs. The lower revenues from the recycling program for the three months
ended December 31, 2018 decreased gross profit by $0.4 million.
Operating, selling, general and administrative expenses increased $0.2 million
to $2.4 million for the three months ended December 31, 2018 from $2.2 million
for the same period last year. This increase was due primarily to professional
service expenses allocated to this segment related to the asset acquisition of
Fulton and Mill City.
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 excludes other income, 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 follows:
Three Months Ended December 31, 2018
Three Months Ended December 31, 2017
Cable TV Telco Total Cable TV Telco Total
Loss from operations $ (320,381 )$ (634,737 )$ (955,118 ) $
(188,500 ) $ (77,168 )$ (265,668 )
Depreciation 80,020 31,697 111,717 66,948 31,195 98,143
Amortization - 266,775 266,775 - 313,311 313,311
Adjusted EBITDA $ (240,361 )$ (336,265 )$ (576,626 )$ (121,552 )$ 267,338$ 145,786
Critical Accounting Policies
Note 1 to the Consolidated Financial Statements in Form 10-K for fiscal 2018
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 reported by us. We believe the following items require the
most significant judgments and often involve complex estimates.
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.
Our position in the industry requires us to carry large inventory quantities
relative to annual sales, but it also allows us to realize high overall gross
profit margins on our sales. We market our products primarily to MSOs,
telecommunication providers and other users of cable television and
telecommunication equipment who are seeking products for which manufacturers
have discontinued production or cannot ship new equipment on a same-day basis as
well as providing used products as an alternative to new products from the
manufacturer. Carrying these large inventory quantities represents our largest
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 consist of new and used electronic components for the cable
television and telecommunications industries. Inventory is stated at the lower
of cost or net realizable value, with cost determined using the weighted-average
method. Net realizable value is the estimated selling prices in the ordinary
course of business, less reasonably predictable costs of completion, disposal,
and transportation. At December 31, 2018, we had total inventory, before the
reserve for excess and obsolete inventories, of $23.6 million, consisting of
$13.7 million in new products and $9.9 million in used or refurbished products.
For the Cable TV segment, our reserve at December 31, 2018 for excess and
obsolete inventory was $4.2 million. If actual market conditions are less
favorable than those projected by management, and our estimates prove to be
inaccurate, we could be required to increase our inventory reserve and our gross
margins could be materially adversely affected.
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. Therefore, we have an obsolete and excess inventory reserve
of $0.8 million at December 31, 2018. In the three months ended December 31,
2018, we increased the reserve by $30 thousand. If actual market conditions
differ from those projected by management, this could have a material impact on
our gross margin and inventory balances based on additional write-downs to net
realizable value or a benefit from inventories previously written down.
Inbound freight charges are included in cost of sales. Purchasing and receiving
costs, inspection costs, warehousing costs, internal transfer costs and other
inventory expenditures are included in operating expenses, since the amounts
involved are not considered material.
Accounts Receivable Valuation
Management judgments and estimates are made in connection with establishing the
allowance for doubtful accounts. Specifically, we analyze the aging of accounts
receivable balances, historical bad debts, customer concentrations, customer
credit-worthiness, current economic trends and changes in our customer payment
terms. Significant changes in customer concentration or payment terms,
deterioration of customer credit-worthiness, or weakening in economic trends
could have a significant impact on the collectability of receivables and our
operating results. If the financial condition of our customers were to
deteriorate, resulting in an impairment of their ability to make payments, an
additional provision to the allowance for doubtful accounts may be required.
The reserve for bad debts was $0.2 million at December 31, 2018 and September
30, 2018. At December 31, 2018, accounts receivable, net of allowance for
doubtful accounts, was $5.0 million.
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 aggregated into the Cable TV operating
segment and the Telco operating segment.
Management utilizes a discounted cash flow analysis to determine the estimated
fair value of each reporting unit. Significant judgments and assumptions
including the discount rate, anticipated revenue growth rate, gross margins and
operating expenses are inherent in these fair value estimates. As a result,
actual results may differ from the estimates utilized in our discounted cash
flow analysis. The use of alternate judgments and/or assumptions could result
in the recognition of different levels of impairment charges in the financial
The Cable TV segment does not have a goodwill balance as it was fully impaired
in fiscal year 2018. We did not record a goodwill impairment for the Telco
segment in the three year period ended September 30, 2018. In addition, we are
implementing strategic plans as discussed in Recent Business Developments in our
fiscal year 2018 Form 10-K to help prevent impairment charges in the future.
Although we do not anticipate a future impairment charge, certain events could
occur that might adversely affect the reported value of goodwill. Such events
could include, but are not limited to, economic or competitive conditions, a
significant change in technology, the economic condition of the customers and
industries we serve, a significant decline in the real estate markets we operate
in, a material negative change in the relationships with one or more of our
significant customers or equipment suppliers, failure to successfully implement
our plan to restructure and expand the Telco sales organization, and failure to
reduce inventory levels within the Telco segment. 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 Telco segment also may
Intangible assets that have finite useful lives are amortized on a straight-line
basis over their estimated useful lives ranging from 3 years to 10 years.
Liquidity and Capital Resources
Cash Flows Used in Operating Activities
We finance our operations primarily through cash flows provided by operations,
and we have a new bank line of credit of up to $2.5 million. During the three
months ended December 31, 2018, we used $1.6 million of cash flows for
operations. The cash flows from operations was negatively impacted by $0.8
million from a net decrease in accounts payable and $0.6 million from a net
increase in accounts receivable. The cash flows from operations was favorably
impacted by $0.3 million from a net decrease in inventory.
Cash Flows Provided by Investing Activities
During the three months ended December 31, 2018, cash provided by investing
activities was $4.5 million, which primarily related to the sale of our Broken
Arrow, Oklahoma facility to a company controlled by David Chymiak for $5.0
million in cash. In addition, in December 2018, we entered into an agreement
with a company controlled by David Chymiak to sell our Cable TV Segment. We
anticipate that this sale will close in the third fiscal quarter of 2019 and
generate approximately $3.9 million in cash at closing.
In December 2018, we entered into a purchase agreement to acquire substantially
all of the net assets of Fulton and Mill City. A deposit of $500,000 was paid
on December 27, 2018 in connection with signing the purchase agreement.
The purchase price for the net assets of Fulton and Mill City was $1.7 million,
subject to a working capital adjustment, and closed on January 4, 2019.
Cash Flows Used for Financing Activities
In November 2018, we extinguished our two outstanding term loans under the
forbearance agreement by paying the outstanding balances of $2.1 million.
In October 2018, we also extinguished our line of credit under the forbearance
agreement by paying the outstanding balance of $0.5 million.
Since we extinguished all of our outstanding term loans and line of credit
outstanding under the forbearance agreement in the first quarter of 2019, we are
no longer subject to the terms of the forbearance agreement and have been
released from the Credit and Term Loan Agreement.
In December 2018, the Company entered into a new credit agreement with a
different lender. This credit agreement contains a $2.5 million revolving line
of credit and matures on December 17, 2019. The Line of Credit requires
quarterly interest payments based on the prevailing Wall Street Journal Prime
Rate plus 0.75% (6.25% at December 31, 2018), and the interest rate is reset
monthly. The new 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 Line of Credit are limited to the
lesser of $2.5 million or the sum of 80% of eligible accounts receivable and 25%
of eligible inventory. Under these limitations, the Company's total available
Line of Credit borrowing base was $2.5 million at December 31, 2018.
We believe that our cash and cash equivalents of $2.8 million at December 31,
2018 and our existing line of credit as well as the anticipated third quarter
closing of the sale of the Cable TV segment will provide sufficient liquidity
and capital resources to cover our operating losses, pay the remaining purchase
price for the Fulton and Mill City asset purchase and cover our additional
working capital and debt payment needs.
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