Special Note on Forward-Looking Statements Certain statements in Management's Discussion and Analysis ("MD&A"), other than purely historical information, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These forward-looking statements generally are identified by the words "estimates," "projects," "believes," "plans," "intends," "will likely result," and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. These statements are subject to a number of risks, uncertainties and developments beyond our control or foresight, including changes in the trends of the wireless infrastructure services industry, changes in the trends of the telecommunications industry, changes in our supplier agreements, technological developments, changes in the general economic environment, the potential impact of the novel strain of coronavirus ("COVID-19") pandemic, the growth or formation of competitors, changes in governmental regulation or taxation, the potential forgiveness of any portion of the PPP Loan, changes in our personnel and other such factors. Our actual results, performance or achievements may differ significantly from the results, performance or achievements expressed or implied in the forward-looking statements. We do not undertake any obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events. Overview The following MD&A is intended to help the reader understand the results of operations, financial condition, and cash flows of the Company. MD&A is provided as a supplement to, and should be read in conjunction with the information presented elsewhere in this quarterly report on Form 10-Q and with the information presented in our annual report on Form 10-K for the year endedSeptember 30, 2020 , which includes our audited consolidated financial statements and the accompanying notes to the consolidated financial statements. The Company reports its financial performance based on two external reporting segments: Wireless and Telecommunications. These reportable segments are described below. Wireless Infrastructure Services ("Wireless") The Company's Wireless segment provides turn-key wireless infrastructure services for the four majorU.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 inNorth America . This segment also offers its customers repair and testing services for telecommunications networking equipment. In addition, this segment offers its customers decommissioning services for surplus and obsolete equipment, which it in turn processes through its recycling program. Recent Business Developments COVID-19 OnMarch 11, 2020 , theWorld Health Organization declared the current outbreak of COVID-19 to be a global pandemic, and onMarch 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" 15 -------------------------------------------------------------------------------- Table of Content s 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 throughMarch 31, 2021 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. With the partial reopening of the economy the economic effects of the pandemic and resulting societal changes remain unpredictable. There are a number of uncertainties that could impact our future results of operations, including the efficacy and widespread distribution of a vaccine, the return of major outdoor events during the summer and fall months, and the impact of COVID-19 on the operating results and capital budgets of our customers. Results of Operations Comparison of Results of Operations for the Three Months EndedMarch 31, 2021 andMarch 31, 2020 Consolidated Consolidated sales increased$0.7 million , or 6%, to$12.7 million for three months endedMarch 31, 2021 from$12.0 million for the three months endedMarch 31, 2020 . The increase in sales was due to increased sales in the Telco segment of$1.0 million partially offset by a decrease in Wireless segment sales of$0.3 million . Consolidated gross profit increased$3.6 million for three months endedMarch 31, 2021 to$3.2 million compared to a deficit of$0.4 million for the same period last year. The increases in gross profit were due to an increase in the Telco segment of$2.3 million , and a Wireless segment increase of$1.3 million . Consolidated operating expenses include indirect costs associated with operating our business such as indirect personnel, facilities, vehicles, insurance, communication, and business taxes. Operating expenses remained consistent at approximately$2.2 million for the three months endedMarch 31, 2021 and$2.1 million the same period last year. Consolidated selling, general and administrative ("SG&A") expenses include overhead, which consist of personnel, insurance, professional services, communication, and other cost categories. SG&A expense increased$0.9 million , or 30%, to$3.8 million for the three months endedMarch 31, 2021 from$2.9 million for the same period last year. The increase in SG&A relates to increased personnel costs such as non-cash stock compensation of$0.1 million , executive severance of$0.2 million , as well as computing and communications costs of approximately$0.2 million , and$0.4 million of increased selling costs compared to the same period last year. Depreciation and amortization expenses decreased$0.2 million , or 40%, to$0.3 million for the three months endedMarch 31, 2021 , from$0.5 million for the same period last year. The decrease was due primarily to a decrease in amortization expenses to the Telco segment of$0.2 million , as a result of intangible impairments taken in fiscal 2020. Interest income primarily consists of interest earned on the promissory note receivable. Interest income has decreased to$33 thousand for the three months endedMarch 31, 2021 compared to$0.1 million for the same period last year, as the note receivable principal has decreased. Interest expense for the three months endedMarch 31, 2021 was$42 thousand as compared to$59 thousand for the same period last year. The expense was related to interest expense on the revolving bank line of credit and the loan with our primary financial lender. Income tax expense was zero during the three months endedMarch 31, 2021 and the same period in 2020. Our effective tax rates during the three months endedMarch 31, 2021 and 2020 were approximately 0%, respectively because increases in our valuation allowance against our deferred tax assets. 16 -------------------------------------------------------------------------------- Table of Content s Segment Results Wireless Revenues for the Wireless segment decreased$0.3 million to$4.3 million for the three months endedMarch 31, 2021 from$4.7 million for the same period of last year. Revenues continued to be negatively impacted due to delays in infrastructure spending from the majorU.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 constrained demand for 5G-related work on existing towers, new raw-land builds, and small cell networks. In addition, we have made and are continuing to make the necessary operational changes in order to be well positioned to secure an increased share of the 5G construction services work. Gross profit was$1.5 million , or 35% for the three months endedMarch 31, 2021 compared to$0.2 million , or 4%, for the three months endedMarch 31, 2020 . The improvement in the gross profit percentage was driven by organizational changes put into place to strengthen margins during the latter half of fiscal 2020. Operating expenses were$1.4 million for each of the three months periods endedMarch 31, 2021 and 2020. Selling, general and administrative expenses increased$0.2 million to$0.6 million for the three months endedMarch 31, 2021 from$0.4 million for the three months endedMarch 31, 2020 . This increase was due to increased sales-related personnel costs. The corporate overhead allocation increased$0.3 million mainly as a result of the employee stock-based compensation plan and interest expense. Depreciation and amortization expense was$0.2 million for the three months endedMarch 31, 2021 and 2020. Telco Sales for the Telco segment increased$1.0 million to$8.3 million for the three months endedMarch 31, 2021 from$7.3 million for the same period last year. The increase in revenues were related to increased sales of used and refurbished equipment, coupled with decreased charges for returns during the quarter compared to the prior year quarter. Gross profit was$1.7 million for the three months endedMarch 31, 2021 and a deficit of$0.6 million for the three months endedMarch 31, 2020 . The increase was mainly related to a$2.1 million obsolescence expense recorded in the prior year quarter. Operating expenses increased$0.1 million to$0.8 million for the three months endedMarch 31, 2021 compared to$0.7 million the three months endedMarch 31, 2020 . The increased operating expense was due to fees related to the utilization of a third-party logistics provider. Selling, general and administrative expenses increased$0.2 million to$1.1 million for the three months endedMarch 31, 2021 from$0.9 million for the same period last year. This increase was due primarily to increased sales commissions. In addition, the corporate allocation increased$0.1 million , which related to the employee stock-compensation plan and executive severance costs. Depreciation and amortization expense decreased$0.2 million to$0.1 million for the three months endedMarch 31, 2021 from$0.3 million for the same period last year. This was due to decreased amortization expense resulting from the impairment of intangibles taken in the three months endedMarch 31, 2020 . Comparison of Results of Operations for the Six Months EndedMarch 31, 2021 andMarch 31, 2020 Consolidated Consolidated sales decreased$0.5 million , or 2%, to$25.4 million for the six months endedMarch 31, 2021 from$25.9 million for the six months endedMarch 31, 2020 . The decrease in sales was primarily in the Wireless segment, which decreased$1.9 million , partially offset by an increase in sales from the Telco segment of$1.4 million . 17 -------------------------------------------------------------------------------- Table of Content s Consolidated gross profit increased$3.7 million , or 116%, to$6.8 million for the six months endedMarch 31, 2021 from$3.2 million for the same period last year. The increase in gross profit was due to an increase in the Telco segment of$2.6 million , as well as an increase in the Wireless segment of$1.1 million . Consolidated operating expenses include indirect costs associated with operating our business such as indirect personnel costs, facilities, vehicles, insurance, communication, and business taxes, among other costs. Operating expenses decreased$0.1 million , or 1%, to$4.2 million for the six months endedMarch 31, 2021 from$4.3 million for the same period last year. Consolidated selling, general and administrative expenses include overhead costs, which primarily consist of personnel, insurance, professional services, and communication, among other costs. Selling, general and administrative expenses increased$1.3 million , or 23%, to$7.0 million for the six months endedMarch 31, 2021 from$5.7 million for the same period last year. General and administrative costs accounted for$0.7 million of the increase, while selling costs accounted for$0.6 million of the increase. Non-cash share-based compensation accounted for$0.4 million of the increased G&A. Depreciation and amortization expenses decreased$0.4 million , or 39%, to$0.6 million for the six months endedMarch 31, 2021 from$1.0 million for the same period last year. The decrease was due primarily to decreased amortization expense resulting from the impairment of intangible assets in the three months endedMarch 31, 2020 . Interest income primarily consists of interest earned on the promissory note from the sale of the cable business inJune 2019 . Interest income was$0.1 million for six months endedMarch 31, 2021 and$0.2 million for the six months endedMarch 31, 2020 . Other expense for the six months endedMarch 31, 2021 was$27.4 thousand as compared to$0.1 million for the same period last year. The expense for the both the six months endedMarch 31, 2021 andMarch 31, 2020 is primarily related to our factoring arrangements with our Wireless segment. Interest expense for the six months endedMarch 31, 2021 was$0.1 million as compared to$0.2 million for the same period last year. Interest expense for the six months endedMarch 31, 2021 was related to the revolving bank line of credit, the loan with our primary financial lender. The provision for income taxes was zero for the six months endedMarch 31, 2021 compared to a benefit of$15 thousand for the six months endedMarch 31, 2020 . Our effective tax rates during the six months endedMarch 31, 2021 and 2020 were approximately 0% because of increases in our valuation allowance against our deferred tax assets. Segment Results Wireless Revenues for the Wireless segment were$9.6 million for the six months endedMarch 31, 2021 and$11.5 million for the same period last year. The decrease in revenue was due to a full six months of COVID-19 related slow-down in activity included in the current year results. Gross profit was$3.1 million , or 33% for the six months endedMarch 31, 2021 and$2.0 million , or 18%, for six months endedMarch 31, 2020 . This increase is due primarily to the impact of structural operational changes and more effective customer sales change order processes in place during the current fiscal six month period. Operating expenses decreased$0.3 million to$2.6 million for the six months endedMarch 31, 2021 from$2.9 million for the same period last year, mainly as a result of lower vehicle and equipment costs as a result of decreased revenues.
Selling, general and administrative expenses increased
Depreciation and amortization expense was consistent at
18 -------------------------------------------------------------------------------- Table of Content s Telco Sales for the Telco segment increased$1.4 million to$15.8 million for the six months endedMarch 31, 2021 from$14.5 million for the same period last year. The increase was mainly related to sales of used and refurbished equipment. Gross profit was$3.7 million for the six months endedMarch 31, 2021 compared to$1.1 million for six months endedMarch 31, 2020 . Gross profit for the six months endedMarch 31, 2021 rebounded after taking a charge of$2.1 million for inventory obsolescence expense in the same period last year. Operating expenses increased$0.2 million to$1.6 million for the six months endedMarch 31, 2021 from$1.4 million for the same period last year. This increase was due primarily to increased costs from our third-party logistics provider as revenue increases, and severance costs for certain employees resulting from cost reduction activities.
Selling, general and administrative expenses increased
Depreciation and amortization expense decreased$0.4 million to$0.2 million from$0.6 million for the six months endedMarch 31, 2021 and 2020, respectively, resulting from significant impairments of intangible assets in the second quarter of 2020. Non-GAAP Financial Measure Adjusted EBITDA is a supplemental, non-GAAP financial measure. EBITDA is defined as earnings before interest expense, income taxes, depreciation and amortization. Adjusted EBITDA as presented also excludes impairment charges for operating lease right-of-use assets and intangible assets including goodwill, stock compensation expense, other income, other expense, interest income and income from equity method investment. Adjusted EBITDA is presented below because this metric is used by the financial community as a method of measuring our financial performance and of evaluating the market value of companies considered to be in similar businesses. Since Adjusted EBITDA is not a measure of performance calculated in accordance with GAAP, it should not be considered in isolation of, or as a substitute for, net earnings as an indicator of operating performance. Adjusted EBITDA, as calculated below, may not be comparable to similarly titled measures employed by other companies. In addition, Adjusted EBITDA is not necessarily a measure of our ability to fund our cash needs. The following table provides a reconciliation by segment of loss from operations to Adjusted EBITDA for the three and six month periods endedMarch 31, 2021 andMarch 31, 2020 , in thousands: Three Months Ended March 31, 2021 Three Months Ended March 31, 2020 Wireless Telco Total Wireless Telco Total Loss from operations$ (1,537) $ (1,510) $ (3,047) $ (2,453) $ (12,226) $ (14,679) Impairment of intangibles including goodwill - - - - 8,714 8,714 Depreciation and amortization expense 176 128 304 169 339 508 Stock compensation expense 107 139 246 23 65 88 Adjusted EBITDA$ (1,254) $ (1,243) $ (2,497) $ (2,261) $ (3,108) $ (5,369) Six Months Ended March 31, 2021 Six Months Ended March 31, 2020 Wireless Telco Total Wireless Telco Total Loss from operations$ (2,642) $ (2,319) $ (4,961) $ (3,235) $ (13,207) $ (16,442) Impairment of intangibles including goodwill - - - - 8,714 8,714 Depreciation and amortization expense 328 257 585 315 640 955 Stock compensation expense 247 314 561 32 74 106 Adjusted EBITDA$ (2,067) $ (1,748) $ (3,815) $ (2,888) $ (3,779) $ (6,667)
Due to rounding, numbers presented may not foot to the totals provided.
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Critical Accounting Policies Our unaudited consolidated financial statements are impacted by the accounting policies used and the estimates and assumptions made by management during their preparation. A complete summary of our significant accounting policies is included in Note 1- Basis of Presentation and Accounting Policies in our Form 10-K. General The preparation of financial statements in conformity withUnited States generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We base our estimates and judgments on historical experience, current market conditions, and various other factors we believe to be reasonable, which form the basis for making judgments about the carrying values of certain assets. Actual results could differ from these estimates under different assumptions or conditions. The most significant estimates and assumptions are discussed below. Inventory Valuation For our Telco segment, our position in the telecommunications industry requires us to carry large inventory quantities relative to annual sales, but it also allows us to realize high gross profit margins on our sales. We market our products primarily to telecommunication providers, resellers, and other users of telecommunication equipmentwho are seeking products for which manufacturers have discontinued production or cannot ship new equipment on a same-day basis, as well as providing used products as an alternative to new products from the manufacturer. Carrying these large inventory quantities represents our largest risk for our Telco segment. Our inventories are all carried in the Telco segment and consist of new and used electronic components for the telecommunications industry. Inventory is stated at the lower of cost or net realizable value, with cost determined using the weighted-average method. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. AtMarch 31, 2021 , we had total inventory, before the reserve for excess and obsolete inventories, of$8.9 million , consisting of$1.3 million in new products and$7.6 million in used or refurbished products. We regularly review the value of our inventory in detail with consideration given to rapidly changing technology which can significantly affect future customer demand. For individual inventory items, we may carry inventory quantities that are excessive relative to market potential, or we may not be able to recover our acquisition costs. In order to address the risks associated with our investment in inventory, we review inventory quantities on hand and reduce the carrying value for obsolete and excess inventories, when our analysis indicates that cost will not be recovered when an item is sold. We identified certain inventory that more than likely will not be sold or that the cost will not be recovered when it is processed through our recycling program. Therefore, we have an obsolete and excess inventory reserve of$3.2 million atMarch 31, 2021 . If actual market conditions differ from those projected by management, this could have a material impact on our gross margin and inventory balances based on additional write-downs to net realizable value or a benefit from inventories previously written down. Inbound freight charges are included in cost of sales. Purchasing and receiving costs, inspection costs, warehousing costs, internal transfer costs and other inventory expenditures are included in operating expenses. Intangibles Intangible assets that have finite useful lives are amortized on a straight-line basis over their estimated useful lives ranging from 3 years to 10 years. Intangible assets are also tested for impairment when events and circumstances indicate that the carrying value may not be recoverable. As ofMarch 31, 2021 , there were no indicators of impairment present. 20 -------------------------------------------------------------------------------- Table of Content s Liquidity and Capital Resources Cash Flows Used in Operating Activities During the six months endedMarch 31, 2021 , cash used in operations was$4.1 million . Cash flows from operations were negatively impacted by a net loss of$5.0 million and net cash used by working capital of$0.2 million , which was partially offset by non-cash adjustments of$1.1 million . Cash Flows Provided by Investing Activities During the six months endedMarch 31, 2021 , cash provided by investing activities was$1.4 million which consisted of$1.5 million of payments received under the promissory note receivable. Cash Flows Used in Financing Activities During the six months endedMarch 31, 2021 , cash used in financing activities was$0.5 million , of which$1.2 million related to repayment of our promissory note payable, partially offset by net proceeds from the sale of our common stock utilizing our shelf registration of$0.9 million . InMarch 2020 , we entered into a loan agreement with our primary financial lender for$3.5 million , bearing interest at 6% per annum. The principal and interest payments correlate to our promissory note receivable with Leveling 8. We monetized$3.5 million of the$5.8 million remaining balance of the promissory note receivable. In connection with the$1.4 million in payments received in the first quarter of 2021, we paid down the remaining outstanding principal under this loan. The Company has a$4.0 million revolving line of credit agreement with its primary financial lender, which matures onDecember 17, 2021 . The line of credit requires quarterly interest payments based on the prevailingWall Street Journal Prime Rate, floating (3.25% atMarch 31, 2021 ), with the addition of a 4% floor rate and a fixed charge coverage ratio of 1.25 to be tested quarterly beginningJune 30, 2021 . AtMarch 31, 2021 , there was$2.8 million outstanding under the line of credit. Future borrowings under the line of credit are limited to the lesser of$4.0 million or the sum of 80% of eligible accounts receivable and 60% of eligible Telco segment inventory. Under these limitations, the Company's total line of credit borrowing capacity was$4.0 million atMarch 31, 2021 . OnApril 14, 2020 , the Company entered into an unsecured loan in the amount of$2.9 million ("PPP Loan") with our primary lender. The PPP Loan matures onApril 14, 2022 , bears interest at 1% per annum, with monthly payments of principal and interest in the amount of$164,045 commencing on the date on which the amount of loan forgiveness is determined. OnAugust 28, 2020 , we submitted our application to our lender, requesting PPP Loan forgiveness of$2.9 million . Our lender reviewed our application and forwarded to the SBA for approval onSeptember 27, 2020 . As of the filing of this Report, we have not received an approval or denial of our application for forgiveness from the SBA; per the Flexibility Act, the date for commencement of loan payments has not yet occurred, and we have made no loan payments. The Company deferred$0.8 million of loan payments during the six months endedMarch 31, 2021 . We continue to take actions to preserve and improve our liquidity. We believe that our cash and cash equivalents and restricted cash of$5.2 million atMarch 31, 2021 and our existing revolving bank line of credit will provide sufficient liquidity and capital resources to cover our operating losses and our additional working capital and debt payment needs. However, we will likely need to seek a waiver for our probable covenant violation under our loan agreements with our primary financial lender. Further, as discussed above, we received the PPP Loan inApril 2020 , which provided funding necessary to offset the immediate and anticipated impacts of COVID-19, and there is some uncertainty whether we will be granted forgiveness from the SBA. In addition, there is still uncertainty surrounding the timing of the overall recovery of the economy and the timing of wireless infrastructure service opportunities for the upgrade to 5G. Therefore, depending on the timing of these factors and our primary financial lender granting us a waiver of 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. In the six months endedMarch 31, 2021 , we utilized our recently filed shelf registration statement to raise additional cash by selling common shares utilizing an at the market offering under our equity distribution agreement with 21 -------------------------------------------------------------------------------- Table of Content sNorthland Securities, Inc. ("Northland"). Under this program, we sold 245,973 shares for net proceeds of$0.9 million . Item 4. Controls and Procedures. We maintain disclosure controls and procedures that are designed to ensure the information we are required to disclose in the reports we file or submit under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of theSecurities and Exchange Commission . Based on their evaluation as ofMarch 31, 2021 , our Chief Executive Officer and Controller 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 Controller as appropriate to allow timely decisions regarding required disclosure. 22
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