ADDVANTAGE TECHNOLOGIES GROUP INC - FORM 10-Q

Attached files

file	filename
EX-10.1 - FINANCIAL INSTITUTION BUSINESS LOAN AGREEMENT DATED DECEMBER 17, 2019 - ADDVANTAGE TECHNOLOGIES GROUP INC	loan_agreement.htm
EX-32.2 - CERTIFICATION PURSUANT TO SECTION 906 OF THE SOX ACT OF 2002 - CFO - ADDVANTAGE TECHNOLOGIES GROUP INC	exhibit32_2.htm
EX-32.1 - CERTIFICATION PURSUANT TO SECTION 906 OF THE SOX ACT OF 2002 - CEO - ADDVANTAGE TECHNOLOGIES GROUP INC	exhibit32_1.htm
EX-31.2 - CERTIFICATION PURSUANT TO SECTION 302 OF THE SOX ACT OF 2002 - CFO - ADDVANTAGE TECHNOLOGIES GROUP INC	exhibit31_2.htm
EX-31.1 - CERTIFICATION PURSUANT TO SECTION 302 OF THE SOX ACT OF 2002 - CEO - ADDVANTAGE TECHNOLOGIES GROUP INC	exhibit31_1.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

FOR THE QUARTERLY PERIOD ENDED December 31, 2019

□	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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).	Yes ⌧ No □

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 January 31, 2020 were 10,361,292.

ADDVANTAGE TECHNOLOGIES GROUP, INC.

Form 10-Q

For the Period Ended December 31, 2019

	PART I. FINANCIAL INFORMATION
		Page
Item 1.	Financial Statements.

	Consolidated Condensed Balance Sheets (unaudited)	2
	December 31, 2019 and September 30, 2019

	Consolidated Condensed Statements of Operations (unaudited)	4
	Three Months Ended December 31, 2019 and 2018

	Consolidated Condensed Statements of Changes in Shareholders’ Equity (unaudited)	5
	Three Months ended December 31, 2019 and 2018

	Consolidated Condensed Statements of Cash Flows (unaudited)	6
	Three Months Ended December 31, 2019 and 2018

	Notes to Unaudited Consolidated Condensed Financial Statements	7

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations.	17

Item 4.	Controls and Procedures.	22

	PART II. OTHER INFORMATION

Item 6.	Exhibits.	23

	SIGNATURES

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

ADDVANTAGE TECHNOLOGIES GROUP, INC.

CONSOLIDATED CONDENSED BALANCE SHEETS

(UNAUDITED)

	December 31, 2019			September 30, 2019
Assets
Current assets:
Cash and cash equivalents	$	608,105		$	1,242,143
Restricted cash		296,174			351,909
Accounts receivable, net of allowance for doubtful accounts of $150,000		4,777,580			4,826,716
Unbilled revenue		2,679,442			2,691,232
Promissory note – current		1,400,000			1,400,000
Income tax receivable		36,350			21,350
Inventories, net of allowance for excess and obsolete inventory of $1,275,000		8,161,656			7,625,573
Prepaid expenses		650,818			543,762
Other assets		77,103			262,462
Total current assets		18,687,228			18,965,147

Property and equipment, at cost:
Machinery and equipment		2,575,220			2,475,545
Leasehold improvements		1,014,643			190,984
Total property and equipment, at cost		3,589,863			2,666,529
Less: Accumulated depreciation		(993,427	)		(835,424	)
Net property and equipment		2,596,436			1,831,105

Right-of-use operating lease assets		4,261,166		‒
Promissory note – noncurrent		4,390,738			4,975,000
Intangibles, net of accumulated amortization		5,738,457			6,002,998
Goodwill		4,877,739			4,877,739
Other assets		205,100			176,355

Total assets	$	40,756,864		$	36,828,344

See notes to unaudited consolidated condensed financial statements.

ADDVANTAGE TECHNOLOGIES GROUP, INC.

CONSOLIDATED CONDENSED BALANCE SHEETS

(UNAUDITED)

	December 31, 2019			September 30, 2019
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable	$	4,188,259		$	4,730,537
Accrued expenses		1,478,122			1,617,911
Deferred revenue		290,977			97,478
Bank line of credit		1,700,000		‒
Operating lease obligations - current		1,086,871
Financing lease obligations – current		316,417		‒
Other current liabilities	‒				757,867
Total current liabilities		9,060,646			7,203,793

Operating lease obligations		3,333,181
Financing lease obligations		590,040		‒
Other liabilities		30,199			177,951
Total liabilities		13,014,066			7,381,744

Shareholders’ equity:
Common stock, $.01 par value; 30,000,000 shares authorized; 10,861,950 shares issued; 10,361,292 shares outstanding		108,620			108,620
Paid in capital		(4,363,213	)		(4,377,103	)
Retained earnings		32,997,405			34,715,097
Total shareholders’ equity before treasury stock		28,742,812			30,446,614

Less: Treasury stock, 500,658 shares, at cost		(1,000,014	)		(1,000,014	)
Total shareholders’ equity		27,742,798			29,446,600

Total liabilities and shareholders’ equity	$	40,756,864		$	36,828,344

See notes to unaudited consolidated condensed financial statements.

ADDVANTAGE TECHNOLOGIES GROUP, INC.

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

(UNAUDITED)

	Three Months Ended December 31,
	2019			2018
Sales	$	13,962,358		$	6,810,097
Cost of sales		10,370,376			5,086,708
Gross profit		3,591,982			1,723,389
Operating expenses		1,887,726			492,823
Selling, general and administrative expenses		3,019,403			1,939,605
Depreciation and amortization expense		447,574			299,385
Loss from operations		(1,762,721	)		(1,008,424	)
Other income (expense):
Interest income		88,631		‒
Income from equity method investment		22,000		‒
Other income (expense)		(57,042	)		90
Interest expense		(23,560	)		(22,977	)
Total other income (expense), net		30,029			(22,887	)

Loss before income taxes		(1,732,692	)		(1,031,311	)
Provision (benefit) for income taxes		(15,000	)		172,000
Loss from continuing operations		(1,717,692	)		(1,203,311	)

Income from discontinued operations, net of tax	‒				164,330

Net loss	$	(1,717,692	)	$	(1,038,981	)

Income (loss) per share:
Basic
Continuing operations	$	(0.17	)	$	(0.12	)
Discontinued operations	‒				0.02
Net loss	$	(0.17	)	$	(0.10	)
Diluted
Continuing operations	$	(0.17	)	$	(0.12	)
Discontinued operations	‒				0.02
Net loss	$	(0.17	)	$	(0.10	)
Shares used in per share calculation:
Basic		10,361,292			10,361,292
Diluted		10,361,292			10,361,292

See notes to unaudited consolidated condensed financial statements.

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

	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

See notes to unaudited consolidated condensed financial statements.

ADDVANTAGE TECHNOLOGIES GROUP, INC.

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Three Months Ended December 31,
	2019			2018
Operating Activities
Net loss	$	(1,717,692	)	$	(1,038,981	)
Net income from discontinued operations	‒				164,330
Net loss from continuing operations		(1,717,692	)		(1,203,311	)
Adjustments to reconcile net loss from continuing operations to net cash
provided by (used in) operating activities:
Depreciation		183,033			32,610
Amortization		264,541			266,775
Provision for excess and obsolete inventories	‒				28,000
Share based compensation expense		17,640			54,320
Gain from equity method investment		(22,000	)	‒
Changes in assets and liabilities:
Accounts receivable		49,136			(452,453	)
Unbilled revenue		11,792		‒
Income tax receivable\payable		(15,000	)		69,715
Inventories		(536,083	)		(262,699	)
Prepaid expenses and other assets		45,807			(79,631	)
Accounts payable		(542,278	)		(499,053	)
Accrued expenses and other liabilities		(108,807	)		150,523
Deferred revenue		193,498		‒
Net cash used in operating activities – continuing operations		(2,176,413	)		(1,895,204	)
Net cash used in operating activities – discontinued operations	‒				(32,783	)
Net cash used in operating activities		(2,176,413	)		(1,927,987	)

Investing Activities
Principal payments from promissory note		584,262		‒
Acquisition of net operating assets of a business	‒				(500,000	)
Loan repayment from equity method investee		22,000			37,000
Purchases of property and equipment		(99,675	)		(1,519	)
Disposals of property and equipment		25,030		‒
Net cash provided by (used in) investing activities – continuing operations		531,617			(464,519	)
Net cash provided by investing activities – discontinued operations	‒				5,010,400
Net cash provided by investing activities		531,617			4,545,881

Financing Activities
Change in bank line of credit		1,700,000		‒
Guaranteed payments for acquisition of business		(667,000	)		(667,000	)
Payments on financing lease obligations		(77,977	)	‒
Payments on notes payable	‒				(1,996,279	)
Net cash provided by (used in) financing activities – continuing operations		955,023			(2,663,279	)
Net cash used in financing activities – discontinued operations	‒				(184,008	)
Net cash provided by (used in) financing activities		955,023			(2,847,287	)

Net decrease in cash and cash equivalents and restricted cash		(689,773	)		(229,393	)
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	$	904,279		$	2,899,887

Supplemental cash flow information:
Cash paid for interest	$	102,313		$	57,178
Cash paid for income taxes	‒			‒

See notes to unaudited consolidated condensed financial statements.

ADDVANTAGE TECHNOLOGIES GROUP, INC.

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

Note 1 - Basis of Presentation and Accounting Policies

Basis of presentation

The 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, consisting only of normal recurring items which are, in the opinion of management, necessary in order to make the 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 three months ended December 31, 2019 and 2018, are not necessarily indicative of the results to be expected for the full fiscal year. It is suggested that these 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 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 consolidated statements of operations. 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. Entities may adopt earlier as of the fiscal year beginning after December 15, 2018, including interim periods within those fiscal years. We are currently in the process of evaluating this new standard update.

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 customers in Central America, South America and, to a substantially lesser extent, other international regions that utilize the

same technology which totaled approximately $0.4 million and $0.5 million in the three months ended December 31, 2019 and 2018, 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 11% of consolidated revenues for the three months ended December 31, 2019.

Our sales by type were as follows:

	Three Months Ended December 31,
	2019		2018

Wireless services sales	$	6,797,881	$	‒
Equipment sales:
Telco		6,782,983		6,619,410
Intersegment	‒			(40,242	)
Telco repair sales		8,410		3,600
Telco recycle sales		373,084		227,329
Total sales	$	13,962,358	$	6,810,097

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 December 31, 2019 and September 30, 2019, contract assets were $2.7 million and $2.7 million, respectively, and contract liabilities were $0.3 million and $0.1 million, respectively. The Company recognized $67 thousand of revenue for the three months ended December 31, 2019 related to contract liabilities of $0.1 million that were recorded in Deferred revenue at September 30, 2019.

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 December 31, 2019, the third-party financial institution has a reserve against the sold receivables of $0.3 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 $2.4 million at December 31, 2019 for which there is a limit of $3.5 million. Although the sale of receivables is with recourse, the Company did not record a recourse obligation at December 31, 2019 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.

For the three months ended December 31, 2019, the Company received proceeds from the sold receivables under all of the various agreements of $7.0 million and included the proceeds in net cash provided by operating activities in the Consolidated Condensed Statements of Cash Flows. The cost of selling these receivables ranges from 1.0% to 1.8%.

The Company recorded costs of $0.1 million for the three months ended December 31, 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. 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.

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

Fiscal year 2020	$	700,000
Fiscal year 2021		1,400,000
Fiscal year 2022		940,000
Fiscal year 2023		940,000
Fiscal year 2024		2,970,000
Total proceeds		6,950,000
Less: interest to be paid		( 1,159,262	)
Promissory note principal balance	$	5,790,738

Note 5 – Inventories

Inventories, which are all within the Telco segment, at December 31, 2019 and September 30, 2019 are as follows:

	December 31, 2019			September 30, 2019

New equipment	$	1,547,653		$	1,496,145
Refurbished and used equipment		7,889,003			7,404,428
Allowance for excess and obsolete inventory		(1,275,000	)		(1,275,000	)

Total inventories, net	$	8,161,656		$	7,625,573

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. Therefore, the Company has a $1.3 million allowance at December 31, 2019 and September 30, 2019.

Note 6 – Intangible Assets

The intangible assets with their associated accumulated amortization amounts at December 31, 2019 and September 30, 2019 are as follows:

	December 31, 2019
	Gross		Accumulated Amortization			Net
Intangible assets:
Customer relationships – 10 years	$	8,396,000	$	(3,757,291	)	$	4,638,709
Trade name – 10 years		2,119,000		(1,019,252	)		1,099,748
Non-compete agreements – 3 years		374,000		(374,000	)	‒

Total intangible assets	$	10,889,000	$	(5,150,543	)	$	5,738,457

	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 – Notes Payable and Line of Credit

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 (4.75% at December 31, 2019), 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 measured annually. At December 31, 2019, there was $1.7 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 $3.5 million at December 31, 2019.

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.

Note 8 – 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 months ended December 31, 2019 and 2018 are:

	Three Months Ended December 31,
	2019			2018
Loss from continuing operations	$	(1,717,692	)	$	(1,203,311	)
Discontinued operations, net of tax		−			164,330
Net income attributable to common shareholders	$	(1,717,692	)	$	(1,038,981	)

Basic weighted average shares		10,361,292			10,361,292
Effect of dilutive securities:
Stock options	‒			‒
Diluted weighted average shares		10,361,292			10,361,292

Earnings (loss) per common share:
Basic:
Continuing operations	$	(0.17	)	$	(0.12	)
Discontinued operations		−			0.02
Net loss	$	(0.17	)	$	(0.10	)
Diluted:
Continuing operations	$	(0.17	)	$	(0.12	)
Discontinued operations		−			0.02
Net loss	$	(0.17	)	$	(0.10	)

The table below includes information related to stock options that were outstanding at the end of each respective three-month period ended December 31 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 because the Company had a net loss for the periods presented. Additionally, for certain stock options, the exercise price exceeded the average market price per share of our common stock for the three months ended December 31, 2019 and 2018.

	Three Months Ended December 31,
	2019		2018
Stock options excluded		770,000		620,000
Weighted average exercise price of
stock options	$	1.73	$	1.83
Average market price of common stock	$	2.27	$	1.34

Note 9 – 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.

At December 31, 2019, 1,100,415 shares of common stock were reserved for stock award grants under the Plan. Of these reserved shares, 7,154 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, selling, general and administrative expense section 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 December 31, 2019 and changes during the three 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		–		–		–
Expired		–		–		–
Forfeited	‒		‒		‒
Outstanding at December 31, 2019		770,000	$	1.73	$	56,300

Exercisable at December 31, 2019		486,668	$	1.93	$	22,933

No nonqualified stock options were granted for the three months ended December 31, 2019. 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.

Compensation expense related to unvested stock options recorded for the three months ended December 31, 2019 is as follows:

	Three Months Ended December 31, 2019
Fiscal year 2017 grant	$	2,686
Fiscal year 2019 grants	$	11,203

The Company records compensation expense over the vesting term of the related options. At December 31, 2019, compensation costs related to these unvested stock options not yet recognized in the consolidated condensed statements of operations was $59,754.

Restricted Stock

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 10 – 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 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 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 components of lease expense are as follows for the three months ended:

	December 31, 2019

Operating lease cost	$	292,122

Finance lease cost:
Amortization of right-of-use assets	$	60,230
Interest on lease liabilities		12,169
Total finance lease cost	$	72,399

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

	December 31, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	292,428
Operating cash flows from finance leases	$	12,169
Financing cash flows from finance leases	$	77,977

Right-of-use assets obtained in exchange for lease obligations:
Operating leases	$	‒
Finance leases	$	239,517

Supplemental balance sheet information related to leases are as follows:

	December 31, 2019
Operating leases
Operating lease right-of-use assets	$	4,261,166

Operating lease obligations - current	$	1,086,871
Operating lease obligations		3,333,181
Total operating lease liabilities	$	4,420,052

Finance leases
Property and equipment, gross	$	873,719
Accumulated depreciation		(60,230	)
Property and equipment, net	$	813,489

Financing lease obligations - current	$	316,417
Financing lease obligations		590,040
Total finance lease liabilities	$	906,457

Weighted Average Remaining Lease Term
Operating leases	4.29 years
Finance leases	3.80 years
Weighted Average Discount Rate
Operating leases		5.00	%
Finance leases		4.94	%

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

	Operating Leases		Financing Leases
2020	$	890,541	$	292,742
2021		1,204,948		225,066
2022		1,225,470		191,948
2023		1,119,773		177,771
2024		544,256		138,753
Thereafter		19,699		4,008
Total lease payments		5,004,687		1,030,288
Less imputed interest		584,635		123,831
Total	$	4,420,052	$	906,457

The Company will be relocating its headquarters and Wireless segment Texas location to a new facility in Carrollton, Texas, a suburb of Dallas, Texas, commencing in February 2020. The facility will be leased over five years and will be accounted for as an operating lease with an estimated right of use asset and lease obligation to be recorded at commencement of $1.1 million.

Note 11 – 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.

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, the promissory note related to the sale of the Cable TV segment, property and equipment, goodwill and intangible assets.

	Three Months Ended
	December 31, 2019			December 31, 2018
Sales
Wireless	$	6,797,881		$	‒
Telco		7,164,477			6,810,097
Total sales	$	13,962,358		$	6,810,097

Gross profit
Wireless	$	1,872,556		$ ‒
Telco		1,719,426			1,723,389
Total gross profit	$	3,591,982		$	1,723,389

Loss from operations
Wireless	$	(1,087,444	)	$ ‒
Telco		(675,277	)		(1,008,424	)
Total loss from operations	$	(1,762,721	)	$	(1,008,424	)

	December 31, 2019		September 30, 2019
Segment assets
Wireless	$	7,846,232	$	5,515,793
Telco		25,335,171		22,619,565
Non-allocated		7,575,461		8,692,986
Total assets	$	40,756,864	$	36,828,344

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Special Note on Forward-Looking Statements

Certain statements in Management's Discussion and Analysis (“MD&A”), other than purely historical information, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements generally are identified by the words “estimates,” “projects,” “believes,” “plans,” “intends,” “will likely result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. These statements are subject to a number of risks, uncertainties and developments beyond our control or foresight, including changes in the trends of the cable 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.

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”)

Results of Operations

Comparison of Results of Operations for the Three Months Ended December 31, 2019 and December 31, 2018

Consolidated

Consolidated sales increased $7.2 million, or 105%, to $14.0 million for the three months ended December 31, 2019 from $6.8 million for the three months ended December 31, 2018. The increase in sales was in the Wireless segment

and Telco segment of $6.8 million and $0.4 million, respectively. Consolidated gross profit increased $1.9 million, or 108%, to $3.6 million for the three months ended December 31, 2019 from $1.7 million for the same period last year. The increase in gross profit was due primarily to the Wireless segment.

Consolidated operating expenses include indirect costs associated with operating our business. Indirect costs are costs that are not directly attributable to projets 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 $1.4 million, or 284%, to $1.9 million for the three months ended December 31, 2019 from $0.5 million the same period last year. The increase in operating expenses was due to the addition of the Wireless segment of $1.2 million and an increase in operating expenses in the Telco segment of $0.2 million.

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 $1.1 million, or 55%, to $3.0 million for the three months ended December 31, 2019 from $1.9 million for the same period last year. This was due to the addition of the Wireless segment of $1.6 million, partially offset by a decrease in the Telco segment of $0.5 million, respectively.

Depreciation and amortization expenses increased $0.1 million, or 49%, to $0.4 million for the three months ended December 31, 2019 from $0.3 million for the same period last year. The increase was due primarily to increased depreciation expense resulting from the acquisition of Fulton in January 2019.

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 December 31, 2019 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 December 31, 2019 was $22 thousand and zero for the three months ended December 31, 2018. The income for the three months ended December 31, 2019 consisted primarily of payments received under a loan to the former YKTG Solutions partners.

Other income (expense) for the three months ended December 31, 2019 was an expense of $57 thousand as compared to almost zero for the same period last year. The expense for the three months ended December 31, 2019 is primarily related to our factoring arrangements with our Wireless segment.

Interest expense for the three months ended December 31, 2019 was $24 thousand as compared to $23 thousand for the same period last year. The expense for the three months ended December 31, 2019 was primarily related to interest expense on the revolving bank line of credit. The expense for the three months ended December 31, 2018 was primarily related to interest expense from our outstanding term loans that were extinguished in November 2018.

The provision (benefit) for income taxes was a benefit of $15 thousand for the three months ended December 31, 2019 compared to a provision for income taxes of $0.2 million for the three months ended December 31, 2018. The tax provision for the three months ended December 31, 2018 was due primarily to an increase in the valuation allowance netting the deferred tax assets to zero.

Segment Results

Wireless

Revenues for the Wireless segment were $6.8 million for the three months ended December 31, 2019 and zero for the same period last year as the acquisition of Fulton Technologies, Inc. and its affiliate (“Fulton”) in January 2019, which was after the first fiscal quarter of 2019. Substantially all of the revenue for the year was derived from wireless infrastructure services.

Revenue for the three months ended December 31, 2019 was negatively impacted by the normal holiday months and winter weather, an unexpected decline in revenue due to a large carrier completing its work in the Southern United States earlier than expected, and continued delays regarding the T-Mobile/Sprint merger decision. Management has

repositioned much of its Southern workforce to the Northern states to supplement growth and backlog in its North business division. The repositioning took several weeks, creating unforeseen costs and lost revenue. In aggregate, the time required to reposition crews, plus the expected weather and holiday impact, resulted in approximately three weeks of lost productivity, significantly impacting our revenue, margin, and profitability. We believe this situation is not representative of the normalized business in the future, although the weather impact will continue in the second fiscal quarter.

Gross margin was $1.9 million, or 28%, for the three months ended December 31, 2019.

Operating expenses were $1.2 million for the three months ended December 31, 2019.

Selling, general and administrative expenses were $1.6 million for the three months ended December 31, 2019.

Depreciation and amortization expense was $0.1 million for the three months ended December 31, 2019.

Overall, the Wireless segment incurred an operating loss of $1.1 million due primarily to the normal seasonality of the business during the winter and holiday months, carrier year-end budget cycles and the slowdown in the South.

Telco

Sales for the Telco segment increased $0.4 million to $7.2 million for the three months ended December 31, 2019 from $6.8 million for the same period last year. The increase in sales for the Telco segment was due to an increase in equipment sales of $0.3 million and recycling revenue of $0.1 million. The increase in Telco equipment sales was due to Nave Communications of $0.1 million and Triton Datacom of $0.2 million.

Gross profit was $1.7 million, or 24% for the three months ended December 31, 2019 and $1.7 million, or 25%, for the three months ended December 31, 2018. The slight decrease in gross margin percentage was due primarily to the overall mix of equipment sales.

Operating expenses increased $0.2 million to $0.7 million for the three months ended December 31, 2019 from $0.5 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 $0.5 million to $1.4 million for the three months ended December 31, 2019 from $1.9 million for the same period last year. This decrease was due primarily to decreased corporate overhead allocation as a result of adding an additional segment due to the acquisition of Fulton in January 2019.

Depreciation and amortization expense remained relatively flat at $0.3 million for the three months ended December 31, 2019 and 2018.

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 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 follows:

	Three Months Ended December 31, 2019									Three Months Ended December 31, 2018
	Wireless			Telco			Total			Wireless		Telco			Total
Loss from operations	$	(1,087,443	)	$	(675,278	)	$	(1,762,721	)	$	−	$	(1,008,424	)	$	(1,008,424	)
Depreciation and amortization expense		146,696			300,879			447,575			−		299,385			299,385
Stock compensation expense		8,804			8,835			17,639			−		54,320			54,320
	$	(931,943	)	$	(365,564	)	$	(1,297,507	)	$	−	$	(654,719	)	$	(654,719	)

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 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 December 31, 2019, we had total inventory, before the reserve for excess and obsolete inventories, of $9.4 million, consisting of $1.5 million in new products and $7.9 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 $1.3 million at December 31, 2019. 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 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, 2019 and September 30, 2019. At December 31, 2019, accounts receivable, net of allowance for doubtful accounts, was $4.8 million.

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 aggregated into the Wireless operating segment and the Telco operating segment.

Management utilizes a discounted cash flow analysis to determine the estimated fair value of each reporting unit. Significant judgments and assumptions including the discount rate, anticipated revenue growth rate, gross margins and operating expenses are inherent in these fair value estimates. As a result, actual results may differ from the estimates utilized in our discounted cash flow analysis. The use of alternate judgments and/or assumptions could result in the recognition of different levels of impairment charges in the financial statements.

We did not record a goodwill impairment for the Telco segment in the three year period ended September 30, 2019. In addition, we are implementing strategic plans as discussed in Recent Business Developments above and in our fiscal year 2019 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 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 Wireless segment and Telco segment also may change.

Intangibles

Intangible assets that have finite useful lives are amortized on a straight-line basis over their estimated useful lives ranging from 3 years to 10 years.

Liquidity and Capital Resources

Cash Flows Used in Operating Activities

We finance our operations primarily through cash flows provided by operations, and we have a revolving bank line of credit of up to $4.0 million. During the three months ended December 31, 2019, we used $2.2 million of cash flows for operations. The cash flows from operations was negatively impacted by $0.5 million from a net decrease in accounts payable and $0.5 million from a net increase in inventory.

Cash Flows Used for Investing Activities

During the three months ended December 31, 2019, cash provided by investing activities was $0.5 million, consisting primarily of payments received under the promissory note related to the sale of the cable business in fiscal year 2019.

Cash Flows Used for Financing Activities

During the three months ended December 31, 2019, cash provided by financing activities was $1.0 million, which primarily related to net borrowings of $1.7 million under our revolving credit agreement, partially offset by the final guaranteed payment of $0.7 million to the Triton Miami, Inc. partners.

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 (4.75% at December 31, 2019), 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 $3.5 million at December 31, 2019.

We believe that our cash and cash equivalents and restricted cash of $0.9 million at December 31, 2019 and our existing revolving bank line of credit as well as the promissory note from the sale of the cable business will provide sufficient liquidity and capital resources to cover our operating losses and our additional working capital and debt payment needs. In addition, we have begun evaluating alternative sources of capital to enhance the Company’s cash position and assist in its working capital needs, especially related to anticipated growth.

Item 4. Controls and Procedures.

We maintain disclosure controls and procedures that are designed to ensure the information we are required to disclose in the reports we file or submit under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Based on their evaluation as of December 31, 2019, 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.

PART II. OTHER INFORMATION

Item 6. Exhibits.

Exhibit No.	Description

10.1	Business Bank Loan Agreement dated December 17, 2019.

31.1	Certification of Chief Executive Officer under Section 302 of the Sarbanes Oxley Act of 2002.

31.2	Certification of Chief Financial Officer under Section 302 of the Sarbanes Oxley Act of 2002.

32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS	XBRL Instance Document.

101.SCH	XBRL Taxonomy Extension Schema.

101.CAL	XBRL Taxonomy Extension Calculation Linkbase.

101.DEF	XBRL Taxonomy Extension Definition Linkbase.

101.LAB	XBRL Taxonomy Extension Label Linkbase.

101.PRE	XBRL Taxonomy Extension Presentation Linkbase.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

ADDVANTAGE TECHNOLOGIES GROUP, INC.

(Registrant)

Date: February 13, 2020 /s/ Joseph E. Hart

Joseph E. Hart,

President and Chief Executive Officer

(Principal Executive Officer)

Date: February 13, 2020 /s/ Kevin D. Brown

Kevin D. Brown,

Chief Financial Officer

(Principal Financial Officer)

Exhibit Index

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

Exhibit No.	Description

10.1	Financial Institution Business Loan Agreement dated December 17, 2019.

31.1	Certification of Chief Executive Officer under Section 302 of the Sarbanes Oxley Act of 2002.

31.2	Certification of Chief Financial Officer under Section 302 of the Sarbanes Oxley Act of 2002.

32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS	XBRL Instance Document.

101.SCH	XBRL Taxonomy Extension Schema.

101.CAL	XBRL Taxonomy Extension Calculation Linkbase.

101.DEF	XBRL Taxonomy Extension Definition Linkbase.

101.LAB	XBRL Taxonomy Extension Label Linkbase.

101.PRE	XBRL Taxonomy Extension Presentation Linkbase.

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ADDVANTAGE TECHNOLOGIES GROUP INC Reports