ADDvantage Technologies (AEYGQ) 10-Q2021 Q2 Quarterly report

The consolidated financial statements include the accounts of ADDvantage Technologies Group, Inc. and its subsidiaries, all of which are wholly owned (collectively, the “Company”). 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 financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial statements and do not include all the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. However, the information furnished reflects all adjustments, which are, in the opinion of management, necessary in order to make the unaudited consolidated financial statements not misleading. 

The Company’s business is subject to seasonal variations due to weather in the geographic areas where services are performed, as well as calendar events and national holidays. Therefore, the results of operations for the six months ended March 31, 2021 and 2020, are not necessarily indicative of the results to be expected for the full fiscal year. These unaudited consolidated financial statements should 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, 2020.

Certain prior period amounts have been reclassified to conform to current year presentation. These reclassifications had no effect on previously reported results of operations or retained earnings.

In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (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. Upon adoption, entities will 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. On November 15, 2019, the FASB delayed the effective date of the standard for companies that qualify under smaller reporting company reporting rules. As amended, the effective date of ASC Topic 326 was delayed until fiscal years beginning after December 15, 2022 for SEC filers that are eligible to be smaller reporting companies under the Securities and Exchange Commission definition. We are currently in the process of evaluating this new standard update, however we do not anticipate the adoption will have a material impact on our results.

Contract assets and contract liabilities are included in unbilled revenue and deferred revenue, respectively, in the consolidated balance sheets. At March 31, 2021 and September 30, 2020, contract assets were $0.6 million and $0.6 million, respectively, and contract liabilities were $0.1 million and $0.1 million, respectively. The Company recognized $0.1 million of contract revenue during the six months ended March 31, 2021 related to contract liabilities recorded in deferred revenue at September 30, 2020.

The Company’s Wireless segment has entered into various agreements, including 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 March 31, 2021, the third-party financial institution has a reserve of $0.3 million, which is reflected as restricted cash, against the sold receivables of $1.3 million. 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 $1.3 million at March 31, 2021 for which there is a limit of $4.0 million. Although the sale of receivables is with recourse, the Company did not record a recourse obligation at March 31, 2021 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 six months ended March 31, 2021 and 2020, the Company received proceeds from the sold receivables under all of the various agreements of $9.5 million and $11.4 million, respectively, and included the proceeds in net cash used in operating activities in the Consolidated Statements of Cash Flows. The fees associated with selling these receivables ranged from 1.4% to 2.3% of the gross receivables sold for the six months ended March 31, 2021 and 2020. The Company recorded costs of $0.1 million and $0.2 million for the three and six months ended March 31, 2021 and 2020, respectively, in other expense in the consolidated statements of operations.

During the fiscal year ended 2019, the Company completed a sale of its former Cable TV reporting segment to Leveling 8, an entity owned by a member of our board and significant shareholder, David Chymiak. Part of the consideration for the sale was a promissory note bearing interest of 6% received from Mr. Chymiak. Mr. Chymiak personally guaranteed the promissory note due to the Company and pledged certain assets to secure the payment of the promissory note, including substantially all of Mr. Chymiak’s Company common stock. During the six months ended ended March 31, 2021, the Company received principal payments totaling $1.5 million, of which approximately $1.0 million was a prepayment. At March 31, 2021, there was $2.3 million outstanding on the promissory note. The remaining promissory note becomes due in a final payment on June 29, 2024.

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 include factory refurbished, Company refurbished and used products.

On March 10, 2020, the Company entered into a loan agreement with its primary financial lender for $3.5 million, bearing interest at 6% per annum. The loan was payable in 7 semi-annual installments of principal and interest with the first payment occurring June 30, 2020. In connection with the $1.5 million payment received in the first fiscal quarter of 2021 from the promissory note receivable, the Company fully repaid the remaining $1.2 million of principal outstanding under this loan.

The Company has a $4.0 million revolving line of credit agreement with its primary financial lender, which matures on December 17, 2021. The line of credit requires quarterly interest payments based on the prevailing Wall Street Journal Prime Rate, floating (3.25% at March 31, 2021), with the addition of a 4% floor rate and a fixed charge coverage ratio of 1.25 to be tested quarterly beginning June 30, 2021. At March 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 at March 31, 2021.

The credit agreement provides that the Company maintain a fixed charge coverage ratio (net cash flow to total fixed charge) of not less than 1.25 to 1.0 to be tested quarterly beginning June 30, 2021. The Company believes that it is probable that it will not be in compliance with this covenant as of the measurement date at June 30, 2021. The noncompliance with this covenant would result in an event of default, which if not cured or waived, could result in the lender accelerating the maturity of the Company’s indebtedness or preventing access to additional funds under the line of credit agreement, or requiring prepayment of outstanding indebtedness under the loan agreement or the line of credit agreement.

On April 14, 2020, the Company entered into an unsecured loan in the amount of $2.9 million ("PPP Loan") with its primary lender pursuant to the Paycheck Protection Program ("PPP") which is sponsored by the Small Business Administration (“SBA”), and is part of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), as amended by the Paycheck Protection Program Flexibility Act of 2020 (“Flexibility Act”). The PPP provides for loans to qualifying businesses, the proceeds of which may be used for payroll costs, rent, utilities, mortgage interest, and interest on other pre-existing indebtedness (the “Permissible Expenses”). The PPP Loan, and accrued interest, may be forgiven partially or in full, if certain conditions are met, which includes if funds were expended for Permissible Expenses.

The PPP Loan matures on April 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 by the SBA. The PPP Loan proceeds were used for Permissible Expenses. On August 28, 2020, we submitted our application to our lender, requesting PPP Loan forgiveness of $2.9 million. Our lender reviewed our application for forgiveness and forwarded to the SBA on September 27, 2020 for approval. In the absence of 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.

While we believe we have met the eligibility requirements for the PPP Loan, and believe we have used the loan proceeds for Permissible Expenses, we can provide no assurances that we will receive full or partial forgiveness of the PPP Loan. Accordingly, we have recorded the full amount of the PPP Loan as debt, which is included in current and long-term debt, on our consolidated balance sheet at March 31, 2021.

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

On April 24, 2020, the Company entered into an Equity Distribution Agreement with Northland Securities, Inc., as agent (“Northland”), pursuant to which the Company may offer and sell, from time to time, through Northland, shares of the Company’s common stock, par value 0.01 per share, having an aggregate offering price of up to $13,850,000 ("Shares").

The offer and sale of the Shares will be made pursuant to a shelf registration statement on Form S-3 and the related prospectus filed by the Company with the Securities and Exchange Commission (the “SEC”) on March 3, 2020, as amended on March 23, 2020, and declared effective by the SEC on April 1, 2020.

Pursuant to the Sales Agreement, Northland may sell the Shares by any method permitted by law deemed to be an “at the market offering” as defined in Rule 415 of the Securities Act of 1933 (the “Securities Act”), including sales made by means of ordinary brokers’ transactions, including on The Nasdaq Global Market, at market prices or as otherwise agreed with Northland. Northland will use commercially reasonable efforts consistent with its normal

trading and sales practices to sell the Shares from time to time, based upon instructions from the Company, including any price or size limits or other customary parameters or conditions the Company may impose. The Sales Agreement may be terminated without prior notice at any time prior to the fulfillment if additional sales are deemed not warranted.

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

During the six months ended March 31, 2021, 245,973 shares were sold by Northland on behalf of the Company with gross proceeds of $0.9 million, and net proceeds after commissions and fees of $0.9 million.

Basic earnings per share are based on the sum of the average number of common shares outstanding and issuable, restricted and deferred shares. Diluted earnings per share include any dilutive effect of stock options and restricted stock. In computing the diluted weighted average shares, the average share price for the period is used in determining the number of shares assumed to be reacquired under the treasury stock method from the exercise of options. Basic and diluted earnings per share for the three and six months ended March 31, 2021 and 2020 are (in thousands, except per share amounts):

The table below includes information related to stock options that were outstanding at the end of each respective three and six-month period ended March 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 either due to the Company incurring a net loss for the periods presented or the exercise price exceeded the average market price per share of our common stock for the three and six months ended March 31, 2021 and 2020.

During the three month period ended March 31, 2021 and 2020, expenses related to share-based arrangements including restricted stock and stock option awards, were $0.2 million and $0.1 million, respectively.

During the six month period ended March 31, 2021 and 2020, compensation expenses related to share-based arrangements including restricted stock and stock option awards, were $0.6 million and $0.1 million respectively.

The Company did not recognize a tax benefit for compensation expense recognized during the three and six month period ended March 31, 2021 and 2020.

At March 31, 2021, unrecognized compensation expense related to non-vested share-based compensation awards not yet recognized in the consolidated statements of operations was $0.9 million. That cost is expected to be recognized over a period of 2.75 years.

Our Telco segment has an operating lease for a building in Jessup, Maryland for Nave Communications.  As a result of moving Nave’s operations to Palco Telecom, a third-party logistics provider in Huntsville, Alabama, in fiscal year 2020, Nave completely vacated the building in May 2020 and has subleased part of the building during certain periods of fiscal year 2021. 

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.

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, 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.

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.

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.

On March 11, 2020, the World Health Organization declared the current outbreak of COVID-19 to be a global pandemic, and on March 13, 2020, the United States declared a national emergency. In response to these declarations and the rapid spread of COVID-19, federal, state and local governments have imposed varying degrees of restrictions on business and social activities to contain COVID-19, including quarantine and “stay-at-home” or “shelter-in-place” orders in markets where we operate. Despite these “stay-at-home” or “shelter-in-place”

orders, we are classified as an essential business due to the services and products we provide to the telecommunications industry. Therefore, we continue to operate in the markets we serve, but most of our back-office and administrative personnel were working from home through March 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.

Consolidated sales increased $0.7 million, or 6%, to $12.7 million for three months ended March 31, 2021 from $12.0 million for the three months ended March 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 ended March 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 ended March 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 ended March 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 ended March 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 ended March 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 ended March 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 ended March 31, 2021 and the same period in 2020. Our effective tax rates during the three months ended March 31, 2021 and 2020 were approximately 0%, respectively because increases in our valuation allowance against our deferred tax assets.

Revenues for the Wireless segment decreased $0.3 million to $4.3 million for the three months ended March 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 major U.S. carriers related to the COVID-19 pandemic. However, we believe that the 5G rollout will gain momentum in the calendar year and that there is substantial 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 ended March 31, 2021 compared to $0.2 million, or 4%, for the three months ended March 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 ended March 31, 2021 and 2020.

Selling, general and administrative expenses increased $0.2 million to $0.6 million for the three months ended March 31, 2021 from $0.4 million for the three months ended March 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 ended March 31, 2021 and 2020.

Sales for the Telco segment increased $1.0 million to $8.3 million for the three months ended March 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 ended March 31, 2021 and a deficit of $0.6 million for the three months ended March 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 ended March 31, 2021 compared to $0.7 million the three months ended March 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 ended March 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 ended March 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 ended March 31, 2020.

Segment Results

Wireless

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.

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.

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, 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.

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 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 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.  At March 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 at March 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.

Intangible assets that have finite useful lives are amortized on a straight-line basis over their estimated useful lives ranging from 3 years to 10 years. Intangible assets are also tested for impairment when events and circumstances indicate that the carrying value may not be recoverable. As of March 31, 2021, there were no indicators of impairment present.

During the six months ended March 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.

During the six months ended March 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.

During the six months ended March 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. 

In March 2020, we entered into a loan agreement with our primary financial lender for $3.5 million, bearing interest at 6% per annum. The 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 on December 17, 2021. The line of credit requires quarterly interest payments based on the prevailing Wall Street Journal Prime Rate, floating (3.25% at March 31, 2021), with the addition of a 4% floor rate and a fixed charge coverage ratio of 1.25 to be tested quarterly beginning June 30, 2021. At March 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 at March 31, 2021.

On April 14, 2020, the Company entered into an unsecured loan in the amount of $2.9 million ("PPP Loan") with our primary lender. The PPP Loan matures on April 14, 2022, bears interest at 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. On August 28, 2020, we submitted our application to our lender, requesting PPP Loan forgiveness of $2.9 million. Our lender reviewed our application and forwarded to the SBA for approval on September 27, 2020. As of the filing of this Report, we have not received an approval or denial of our application for forgiveness from the SBA; per the Flexibility Act, the date for commencement of loan payments has not yet occurred, and we have made no loan payments. The Company deferred $0.8 million of loan payments during the six months ended March 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 at March 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 in April 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 ended March 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

Northland Securities, Inc. (“Northland”). Under this program, we sold 245,973 shares for net proceeds of $0.9 million.

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 March 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.