The following discussion and analysis of financial condition and results of operations should be read in conjunction with our consolidated historical financial statements and the notes to those statements that appear elsewhere in this report. Certain statements in the discussion contain forward-looking statements based upon current expectations that involve risks and uncertainties, such as plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors.
General
During fiscal year 2014, theThe Company changed its organizational structure with the acquisition of Nave Communications. As a result of this acquisition, information that the Company’s management team regularly reviews for purposes of allocating resources and assessing performance changed. Therefore, beginning in fiscal year 2014, the Company is reportingreports its financial performance based on its newtwo external reporting segments: Cable Television and Telecommunications. These reportable segments are described below.
Cable Television (“Cable TV”)
The Company’s Cable TV segment sells new, surplus and re-manufacturedrefurbished cable television equipment to cable MSOs throughout North America, Central America and South America.America as well as other resellers who sell to these types of customers. Our Cable TV segment is a Premier Partner for Cisco’s products, which allows them to sell both video-related and IT-related products in the United States and a leading distributor of Arris broadband products. The Cable Television segment also distributes products from other OEMs including Alpha, Blonder-Tongue, RL Drake, Corning-Gilbert, Promax, Quintech, Standard and Triveni Digital. In addition, we also operate technical service centers that offer repair services for our cable MSO customers on most products that we sell.
Telecommunications (“Telco”)
The Company’s Telco segment sells new and used telecommunications networking equipment from a wide range of manufacturers. We have an extensive stock on hand in order to serve our telecommunications customers. We primarily resell our inventory in North America, but we have a worldwide customer base, which we are actively trying to expand, especially in the European market.base. In addition, this segment offers its customers decommissioning services for surplus and obsolete equipment, which it then processes through its recycling services.program.
Recent Business Developments
Acquisition of Nave Communications CompanyBusiness Strategy
On February 28, 2014, the Company acquired all of the outstanding common stock of Nave Communications, a provider of quality used telecommunication networking equipment. The purchase price for Nave Communications included approximately $9.6 million in cash payments, as well as $3.0 million in deferred payments over the next three years. In addition, the Company will make future earn-out payments equal to 70% of Nave Communications’ annual EBITDA in excess of an EBITDA target of $2 million per year over the next three years, which is estimated to be between $0.7 million and $1.0 million annually.
Sale of Adams Global Communications
On January 31, 2014, the Company executed an agreement to sell the majority of the net assets and operations of Adams Global Communications (“AGC”) to Adams Cable Equipment, a supplier of customer premise equipment (“CPE”) and other products for the cable television industry, for approximately $2 million in cash, which yielded an after tax loss of $0.6 million. As part of the sales agreement, ADDvantage retained their existing relationship with Arris Solutions, as well as non-CPE inventory consisting primarily of headend and access and transport equipment. In addition, ADDvantage retained the AGC facility, which was actively marketed for sale. As part of the agreement, the Company also agreed to not compete in the used CPE market for three years. AGC’s net assets that were disposed of consisted of approximately $2.5 million of current assets, $0.5 million of noncurrent assets and $0.1 million of current liabilities, which yielded a loss on the sale, net of tax, of approximately $0.6 million.
Assets Held for Sale
As a result of the sale of the net assets of AGC discussed above, the Company retained the AGC facility and engaged a real estate broker to sell the facility. On June 30, 2014, the Company sold the AGC facility for $1.5 million with net settlement proceeds of $1.4 million. The sale resulted in a pretax loss of $0.1 million.
Business Strategy
In fiscal year 2014, we continued to execute on our growth strategy of organic growth and acquisitions. Our Cable TV segment has experienced top-line revenue declines since 2008 due to decreased plant expansions and bandwidth equipment upgrades as a result of lower new housing developments and an overall lower cable television subscriber base. Therefore, in fiscal year 2012, our Company initiated a growth strategy through both organic growth of our existing Cable TV business and acquisitions, which would diversify our Company into other areas of the telecommunications industry. For the Cable TV segment, our growth strategy is primarily focused on organic growth in order to gain market share in a shrinking capital equipment expenditure market. We believe we canseek to increase this business segment primarily along three major fronts: 1) expand product offerings among existing OEM vendors, 2) add additional vendors to our product offering mix, and 3) expand our sales force.force, and 4) expand our service center operations. In fiscal year 2016, we hired additional sales people with expertise in our industry and in new product offerings. In addition, in fiscal year 2016 we acquired a service center in Kingsport, Tennessee, which expanded our geographic footprint in the southeast portion of the United States. We believe these changes will position us well as we begin fiscal year 2017.
Our Telco segment was formed when we acquired Nave Communications in February 2014 weas part of our growth acquisition strategy. In fiscal year 2016, this segment did increasenot perform to our product offerings with our OEM vendors and increased our supply of inventory on handexpectations due to a general weakness in order to better serve our customers.the telecommunication’s market it primarily serves. In addition, we continueestablished a reserve in fiscal year 2016 for slow-moving and obsolete inventory for this segment, which decreased its overall operating results. This segment has several initiatives in place to expandgrow its top-line revenue and operating results including expanding our sales force, in orderexpanding our end-user customer base, expanding the capacity of our recycling program and testing our used inventory equipment prior to gain additional market share in the Cable TV segment. Also, as discussed above, we divested AGC from this segment as it was not performingsale to our expectations and it did not fit our core distribution strategy in this segment.end user customers.
We believe that the current state of the industry may provide opportunities for expansionAs part of our business through acquisitions. We are seekingon-going acquisition opportunities that will enablegrowth strategy, in fiscal 2016, we engaged an investment banker to help us to expand the scope of our business withinidentify a strategic acquisition in the broader telecommunications industry. In fiscal year 2013, we engaged an investment banking firmSubsequent to help us identify and ultimately close a strategic acquisition. On February 28, 2014,September 30, 2016, the Company acquired substantially all the assets of Triton Miami, Inc. (“Triton Miami”), a provider of new and refurbished enterprise networking products, including desktop phones, enterprise switches and wireless routers. This acquisition further diversifies our Company into the broader telecommunications industry, and we believe that there are many areas where Triton Miami is complementary in nature to our existing business. The Company has formed a new subsidiary called ADDvantage Triton, LLC (“Triton”). Under the terms of the outstanding common stockasset purchase agreement, the Company purchased Triton Miami’s assets for $6.6 million in cash and $2.0 million of Nave Communications, a telecommunications distributordeferred payments over the next three years. In addition, the Company will also make payments to the Triton Miami owners, if they have not resigned from Triton, over the next three years equal to 60% of used telecommunication networking equipment and a recyclerTriton’s annual EBITDA in excess of surplus and obsolete telecommunications equipment. This acquisition, along with its retained$1.2 million per year. The Company will recognize the payments ratably over the three year period as compensation expense. All members of the Triton Miami management team has diversifiedare now employed by Triton and remain in the Company’s business outsidesame roles they held at Triton Miami. We believe that this acquisition will be immediately accretive to our overall operating results.
Investment in YKTG Solutions, LLC (“YKTG Solutions”)
On March 10, 2016, the Company announced that it entered into a joint venture, YKTG Solutions, which will support decommission work on cell tower sites across 13 states in the northeast on behalf of a major U.S. wireless provider. YKTG Solutions, certified as a minority-based enterprise, is owned 51% by YKTG, LLC and 49% by the Company. The joint venture is governed by an operating agreement for completing the decommission project, but the operating agreement can be expanded to include other projects upon agreement by both owners.
For its role in the decommission project, the Company will earn a management fee from YKTG Solutions based on billings. The Company is financing the decommission project pursuant to the terms of a loan agreement between the Company and YKTG Solutions by providing a revolving line of credit. The management fee encompasses any interest earned on outstanding advances under the loan agreement. The Company anticipates that this project will be completed in our third quarter of 2017, and estimates that this project will generate a total of approximately $1 million in pretax income over the life of the cable televisionproject.
industry and will also allow the Company to capitalize on growth opportunities in both the cable television and telecommunication industries.
After completing the integrationResults of Nave Communications into our business, we will continue to evaluate companies in the telecommunications market and are optimistic that we will identify and execute another strategic acquisition. It should be noted, however, that the identification and completion of acquisitions on terms favorable to the Company and the successful integration of acquired businesses into our existing business are matters posing some risk to any company and about which we can give no assurance.Operations
Results of Operations
Year Ended September 30, 2014,2016, compared to Year Ended September 30, 20132015 (all references are to fiscal years)
Consolidated
Consolidated sales increased $7.2decreased $5.0 million before the impact of intersegment sales, or 25%12%, to $35.9$38.7 million for 20142016 from $28.7$43.7 million for 2013.2015. The increasedecrease in net sales was a result of the addition of the Telco segment of $8.7 million as a result of the Nave Communications acquisition, partially offset bydue to a decrease in both the Cable TV segmentand Telco segments of $1.5 million.$2.4 million and $3.0 million, respectively.
Consolidated gross profit increaseddecreased $2.9 million, or 33%19%, to $11.6$12.4 million for 20142016 from $8.7$15.3 million for 2013.2015. The increasedecrease in gross profit was due primarily to the addition of the Telco segment of $3.8 million as a result of the Nave Communications acquisition, partially offset by a decrease in both the Cable TV segmentand Telco segments of $0.9 million.$0.3 million and $2.6 million, respectively.
Operating, selling, general and administrative expenses include all personnel costs, which include fringe benefits, insurance and business taxes, as well as occupancy, communication and professional services, among other less significant cost categories. Operating, selling, general and administrative expenses decreased $0.6 million, or 5%, to $12.1 million for 2016 compared to $12.7 million for 2015. This decrease was primarily due to decreased expenses of the Telco segment of $1.1 million, partially offset by an increase in Cable TV segment expenses of $0.5 million.
Other income and expense consists of activity related to our investment in YKTG Solutions, including other income, interest income and equity earnings (losses), and interest expense related to our notes payable. Other income, which represents our fee for our role in the YKTG Solutions projects, was $0.5 million for 2016. Equity losses related to the YKTG Solutions investment totaled $0.2 million. The decommission work on cell tower sites in the northeast on behalf of a major U.S. wireless provider incurred an equity loss of $0.5 million for 2016. This equity loss was partially offset by another project with a major U.S. telecommunications provider, which generated equity earnings of $0.3 million. Interest expense decreased $0.1 million to $0.2 million for 2016 from $0.3 million for the same period last year.
The provision for income taxes from continuing operations decreased by $0.6 million to $0.2 million, or an effective rate of 38%, for 2016 from $0.8 million, or an effective rate of 34%, for the same period last year.
Segment results
Cable TV
Sales for the Cable TV segment decreased $2.4 million, or 9%, to $23.0 million for the year ended September 30, 2016 from $25.4 million for the same period last year. The decrease in sales was primarily due to a decrease of $3.4 million in new equipment sales, partially offset by an increase of $0.3 million and $0.7 million in refurbished equipment sales and repair service revenues, respectively.
Gross profit decreased $0.2 million, or 3%, to $7.8 million for the year ended September 30, 2016 from $8.0 million for the same period last year. Gross margin was 34% for 2016 and 32% for 2015. The increase in gross margin was primarily due to higher gross margins on refurbished equipment sales.
Operating, selling, general and administrative expenses increased $0.5 million, or 8%, to $6.3 million for the year ended September 30, 2016 from $5.8 million for the same period last year. The increase was due primarily to increased personnel costs primarily related to the acquisition of the net operating assets of Advantage Solutions, LLC.
Telco
Sales for the Telco segment decreased $3.0 million, or 16%, to $15.8 million for the year ended September 30, 2016 from $18.8 million for the same period last year. The decrease in sales resulted from a decrease in used equipment sales of $4.1 million, partially offset by an increase in new equipment sales and recycling revenue of $1.0 million and $0.1 million, respectively. The decrease in sales was due in part to the absence of $2.3 million in used equipment sales to an end-user customer in fiscal year 2015. In addition, we believe that the decreased sales volume in 2016 was due to delays in capital expenditures from our major customers due to weak economic conditions and budgetary constraints in the first quarter of fiscal year 2016.
Gross profit decreased $2.6 million, or 36%, to $4.7 million for the year ended September 30, 2016 from $7.3 million for the same period last year. Gross margin was 30% for 2016 and 39% for 2015. The decrease in the gross margin was primarily due to lower margins on recycling revenue as a result of lower commodity prices and increased costs of products being recycled. In addition, in 2016, the Telco segment identified certain inventory that more than likely will not be sold or 81%that the cost will not be recovered when it is sold, and had not yet been processed through its recycling program. Therefore, the Company recorded a $0.4 million charge, which increased cost of sales for the year ended September 30, 2016, to allow for obsolete and excess inventory. We also reviewed the cost of inventories against estimated market value and recorded a lower of cost or market reserve of $0.2 million for inventories that have a cost in excess of estimated market value.
Operating, selling, general and administrative expenses decreased $1.1 million, or 17%, to $5.8 million for the year ended September 30, 2016 from $6.9 million for the same period last year. The decrease in expenses was primarily due to lower earn-out payments related to the Nave Communications acquisition in March 2016 as compared to March 2015, which were $0.2 million and $0.7 million, respectively. In addition, personnel costs decreased $0.3 million. In March 2016, we made our second annual earn-out payment for $0.2 million, which was equal to 70% of Nave Communications’ annual adjusted EBITDA in excess of $2.0 million per year (“Nave Earn-out”). We will make the third and final Nave Earn-out payment in March 2017, which we estimate will be less than $0.3 million.
Non-GAAP Financial Measure
EBITDA is a supplemental, non-GAAP financial measure. EBITDA is defined as earnings before interest expense, income taxes, depreciation and amortization. In addition, EBITDA as presented excludes other income, interest income and income from equity method investment. 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 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. EBITDA, as calculated below, may not be comparable to similarly titled measures employed by other companies. In addition, EBITDA is not necessarily a measure of our ability to fund our cash needs.
A reconciliation by segment of income (loss) from operations to EBITDA follows:
| | | Year Ended September 30, 2016 | | Year Ended September 30, 2015 | |
| | | Cable TV | | | Telco | | | Total | | | Cable TV | | | Telco | | | Total | |
| | | | | | | | | | | | | | | | | | | |
| Income (loss) from operations | | $ | 1,478,676 | | | $ | (1,134,815 | ) | | $ | 343,861 | | | $ | 2,210,414 | | | $ | 365,796 | | | $ | 2,576,210 | |
| Depreciation | | | 322,076 | | | | 99,874 | | | | 421,950 | | | | 296,876 | | | | 111,827 | | | | 408,703 | |
| Amortization | | | − | | | | 825,804 | | | | 825,804 | | | | − | | | | 825,805 | | | | 825,805 | |
EBITDA (a) | | $ | 1,800,752 | | | $ | (209,137 | ) | | $ | 1,591,615 | | | $ | 2,507,290 | | | $ | 1,303,428 | | | $ | 3,810,718 | |
| (a) | The Telco segment includes earn-out expenses of $0.2 and $0.7 million for the year ended September 30, 2016 and 2015, respectively, related to the acquisition of Nave Communications. |
Year Ended September 30, 2015, compared to Year Ended September 30, 2014
Consolidated
Consolidated sales increased $7.8 million, or 22%, to $43.7 million for 2015 from $35.9 million for 2014. The increase in sales was due to an increase in the Telco segment of $9.6 million primarily resulting from the Nave Communications acquisition in February 2014, partially offset by a decrease in the Cable TV segment of $1.8 million.
Consolidated gross profit increased $3.7 million, or 32%, to $15.3 million for 2015 from $11.6 million for 2014. The increase in gross profit was due to an increase in the Telco segment of $3.5 million as a result of the Nave Communications acquisition, and an increase in the Cable TV segment of $0.2 million.
Operating, selling, general and administrative expenses include all personnel costs, which include fringe benefits, insurance and business taxes, as well as occupancy, communication and professional services, among other less
significant cost categories. Operating, selling, general and administrative expenses increased $2.2 million, or 21%, to $12.7 million for 2015 compared to $10.5 million for 2014 compared to $5.8 million for 2013.2014. This increase was primarily due to increased expenses of the Cable TV segment of $0.5 million and the Telco segment of $4.2$2.7 million, which was a result of the Nave Communications acquisition.acquisition, offset by a decrease in the Cable TV segment expenses of $0.5 million.
Interest expense increased $0.2$0.1 million to $0.2$0.3 million for 20142015 from $26,000$0.2 million for the same period last year. The increase was due primarily to interest expense incurred on the $5.0 million term loan entered into in connection with the Nave Communications acquisition.
The provision for income taxes from continuing operations decreasedincreased by $0.9$0.6 million to $0.8 million, or an effective rate of 34%, for 2015 from $0.2 million, or an effective rate of 25.0%, for 2014 from $1.1 million, or an effective rate of 38.3%25%, for the same period last year. The 2014 provision for income taxes includes an adjustment to the federal tax provision for an additional deduction for state income taxes with an impact of approximately $40 thousand.
Segment results
Cable TV
Net salesSales for the Cable TV segment decreased $1.5$1.8 million, or 7%, to $27.2$25.4 million for the year ended September 30, 20142015 from $28.7 million for the same period last year. New equipment sales decreased $0.7 million, or 4%, to $18.2 million for 2014 from $18.9 million for 2013. Net refurbished sales decreased $0.6 million, or 9%, to $5.2 million for 2014 from $5.8 million for the same period last year. Net repair service revenues decreased $0.2 million, or 6%, to $3.8 million for 2014 from $4.0$27.2 million for the same period last year. The decrease in sales was primarily due to a decrease of $1.0 million, $0.4 million and $0.4 million in new equipment sales, was due primarily to the continued decrease in plant expansions and bandwidth upgrades in the cable television industry and the absence ofrefurbished equipment sales, as a result of Hurricane Sandy in fiscal year 2013, partially offset by supplying a major MSO equipment for certain projects. In addition,and repair service revenue decreased $0.2 million.revenues, respectively.
GrossIn spite of lower sales, gross profit decreased $0.9increased $0.2 million, or 3%, to $7.8$8.0 million for the year ended September 30, 20142015 from $8.7$7.8 million for the same period last year. Gross margin was 32% for 2015 and 29% for 2014. The increase in gross margin was primarily due to higher gross margins on refurbished equipment sales.
Operating, selling, general and administrative expenses decreased $0.5 million, or 7%, to $5.8 million for the year ended September 30, 2015 from $6.3 million for the same period last year. The decrease in gross profit was primarily due to lower net sales. Gross margin was 29%allocations of corporate overhead to this segment of $0.3 million and lower payroll-related costs of $0.2 million.
Telco
Sales for the Telco segment increased $10.1 million, or 116%, to $18.8 million for the year ended September 30, 20142015 from $8.7 million for the same period last year primarily as a result of the acquisition of Nave Communications. The increase in sales resulted from an increase in used equipment sales of $10.0 million and 30%recycling revenue of $0.1 million.
Gross profit increased $3.5 million, or 90%, to $7.3 million for the year ended September 30, 2013.2015 from $3.8 million for the same period last year. Gross margin was 39% for 2015 and 44% for 2014. The decrease in the gross margin was primarily due to lower margins on recycling revenue as a result of lower commodity prices.
Operating, selling, general and administrative expenses increased $0.5$2.7 million, or 63%, to $6.3$6.9 million for the year ended September 30, 20142015 from $5.8$4.2 million for the same period last year. The increase in expenses was primarily due primarily to increased
personnel costs as a result of expanding our sales force as discussed in our “Business Strategy” section above.
Telco
Net sales for the Telco segment were $8.7 million for the year ended September 30, 2014 and zero for the same period last year as a result of the acquisition of Nave Communications. Net salesIn addition, these expenses included $0.7 million and $0.4 million for 2015 and 2014, respectively, for earn-out payments related to the Telco segment consistedNave Communications acquisition. In March 2015, we made our first of $7.5three earn-out payments for $0.7 million, which was equal to 70% of used equipment sales and $1.2 millionNave Communications’ annual adjusted EBITDA in excess of recycling revenue. Gross margin was 42% for the year ended September 30, 2014.
Operating, selling, general and administrative expenses were $4.2$2.0 million for the year ended September 30, 2014. Thesetwelve month period ending February 28, 2015. Also, in 2014, these expenses included $0.6 million of direct costs in connection with the acquisition of Nave Communications.Communications, which did not recur.
Discontinued Operations
Loss from discontinued operations, net of tax, was $36 thousandzero for the year ended September 30, 20142015 compared to $100$36 thousand for the same period last year. This activity included the operations of AGC prior to the sale on January 31, 2014.
Loss on sale of discontinued operations, net of tax, was $0.6 million for the year ended September 30, 2014. This loss
consisted of a pretax loss of $0.9 million from the sale of the net assets of AGC on January 31, 2014 for $2 million in cash and a pretax loss of $0.1 million from the sale of the AGC facility on June 30, 2014 for $1.5 million in cash.
Non-GAAP Financial Measure
EBITDA is a supplemental, non-GAAP financial measure. EBITDA is defined as earnings before interest expense, income taxes, depreciation and amortization. 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 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. EBITDA, as calculated below, may not be comparable to similarly titled measures employed by other companies. In addition, EBITDA is not necessarily a measure of our ability to fund our cash needs.
A reconciliation by segment of operating income (loss) from operations to EBITDA follows:
| | | Year Ended September 30, 2014 | | | Year Ended September 30, 2013 | | | Year Ended September 30, 2015 | | | Year Ended September 30, 2014 | |
| | | Cable TV | | | Telco | | | Total | | | Cable TV | | | Telco | | | Total | | | Cable TV | | | Telco | | | Total | | | Cable TV | | | Telco | | | Total | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Operating income (loss) | | $ | 1,492,100 | | | $ | (395,001 | ) | | $ | 1,097,099 | | | $ | 2,896,254 | | | $ | − | | | $ | 2,896,254 | | |
| Income (loss) from operations | | | $ | 2,210,414 | | | $ | 365,796 | | | $ | 2,576,210 | | | $ | 1,492,100 | | | $ | (395,001 | ) | | $ | 1,097,099 | |
| Depreciation | | | 306,538 | | | | 53,741 | | | | 360,279 | | | | 276,356 | | | | − | | | | 276,356 | | | | 296,876 | | | | 111,827 | | | | 408,703 | | | | 293,353 | | | | 66,926 | | | | 360,279 | |
| Amortization | | | − | | | | 481,722 | | | | 481,722 | | | | − | | | | − | | | | − | | | | − | | | | 825,805 | | | | 825,805 | | | | − | | | | 481,722 | | | | 481,722 | |
EBITDA (a) | | $ | 1,798,638 | | | $ | 140,462 | | | $ | 1,939,100 | | | $ | 3,172,610 | | | $ | − | | | $ | 3,172,610 | | | $ | 2,507,290 | | | $ | 1,303,428 | | | $ | 3,810,718 | | | $ | 1,785,453 | | | $ | 153,647 | | | $ | 1,939,100 | |
| (a) | The Telco segment for the year ended September 30, 2014 includes acquisition-related costs of $0.6 million related to the acquisition of Nave Communications. |
Year Ended September 30, 2013, compared to Year Ended September 30, 2012
For this discussion, consolidated results and segment results are the same as the Telco segment did not have activity until the Nave Communications acquisition in 2014.
Consolidated
Consolidated sales decreased $1.0 million, or 3%, to $28.7 million for 2013 from $29.7 million for 2012. New equipment sales decreased $0.7 million, or 4%, to $18.9 million for 2013 from $19.6 million for 2012. Net refurbished sales increased $0.1 million, or 1%, to $5.8 million for 2013 from $5.7 million for the same period last
year. The net decrease in equipment sales was primarily due to the continued decrease in plant expansions and bandwidth upgrades in the cable television industry, partially offset by increased equipment sales as a result of Hurricane Sandy. Net repair service revenues decreased $0.3 million, or 7%, to $4.0 million for 2013 from $4.3 million for the same period last year.
Gross profit increased $0.1 million, or 2%, to $8.7 million for 2013 from $8.6 million for 2012. The increase in gross profit was primarily due to the mix of equipment sales as refurbished equipment generates a higher profit margin than new equipment, largely offset by lower overall net sales and an increase in the provision for excess of excess and obsolete inventory of $0.6 million. Gross profit margins were 30% for 2013 and 29% for 2012.
Operating, selling, general and administrative expenses include all personnel costs, which include fringe benefits, insurance and business taxes, as well as occupancy, communication and professional services, among other less significant cost categories. Operating, selling, general and administrative expenses decreased $0.1 million to $5.8 million for September 30, 2013 from $5.9 million for the same period last year.
Interest expense decreased $1.1 million to $26,000 for 2013 from $1.1 million for the same period last year. The decrease was due primarily to lower interest expense as a result of the March 2012 payoff of the outstanding amount of $9.4 million under the second term loan under the Amended and Restated Revolving Credit and Term Loan Agreement and a $0.8 million payment made in order to terminate the associated interest rate swap agreement. The interest rate swap agreement termination payment was recorded as interest expense in 2012.
The provision for income taxes from continuing operations increased by $0.5 million to $1.1 million, or an effective rate of 38.3%, for 2013 from $0.6 million, or an effective rate of 37.6%, for the same period last year.
Discontinued Operations
Gain (loss) from discontinued operations, net of tax, was a loss of $0.1 million for the year ended September 30, 2013 compared to a gain of $0.3 million for the same period last year. This activity included the operations of Adams Global Communications prior to the sale on January 31, 2014.
Non-GAAP Financial Measure
EBITDA is a supplemental, non-GAAP financial measure. EBITDA is defined as earnings before interest expense, income taxes, depreciation and amortization. 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 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. EBITDA, as calculated below, may not be comparable to similarly titled measures employed by other companies. In addition, EBITDA is not necessarily a measure of our ability to fund our cash needs.
A reconciliation by segment of operating income to EBITDA follows:
| | | Year Ended September 30, 2013 | | | Year Ended September 30, 2012 | |
| | | Cable TV | | | Telco | | | Total | | | Cable TV | | | Telco | | | Total | |
| | | | | | | | | | | | | | | | | | | |
| Operating income | | $ | 2,896,254 | | | $ | − | | | $ | 2,896,254 | | | $ | 2,619,134 | | | $ | − | | | $ | 2,619,134 | |
| Depreciation | | | 276,356 | | | | − | | | | 276,356 | | | | 300,961 | | | | − | | | | 300,961 | |
| Amortization | | | − | | | | − | | | | − | | | | − | | | | − | | | | − | |
| EBITDA | | $ | 3,172,610 | | | $ | − | | | $ | 3,172,610 | | | $ | 2,920,095 | | | $ | − | | | $ | 2,920,095 | |
Liquidity and Capital Resources
Cash Flows Used inProvided by Operating Activities
We generally finance our operations primarily through cash flows provided by operations, and we also have available to us a bank line of credit of up to $7.0 million.million in availability. During 2014,2016, we used $1.7generated $3.5 million of cash flowflows from operations. The cash flow from
operations was unfavorably impacted by $2.2 million from a net increase in inventory due primarily to purchases of new inventory with certain manufacturer incentives and purchases of refurbished telecommunications inventory and by $2.4 million from a net increase in accounts receivable due primarily to increased sales in the last month of 2014 compared to 2013. In addition, the cash flowflows from operations was favorably impacted by $0.8a $0.9 million reduction in inventory due primarily to decreasing our inventory position in the Telco segment. The cash flows from operations was unfavorably impacted by a net$0.6 million increase in accrued expensesincome tax receivable. The increase in income tax receivable was due primarily resulting from a $0.4 million accrual related to changes in our tax estimates due largely to our inventory position and investment in YKTG Solutions at the firstend of 2016.
In March 2016, we made our second annual earn-out payment related to the Nave Communications acquisition. We will make future earn-out payments over the next three yearsfor $0.2 million, which was equal to 70% of Nave Communications’ annual adjusted EBITDA in excess of $2.0 million per year (“Nave Earn-out”),. We will make the third and final Nave Earn-out payment in March 2017, which we estimate will be between $0.7 million and $1.0 million annually.less than $0.3 million.
Cash Flows Used in Investing Activities
During 2014,2016, cash used in investing activities was $6.3$4.3 million. This useIn March 2016, we paid $1.0 million for the second of cash was primarily due to the acquisition of Nave Communications in the amount of approximately $9.6 million, net of cash acquired. We also recorded an accrual at present value for deferred consideration of $2.7 million relatedthree annual installment payments to the Nave Communications acquisition,owners for deferred consideration resulting from the Nave Communications acquisition. The deferred consideration, which consistsconsisted of $3.0 million to be paid in equal annual installments over the three years, tois recorded at its present value of $1.0 million at September 30, 2016.
On December 31, 2015, we acquired the Nave Communications owners.net operating assets of a business for $0.2 million. The acquisition is discussed in Note 2 of the Notes to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.
During 2014,2016, we funded YKTG Solutions, pursuant to a revolving line of credit between the sale of the net assets of Adams Global CommunicationsCompany and YKTG Solutions, for $2.0 and the sale of the AGC facility for $1.5 with net settlement proceeds of $1.4 million provided$2.8 million. We plan to fund future advances to YKTG Solutions utilizing our cash flows from investing activities for discontinued operations or our revolving line of $3.4 million.credit. The dispositioninvestment in YKTG Solutions is discussed in Note 34 of the Notes to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.
Cash Flows Provided by Financing Activities
Cash Flows Used in Financing Activities
During 2014,2016, cash provided byused in financing activities was $4.5 million primarily due to cash borrowings of $5.0 million, partially offset by note payable payments of $0.5$0.9 million. Cash borrowings were due to a new term loan of $5.0 million under our Amended and Restated Revolving Credit and Term Loan Agreement (“Credit and Term Loan Agreement”). This term loan was used to assist in the funding of the acquisition of Nave Communications.
During 2014, weWe made principal payments totaling $0.5of $0.9 million on our two term loans under our Credit and Term Loan Agreement. The first term loan has a balance of $1.3 million at September 30, 2014.Agreement with our primary lender. The first term loan requires monthly payments of $15,334 plus accrued interest through November 2021. Our second term loan entered into in connection with the acquisition of Nave Communications, is a five year term loan with a seven year amortization payment schedule with monthly principal and interest payments of $68,505 through March 2019.
At September 30, 2014,2016, there was not a balance outstanding under theour line of credit. The lesser of $7.0 million or the total of 80% of the qualified accounts receivable plus 50% of qualified inventory less any outstanding term loans is available to us under the revolving credit facility ($7.0 million at September 30, 2014)2016). Any outstanding balance onfuture borrowings under the revolving credit facility would beare due on maturity which is November 28, 2014.at maturity.
Subsequent to September 30, 2014,2016, ADDvantage entered into a third term loan for $4.0 million under the Company signed the Fifth Amendment to the Amended and Restated Revolving Credit and Term Loan Agreement in connection with its primary financial lender dated November 28, 2014. This amendment extended the Lineasset acquisition of Credit maturity to November 27, 2015.Triton Miami on October 14, 2016 (see Note 2). The Line$4.0 million term loan is due on October 14, 2019, with monthly principal and interest payments of Credit remains at $7.0 million, and the$118,809. The interest rate remains aton the prevailing 30-day LIBORterm loan is a fixed interest rate plus 2.75%of 4.40%. This term loan is collateralized by inventory, accounts receivable, equipment and fixtures and general intangibles. This additional term loan has not materially impacted our availability under our credit facility as the Triton Miami asset acquisition contributed additional assets to our borrowing base.
We expectbelieve that our cash and cash equivalents of $5.3$4.5 million at September 30, 2014,2016, cash flowflows from operations and our existing line of credit to provide sufficient liquidity and capital resources to meet our working capital and debt payment needs.
Critical Accounting Policies and Estimates
Note 1 to the Consolidated Financial Statements in this Form 10-K for fiscal year 20142016 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
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 relate to the carrying value of our inventory and, to a lesser extent, the adequacy of our allowance for doubtful accounts.are discussed below.
Inventory Valuation
Our position in the industry requires us to carry large inventory quantities relative to annual sales, but it also allows us to realize high overall gross profit margins on our sales. We market our products primarily to MSOs, telecommunication providers and other users of cable television and telecommunication equipment who are seeking products for which manufacturers have discontinued production or cannot ship new equipment on a same-day basis as well as providing used products as an alternative to new products from the manufacturer. Carrying these large inventory quantities represents our largest 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 consist of new and used electronic components for the cable televisionand telecommunications industry. Inventory is stated at the lower of cost or market, with cost determined using the weighted-average method. At September 30, 2014,2016, we had total inventory, before the reserve for excess and obsolete inventory, of $24.9$24.1 million, consisting of $16.9$15.1 million in new products and $8.0$9.0 million in used or refurbished products.
For the Cable TV segment, our reserve at September 30, 20142016 for excess and obsolete inventory was $2.2 million, which reflects an increase to the reserve of approximately $0.6 million and a writemillion. In addition, in 2016, we wrote down, ofagainst this reserve, the carrying value offor certain inventory items by approximately $0.2$1.1 million to reflect deterioration in the market demandprice of that inventory. If actual market conditions are less favorable than those projected by management, and our estimates prove to be inaccurate, we could be required to increase our inventory reserve and our gross margins could be materially adversely affected.
For the Telco segment, we do not maintain anany obsolete and excess telecommunications inventory reserve as we recycle any surplus and obsolete equipment on handis processed through ourits recycling program when it is identified. Therefore, for fiscal years ended September 30, 2015 and 2014, there were no charges recorded to allow for obsolete inventory. However, in fiscal year ended September 30, 2016, 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 sold, and had not yet been processed through its recycling program. Therefore, the Company recorded a $0.4 million reserve, which increased cost of sales for the fiscal year ended September 30, 2016, to allow for obsolete and excess inventory. We also reviewed the cost of inventories against estimated market value and recorded a lower of cost or market write-off of $0.2 million for inventories that have a cost in excess of estimated market value. If actual market conditions differ from those projected by management, this could have a material impact on our gross margin and inventory balances based on additional write-downs to net realizable value or a benefit from inventories previously written down.
Inbound freight charges are included in cost of sales. Purchasing and receiving costs, inspection costs, warehousing costs, internal transfer costs and other inventory expenditures are included in operating expenses, since the amounts involved are not considered material.
Accounts Receivable Valuation
Management judgments and estimates are made in connection with establishing the allowance for doubtful accounts. Specifically, we analyze the aging of accounts receivable balances, historical bad debts, customer concentrations, customer credit-worthiness, current economic trends and changes in our customer payment terms. Significant changes in customer concentration or payment terms, deterioration of customer credit-worthiness, or weakening in economic trends could have a significant impact on the collectability of receivables and our operating results. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, an additional provision to the allowance for doubtful accounts may be required. The reserve for bad debts was $0.2 million at September 30, 2014 and $0.3 million at September 30, 2013.2016 and September 30, 2015. At September 30, 2014,2016, accounts receivable, net of allowance for doubtful accounts, was $6.4$4.3 million.
Note Receivable Valuation
Included in Investment in and loans to equity method investee as of September 30, 2016 is a note receivable from the Company's joint venture partner, YKTG Solutions, of $3.0 million. To date, this joint venture has incurred operating losses totaling $0.4 million and, as of September 30, 2016, the total assets of the joint venture are less than the amount it owes to ADDvantage. Management judgements and estimates are made in connection with collection of the note receivable from the joint venture. Specifically, we analyzed the income statement forecast of the joint venture project to determine if this project will ultimately be profitable, and therefore, be able to satisfy its obligations to ADDvantage. In addition, in the event the joint venture can not satisfy its obligations to ADDvantage, ADDvantage has a guarantee agreement with the joint venture partners. As of September 30, 2016, we believe that the note receivable from the
Goodwilljoint venture is fully collectible. If the financial condition of the joint venture deteriorates, resulting in an inability to satisfy its obligation to ADDvantage, a provision for doubtful accounts for this note receivable to the joint venture may be required.
Goodwill
Goodwill represents the excess of purchase price of acquisitions over the acquisition date fair value of the net assets of businesses 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, or operating segment, with the reporting unit’s carrying value, including goodwill. Our reporting units for purposes of the goodwill impairment calculation are the Cable TV operating segment and the Telco operating segment.
Management utilizes a discounted cash flow analysis to determine the estimated fair value of each reporting unit. Significant judgments and assumptions including the discount rate and anticipated revenue growth rate, gross margins and operating expenses are inherent in these fair value estimates, which are based on historical operating results. 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. If the carrying value of one of the reporting unitunits exceeds its fair value, a computation of the implied fair value of goodwill would then be compared to its related carrying value. If the carrying value of the reporting unit’s goodwill exceeds the implied fair value of goodwill, an impairment loss would be recognized in the amount of the excess. If an impairment charge is incurred, it would negatively impact our results of operations and financial position.
We performed our annual impairment test for both reporting units in the fourth quarter of 2016 and determined that the fair value of our reporting units exceeded their carrying values. Therefore, no impairment existed as of September 30, 2016.
We did not record a goodwill impairment for either of our two reporting units in the three year period ended September 30, 2014.2016. Although we do not anticipate a future impairment charge, certain events could occur that might adversely affect the reported value of goodwill. Such events could include, but are not limited to, economic or competitive conditions, a significant change in technology, the economic condition of the customers and industries we serve, a significant decline in the real estate markets we operate in, and a material negative change in the relationships with one or more of our significant customers or equipment suppliers. If our judgments and assumptions change as a result of the occurrence of any of these events or other events that we do not currently anticipate, our expectations as to future results and our estimate of the implied value of each reporting unit also may change.
We performed our annual impairment test for both reporting units in the fourth quarter to determine whether an impairment existed and to determine the amount of headroom at September 30, 2014. Headroom is defined as the percentage difference between the carrying value of the goodwill and its fair value. At September 30, 2014, headroom for the Cable TV and Telco reporting units were 147% and 199%, respectively.Intangibles
Intangibles
As a result of the Nave Communications acquisition, we have intangible assets with finite useful lives. 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.
Impairment of Long-Lived Assets
The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the asset’s carrying amount may not be recoverable. The Company conducts its long-lived asset impairment analyses in accordance with Accounting Standards Codification (“ASC”) 360-10-15, “Impairment or Disposal of Long-Lived Assets.” ASC 360-10-15 requires the Company to group assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities and evaluate the asset group against the sum of the undiscounted future cash flows. If the undiscounted cash flows do not indicate the carrying amount of the asset is recoverable, an impairment charge is measured as the amount by which the carrying amount of the asset group exceeds its fair value based on discounted cash flow analysis or appraisals.
In the third fiscal quarter of 2016, we concluded that there was a triggering event requiring assessment of impairment for certain of our intangible assets in connection with a new operating system implemented in our Telco segment. The new operating system in our Telco segment enhanced the functionality of the overall software system and decreased reliance upon a former employee maintaining the predecessor system. We did not record an impairment charge against the technology intangible asset as we determined that the carrying amount of the asset group did not exceed the sum
of the undiscounted cash flows for the asset group.
Recently Issued Accounting Standards
In AprilMay 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-08: “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360)”. This new guidance defines a discontinued operation as a disposal of a component or a group of components of an entity that represents a strategic shift in operations that has a major effect on the Company’s operations and financial results. This guidance will require additional disclosures for discontinued operations as well as new disclosures for individually significant disposal transactions that do not qualify for discontinued operations reporting. The guidance is effective for all disposals (or classifications as held for sale) of components of an entity that occur within annual periods beginning on or after December 15, 2014. Management does not anticipate that the adoption of ASU No. 2014-08 to have a significant impact on the Company’s consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09: “Revenue from Contracts with Customers (Topic 606)”. This guidance was issued to clarify the principles for recognizing revenue and develop a common revenue standard for U.S. GAAP and International Financial Reporting Standards (“IFRS”). The guidanceIn addition, in August 2015, the FASB issued ASU No. 2015-14: “Revenue from Contracts with Customers (Topic 606). This update was issued to defer the effective date of ASU No. 2014-09 by one year. Therefore, the effective date of ASU No. 2014-09 is effective for the fiscal years
and interimannual reporting periods within those years beginning after December 15, 2016.2017. Management is evaluating the impact that ASU No. 2014-09 will have on the Company’s consolidated financial statements. Based on management’s initial assessment of ASU 2014-09, management does not expect that ASU No. 2014-09 will have a material impact on the Company’s consolidated financial statements.
In September 2015, the FASB issued ASU No. 2015-16: “Business Combinations (Topic 805)”. This guidance was issued to amend existing guidance related to measurement period adjustments associated with a business combination. The new standard requires the Company to recognize measurement period adjustments in the reporting period in which the adjustments are determined, including any cumulative charge to earnings in the current period. The amendment removes the requirement to adjust prior period financial statements for these measurement period adjustments. The guidance is effective for annual periods beginning after December 15, 2015 and early adoption is permitted. Management has adopted ASU No. 2015-16 and as of September 30, 2016 it has not had an impact on the Company’s consolidated financial statements.
In November 2015, the FASB issued ASU No. 2015-17: “Income Taxes (Topic 740) – Balance Sheet Classification of Deferred Taxes.” This guidance was issued to simplify the presentation of deferred income taxes. The amendments in this Update require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The effective date of ASU No. 2015-17 is for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Management decided to early adopt ASU No. 2015-17. Prior periods were retrospectively adjusted.
In February 2016, the FASB issued ASU No. 2016-02: “Leases (Topic 842)” which is intended to improve financial reporting about leasing transactions. The ASU will require organizations (“lessees”) that lease assets with lease terms of more than twelve months to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. Organizations that own the assets leased by lessees (“lessors”) will remain largely unchanged from current GAAP. In addition, the ASU will require disclosures to help investors and other financial statement users better understand the amount, timing and uncertainty of cash flows arising from leases. The guidance is effective for annual periods beginning after December 15, 2018 and early adoption is permitted. Management is evaluating the impact that ASU No. 2016-02 will have on the Company’s consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-09: “Compensation – Stock Compensation (Topic 718)” which is intended to improve employee share-based payment accounting. This ASU identifies areas for simplification involving several aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, an option to recognize gross stock compensation expense with actual forfeitures recognized as they occur, as well as certain classifications on the statement of cash flows. The guidance is effective for annual periods beginning after December 15, 2016 and interim periods within those annual periods. Early adoption is permitted. Management is evaluating the impact that ASU No. 2016-09 will have on the Company’s consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15: “Statement of Cash Flows (Topic 230) – Classification of Certain Cash Receipts and Cash Payments.” This update addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. The amendments in this Update are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. Management is evaluating the impact that ASU No. 2016-15 will have on the Company’s consolidated financial statements.
Off-Balance Sheet Arrangements
None.
Item 8.Financial Statements and Supplementary Data.
Index to Financial Statements | Page |
| | |
| Report of Independent Registered Public Accounting Firm | |
| | |
Consolidated Balance Sheets, September 30, 20142016 and 20132015 | |
| | |
Consolidated Statements of Operations, and Comprehensive Income (Loss), Years ended | |
ended September 30, 2014, 20132016, 2015 and 2012
2014 | |
| | |
| Consolidated Statements of Changes in Shareholders’ Equity, Years ended | |
September 30, 2014, 20132016, 2015 and 2012 2014 | |
| | |
| Consolidated Statements of Cash Flows, Years ended | |
September 30, 2014, 20132016, 2015 and 2012 2014 | |
| | |
| Notes to Consolidated Financial Statements | |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
ADDvantage Technologies Group, Inc.
We have audited the accompanying consolidated balance sheets of ADDvantage Technologies Group, Inc. and subsidiaries (the “Company”) as of September 30, 20142016 and 2013,2015, and the related consolidated statements of operations, and comprehensive income (loss), shareholders’ equity and cash flows for each of the three years in the period ended September 30, 2014.2016. Our audits of the consolidated financial statements also included the financial statement schedules of ADDvantage Technologies Group, Inc., listed in Item 15(a). These financial statements and financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of ADDvantage Technologies Group, Inc. and subsidiaries as of September 30, 20142016 and 2013,2015, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2014,2016, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
/s/ HOGANTAYLOR LLP
December 9, 201413, 2016
Tulsa, Oklahoma
ADDVANTAGE TECHNOLOGIES GROUP, INC. CONSOLIDATED BALANCE SHEETS
| | | September 30, | |
| | | 2016 | | | 2015 | |
| Assets | | | | | | |
| Current assets: | | | | | | |
| Cash and cash equivalents | | $ | 4,508,126 | | | $ | 6,110,986 | |
Accounts receivable, net of allowance for doubtful accounts of $250,000 | | | 4,278,855 | | | | 4,286,377 | |
| Income tax receivable | | | 480,837 | | | | − | |
| Inventories, net of allowance for excess and obsolete | | | | | | | | |
| inventory of $2,570,868 and $2,756,628, respectively | | | 21,524,919 | | | | 23,600,996 | |
| Prepaid expenses | | | 323,289 | | | | 153,454 | |
| Total current assets | | | 31,116,026 | | | | 34,151,813 | |
| | | | | | | | | |
| Property and equipment, at cost: | | | | | | | | |
| Land and buildings | | | 7,218,678 | | | | 7,218,678 | |
| Machinery and equipment | | | 3,833,230 | | | | 3,415,164 | |
| Leasehold improvements | | | 151,957 | | | | 151,957 | |
| Total property and equipment, at cost | | | 11,203,865 | | | | 10,785,799 | |
| Less: Accumulated depreciation | | | (4,993,102 | ) | | | (4,584,796 | ) |
| Net property and equipment | | | 6,210,763 | | | | 6,201,003 | |
| | | | | | | | | |
| Investment in and loans to equity method investee | | | 2,588,624 | | | | – | |
| Intangibles, net of accumulated amortization | | | 4,973,669 | | | | 5,799,473 | |
| Goodwill | | | 3,910,089 | | | | 3,910,089 | |
| Deferred income taxes | | | 1,333,000 | | | | 1,490,000 | |
| Other assets | | | 135,988 | | | | 134,678 | |
| | | | | | | | | |
| Total assets | | $ | 50,268,159 | | | $ | 51,687,056 | |
| | | September 30, | |
| | | 2014 | | | 2013 | |
| Assets | | | | | | |
| Current assets: | | | | | | |
Cash and cash equivalents | | $ | 5,286,097 | | | $ | 8,476,725 | |
Accounts receivable, net of allowance for doubtful accounts of $200,000 and $300,000, respectively | | | 6,393,580 | | | | 2,390,979 | |
Income tax refund receivable | | | 220,104 | | | | 258,790 | |
Inventories, net of allowance for excess and obsolete | | | | | | | | |
inventory of $2,156,628 and $1,600,000, respectively | | | 22,780,523 | | | | 18,011,706 | |
Prepaid expenses | | | 174,873 | | | | 106,509 | |
Deferred income taxes | | | 1,416,000 | | | | 1,066,000 | |
Current assets of discontinued operations held for sale | | | − | | | | 3,267,917 | |
| Total current assets | | | 36,271,177 | | | | 33,578,626 | |
| | | | | | | | | |
| Property and equipment, at cost: | | | | | | | | |
Land and buildings | | | 7,208,679 | | | | 7,208,679 | |
Machinery and equipment | | | 3,244,153 | | | | 2,991,412 | |
Leasehold improvements | | | 206,393 | | | | 9,633 | |
| Total property and equipment, at cost | | | 10,659,225 | | | | 10,209,724 | |
| Less accumulated depreciation | | | (4,191,516 | ) | | | (3,831,238 | ) |
| Net property and equipment | | | 6,467,709 | | | | 6,378,486 | |
| | | | | | | | | |
| Intangibles, net of accumulated amortization | | | 6,625,278 | | | | − | |
| Goodwill | | | 3,910,089 | | | | 1,150,060 | |
| Other assets | | | 131,428 | | | | 11,428 | |
| Assets of discontinued operations held for sale | | | − | | | | 1,997,520 | |
| | | | | | | | | |
| Total assets | | $ | 53,405,681 | | | $ | 43,116,120 | |
| | | | | | | | | |
See notes to audited consolidated financial statements.
ADDVANTAGE TECHNOLOGIES GROUP, INC.
CONSOLIDATED BALANCE SHEETS
| | | September 30, | | | September 30, | |
| | | 2014 | | | 2013 | | | 2016 | | | 2015 | |
| Liabilities and Shareholders’ Equity | | | | | | | | | | | | |
| Current liabilities: | | | | | | | | | | | | |
Accounts payable | | $ | 2,880,761 | | | $ | 1,138,494 | | | $ | 1,857,953 | | | $ | 1,784,482 | |
Accrued expenses | | | 1,809,878 | | | | 878,474 | | | | 1,324,652 | | | | 1,358,681 | |
| Income tax payable | | | | – | | | | 122,492 | |
Notes payable – current portion | | | 845,845 | | | | 184,008 | | | | 899,603 | | | | 873,752 | |
Other current liabilities | | | 983,269 | | | | − | | | | 963,127 | | | | 982,094 | |
Current liabilities of discontinued operations held for sale | | | − | | | | 226,757 | | |
| Total current liabilities | | | 6,519,753 | | | | 2,427,733 | | | | 5,045,335 | | | | 5,121,501 | |
| | | | | | | | | | | | | | | | | |
| Notes payable, less current portion | | | 5,240,066 | | | | 1,318,604 | | | | 3,466,358 | | | | 4,366,130 | |
| Deferred income taxes | | | 267,000 | | | | 193,000 | | |
| Other liabilities | | | 1,942,889 | | | | − | | | | 131,410 | | | | 1,064,717 | |
| Total liabilities | | | | 8,643,103 | | | | 10,552,348 | |
| | | | | | | | | | | | | | | | | |
| Shareholders’ equity: | | | | | | | | | | | | | | | | |
Common stock, $.01 par value; 30,000,000 shares authorized; 10,541,864 and 10,499,138 shares issued, respectively; 10,041,206 and 9,998,480 shares outstanding, respectively | | | 105,419 | | | | 104,991 | | |
Common stock, $.01 par value; 30,000,000 shares authorized; 10,634,893 and 10,564,221 shares issued, respectively; 10,134,235 and 10,063,563 shares outstanding, respectively | | | | 106,349 | | | | 105,642 | |
Paid in capital | | | (5,312,881 | ) | | | (5,578,500 | ) | | | (4,916,791 | ) | | | (5,112,269 | ) |
Retained earnings | | | 45,643,449 | | | | 45,650,306 | | | | 47,435,512 | | | | 47,141,349 | |
Total shareholders’ equity before treasury stock | | | 40,435,987 | | | | 40,176,797 | | | | 42,625,070 | | | | 42,134,722 | |
| | | | | | | | | | | | | | | | | |
Less: Treasury stock, 500,658 shares, at cost | | | (1,000,014 | ) | | | (1,000,014 | ) | | | (1,000,014 | ) | | | (1,000,014 | ) |
| Total shareholders’ equity | | | 39,435,973 | | | | 39,176,783 | | | | 41,625,056 | | | | 41,134,708 | |
| | | | | | | | | | | | | | | | | |
| Total liabilities and shareholders’ equity | | $ | 53,405,681 | | | $ | 43,116,120 | | | $ | 50,268,159 | | | $ | 51,687,056 | |
See notes to audited consolidated financial statements.
ADDVANTAGE TECHNOLOGIES GROUP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
| | | Years ended September 30, | |
| | | 2016 | | | 2015 | | | 2014 | |
| Sales | | $ | 38,663,264 | | | $ | 43,733,620 | | | $ | 35,888,692 | |
| Cost of sales | | | 26,222,381 | | | | 28,434,731 | | | | 24,283,236 | |
| Gross profit | | | 12,440,883 | | | | 15,298,889 | | | | 11,605,456 | |
| Operating, selling, general and administrative expenses | | | 12,097,022 | | | | 12,722,679 | | | | 10,508,357 | |
| Income from operations | | | 343,861 | | | | 2,576,210 | | | | 1,097,099 | |
| Other income (expense): | | | | | | | | | | | | |
| Other income | | | 459,636 | | | | − | | | | – | |
| Interest income | | | 90,686 | | | | − | | | | – | |
| Loss from equity method investment | | | (184,996 | ) | | | − | | | | – | |
| Interest expense | | | (236,024 | ) | | | (305,310 | ) | | | (217,910 | ) |
| Total other income (expense), net | | | 129,302 | | | | (305,310 | ) | | | (217,910 | ) |
| | | | | | | | | | | | | |
| Income before income taxes | | | 473,163 | | | | 2,270,900 | | | | 879,189 | |
| Provision for income taxes | | | 179,000 | | | | 773,000 | | | | 220,000 | |
| Income from continuing operations | | | 294,163 | | | | 1,497,900 | | | | 659,189 | |
| | | | | | | | | | | | | |
| Discontinued operations: | | | | | | | | | | | | |
| Loss from discontinued operations, net of tax | | | − | | | | − | | | | (36,211 | ) |
| Loss on sale of discontinued operations, net of tax | | | − | | | | − | | | | (629,835 | ) |
| Discontinued operations, net of tax | | | − | | | | − | | | | (666,046 | ) |
| | | | | | | | | | | | | |
| Net income (loss) | | $ | 294,163 | | | $ | 1,497,900 | | | $ | (6,857 | ) |
| | | | | | | | | | | | | |
| Earnings (loss) per share: | | | | | | | | | | | | |
| Basic | | | | | | | | | | | | |
| Continuing operations | | $ | 0.03 | | | $ | 0.15 | | | $ | 0.07 | |
| Discontinued operations | | | − | | | | − | | | | (0.07 | ) |
| Net income (loss) | | $ | 0.03 | | | $ | 0.15 | | | $ | (0.00 | ) |
| Diluted | | | | | | | | | | | | |
| Continuing operations | | $ | 0.03 | | | $ | 0.15 | | | $ | 0.07 | |
| Discontinued operations | | | − | | | | − | | | | (0.07 | ) |
| Net income (loss) | | $ | 0.03 | | | $ | 0.15 | | | $ | (0.00 | ) |
| Shares used in per share calculation: | | | | | | | | | | | | |
| Basic | | | 10,107,483 | | | | 10,055,052 | | | | 10,021,431 | |
| Diluted | | | 10,111,545 | | | | 10,055,052 | | | | 10,049,440 | |
| | | Years ended September 30, | |
| | | 2014 | | | 2013 | | | 2012 | |
| Sales | | | 35,888,692 | | | | 28,677,351 | | | | 29,677,178 | |
| Cost of sales | | | 24,283,236 | | | | 19,968,034 | | | | 21,119,250 | |
| Gross profit | | | 11,605,456 | | | | 8,709,317 | | | | 8,557,928 | |
| Operating, selling, general and administrative expenses | | | 10,508,357 | | | | 5,813,063 | | | | 5,938,794 | |
| Income from operations | | | 1,097,099 | | | | 2,896,254 | | | | 2,619,134 | |
| Interest expense | | | 217,910 | | | | 25,980 | | | | 1,113,854 | |
| Income before income taxes | | | 879,189 | | | | 2,870,274 | | | | 1,505,280 | |
| Provision for income taxes | | | 220,000 | | | | 1,098,351 | | | | 566,000 | |
| Income from continuing operations | | | 659,189 | | | | 1,771,923 | | | | 939,280 | |
| | | | | | | | | | | | | |
| Discontinued operations: | | | | | | | | | | | | |
| Income (loss) from discontinued operations, net of tax | | | (36,211 | ) | | | (102,207 | ) | | | 311,212 | |
| Loss on sale of discontinued operations, net of tax | | | (629,835 | ) | | | − | | | | − | |
| Discontinued operations, net of tax | | | (666,046 | ) | | | (102,207 | ) | | | 311,212 | |
| | | | | | | | | | | | | |
| Net income (loss) attributable to common shareholders | | | (6,857 | ) | | | 1,669,716 | | | | 1,250,492 | |
| | | | | | | | | | | | | |
| Other comprehensive gain: | | | | | | | | | | | | |
| Unrealized gain on interest rate swap, net of $0, $0 and $370,000 tax provision, respectively | | | – | | | | − | | | | 587,258 | |
| | | | | | | | | | | | | |
| Comprehensive income (loss) | | $ | (6,857 | ) | | $ | 1,669,716 | | | $ | 1,837,750 | |
| | | | | | | | | | | | | |
| Earnings (loss) per share: | | | | | | | | | | | | |
Basic | | | | | | | | | | | | |
Continuing operations | | $ | 0.07 | | | $ | 0.18 | | | $ | 0.09 | |
Discontinued operations | | | (0.07 | ) | | | (0.01 | ) | | | 0.03 | |
Net income (loss) | | $ | (0.00 | ) | | $ | 0.17 | | | $ | 0.12 | |
Diluted | | | | | | | | | | | | |
Continuing operations | | $ | 0.07 | | | $ | 0.18 | | | $ | 0.09 | |
Discontinued operations | | | (0.07 | ) | | | (0.01 | ) | | | 0.03 | |
Net income (loss) | | $ | (0.00 | ) | | $ | 0.17 | | | $ | 0.12 | |
| Shares used in per share calculation: | | | | | | | | | | | | |
Basic | | | 10,021,431 | | | | 10,052,359 | | | | 10,196,241 | |
Diluted | | | 10,049,440 | | | | 10,052,359 | | | | 10,197,496 | |
See notes to audited consolidated financial statements.
ADDVANTAGE TECHNOLOGIES GROUP, INC. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended September 30, 2014, 20132016, 2015 and 20122014
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | Common Stock | | | Paid-in | | | Retained | | | Treasury | | | | |
| | | Shares | | | Amount | | | Capital | | | Earnings | | | Stock | | | Total | |
| Balance, September 30, 2013 | | | 10,499,138 | | | $ | 104,991 | | | $ | (5,578,500 | ) | | $ | 45,650,306 | | | $ | (1,000,014 | ) | | $ | 39,176,783 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Net loss | | | – | | | | – | | | | – | | | | (6,857 | ) | | | – | | | | (6,857 | ) |
| Restricted stock issuance | | | 42,726 | | | | 428 | | | | 135,572 | | | | – | | | | – | | | | 136,000 | |
| Share based compensation expense | | | – | | | | – | | | | 130,047 | | | | – | | | | – | | | | 130,047 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance, September 30, 2014 | | | 10,541,864 | | | $ | 105,419 | | | $ | (5,312,881 | ) | | $ | 45,643,449 | | | $ | (1,000,014 | ) | | $ | 39,435,973 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income | | | – | | | | – | | | | – | | | | 1,497,900 | | | | – | | | | 1,497,900 | |
| Restricted stock, net of forfeited | | | 22,357 | | | | 223 | | | | 58,944 | | | | – | | | | – | | | | 59,167 | |
| Share based compensation expense | | | – | | | | – | | | | 141,668 | | | | – | | | | – | | | | 141,668 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance, September 30, 2015 | | | 10,564,221 | | | $ | 105,642 | | | $ | (5,112,269 | ) | | $ | 47,141,349 | | | $ | (1,000,014 | ) | | $ | 41,134,708 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income | | | – | | | | – | | | | – | | | | 294,163 | | | | – | | | | 294,163 | |
| Restricted stock issuance | | | 70,672 | | | | 707 | | | | 121,794 | | | | – | | | | – | | | | 122,501 | |
| Share based compensation expense | | | – | | | | – | | | | 73,684 | | | | – | | | | – | | | | 73,684 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance, September 30, 2016 | | | 10,634,893 | | | $ | 106,349 | | | $ | (4,916,791 | ) | | $ | 47,435,512 | | | $ | (1,000,014 | ) | | $ | 41,625,056 | |
| | | | | | | | | | | | | | | Accumulated | | | | | | | |
| | | | | | | | | | | | | | | Other | | | | | | | |
| | | Common Stock | | | Paid-in | | | Retained | | | Comprehensive | | | Treasury | | | | |
| | | Shares | | | Amount | | | Capital | | | Earnings | | | Income (Loss) | | | Stock | | | Total | |
| Balance, September 30, 2011 | | | 10,431,354 | | | $ | 104,314 | | | $ | (5,884,521 | ) | | $ | 42,730,098 | | | $ | (587,258 | ) | | $ | (406,279 | ) | | $ | 35,956,354 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income | | | – | | | | – | | | | – | | | | 1,250,492 | | | | – | | | | – | | | | 1,250,492 | |
| Restricted stock issuance | | | 31,969 | | | | 320 | | | | 69,680 | | | | – | | | | – | | | | – | | | | 70,000 | |
| Stock options exercised | | | 2,000 | | | | 20 | | | | 1,600 | | | | – | | | | – | | | | – | | | | 1,620 | |
| Net unrealized gain on interest swap | | | – | | | | – | | | | – | | | | – | | | | 587,258 | | | | – | | | | 587,258 | |
| Share based compensation expense | | | – | | | | – | | | | 64,738 | | | | – | | | | – | | | | – | | | | 64,738 | |
| Purchase of common stock | | | – | | | | – | | | | – | | | | – | | | | – | | | | (113,821 | ) | | | (113,821 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance, September 30, 2012 | | | 10,465,323 | | | $ | 104,653 | | | $ | (5,748,503 | ) | | $ | 43,980,590 | | | $ | – | | | $ | (520,100 | ) | | $ | 37,816,640 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income | | | – | | | | – | | | | – | | | | 1,669,716 | | | | – | | | | – | | | | 1,669,716 | |
| Restricted stock issuance | | | 31,815 | | | | 318 | | | | 69,682 | | | | – | | | | – | | | | – | | | | 70,000 | |
| Stock options exercised | | | 2,000 | | | | 20 | | | | 3,280 | | | | – | | | | – | | | | – | | | | 3,300 | |
| Share based compensation expense | | | – | | | | – | | | | 97,041 | | | | – | | | | – | | | | – | | | | 97,041 | |
| Purchase of common stock | | | – | | | | – | | | | – | | | | – | | | | – | | | | (479,914 | ) | | | (479,914 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance, September 30, 2013 | | | 10,499,138 | | | $ | 104,991 | | | $ | (5,578,500 | ) | | $ | 45,650,306 | | | $ | – | | | $ | (1,000,014 | ) | | $ | 39,176,783 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net loss | | | – | | | | – | | | | – | | | | (6,857 | ) | | | – | | | | – | | | | (6,857 | ) |
| Restricted stock issuance | | | 42,726 | | | | 428 | | | | 135,572 | | | | – | | | | – | | | | – | | | | 136,000 | |
| Share based compensation expense | | | – | | | | – | | | | 130,047 | | | | – | | | | – | | | | – | | | | 130,047 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance, September 30, 2014 | | | 10,541,864 | | | $ | 105,419 | | | $ | (5,312,881 | ) | | $ | 45,643,449 | | | $ | – | | | $ | (1,000,014 | ) | | $ | 39,435,973 | |
See notes to audited consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | Years ended September 30, | |
| | | 2016 | | | 2015 | | | 2014 | |
| Operating Activities | | | | | | | | | |
| Net income (loss) | | $ | 294,163 | | | $ | 1,497,900 | | | $ | (6,857 | ) |
| Net loss from discontinued operations | | | − | | | | − | | | | (666,046 | ) |
| Net income from continuing operations | | | 294,163 | | | | 1,497,900 | | | | 659,189 | |
| Adjustments to reconcile net income (loss) to net cash | | | | | | | | | | | | |
| provided by (used in) operating activities: | | | | | | | | | | | | |
| Depreciation | | | 421,950 | | | | 408,703 | | | | 360,279 | |
| Amortization | | | 825,804 | | | | 825,805 | | | | 481,722 | |
| Allowance for doubtful accounts | | | – | | | | 50,000 | | | | − | |
| Provision for excess and obsolete inventories | | | 951,282 | | | | 600,000 | | | | 601,351 | |
| (Gain) loss on disposal of property and equipment | | | (2,000 | ) | | | 30,652 | | | | − | |
| Deferred income tax provision (benefit) | | | 157,000 | | | | (341,000 | ) | | | (276,000 | ) |
| Share based compensation expense | | | 192,213 | | | | 239,613 | | | | 212,436 | |
| Loss from equity method investment | | | 184,996 | | | | – | | | | – | |
Cash provided (used) by changes in operating assets and liabilities: | | | | | | | | | | | | |
| Accounts receivable | | | 115,479 | | | | 2,057,203 | | | | (2,351,459 | ) |
| Income tax receivable\payable | | | (603,329 | ) | | | 342,596 | | | | 38,686 | |
| Inventories | | | 1,140,895 | | | | (1,420,473 | ) | | | (2,188,205 | ) |
| Prepaid expenses | | | (165,863 | ) | | | (17,359 | ) | | | (14,753 | ) |
| Other assets | | | (1,310 | ) | | | (3,250 | ) | | | − | |
| Accounts payable | | | 15,514 | | | | (1,096,279 | ) | | | (78,670 | ) |
| Accrued expenses | | | 13,697 | | | | (330,544 | ) | | | 838,479 | |
Net cash provided by (used in) operating activities − continuing operations | | | 3,540,491 | | | | 2,843,567 | | | | (1,716,945 | ) |
Net cash provided by operating activities − discontinued operations | | | − | | | | − | | | | 280,462 | |
| Net cash provided by (used in) operating activities | | | 3,540,491 | | | | 2,843,567 | | | | (1,436,483 | ) |
| | | | | | | | | | | | | |
| Investing Activities | | | | | | | | | | | | |
| Acquisition of net operating assets, net of cash acquired | | | (178,000 | ) | | | − | | | | (9,630,647 | ) |
| Guaranteed payments for acquisition of business | | | (1,000,000 | ) | | | (1,000,000 | ) | | | − | |
| Investments in and loans to equity method investee | | | (3,040,839 | ) | | | – | | | | − | |
| Distributions from equity method investee | | | 267,219 | | | | – | | | | − | |
| Purchases of property and equipment | | | (317,810 | ) | | | (172,649 | ) | | | (43,977 | ) |
| Net cash used in investing activities – continuing operations | | | (4,269,430 | ) | | | (1,172,649 | ) | | | (9,674,624 | ) |
Net cash provided by investing activities − discontinued operations | | | − | | | | − | | | | 3,413,001 | |
| Net cash used in investing activities | | | (4,269,430 | ) | | | (1,172,649 | ) | | | (6,261,623 | ) |
| | | | | | | | | | | | | |
| Financing Activities | | | | | | | | | | | | |
| Proceeds on notes payable | | | − | | | | − | | | | 5,000,000 | |
| Payments on notes payable | | | (873,921 | ) | | | (846,029 | ) | | | (492,522 | ) |
| Net cash provided by (used in) financing activities | | | (873,921 | ) | | | (846,029 | ) | | | 4,507,478 | |
| | | | | | | | | | | | | |
| Net increase (decrease) in cash and cash equivalents | | | (1,602,860 | ) | | | 824,889 | | | | (3,190,628 | ) |
| Cash and cash equivalents at beginning of year | | | 6,110,986 | | | | 5,286,097 | | | | 8,476,725 | |
| Cash and cash equivalents at end of year | | $ | 4,508,126 | | | $ | 6,110,986 | | | $ | 5,286,097 | |
| | | | | | | | | | | | | |
| Supplemental cash flow information: | | | | | | | | | | | | |
| Cash paid for interest | | $ | 195,086 | | | $ | 245,051 | | | $ | 126,659 | |
| Cash paid for income taxes | | $ | 597,200 | | | $ | 944,000 | | | $ | 62,000 | |
| | | | | | | | | | | | | |
| Supplemental noncash investing activities: | | | | | | | | | | | | |
| Deferred guaranteed payments for acquisition of business | | $ | − | | | $ | − | | | $ | (2,744,338 | ) |
| | | Years ended September 30, | |
| | | 2014 | | | 2013 | | | 2012 | |
| Operating Activities | | | | | | | | | |
| Net income (loss) | | $ | (6,857 | ) | | $ | 1,669,716 | | | $ | 1,250,492 | |
| Net income (loss) from discontinued operations | | | (666,046 | ) | | | (102,207 | ) | | | 311,212 | |
| Net income from continuing operations | | | 659,189 | | | | 1,771,923 | | | | 939,280 | |
| Adjustments to reconcile net income to net cash | | | | | | | | | | | | |
provided by (used in) operating activities: | | | | | | | | | | | | |
Depreciation | | | 360,279 | | | | 276,356 | | | | 300,961 | |
Amortization | | | 481,722 | | | | − | | | | − | |
Provision for excess and obsolete inventories | | | 601,351 | | | | 600,000 | | | | 580,587 | |
(Gain) loss on disposal of property and equipment | | | − | | | | (5,950 | ) | | | 114,071 | |
Deferred income tax provision (benefit) | | | (276,000 | ) | | | (15,000 | ) | | | 234,000 | |
Share based compensation expense | | | 212,436 | | | | 167,041 | | | | 201,404 | |
Cash provided (used) by changes in operating assets and liabilities: | | | | | | | | | | | | |
Accounts receivable | | | (2,351,459 | ) | | | 195,733 | | | | 1,199,368 | |
Income tax refund receivable | | | 38,686 | | | | 137,547 | | | | (46,592 | ) |
Inventories | | | (2,188,205 | ) | | | 1,066,800 | | | | 3,280,568 | |
Prepaid expenses | | | (14,753 | ) | | | 2,045 | | | | (76,300 | ) |
Other assets | | | − | | | | 2,350 | | | | 123 | |
Accounts payable | | | (78,670 | ) | | | 8,844 | | | | (815,732 | ) |
Accrued expenses | | | 838,479 | | | | (84,847 | ) | | | (218,649 | ) |
Net cash provided by (used in) operating activities − continuing operations | | | (1,716,945 | ) | | | 4,122,842 | | | | 5,693,089 | |
Net cash provided by (used in) operating activities − discontinued operations | | | 280,462 | | | | (16,365 | ) | | | (709,949 | ) |
| Net cash provided by (used in) operating activities | | | (1,436,483 | ) | | | 4,106,477 | | | | 4,983,140 | |
| | | | | | | | | | | | | |
| Investing Activities | | | | | | | | | | | | |
Acquisition of net operating assets, net of cash acquired | | | (9,630,647 | ) | | | – | | | | − | |
Purchases of property and equipment | | | (43,977 | ) | | | (211,223 | ) | | | (10,069 | ) |
Proceeds from disposal of property and equipment | | | − | | | | 12,350 | | | | − | |
| Net cash used in investing activities – continuing operations | | | (9,674,624 | ) | | | (198,873 | ) | | | (10,069 | ) |
Net cash provided by (used in) investing activities − discontinued operations | | | 3,413,001 | | | | − | | | | (197,858 | ) |
| Net cash used in investing activities | | | (6,261,623 | ) | | | (198,873 | ) | | | (207,927 | ) |
| | | | | | | | | | | | | |
| Financing Activities | | | | | | | | | | | | |
Proceeds on notes payable | | | 5,000,000 | | | | − | | | | − | |
Payments on notes payable | | | (492,522 | ) | | | (184,008 | ) | | | (10,371,508 | ) |
Purchase of treasury stock | | | − | | | | (479,914 | ) | | | (113,821 | ) |
Proceeds from stock options exercised | | | − | | | | 3,300 | | | | 1,620 | |
| Net cash provided by (used in) financing activities | | | 4,507,478 | | | | (660,622 | ) | | | (10,483,709 | ) |
| | | | | | | | | | | | | |
| Net increase (decrease) in cash and cash equivalents | | | (3,190,628 | ) | | | 3,246,982 | | | | (5,708,496 | ) |
| Cash and cash equivalents at beginning of year | | | 8,476,725 | | | | 5,229,743 | | | | 10,938,239 | |
| Cash and cash equivalents at end of year | | $ | 5,286,097 | | | $ | 8,476,725 | | | $ | 5,229,743 | |
| | | | | | | | | | | | | |
| Supplemental cash flow information: | | | | | | | | | | | | |
Cash paid for interest | | $ | 126,659 | | | $ | 26,137 | | | $ | 1,164,522 | |
Cash paid for income taxes | | $ | 62,000 | | | $ | 971,000 | | | $ | 622,210 | |
| | | | | | | | | | | | | |
| Supplemental noncash investing activities: | | | | | | | | | | | | |
Deferred guaranteed payments for acquisition of business | | $ | (2,744,338 | ) | | $ | − | | | $ | − | |
See notes to consolidated financial statements.