UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

☒⌧ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended September 30, ~~2017~~2019

☐□TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 1-10799

ADDVANTAGE TECHNOLOGIES GROUP, INC.

(Exact name of registrant as specified in its charter)

Oklahoma	73-1351610
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

~~1221 E. Houston, Broken Arrow, Oklahoma~~13757 N. Stemmons Freeway, Farmers Branch, Texas	~~74012~~ 75234
(Address of principal executive offices)	(Zip code)

Registrant’s telephone number: (918) 251-9121

Securities registered under Section 12(b) of the Act:

Title of each class	Name of exchange on which registered
Common Stock, $.01 par value	NASDAQ Global Market

Securities registered under Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.	Yes ☐□ No ☒⌧

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.	Yes ☐□ No ☒⌧

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.	Yes ☒⌧ No ☐□
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post s~~uch~~such files).	Yes ☒⌧ No ☐□
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.	☒⌧
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, ~~or a~~ smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, ~~“accelerated filer”~~ “accelerated filer,” “smaller reporting company,” and ~~“smaller~~ ~~reporting~~“emerging growth company” in Rule 12b-2 of the Exchange Act. Large accelerated filer ☐□ Accelerated filer ☐□ Non-accelerated filer ☐⌧ Smaller reporting company ☒⌧ Emerging growth company □
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.	□
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).	Yes ☐□ No ☒⌧
The aggregate market value of the outstanding shares of common stock, par value $.01 per share, held by non-affiliates computed by reference to the closing price of the registrant’s common stock as of March 31, ~~2017~~2019 was ~~$10,673,601.~~$7,825,604.
The number of shares of the registrant’s outstanding common stock, $.01 par value per share, was ~~10,225,995~~10,361,292 as of November 30, ~~2017.~~2019.
~~Documents Incorporated by Reference~~

The identified sections of definitive Proxy Statement to be filed as Schedule 14A pursuant to Regulation 14A in connection with the Registrant’s 2018 annual meeting of shareholders are incorporated by reference into Part III of this Form 10-K. The Proxy Statement will be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Form 10-K.

ADDVANTAGE TECHNOLOGIES GROUP, INC.

FORM 10-K

YEAR ENDED SEPTEMBER 30, ~~2017~~2019

INDEX

		Page
	PART I


Item 1.	Business.	3
Item 2.	Properties.	7
Item 3.	Legal Proceedings.	8


	PART II

Item 5.	Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.	9
Item 6.	Selected Financial Data.	10
Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations.	10

Item 8.	Financial Statements and Supplementary Data.	21
Item 9.	Changes in and Disagreements ~~With~~with Accountants on Accounting and Financial Disclosure.	4448
Item 9A.	Controls and Procedures.	4448
Item 9B.	Other Information.	4549
	PART III

Item 10.	Directors, Executive Officers and Corporate Governance.	4549
Item 11.	Executive Compensation.	4549
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.	4549
Item 13.	Certain Relationships and Related Transactions, and Director Independence.	4549
Item 14.	Principal Accounting Fees and Services.	4549

	PART IV

Item 15.	Exhibits, Financial Statement Schedules.	4650

	SIGNATURES

PART I

Item 1. Business.

Forward-Looking Statements

Certain matters discussed in this report constitute forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, including statements which relate to, among other things, expectations of the business environment in which ADDvantage Technologies Group, Inc. (the “Company”, “We”, “Our” or “ADDvantage”) operates, projections of future performance, perceived opportunities in the market and statements regarding our goals and objectives and other similar matters. The words “estimates”, “projects”, “intends”, “expects”, “anticipates”, “believes”, “plans”, “goals”, “strategy”, “likely”, “may”, “should” and similar expressions often identify forward-looking statements. These forward-looking statements are found at various places throughout this report and the documents incorporated into it by reference. These and other statements, which are not historical facts, are hereby identified as “forward-looking statements” for purposes of the safe harbor provided by Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. These statements are subject to a number of risks, uncertainties and developments beyond our control or foresight, including changes in the cable television and telecommunications industries, changes in customer and supplier relationships, technological developments, changes in the economic environment generally, the growth or formation of competitors, changes in governmental regulation or taxation, changes in our personnel, our ability to identify, complete and integrate acquisitions on favorable terms 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.

Background

The Company was incorporated under the laws of Oklahoma in September 1989 as “ADDvantage Media Group, Inc.” In December 1999, its name was changed to ADDvantage Technologies Group, Inc. ~~Our~~In 2019, the Company moved its headquarters ~~are located in~~from Broken Arrow, ~~Oklahoma.~~Oklahoma to the Dallas, Texas area.

WeThe Company (through ~~our~~its subsidiaries) ~~distribute~~i) provides turn-key wireless infrastructure services for wireless carriers, tower companies and ~~service~~equipment manufacturers, and ii) distributes and services a comprehensive line of electronics and hardware for the ~~cable television and~~ telecommunications ~~industries. We also provide equipment repair services to cable operators.~~industry. In addition, we offer our ~~telecommunications~~ customers decommissioning services for surplus and obsolete equipment, which we in turn process through our recycling ~~services.~~program.

~~Several of~~Fulton Technologies, Inc. (“Fulton”) was purchased on January 4, 2019, which established the Company’s Wireless Infrastructure Services segment.

The Company’s Telecommunications segment operates through our subsidiaries, ~~through their long-standing relationships with the original equipment manufacturers~~Nave Communications Company (“~~OEMs”~~Nave”) and ~~specialty repair facilities, have established themselves as value-added resellers~~ADDvantage Triton, LLC (“~~VARs”~~Triton”). ADDvantage has a reseller agreement with Arris Solutions to sell cable television equipment in the United States. We are one of only three distributors of Arris broadband products. We are a distributor of Cisco video products as a Cisco Premier Partner, which allows us to sell Cisco’s IT related products. In addition, we are designated as an authorized third party Cisco repair center for select video products. Our subsidiaries also sell products from other OEMs including Alpha, Blonder-Tongue, RL Drake, Corning-Gilbert, Promax, Quintech, Standard and Triveni Digital.

~~In addition to offering a broad range of new products,~~For our telecommunications subsidiaries, we sell new, surplus-new and refurbished equipment that we purchase in the market as a result of ~~cable or~~ telecommunications ~~operator~~ system upgrades or an overstock ~~in their warehouses.~~supplies. We maintain one of the industry's largest inventories of new and used equipment, which allows us to expedite delivery of mission-critical products to our customers. We continually evaluate new product offerings in the broader telecommunications industry as technology ~~in this industry~~ evolves ~~rapidly~~ and ~~will~~ upgrade our product offerings ~~for our customers in order~~ to stay current with ~~their~~our customer’s technology platforms.

~~Most of our subsidiaries operate technical service centers that service/repair most brands of cable television equipment.~~

Website Access to Reports

Our public website is ~~addvantagetechnologies.com~~www.addvantagetechnologies.com. We make available, free of charge through the “Investor Relations” section of our website, our annual reports to stockholders, annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (“SEC”). Any material we file with or furnish to the SEC is also maintained on the SEC website ((www.sec.gov).

The information contained on our website, or available by hyperlink from our website, is not incorporated into this Form 10-K or other documents we file with, or furnish to, the SEC. We intend to use our website as a means of disclosing material non-public information and for complying with our disclosure obligations under Regulation FD. Such disclosures will be included on our website in the “Investor Relations” section. Accordingly, investors should monitor such portions of our website, in addition to following our press releases, SEC filings and public conference calls and webcasts.

Operating Segments

In the second and third quarters of fiscal year 2019, the Company changed its organizational structure with the acquisition of Fulton and the sale of the Cable TV segment. As a result of these changes, information that the Company’s management team regularly reviews for purposes of allocating resources and assessing performance changed. The ~~Company reports its financial performance based on two reporting segments:~~Company’s current reportable segments are Wireless Infrastructure Services (“Wireless”) and Telecommunications (“Telco”). The Cable Television (“Cable TV”) ~~and Telecommunications (“Telco”)~~segment was sold on June 30, 2019. Therefore, the Company has classified the Cable TV segment as discontinued operations (see Note 4 – Discontinued Operations).

~~The Cable TV segment sells~~Products and Services

Wireless Segment

We provide 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 ~~surplus~~small cells for 5G.

As part of the Fulton acquisition, we were able to hire and ~~refurbished cable television~~retain the majority of Fulton’s existing employee base. Fulton now has approximately 100 employees. Fulton performs equipment installations, upgrades and maintenance services for its customers primarily on communication towers. Having the proper safety record, training capability and quality oversight is paramount in the industry. Fulton has prided itself in performing safe, timely and high-quality services. Demand for tower equipment installation and upgrading services is at an all-time high, and we expect this trend to ~~cable television operators (called multiple system operators or “MSOs”) or other resellers that sell~~continue for the foreseeable future as wireless carriers continue to ~~these customers throughout North America, Central America, South America~~add capacity, expand their networks and upgrade their current technology for high speed connectivity, including 5G.

Fulton also supports the installation and support of temporary tower locations. This niche and growing business includes the erection of temporary towers to allow for the maintenance of permanent locations without causing a ~~substantially lesser extent, other international regions that utilize~~degradation of wireless in the ~~same technology.~~area. In addition, ~~this segment repairs cable television equipment~~Fulton provides temporary tower solutions for ~~various companies.~~special events that require an increase of coverage and capacity for festivals, concerts and sporting events. Fulton has an inventory of temporary poles of different sizes and uses a unique installation process for the quick deployment of a tower location with little to no environmental impact.

Telco Segment

The Telco segment provides quality new and used telecommunication networking equipment, including both central office and customer premise equipment, to its customer base of telecommunications providers, enterprise customers and resellers by utilizing its inventory from a broad range of manufacturers as well as other supply channels. 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.

~~Products and Services~~

~~Cable TV Segment~~

We offer our customers a wide range of new, surplus-new and refurbished products across the leading OEM suppliers in the industry that are used in connection with video, telephone and internet data signals.

~~Headend Products~~ – Headend products are used by a system operator for signal acquisition, processing and manipulation for further transmission. Among the products we offer in this category are satellite receivers, integrated receiver/decoders, demodulators, modulators, antennas and antenna mounts, amplifiers, equalizers and processors. The headend of a television signal distribution system is the “brain” of the system; the central location where the multi-channel signal is initially received, converted and allocated to specific channels for distribution. In some cases, where the signal is transmitted in encrypted form or digitized and compressed, the receiver will also be required to decode the signal.

~~Fiber Products~~ – Fiber products are used to transmit the output of cable system headend to multiple locations using fiber-optic cable. In this category, we currently offer products including optical transmitters, fiber-optic cable, receivers, couplers, splitters and compatible accessories. These products convert radio frequencies to light frequencies and launch them on optical fiber. At each receiver site, an optical receiver is used to convert the signals back to radio frequencies for distribution to subscribers.

~~Access and Transport Products~~ – Access and transport products are used to permit signals to travel from the headend to their ultimate destination in a home, apartment, hotel room, office or other terminal location along a distribution network of fiber-optic or coaxial cable. Among the products we offer in this category are transmitters, receivers, line extenders, broadband amplifiers, directional taps and splitters.

~~Test Equipment~~ – Test equipment is used in the set-up, signal testing and maintenance of electronic equipment and the overall support of the cable television system. Test equipment is vital in maintaining the proper function and efficiency of this electronic equipment, which helps to provide high quality video, telephone and high speed data to the end user.

~~Hardware Equipment~~ – ~~We inventory and sell to our customers other hardware such as connector and cable products.~~

~~We offer repair services for most brands of cable equipment at each of our locations.~~

~~Telco Segment~~

We offer our customers a wide range of new and used telecommunication equipment across most major manufacturers consisting primarily of component parts to expand capacity, provide spares or replace non-working components.

Central Office Equipment – Central office equipment includes optical transport, switching, and data center equipment on a customer’s communication network. Optical equipment products aggregate and transport internet ~~traffic,~~traffic; switching equipment products originate, terminate and route voice ~~traffic,~~traffic; and data equipment products transport internet and voice over internet protocol (“VOIP”) traffic via routers.

Customer Premise Equipment (“CPE”) – CPE includes integrated access devices, channel banks, internet protocol private branch exchange (“IP PBX”) phones, and routers that are placed inside the customer site that will receive the communication signal from the communication services provider.

In addition, we offer our customers decommissioning services for surplus and obsolete telecom equipment, which we then process through our Responsible Recycling (“R2”)-certified recycling program.

Revenues by Geographic Area

Our revenues by geographic areas were as follows:

2017 2016 2015
United States
Cable TV $ 21,566,082 $ 21,936,344 $ 23,975,197
Telco (a) 22,822,538 13,693,837 16,031,293
Canada, Central America, Asia, Europe, Mexico, South America and Other
Cable TV 1,240,093 1,055,682 1,418,488
Telco (a) 3,085,033 1,977,401 2,308,642
$ 48,713,746 $ 38,663,264 $ 43,733,620

~~(a) The Telco segment revenues for fiscal year 2017 include Triton Datacom revenues from October 14, 2016 through September 30, 2017.~~

	2019		2018		2017
United States
Wireless	$	22,918,535	$	‒	$	‒
Telco		29,789,593		24,606,027		22,822,538
Canada, Central America, Asia, Europe, Mexico, South America and Other
Telco		2,410,169		2,867,255		3,085,033
	$	55,118,297	$	27,473,282	$	25,907,571

Broken Arrow, Oklahoma – We own a facility in a suburb of Tulsa consisting of our headquarters, additional offices, warehouse and service center of approximately 162,500 square feet on ten acres, with an investment of $4.9 million, financed by a loan with a remaining balance of $0.8 million, due in monthly payments through 2021 at an interest rate of LIBOR plus 1.4%.

Dallas, Texas – We lease, on a month-to-month basis, a facility in a suburb of Dallas consisting of our headquarters, an office and warehouse with monthly rental payments of $23,920. We will be relocating to a different facility in the Dallas area in the second quarter of fiscal year 2020.

·	~~Deshler, Nebraska – We own a facility near Lincoln consisting of land and an office, warehouse and service center of approximately 8,000 square feet.~~

Tulsa, Oklahoma – We lease a facility in a suburb of Tulsa consisting of offices with monthly rental payments of $2,500 through December 2019, to a company controlled by David Chymiak, a director and substantial shareholder.

Chicago, Illinois – We lease a facility in a suburb of Chicago consisting of an office, warehouse and service center of approximately 40,000 square feet, with monthly rental payments of $21,427 through July 31, 2024.

Warminster, Pennsylvania – We own a facility in a suburb of Philadelphia consisting of an office, warehouse and service center of approximately 12,000 square feet, with an investment of $0.6 million. We also lease property of approximately 2,000 square feet, with monthly rental payments of $1,467 through December 31, 2018. We also rent on a month-to-month basis another property of approximately 2,000 square feet, with monthly rental payments of $1,325.

Minneapolis, Minnesota – We lease a facility in Minneapolis consisting of an office and service center of approximately 22,000 square feet, with monthly rental payments of $14,085 through December 31, 2022. This facility has been fully subleased through November 30, 2020.

·	~~Sedalia, Missouri – We own a facility near Kansas City consisting of land, an office, warehouse and service center of approximately 60,300 square feet.~~

·	~~New Boston, Texas – We own a facility near Texarkana consisting of land, an office, warehouse and service center of approximately 13,000 square feet.~~

·	Suwanee, Georgia – We rent, on a month-to-month basis, a facility in a suburb of Atlanta consisting of an office and service center of approximately 5,000 square feet, with monthly rental payments of $3,060.

·	Kingsport, Tennessee – We lease a facility in Kingsport, Tennessee consisting of office space, warehouse, and service center of approximately 14,000 square feet with monthly rental payments to a Company employee of $4,000 per month through December 31, 2018.

Telco Segment

·	Jessup, Maryland – We lease a facility in a suburb of Baltimore consisting of an office, warehouse, and service center of approximately 88,000 square feet, with monthly rental payments of $43,076 increasing each year by 2.5% through November 30, 2023.

Jessup, Maryland – We lease a facility in a suburb of Baltimore consisting of an office, warehouse, and service center of approximately 88,000 square feet, with monthly rental payments of $45,256 increasing each year by 2.5% through November 30, 2023. The rental payment does not include taxes and common area maintenance fees. We sublease, on a month-to-month basis, approximately 67,000 square feet for $33,433 a month. We plan to exit this facility and move our office staff to another location in the Baltimore area in 2020.

Miami, Florida – We lease four different adjoining properties in Miami, Florida consisting of office space, warehouse, and service center totaling approximately 9,000 square feet with monthly rental payments to a Company owned by two employees of $12,626 per month through December 31, 2019 for three of the properties. We pay an unrelated third party lease payments of $2,461 per month through August 31, 2018 for the remaining property.

Miami, Florida – We lease a facility in a suburb of Miami consisting of an office, warehouse and service center totaling approximately 31,000 square feet with monthly rental payments of $16,993 increasing each year by 3% through October 31, 2024. The rental payment does not include taxes and common area maintenance fees.

We believe that our current facilities are adequate to meet our needs.

Item 3. Legal Proceedings.

From time to time in the ordinary course of business, we ~~have become~~are a party to various types of legal proceedings. We do not believe that these proceedings, individually or in the aggregate, will have a material adverse effect on our financial position, results of operations or cash flows.

PART II

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Market Information

The table sets forth the high and low sales prices on the NASDAQ Global Market under the symbol “AEY” for the quarterly periods indicated.

Year Ended September 30, 2017	High		Low
Year Ended September 30, 2019					High	Low

First Quarter	$	1.94	$	1.60	$1.60	$1.25
Second Quarter	$	2.08	$	1.70	$1.50	$1.32
Third Quarter	$	1.92	$	1.58	$1.98	$1.23
Fourth Quarter	$	1.70	$	1.32	$2.20	$1.57

Year Ended September 30, 2016	High		Low
Year Ended September 30, 2018					High	Low

First Quarter	$	2.38	$	1.30	$2.33	$1.38
Second Quarter	$	2.07	$	1.57	$1.57	$1.28
Third Quarter	$	2.04	$	1.67	$1.50	$1.21
Fourth Quarter	$	2.31	$	1.70	$1.83	$1.29

Holders

At November 30, ~~2017,~~2019, we had approximately 6050 shareholders of record and, based on information received from brokers, there were approximately ~~1,500~~1,300 beneficial owners of our common stock.

Dividend policy

We have never declared or paid a cash dividend on our common stock. It has been the policy of our Board of Directors to use all available funds to finance the development and growth of our business. The payment of cash dividends in the future will be dependent upon our earnings, financial requirements and other factors deemed relevant by our Board of Directors.

Securities authorized for issuance under equity compensation plans

The information in the following table is as of September 30, ~~2017:~~2019:

Plan Category	Number of securities to be issued upon exercise of outstanding options, warrants and rights (a)		Weighted-average exercise price of outstanding options, warrants and rights (b)		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c)		Number of securities to be issued upon exercise of outstanding options, warrants and rights (a)	Weighted-average exercise price of outstanding options, warrants and rights (b)	Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c)
Equity compensation plans approved by security holders		700,000	$	2.54		212,451	770,000	$1.73	7,154
Equity compensation plans not approved by security holders		0		0		0	0	0	0
Total		700,000	$	2.54		212,451	770,000	$1.73	7,154

Item 6. Selected Financial Data.

SELECTED CONSOLIDATED FINANCIAL DATA

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

Fiscal Year Ended September 30,

	2017			2016		2015		2014		2013		2019			2018			2017			2016			2015

Sales	$	48,714		$	38,663	$	43,734	$	35,889	$	28,677	$	55,118		$	27,473		$	25,908		$	15,666		$	18,337

Income from operations	$	146		$	344	$	2,576	$	1,097	$	2,896
Income (loss) from operations												$	(3,976	)	$	(3,798	)	$	(2,916	)	$	(2,092	)	$	722

Income (loss) from continuing operations	$	(98	)	$	294	$	1,498	$	659	$	1,772
Loss from continuing operations												$	(4,035	)	$	(5,784	)	$	(2,456	)	$	(2,447	)	$	(1,010	)

Continuing operations earnings (loss) per share
Continuing operations loss per share
Basic	$	(0.01	)	$	0.03	$	0.15	$	0.07	$	0.18	$	(0.39	)	$	(0.56	)	$	(0.24	)	$	(0.24	)	$	(0.10	)
Diluted	$	(0.01	)	$	0.03	$	0.15	$	0.07	$	0.18	$	(0.39	)	$	(0.56	)	$	(0.24	)	$	(0.24	)	$	(0.10	)

Total assets	$	54,848		$	50,268	$	51,687	$	53,139	$	42,923	$	36,828		$	25,944		$	30,689		$	24,895		$	25,142

Long-term obligations inclusive of current maturities	$	6,284		$	4,366	$	5,240	$	6,086	$	1,503	$	‒		$	1,996		$	5,502		$	3,400		$	4,090

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

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

The Company reports its financial performance based on two external reporting segments: ~~Cable Television~~Wireless and Telecommunications. These reportable segments are described below.

~~Cable Television~~Wireless Infrastructure Services (“~~Cable TV”~~Wireless”)

The Company’s Cable TV segment sells new, surplus and refurbished cable television equipment to cable MSOs throughout North America, Central America and South America as well as other resellers who sell to these typesOn January 4, 2019, the Company purchased substantially all of ~~customers. Our Cable TV segment is a Premier Partner for Cisco’s products,~~the net assets of Fulton, which ~~allows them to sell both video-related and IT-related products in~~comprises the United States and a leading distributor of Arris broadband products. The Cable Television segment distributes products from other OEMs including Alpha, Blonder-Tongue, RL Drake, Corning-Gilbert, Promax, Quintech, Standard and Triveni Digital. In addition, we operate technical service centers that offer repairWireless segment. Fulton provides turn-key wireless infrastructure services for ~~our cable MSO customers~~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 ~~most products that we sell.~~cell sites and the construction of new small cells for 5G.

Telecommunications (“Telco”)

The Company’s Telco segment ~~primarily~~ sells ~~certified used~~new and refurbished telecommunications networking equipment, ~~from a broad range~~including both central office and customer premise equipment, to its customer base of ~~manufacturers to~~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 is a reseller of new telecommunications equipment from certain manufacturers. Also,~~ this segment offers its customers decommissioning services for surplus and obsolete equipment, which it in turn processes through its recycling services. As a result of the Triton Miami, Inc. (“Triton Miami”) acquisition , this segment includes the Company’s newly formed Triton Datacom subsidiary, a provider of new and refurbished enterprise networking products, including IP desktop phones,program.

~~enterprise switches and wireless routers.~~

Recent Business Developments

~~Business Strategy~~Purchase of Net Assets of Fulton Technologies, Inc. and Mill City Communications, Inc.

On December 27, 2018, we entered into a purchase agreement to acquire substantially all of the net assets of Fulton Technologies and Mill City. We closed this transaction on January 4, 2019 for $1.3 million in cash. The purchase allows us to enter into the wireless communication services business, which is poised for significant growth with the advent of 5G technology. This acquisition is part of the overall growth strategy that will further grow and diversify the Company into the broader telecommunications industry by providing wireless infrastructure services, which will continue to experience significant growth.

Fulton operates out of two primary locations. Fulton North, which is based just outside of Chicago in Roselle, Illinois, operates across the northern states including Illinois, Iowa and Minnesota. Fulton Southwest, which is based in Dallas, Texas, operates throughout Texas and neighboring states. As part of the asset purchase, we also acquired Mill City, which is based in Fridley, Minnesota. In April 2019, we decided to market and sell the assets of the Mill City operation and focus the company’s operations on its two large metropolitan locations. Fulton’s coverage of Chicago, Dallas, Houston, San Antonio and Austin allows it to participate in a collection of top wireless markets in the nation.

One of the key attractions of acquiring Fulton is that it had existing contracts and customer relationships. Fulton is an approved vendor with the four major U.S. wireless carriers, leading communication tower companies, national integrators, and major equipment manufacturers. The acquisition allowed us to enter the wireless communication space quickly and cost effectively. The customer contracts that Fulton had in place eliminated a key barrier for us to enter this industry due to the required experience and safety qualifications necessary to obtain the contracts.

In one of its business lines, Fulton performs equipment installations, upgrades and maintenance services for its customers primarily on communication towers. Having the proper safety record, training capability and quality oversight is paramount in the industry. Fulton has prided itself in performing safe, timely and high-quality services. Demand for tower equipment installation and upgrading services is at an all-time high, and we expect this trend to continue for the foreseeable future as wireless carriers continue to add capacity, expand their networks and upgrade their current technology for high speed connectivity, including 5G technology.

Fulton’s other primary business line involves the installation and support of temporary tower locations. This niche and growing business includes the erection of temporary towers to allow for the maintenance of permanent locations without causing a degradation of wireless service coverage in the area. In addition, Fulton provides temporary tower solutions for special events that require an increase of coverage and capacity for festivals, concerts and sporting events. Fulton has an inventory of temporary poles of different sizes and uses a unique installation process for the quick deployment of a tower location with little to no environmental impact.

Wireless Segment Operating Results Improvements

We are excited about the fiscal third and fourth quarter results of our Wireless segment. We planned that Fulton would incur operating losses in the first few months after the acquisition as we integrated and began ramping up the operation. In just our first nine months of operating this segment, Fulton was able to achieve revenue of $22.9 million with continually improving operating results as we continue to integrate the operation, which demonstrates Fulton’s growth potential. As part of the acquisition, we were able to hire and retain the majority of Fulton’s existing employee base, and we continue to successfully recruit strong industry talent throughout the business to help us implement operational improvements with a focus on improving our quality and project margins. We are seeing increased opportunities in the industry as wireless carriers prepare for the roll out of 5G and the required densification of their networks. We also believe that the recent merger news in the industry will present additional opportunities as networks are rationalized and a new carrier potentially expands their network to gain market share. Our continued goal is to solidify our processes and project oversight to successfully and profitably take advantage of new growth opportunities as they present themselves. Although there is still much work to do at Fulton over the next several quarters, we believe that Fulton will continue to provide strong revenue growth and gradually improving margins.

Telco Segment

We continue to see efficiencies from the operational restructuring put in place earlier this fiscal year, which has enabled us to focus our core team on sales, procurement and recycling opportunities. We are also ramping up our

repair activities to take advantage of our new capabilities as we further expand our business lines. We have recently added new employees to our team across both Nave and Triton Datacom with strong experience in online marketing and sales across both Nave and Triton.

At Triton Datacom, we are excited about our new facility that we moved into in October 2019. The facility has been designed to streamline and improve our processes including inventory management, shipping and receiving and the refurbishment operations. The added space will allow us to develop the internal systems necessary to expand our refurbishment capabilities and new equipment sales by adding additional product lines and manufacturers. We have also increased our focus on the brokerage business and internet sales by expanding our sales channels. We believe that Triton is poised to expand, capture additional market share and develop new customers. While Triton’s revenues are ahead of last year, we look forward to seeing Triton’s operating results improve as a result of these changes.

Discontinued Operations

In December 2018, the Company entered into an agreement for the sale of our Cable TV segment business to Leveling 8, Inc., a company controlled by David Chymiak, for $10.3 million. David Chymiak is a member of the Company’s Board of Directors and a substantial shareholder of the Company, and he was the Chief Technology Officer and President of Tulsat LLC until the closing of the sale. This agreement was approved by the Company’s Strategic Direction Committee and Board of Directors. The sale was subject to shareholder approval, and in April 2019, the Company distributed a proxy statement to its shareholders for a special meeting of shareholders on May 29, 2019. The shareholders approved the sale at the special meeting, and the Company then closed the transaction effective as of June 30, 2019.

The ~~Company continues~~$10.3 million purchase price consisted of $3.9 million of cash at closing (subject to ~~have~~ a ~~growth strategy consisting both~~working capital adjustment of ~~organic growth~~$1.1 million), less $2.1 million of cash proceeds received from the sale of the Sedalia, Missouri and ~~strategic acquisitions within~~Warminster, Pennsylvania facilities and a $6.4 million promissory note to be paid in semi-annual installments over five years with an interest rate of 6.0%. The sale of the ~~broader telecommunications industry. To date, we have~~facility in Broken Arrow, Oklahoma for $5.0 million was completed ~~two acquisitions under this strategy, Nave Communications Company (“Nave Communications”)~~prior to entering into the sale agreement, and ~~Triton Miami, which make up our Telco segment. Due primarily~~therefore was not an adjustment to ~~these two acquisitions, in May of 2017, the Company hired a VP of Sales to manage~~ the overall sales force of the Company. In 2017, Nave Communications experienced lower sales volumes due primarily to attrition in its sales force, and therefore its operating results were lower than expected. Since joining the Company in May, the VP of Sales has been focused on the development and implementation of an improved sales strategy and organization for Nave Communications with the goal to increase the sales volume and improve profitability of the overall Telco segment.purchase price.

~~Primarily~~In March and June 2019, we sold the Sedalia, Missouri and Warminster, Pennsylvania buildings to David Chymiak LLC for a cash purchase price of $1.4 million and $0.7 million, respectively. The proceeds from these sales were a credit to the purchase price and down payment to the proposed Cable TV sale as discussed above.

Therefore, as a result of the ~~lower operating results~~sale of the Cable TV business to Leveling 8 and the three facility sales to David Chymiak, we will receive total proceeds of $14.2 million. These proceeds consist of $7.1 million in cash received from the ~~Telco segment,~~facility sales, $0.7 million received in the fourth quarter of 2019, and a promissory note of $6.4 million to be paid over five years, which is personally guaranteed by David Chymiak. Taken as a whole, these transactions resulted in a net pretax loss of $1.5 million for the year ended September 30, 2019.

The proceeds from these sale transactions were used to pay existing debt as well as to support the Company’s strategic growth plans and working capital needs.

Additional Board Member

In July, we appointed a new independent director, John Shelnutt, to our Board of Directors. Mr. Shelnutt was appointed due to his extensive experience and contacts in the telecommunications industry as well as his background in business leadership and corporate strategy. Mr. Shelnutt is currently a Vice President of Blue Danube Systems, and previously served in various executive capacities at Cisco, including leading their mobility division with global responsibility for mobile product offerings. Mr. Shelnutt also spent 12 years in various executive leadership roles at Alcatel, including the startup of their global DSL division and managing their United States mobility division. Mr. Shelnutt has served on various boards within the telecommunications industry including the QuEST Forum, ATIS, Broadband Forum and was an advisor to Tech Titans of Dallas, Texas and the City of New York Public Schools Technology group. We are excited about John joining the Board and sharing his experience and talent with us as we continue to grow.

Banking Arrangements

In the first fiscal quarter of 2019, we used internal funds and cash provided by the sale of the Broken Arrow, Oklahoma

facility to pay off our outstanding term loans and line of credit under a forbearance agreement with a financial lender totaling $2.6 million. As a result of paying off the outstanding debt under the forbearance agreement, we were no longer under the forbearance agreement.

In December 2018, we entered into another credit agreement with a different financial lender. This credit agreement contains a $2.5 million revolving line of credit and matures on December 17, 2019.

Subsequent to September 30, 2019, the Company ~~was out~~renewed its revolving bank line of ~~compliance with its fixed charge coverage ratio debt covenant with its primary financial lender at September 30, 2017.~~credit for one more year to a maturity date of December 17, 2020. As part of this renewal, the revolving bank line of credit increased from $2.5 million to $4.0 million. The ~~Company has obtained a waiver from its primary financial lender for~~other terms of the ~~covenant violation.~~

~~Due to~~renewal were essentially the lower than expected operating results from the Telco segment, the Company has temporarily suspended its strategic acquisition plan. As the sales strategy is implemented within the Telco segment and their operating results improve on a sustainable basis, we plan to resume our strategic acquisitions strategy within the broader telecommunications industry in order to further expand our Company within the industry. 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 subjects the company to additional risks and we can give no assurance to the ultimate outcomes of such transactions.same.

Results of Operations

Year Ended September 30, ~~2017,~~2019, compared to Year Ended September 30, ~~2016~~2018 (all references are to fiscal years)

Consolidated

Consolidated sales increased ~~$10.0~~$27.6 million before the impact of intersegment sales, or ~~26%~~101%, to ~~$48.7~~$55.1 million for ~~2017~~2019 from ~~$38.7~~$27.5 million for ~~2016.~~2018. The increase in sales was due to the acquisition of the Wireless segment resulting in sales of $22.9 million and an increase in the Telco segment of ~~$10.2 million, partially offset by a decrease in the Cable TV segment of $0.2~~$4.7 million.

Consolidated gross profit increased ~~$2.4~~$1.7 million, or ~~19%~~23%, to ~~$14.8~~$9.1 million for ~~2017~~2019 from ~~$12.4~~$7.4 million for ~~2016.~~2018. The increase in gross profit was due to an increase in the Wireless segment of $2.0 million, partially offset by a decrease in the Telco segment of ~~$2.4~~$0.3 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 ~~$2.6~~$2.8 million, or ~~21%~~27%, to ~~$14.7~~$13.1 million for ~~2017~~2019 compared to ~~$12.1~~$10.3 million for ~~2016.~~2018. This increase was primarily due to increased expenses ofin the ~~Telco~~Wireless segment of ~~$3.0~~$3.5 million, partially offset by a decrease in ~~Cable TV~~Telco segment expenses of $0.7 million.

The Company recorded a $0.9 million restructuring charge for the Telco Segment for the year ended September 30, 2018 resulting from management’s decision to move Nave’s inventory management and order fulfillment operations from its facility in Jessup, Maryland to Palco Telecom (“Palco”), a third-party reverse logistics provider in Huntsville, Alabama. As a result, Nave incurred the following restructuring charges: 1) intangible impairment charge of $0.4 ~~million.~~million related to inventory tracking software that will no longer be utilized; 2) moving expenses of $0.4 million to transfer Nave’s inventory from its facility in Jessup, Maryland to Palco; and 3) severance expenses of $0.1 million for Nave operations employees.

Other income and expense primarily 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~~. Equity earnings for our role in the YKTG Solutions projects, was zero for 2017 compared to $0.5 million for 2016. Equity income for 2017 was zero compared to an equity loss of $0.2 million for 2016. 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 for 2016. For the year ended September 30, ~~2017,~~2019 were $0.1 million and equity losses were $0.3 million for the ~~Company did not record other income or~~year ended September 30, 2018. The equity ~~income related~~earnings for the year ended September 30, 2019 consisted primarily of payments received under a loan to the former YKTG Solutions aspartners. The equity losses for the ~~fees owed to~~year ended September, 2018 consisted primarily of a legal settlement with a subcontractor on the ~~Company may not ultimately be collectible from~~ YKTG ~~Solutions.~~Solutions wireless cell tower decommissioning project and the associated legal expenses.

Interest expense ~~increased $0.2~~decreased $0.1 million to ~~$0.4~~$0.1 million for ~~2017~~2019 from $0.2 million for the same period last year

primarily related to ~~financing~~ the ~~Company’s acquisition~~impact of ~~Triton Miami.~~extinguishing one of our term loans in November 2018.

The benefit for income taxes from continuing operations was ~~$0.1 million,~~$13 thousand for 2019, or an effective rate of ~~60%~~0.3%, ~~for 2017~~ from a provision of $0.2 million, or an effective rate of 38%, for the same period last year. The effective rate for the year ended September 30, 2017 was higher in 2017 due primarily to losses in states with higher tax rates.

~~Segment results~~

~~Cable TV~~

~~Sales for the Cable TV segment decreased $0.2 million, or 1%, to $22.8 million for the year ended September 30, 2017 from $23.0~~$1.5 million for the same period last year. The ~~decrease~~tax provision in ~~sales~~2018 was due primarily ~~due~~ to the establishment of a ~~decrease of $1.1 million in refurbished equipment sales, partially offset by an increase of $0.1 million and $0.8 million in new equipment sales and repair service revenues, respectively.~~valuation allowance.

~~Gross profit remained flat at $7.8~~

Segment results

Wireless

Revenues for the Wireless segment were $22.9 million for the ~~years~~year ended September 30, ~~2017~~2019 and ~~September 30, 2016.~~zero for the same period last year as a result of the acquisition of Fulton. Substantially all of the revenue for the year was derived from wireless infrastructure services. Gross margin was ~~34%~~9% for ~~both 2017 and 2016.~~the year ended September 30, 2019.

Operating, selling, general and administrative expenses ~~decreased $0.4 million, or 6%, to $5.9~~were $3.5 million for the year ended September 30, ~~2017 from $6.3~~2019. These expenses included $0.2 million ~~for~~of acquisition costs in connection with the ~~same period last year due primarily to a decrease in the corporate overhead allocation for 2017 primarily~~acquisition of Fulton as ~~a result~~well as integration expenses of ~~the Triton Miami acquisition.~~$0.3 million.

Telco

Sales for the Telco segment increased ~~$10.2~~$4.7 million, or ~~65%~~17%, to ~~$26.0~~$32.2 million for the year ended September 30, ~~2017~~2019 from ~~$15.8~~$27.5 million for the same period last year. The increase in sales resulted from an increase in ~~new equipment sales, used~~ equipment sales and recycling revenue of ~~$0.2 million, $9.4~~$3.8 million and ~~$0.6~~$0.9 million, respectively. The increase in Telco ~~used~~ equipment sales was ~~primarily~~ due to Triton Datacom, which offset the continued lower sales from Nave Communications. In addition, Triton Datacom’s sales were negatively impacted due to a facility closure in September for approximately two weeks because of Hurricane Maria. The Company is continuing to address the lower equipmentincreased sales at Nave Communications ~~by restructuring~~ and ~~expanding its sales force, targeting a broader end-user customer base, increasing sales~~Triton Datacom of $1.9 million each. The increase in recycling revenue was due primarily to ~~the reseller market and expanding the capacity~~increased volume of ~~the~~ recycling ~~program.~~shipments.

Gross profit ~~increased $2.4~~decreased $0.3 million, or ~~50%~~5%, to $7.1 million for the year ended September 30, ~~2017 from $4.7~~2019 compared to $7.4 million for the same period last year. Gross margin was 22% for 2019 and 27% for ~~2017 and 30% for 2016. The~~2018. Gross margin decreased primarily due to an increase in ~~gross profit was due to Triton Datacom, which offset~~obsolescence expense of $0.5 million and an increase in lower ~~gross profit from Nave Communications as a result~~ of ~~lower equipment sales. The decrease in gross margin was due primarily to lower gross margins from equipment sales from Nave Communications as a result~~cost or net realizable value expense of ~~an increased percentage of sales to resellers as compared to end-user customers and increased sourcing of equipment to fulfill equipment sales.~~$0.5 million.

Operating, selling, general and administrative expenses ~~increased $3.0~~decreased $0.7 million, or ~~51%~~9%, to ~~$8.8~~$9.6 million for the year ended September 30, ~~2017~~2019 from ~~$5.8~~$10.3 million for the same period last year. ~~The increase~~This decrease was due primarily to ~~operating~~decreased personnel costs.

The Telco segment incurred a $0.9 million restructuring charge for the Telco Segment for the year ended September 30, 2018 resulting from management’s decision to move Nave’s inventory management and order fulfillment operations from its facility in Jessup, Maryland to Palco Telecom (“Palco”), a third-party reverse logistics provider in Huntsville, Alabama. As a result, Nave incurred the following restructuring charges: 1) intangible impairment charge of $0.4 million related to inventory tracking software that will no longer be utilized; 2) moving expenses of ~~$2.3~~$0.4 million to transfer Nave’s inventory from ~~Triton Datacom, Triton Datacom earn-out~~its facility in Jessup, Maryland to Palco; and 3) severance expenses of ~~$0.2~~$0.1 million ~~and $0.2~~for Nave operations employees.

Discontinued Operations

Loss from discontinued operations, net of tax, was $1.3 million for the year ended September 30, 2019 compared to a loss of ~~acquisition-related expenses.~~$1.5 million last year. This activity included the operations of the Cable TV segment prior to the sale on June 30, 2019. We recognized a loss on the sale of the Cable TV segment of $1.5 million for the year ended September 30, 2019. The Cable TV segment recognized a goodwill impairment charge of $1.2 million for the year ended September 30, 2018.

Non-GAAP Financial Measure

Adjusted EBITDA is a supplemental, non-GAAP financial measure. EBITDA is defined as earnings before interest expense, income taxes, depreciation and amortization. Adjusted EBITDA as presented also excludes restructuring charge, 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 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.

1214

A reconciliation by segment of ~~income (loss)~~loss from operations to Adjusted EBITDA follows:

	Year Ended September 30, 2017							Year Ended September 30, 2016							Year Ended September 30, 2019									Year Ended September 30, 2018
	Cable TV		Telco			Total		Cable TV		Telco			Total		Wireless			Telco			Total			Wireless		Telco			Total

Income (loss) from operations	$	1,834,484	$	(1,688,878	)	$	145,606	$	1,478,676	$	(1,134,815	)	$	343,861
Loss from operations															$	(1,513,280	)	$	(2,462,834	)	$	(3,976,114	)	$	‒	$	(3,797,957	)	$	(3,797,957	)
Depreciation		303,571		143,263			446,834		322,076		99,874			421,950		237,333			130,159			367,492			‒		136,761			136,761
Amortization		−		1,267,182			1,267,182		−		825,804			825,804		18,300			1,067,100			1,085,400			−		1,253,244			1,253,244
Adjusted EBITDA (a)	$	2,138,055	$	(278,433	)	$	1,859,622	$	1,800,752	$	(209,137	)	$	1,591,615
Restructuring charge															‒			‒			‒			‒			941,059			941,059
Stock compensation expense																62,190			137,102			199,292			−		155,174			155,174
Adjusted EBITDA (a)(b)															$	(1,195,457	)	$	(1,128,473	)	$	(2,323,930	)	$	−	$	(1,311,719	)	$	(1,311,719	)

(a)	The Wireless segment includes acquisition expenses of $0.2 million and integration expenses of $0.3 million for the year ended September 30, 2019, related to the acquisition of Fulton (See Note 3 – Acquisition).

(b)

The Telco segment includes ~~earn-out expenses~~an inventory obsolescence charge of $0.7 million and $0.2 million for ~~each of~~ the years ended September 30, ~~2017~~2019 and ~~2016, related to~~2018, respectively. In addition, the ~~acquisition~~Telco segment includes a lower of ~~Triton Miami~~cost or net realizable value charge of $0.7 million and ~~Nave Communications.~~$0.2 million for the years ended September 30, 2019 and 2018, respectively.

Year Ended September 30, ~~2016,~~2018, compared to Year Ended September 30, ~~2015~~2017(all references are to fiscal years)

For this discussion, consolidated results and segment results are the same as the Wireless segment did not have activity until the Fulton acquisition in 2019.

Consolidated

Consolidated sales ~~decreased $5.0~~increased $1.6 million before the impact of intersegment sales, or ~~12%~~6%, to ~~$38.7~~$27.5 million for ~~2016~~2018 from ~~$43.7~~$25.9 million for ~~2015.~~2017. The ~~decrease~~increase in sales was due to ~~a decrease~~an increase in ~~both~~ the ~~Cable TV and~~ Telco ~~segments~~equipment sales of ~~$2.4 million and $3.0 million, respectively.~~

~~Consolidated gross profit decreased $2.9 million, or 19%, to $12.4 million for 2016 from $15.3 million for 2015.~~$1.6 million. The ~~decrease~~increase in ~~gross profit~~Telco equipment sales was due to ~~a decrease in both the Cable TV~~increased sales at Nave Communications and ~~Telco segments~~Triton Datacom of $1.3 million and $0.3 million, respectively. The increase in equipment sales at Nave Communications can be attributed in part to the Company addressing the lower equipment sales it had been experiencing over the past several quarters at Nave Communications by restructuring its sales force and ~~$2.6~~implementing a new sales strategy.

Gross profit increased $0.3 million, ~~respectively.~~or 5%, to $7.4 million for the year ended September 30, 2018 compared to $7.1 million for the same period last year. Gross margin was 27% for both 2018 and 2017.

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~~increased $0.3 million, or 5%3%, to ~~$12.1~~$10.3 million for ~~2016~~2018 compared to ~~$12.7~~$10.0 million for ~~2015.~~2017. This ~~decrease~~increase was due primarily ~~due~~ to ~~decreased~~increased personnel costs.

The Telco segment incurred a $0.9 million restructuring charge for the Telco Segment for the year ended September 30, 2018 resulting from management’s decision to move Nave’s inventory management and order fulfillment operations from its facility in Jessup, Maryland to Palco, a third-party reverse logistics provider in Huntsville, Alabama. As a result, Nave incurred the following restructuring charges: 1) intangible impairment charge of $0.4 million related to inventory tracking software that will no longer be utilized; 2) moving expenses of ~~the Telco segment of $1.1~~$0.4 million ~~partially offset by an increase~~to transfer Nave’s inventory from its facility in ~~Cable TV segment~~Jessup, Maryland to Palco; and 3) severance expenses of ~~$0.5 million.~~$0.1 million for Nave operations employees.

Other income and expense primarily consists of activity related to our investment in YKTG Solutions, including ~~other income,~~

~~interest income and~~ equity earnings (losses),. Equity losses for the year ended September 30, 2018 were $0.3 million and ~~interest expense related to our notes payable. Other income, which represents our fee~~zero for ~~our role in~~the year ended September 30, 2017. The equity losses for year ended September 30, 2018 consisted primarily of a legal settlement with a subcontractor on 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~~wireless cell tower ~~sites in~~decommissioning project and 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.associated legal expenses.

Interest expense decreased ~~$0.1~~$0.2 million to $0.2 million for ~~2016~~2018 from ~~$0.3~~$0.4 million for the same period last ~~year.~~year

primarily related to the impact of paying off one of our term loans in December 2017.

The provision for income taxes from continuing operations ~~decreased by $0.6 million to $0.2~~was $1.5 million, or an effective rate of ~~38%,~~36% for ~~2016~~2018 from ~~$0.8 million, or an effective rate~~a benefit 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~~$0.8 million for the same period last year. The ~~decrease~~effective rate for the year ended September 30, 2018 was higher due primarily to establishing a valuation allowance for deferred taxes. The effective tax rate for the year ended September 30, 2018 was also increased by net operating losses in ~~sales was~~states with higher tax rates due 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.~~the loss from YKTG Solutions.

~~Gross profit decreased $0.2 million, or 3%, to $7.8~~Discontinued Operations

Loss from discontinued operations, net of tax, was $1.5 million for the year ended September 30, ~~2016 from $8.0~~2018 compared to income of $2.4 million ~~for~~in 2017. This activity included the ~~same period last year. Gross margin was 34% for 2016 and 32% for 2015.~~operations of the Cable TV segment prior to the sale on June 30, 2019. 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~~Cable TV segment recognized a goodwill impairment charge of $1.2 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 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 $0.1 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.2018.

Non-GAAP Financial Measure

A reconciliation by segment of ~~income (loss)~~loss from operations to Adjusted EBITDA follows:

	Year Ended September 30, 2016							Year Ended September 30, 2015							Year Ended September 30, 2018								Year Ended September 30, 2017
	Cable TV		Telco			Total			Cable TV		Telco		Total		Wireless		Telco			Total			Wireless		Telco			Total

Income (loss) from operations	$	1,478,676	$	(1,134,815	)	$	343,861		$	2,210,414	$	365,796	$	2,576,210
Loss from operations															$	‒	$	(3,797,957	)	$	(3,797,957	)	$	‒	$	(2,916,351	)	$	(2,916,351	)
Depreciation		322,076		99,874			421,950			296,876		111,827		408,703		‒		136,761			136,761			‒		151,235			151,235
Amortization		−		825,804			825,804			−		825,805		825,805		‒		1,253,244			1,253,244			−		1,267,182			1,267,182
Restructuring charge															‒		941,059			941,059			‒			‒			‒
Stock compensation expense																‒		155,174			155,174			−		175,465			175,465
Adjusted EBITDA (a)	$	1,800,752	$	(209,137	)	$	1,591,615		$	2,507,290	$	1,303,428	$	3,810,718	$	‒	$	(1,311,719	)	$	(1,311,719	)	$	−	$	(1,322,469	)	$	(1,322,469	)

(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,~~2017, related to the acquisition of ~~Nave Communications.~~Triton Miami, Inc. The Telco segment includes an inventory obsolescence charge of $0.2 million and $0.3 million for the years ended September 30, 2018 and 2017, respectively. In addition, the Telco segment includes a lower of cost or net realizable value charge of $0.2 million and $0.1 million for the years ended September 30, 2018 and 2017, respectively.

Liquidity and Capital Resources

Cash Flows ~~Provided by~~Used in Operating Activities

We generally finance our operations primarily through cash flows provided by operations, our quick payment accounts receivable programs in our Wireless segment and ~~we have a bank~~our line of credit of up to ~~$7.0~~$2.5 million. During ~~2017,~~2019, we ~~generated $2.9~~used $6.0 million of cash flows ~~from~~for continuing operations. ~~The cash flows from operations was favorably impacted by $1.0 million from a net increase in accounts payable.~~ The cash flows from operations was negatively impacted by ~~$0.7~~a $1.4 million net increase in accounts receivable, a $2.3 million net increase in unbilled revenue and a $1.6 million net increase of inventories. In addition, the cash flows from operations was favorably impacted by $0.5 million from a net increase in ~~inventory.~~accrued expenses. Net cash provided by operating activities from discontinued operations was $1.2 million.

Cash Flows ~~Used in~~Provided by Investing Activities

During ~~2017,~~2019, cash used inby investing activities for continuing operations was ~~$5.3 million. The cash used in investing activities is~~$0.5 million, which primarily related to ~~payments~~the purchase of ~~$6.6~~substantially all of the net assets of Fulton Technologies. The net purchase price was $1.3 million. Cash received from the sale of the Cable TV segment was $0.8 million.

During 2019, cash provided by investing activities for discontinued operations of $7.1 million was related to the ~~acquisition~~sales of ~~Triton Miami, as~~three facilities within the Cable TV segment to a company controlled by David Chymiak. The sales were our Broken Arrow, Oklahoma facility for $5.0 million, our Sedalia, Missouri facility for $1.4 million and our Warminster, Pennsylvania facility for $0.7 million. In addition, we also have a promissory note of $6.4 million resulting from the sale of the Cable TV segment to Leveling 8. These sales are discussed in Note 24 of the Notes to the Consolidated Financial ~~Statements included in Item~~Statements. Subsequent to September 30, 2019, the first installment of the promissory note of $0.7 million for principal and interest was paid by Leveling 8 of this Annual Report on Form 10-K, and payments of $1.0 million in March 2017 for the final annual installment payment from the Nave Communications acquisition. Additionally, during 2017, cash used in investing activities was offset by note receivable payments from the YKTG Solutions joint venture of $2.5 million.

~~The Company recorded an accrual at present value for deferred consideration of $1.8 million related~~ to the acquisition of Triton Miami, which consists of $2.0 million to be paid in equal annual installments over three years to the Triton Miami owners. The Company will also make annual payments to the Triton Miami owners, if they have not resigned from Triton Datacom, over the next three years equal to 60% of Triton Datacom’s annual EBITDA in excess of $1.2 million per year, which the Company estimates will be between $0.2 million and $0.6 million annually.Company.

Cash Flows ~~Provided by~~Used in Financing Activities

~~During 2017, cash provided by financing activities was $1.9 million primarily due to cash borrowings~~In November 2018, we extinguished one of ~~$4.0 million, partially offset by notes payable payments of $2.1 million. Cash borrowings were due to a new term loan of $4.0 million under~~ our Amended and Restated Revolving Credit and Term Loan Agreement (“Credit and Term Loan Agreement”) with our primary financial lender. This term loan was used to assist in the funding of the acquisition of Triton Miami.

~~During 2017, we made principal payments of $2.1 million on our three~~two outstanding term loans under ~~our Credit and Term Loan Agreement with our primary lender. The first term loan requires monthly payments~~the forbearance agreement by paying the outstanding balance of $15,334 plus accrued interest through November 2021. Our second term loan 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. Our third term loan, entered into in connection with the acquisition of Triton Miami, is a three year term loan with monthly principal and interest payments of $118,809 through$1.5 million. In October ~~2019.~~

~~At September 30, 2017, there was not a balance outstanding under~~2018, we also extinguished our line of ~~credit.~~credit under the forbearance agreement by paying the outstanding balance of $0.5 million. As a result of these payments, we were no longer under the forbearance agreement.

In December 2018, the Company entered into a credit agreement with a different lender. This credit agreement contains a $2.5 million revolving bank line of credit and matures on December 17, 2019. The revolving bank line of credit requires quarterly interest payments based on the prevailing Wall Street Journal Prime Rate (5.0% at September 30, 2019), and the interest rate is reset monthly. Future borrowings under the Line of Credit are limited to the lesser of ~~$7.0~~$2.5 million or the ~~total~~sum of 80% of ~~the qualified~~eligible accounts receivable ~~plus 50%~~and 25% of ~~qualified inventory is available to us under~~eligible inventory. Under these limitations, the ~~revolving~~Company’s total line of credit ~~facility ($7.0~~borrowing capacity was $2.5 million at September 30, ~~2017). On March 31, 2017,~~2019. At September 30, 2019, the amount outstanding under the revolving bank line of credit was zero.

Subsequent to September 30, 2019, the Company ~~executed~~renewed its revolving bank line of credit for one more year to a maturity date of December 17, 2020. As part of this renewal, the ~~Eighth Amendment under the Credit and Term Loan Agreement, which extended the Line~~revolving bank line of ~~Credit maturity~~credit increased from $2.5 million to ~~March 30, 2018.~~$4.0 million. The other terms of the ~~Line of Credit remained~~renewal were essentially the same.

During the year ended September 30, 2019, cash used by financing activities for discontinued operations of $0.6 million related to extinguishing one of the two outstanding term loans under the forbearance agreement by paying the outstanding balance of $0.6 million in November 2018.

We believe that our cash and cash equivalents and restricted cash of ~~$4.0~~$1.6 million at September 30, ~~2017, cash flows from operations and~~2019, our existing revolving bank line of credit, our accounts receivable programs for our Wireless segment and future payments from our promissory note resulting from the Cable TV segment sale will provide sufficient liquidity and capital resources to ~~meet~~cover our operating losses and our additional working capital and debt payment needs.

~~At September 30, 2017,~~ As discussed in the Recent Business Developments section, our Wireless segment is seeing increased opportunities in the industry as wireless carriers prepare for the roll out of 5G and the required densification of their networks, and we were not in compliance with our fixed charge coverage ratio financial covenant with our primary financial lender under our Credit and Term Loan Agreement. This financial covenant violation was due primarily to lower operating results from our Telco segment in fiscal year 2017. We notified our primary financial lender of the covenant violation, and on December 1, 2017, the primary financial lender granted a waiver of the covenant violation. Subsequent to September 30, 2017, we elected to extinguish our second term loan by paying the outstanding balance plus a prepayment penalty of $25 thousand as part of our overall plan to become compliant with our financial covenants. As a result, wealso believe that ~~we will be in compliance with our financial covenants at December 31, 2017.~~

~~Any failure to comply with these covenants~~the recent merger news in the ~~future may result in an event~~industry will present additional opportunities as networks are rationalized and a new carrier potentially expands their network to gain market share. Depending on the timing and scope of default, which if not cured or waived, could result in the lender accelerating the maturity of our indebtedness or preventing access to additional funds under the Credit and Term Loan Agreement, or requiring prepayment of outstanding indebtedness under the Credit and Term Loan Agreement. If the maturity of the indebtedness is accelerated, sufficient cash resources to satisfy the debt obligations may not be available, andthese opportunities, we may ~~not be able~~need to ~~continue operations as planned. The indebtedness under~~seek additional funding to finance the ~~Credit and Term Loan Agreement is secured by a security interest in substantially all of our tangible and intangible assets of the Company. If we are unable to repay~~necessary working capital for such indebtedness, the lender could foreclose on these assets. However, given our ability to continue to service our debt, our past relationship with our primary financial lender and our improved sales strategy within our Telco segment, we expect we would be able to obtain covenant waivers from our primary financial lender until such time that we are in compliance with our debt covenants.opportunities.

Critical Accounting Policies and Estimates

Note 1 to the Consolidated Financial Statements in this Form 10-K for fiscal year ~~2017~~2019 includes a summary of the significant accounting policies or methods used in the preparation of our Consolidated Financial Statements. Some of those significant accounting policies or methods require us to make estimates and assumptions that affect the amounts reported by us. We believe the following items require the most significant judgments and often involve complex estimates.

General

The preparation of financial statements in conformity with United States generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We base our estimates and judgments on historical experience, current market conditions, and various other factors we believe to be reasonable under the circumstances, the results

of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates under different assumptions or conditions. The most significant estimates and assumptions are discussed below.

Inventory Valuation

~~Our~~For our Telco segment, our position in the telecommunications industry ~~and overall business strategy~~ requires us to carry relatively large inventory quantities relative to annual sales, but it also allows us to realize high overall gross profit margins on our sales. We market our products primarily to ~~MSOs,~~ telecommunication providers, telecommunication resellers, 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 are all carried in the Telco segment and consist of new and used electronic components for the ~~cable and~~ telecommunications ~~industries.~~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 September 30, ~~2017,~~2019, we had total inventory, before the reserve for excess and obsolete ~~inventory, $25.3~~inventories, of $8.9 million, consisting of ~~$14.6~~$1.5 million in new products and ~~$10.7~~$7.4 million in used or refurbished products.

For the Cable TV segment, our reserve at September 30, 2017 for excess and obsolete inventory was $2.3 million. In 2017, we increased the reserve by $0.6 million, and we wrote down, against this reserve, the carrying value for certain inventory items by $0.5 million to reflect deterioration in the market price 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, any obsolete and excess telecommunications inventory is processed through its recycling program when it is identified. However, the Telco segment~~We 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~~our recycling program. Therefore, we have aan obsolete and excess inventory reserve of ~~$0.6~~$1.3 million at September 30, ~~2017.~~2019. In ~~2017,~~2019, we increased the reserve ~~net of write-downs,~~ by ~~$0.3~~$0.5 million. We also reviewed the cost of inventories against estimated market value and recorded a lower of cost or net realizable value write-off of ~~$0.1~~$0.7 million for inventories that have a cost in excess of estimated net realizable 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.~~a material component of cost of sales.

Accounts Receivable Valuation

Management judgments and estimates are made in connection with establishing the allowance for doubtful accounts. Specifically, we analyze the aging of accounts receivable balances, historical bad debts, customer concentrations, customer credit-worthiness, current economic trends and changes in our customer payment terms. Significant changes in customer concentration or payment terms, deterioration of customer credit-worthiness, or weakening in economic trends could have a significant impact on the collectability of receivables and our operating results. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, an additional provision to the allowance for doubtful accounts may be required. The reserve for bad debts was $0.2 million at September 30, ~~2017~~2019 and ~~$0.3 million at~~ September 30, ~~2016.~~2018. At September 30, ~~2017,~~2019, accounts receivable, net of allowance for doubtful accounts, was ~~$5.6~~$4.8 million.

~~Note Receivable Valuation~~

Included in investment in and loans to equity method investee as of September 30, 2017 is a note receivable from the Company's joint venture partner, YKTG Solutions, of $0.1 million. To date, this joint venture has incurred operating losses and, as of September 30, 2017, the total assets of the joint venture are less than the amount it owes to ADDvantage. In 2017, the U.S. wireless provider, which the joint venture was supporting decommission work on cell tower sites across 13 states in the northeast, changed the process for assigning the various sites within the decommission project, which YKTG Solutions believes would result in a negative cash flow for the joint venture. Accordingly, YKTG Solutions elected to suspend the acceptance of any further work under the decommission project unless and until the U.S. wireless provider resumes its previous process of assigning the sites under the decommission project.

Management judgements and estimates are made in connection with collection of the note receivable from the joint venture. Specifically, since the decommission project on behalf of the U.S. wireless provider has been suspended, we determined the remaining billings and vendor payments to be incurred for this project to determine the ability of the joint venture to satisfy its obligations to the Company. Based on this analysis, we determined that the remaining net assets of the joint venture will not satisfy the obligation to the Company. Therefore, the Company did not record management fees or equity income for the year ended September 30, 2017, as the collectability of the amounts owed to the Company are not reasonably assured. The Company is pursuing collections from the joint venture partners under personal guarantee agreements provided to the Company. The investment in and loans to equity method investee reflects the estimated net realizable amount of $0.1 million, after considering the personal guarantees the Company has with the joint venture partners.

Goodwill

Goodwill represents the excess of purchase price of acquisitions over the acquisition date fair value of the net ~~identifiable tangible and intangible~~ 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 aggregated into the ~~Cable TV~~Wireless operating segment and the Telco operating segment.

Management utilizes a discounted cash flow analysis to determine the estimated fair value of each reporting unit. Significant judgments and assumptions including the discount rate, anticipated revenue growth rate, gross margins and operating expenses are inherent in these fair value estimates. As a result, actual results may differ from the estimates utilized in our discounted cash flow analysis. The use of alternate judgments and/or assumptions could result in the recognition of different levels of impairment charges in the financial statements. If the carrying value of one of the reporting units 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 2017 and determined that the fair value of our reporting units exceeded their carrying values. Therefore, no impairment existed as of September 30, 2017.

We did not record a goodwill impairment for ~~either of our two reporting units~~the Wireless or Telco segments in the three year period ended September 30, ~~2017. However,~~2019. In addition, we are implementing strategic plans as discussed in Recent Business Developments to help prevent impairment charges in the future, which include the restructuring and expansion of the sales organization in the Telco segment to increase the volume of sales activity, and reducing inventory levels in both the Cable TV and Telco segments.future. Although we do not anticipate a future impairment charge, certain events could occur that might adversely affect the reported value of goodwill. Such events could include, but are not limited to, economic or competitive conditions, a significant change in technology, the economic condition of the customers and industries we serve, a ~~significant decline in the real estate markets we operate in, a~~ material negative change in the relationships with one or more of our significant customers or equipment suppliers, failure to successfully implement our plan to restructure and ~~expansion of~~expand the Telco sales organization, and failure to reduce inventory levels within the ~~Cable TV or~~ Telco ~~segments.~~segment. If our judgments and assumptions change as a result of the occurrence of any of these events or other events that we do not currently anticipate, our expectations as to future results and our estimate of the implied fair value of ~~each reporting unit~~the Wireless segment and Telco segment also may change.

As a result of the ~~Triton Miami~~Fulton Technologies acquisition, wethe Company recorded additional goodwill of ~~$2.1 million~~$57 thousand as the purchase price exceeded the acquisition date fair value of the net ~~identifiable~~ assets based on the final purchase price allocation.

Intangibles

Intangible assets that have finite useful lives are amortized on a straight-line basis over their estimated useful lives ranging from 3 years to 10 years. As a result of the ~~Triton Miami~~Fulton Technologies acquisition, wethe Company has recorded an additional intangible ~~assets~~asset for customer relationships of ~~$3.9 million, trade name of $0.8 million and non-compete agreements of $0.1~~$0.2 million based on the final purchase price allocation.

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.

Recently Issued Accounting Standards

In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09: “Revenue from Contracts with Customers (Topic 606)”. This ASU 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”). In

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 for annual reporting periods beginning after December 15, 2017. Management is evaluating the impact that ASU No. 2014-09 will have on the Company’s consolidated financial statements. Based on management’s 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 February 2016, the FASB issued ASU ~~No.~~ 2016-02: “Leases (Topic 842)” which is intended to improve financial reporting about leasing transactions. This 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, this 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. Based on management’s initial

assessment, ASU ~~No.~~ 2016-02 will have a material impact on the Company’s consolidated financial statements. Management reviewed its lease obligations and determined that the Company generally does not enter into long-term lease obligations with the exception of its real estate leases for its facilities and its fleet leases for the Wireless segment. The Company is a lessee on certain real estate leases and vehicle leases that will ~~need to~~ be reported as right of use assets and liabilities at an ~~estimated~~ amount of $3$5.4 million on the Company’s consolidated financial statements on the date of ~~adoption.~~

~~In March 2016, the FASB issued ASU No. 2016-09: “Compensation – Stock Compensation (Topic 718)”~~adoption, 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 has determined that ASU No. 2016-09 will not have a material impact on the Company’s consolidated financial statements. The Company does not currently have excess tax benefits or deficiencies from stock compensation expense. The Company adopted ASU 2016-09 on October 1, ~~2017.~~2019.

In June 2016, the FASB issued ASU 2016-13: “Financial Instruments —– Credit Losses (Topic 326) – Measurement of Credit Losses on Financial Instruments.” This ASU requires entities to measure all expected credit losses for most financial assets held at the reporting date based on an expected loss model which includes historical experience, current conditions, and reasonable and supportable forecasts. Entities will now use forward-looking information to better form their credit loss estimates. This ASU also requires enhanced disclosures to help financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an entity’s portfolio. ASU 2016-13 is effective for annual periods beginning after December 15, 2019, including interim periods within those fiscal periods. Entities may adopt earlier as of the fiscal year beginning after December 15, 2018, including interim periods within those fiscal years. We are currently in the process of evaluating this new standard update.

In August 2016, the FASB issued ASU 2016-15: “Statement of Cash Flows (Topic 230) – Classification of Certain Cash Receipts and Cash Payments.” This ASU addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. The amendments in this ASU are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. Based on management’s initial assessment of ASU No. 2016-15, the cash flows associated with guaranteed payments for acquisition of businesses will be reported as a financing activity in the Statement of Cash Flows, as opposed to an investing activity where it is currently reported.

In January 2017, the FASB issued ASU No. 2017-01: “Business Combinations (Topic 805) – Clarifying the definition of a Business.” This ASU clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The guidance is effective for annual periods beginning after December 15, 2017, including interim periods within those periods. This ASU 2017-01 was issued to clarify guidance and will not have a material impact on the Company’s consolidated financial statements. ASU No. 2017-01 does not change the accounting for previously acquired businesses.

In January 2017, the FASB issued ASU 2017-04: “Intangibles – Goodwill and Other (Topic 350) – Simplifying the Test for Goodwill Impairment.” This ASU eliminates the second step in the goodwill impairment test which requires an entity to determine the implied fair value of the reporting unit’s goodwill. Instead, an entity should recognize an

impairment loss if the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, with the impairment loss not to exceed the amount of goodwill allocated to the reporting unit. This ASU is effective for annual and interim goodwill impairment tests conducted in fiscal years beginning after December 15, 2019, with early adoption permitted. Management is evaluating the impact that ASU No. 2017-04 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	22

Consolidated Balance Sheets, September 30, ~~2017~~2019 and ~~2016~~2018	23

Consolidated Statements of Operations, Years ended
September 30, ~~2017, 2016~~2019, 2018 and ~~2015~~2017	25

Consolidated Statements of Changes in Shareholders’ Equity, Years ended
September 30, ~~2017, 2016~~2019, 2018 and ~~2015~~2017	26

Consolidated Statements of Cash Flows, Years ended
September 30, ~~2017, 2016~~2019, 2018 and ~~2015~~2017	27

Notes to Consolidated Financial Statements	2829

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and the Board of Directors ~~and Stockholders~~ of

ADDvantage Technologies Group, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of ADDvantage Technologies, ~~Group,~~ Inc. and its subsidiaries (the Company) as of September 30, ~~2017~~2019 and ~~2016,~~2018, and the related consolidated statements of operations, changes in ~~shareholders’~~shareholders' equity, and cash flows for each of the three years in the period ended September 30, ~~2017.~~ 2019, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 2019, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility of the ~~Company’s~~Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the ~~Public Company Accounting Oversight Board (United States).~~PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material ~~misstatement.~~misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. ~~Our~~As part of our audits ~~included consideration~~we are required to obtain an understanding of internal control over financial reporting ~~as a basis for designing audit procedures that are appropriate in the circumstances,~~ but not for the ~~purpose~~purposes of expressing an opinion on the effectiveness of the ~~Company’s~~Company's internal control over financial reporting. Accordingly, we express no such opinion. ~~An audit also includes~~

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence ~~supporting~~regarding the amounts and disclosures in the financial ~~statements, assessing~~statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial ~~statement presentation.~~statements. 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, 2017 and 2016, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2017, in conformity with U.S. generally accepted accounting principles.

/s/ HOGANTAYLOR LLP

We have served as the Company’s auditor since 2006.

Tulsa, Oklahoma

December ~~14, 2017~~17, 2019

ADDVANTAGE TECHNOLOGIES GROUP, INC.

CONSOLIDATED BALANCE SHEETS

	September 30,						September 30,
	2017			2016			2019			2018
Assets
Current assets:
Cash and cash equivalents	$	3,972,723		$	4,508,126		$	1,242,143		$	3,129,280
Accounts receivable, net of allowance for doubtful accounts of $150,000 and $250,000, respectively		5,567,005			4,278,855
Restricted cash								351,909		‒
Accounts receivable, net of allowance for doubtful accounts of $150,000								4,826,716			2,578,998
Unbilled revenue								2,691,232		‒
Promissory note – current								1,400,000		‒
Income tax receivable		247,186			480,837			21,350			178,766
Inventories, net of allowance for excess and obsolete
inventory of $2,939,289 and $2,570,868, respectively		22,333,820			21,524,919
Inventories, net of allowance for excess and obsolete inventory of $1,275,000 and $815,000, respectively								7,625,573			7,462,491
Prepaid expenses		298,152			323,289			543,762			253,405
Other current assets								262,462		‒
Current assets of discontinued operations							‒				16,925,526
Total current assets		32,418,886			31,116,026			18,965,147			30,528,466

Property and equipment, at cost:
Land and buildings		7,218,678			7,218,678
Machinery and equipment		3,995,668			3,833,230			2,475,545			1,084,024
Leasehold improvements		202,017			151,957			190,984			190,984
Total property and equipment, at cost		11,416,363			11,203,865			2,666,529			1,275,008
Less: Accumulated depreciation		(5,395,791	)		(4,993,102	)		(835,424	)		(773,312	)
Net property and equipment		6,020,572			6,210,763			1,831,105			501,696

Promissory note – noncurrent								4,975,000		‒
Investment in and loans to equity method investee		98,704			2,588,624		‒				49,000
Intangibles, net of accumulated amortization		8,547,487			4,973,669			6,002,998			6,844,398
Goodwill		5,970,244			3,910,089			4,877,739			4,820,185
Deferred income taxes		1,653,000			1,333,000
Other assets		138,712			135,988			176,355			125,903
Assets of discontinued operations							‒				1,524,972

Total assets	$	54,847,605		$	50,268,159		$	36,828,344		$	44,394,620

See notes to consolidated financial statements.

ADDVANTAGE TECHNOLOGIES GROUP, INC.

CONSOLIDATED BALANCE SHEETS

	September 30,						September 30,
	2017			2016			2019			2018
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable	$	3,392,725		$	1,857,953		$	4,730,537		$	3,300,388
Accrued expenses		1,406,722			1,324,652			1,617,911			711,936
Deferred revenue								97,478		‒
Notes payable – current portion		4,189,605			899,603		‒				1,996,279
Other current liabilities		664,325			963,127			757,867			664,374
Current liabilities of discontinued operations							‒				2,392,780
Total current liabilities		9,653,377			5,045,335			7,203,793			9,065,757

Notes payable, less current portion		2,094,246			3,466,358
Other liabilities		1,401,799			131,410			177,951			801,612
Total liabilities		13,149,422			8,643,103			7,381,744			9,867,369

Shareholders’ equity:
Common stock, $.01 par value; 30,000,000 shares authorized; 10,726,653 and 10,634,893 shares issued, respectively; 10,225,995 and 10,134,235 shares outstanding, respectively		107,267			106,349
Common stock, $.01 par value; 30,000,000 shares authorized; 10,861,950 and 10,806,803 shares issued, respectively; 10,361,292 and 10,306,145 shares outstanding, respectively								108,620			108,068
Paid in capital		(4,746,466	)		(4,916,791	)		(4,377,103	)		(4,598,343	)
Retained earnings		47,337,396			47,435,512			34,715,097			40,017,540
Total shareholders’ equity before treasury stock		42,698,197			42,625,070			30,446,614			35,527,265

Less: Treasury stock, 500,658 shares, at cost		(1,000,014	)		(1,000,014	)		(1,000,014	)		(1,000,014	)
Total shareholders’ equity		41,698,183			41,625,056			29,446,600			34,527,251

Total liabilities and shareholders’ equity	$	54,847,605		$	50,268,159		$	36,828,344		$	44,394,620

See notes to consolidated financial statements.

ADDVANTAGE TECHNOLOGIES GROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

	Years ended September 30,									Years ended September 30,
	2017			2016			2015			2019			2018			2017
Sales	$	48,713,746		$	38,663,264		$	43,733,620		$	55,118,297		$	27,473,282		$	25,907,571
Cost of sales		33,903,153			26,222,381			28,434,731			46,025,775			20,056,067			18,835,333
Gross profit		14,810,593			12,440,883			15,298,889			9,092,522			7,417,215			7,072,238
Operating, selling, general and administrative expenses		14,664,987			12,097,022			12,722,679			13,068,636			10,274,113			9,988,589
Income from operations		145,606			343,861			2,576,210
Restructuring charge										‒				941,059			–
Loss from operations											(3,976,114	)		(3,797,957	)		(2,916,351	)
Other income (expense):
Other income		–			459,636			−
Interest income		–			90,686			−			96,411		‒			‒
Loss from equity method investment		–			(184,996	)		−
Income (loss) from equity method investment											135,505			(258,558	)	‒
Other expense											(223,999	)	‒			‒
Interest expense		(389,722	)		(236,024	)		(305,310	)		(79,902	)		(210,182	)		(369,394	)
Total other income (expense), net		(389,722	)		129,302			(305,310	)
Total other expense, net											(71,985	)		(468,740	)		(369,394	)

Income (loss) before income taxes		(244,116	)		473,163			2,270,900
Loss before income taxes											(4,048,099	)		(4,266,697	)		(3,285,745	)
Provision (benefit) for income taxes		(146,000	)		179,000			773,000			(13,000	)		1,517,000			(830,000	)
Loss from continuing operations											(4,035,099	)		(5,783,697	)		(2,455,745	)

Net income (loss)	$	(98,116	)	$	294,163		$	1,497,900
Income (loss) from discontinued operations, net of tax											(1,267,344	)		(1,536,159	)		2,357,629

Earnings (loss) per share:
Net loss										$	(5,302,443	)	$	(7,319,856	)	$	(98,116	)

Income (loss) per share:
Basic	$	(0.01	)	$	0.03		$	0.15
Continuing operations										$	(0.39	)	$	(0.56	)	$	(0.24	)
Discontinued operations											(0.12	)		(0.15	)		0.23
Net loss										$	(0.51	)	$	(0.71	)	$	(0.01	)
Diluted	$	(0.01	)	$	0.03		$	0.15
Continuing operations										$	(0.39	)	$	(0.56	)	$	(0.24	)
Discontinued operations											(0.12	)		(0.15	)		0.23
Net loss										$	(0.51	)	$	(0.71	)	$	(0.01	)
Shares used in per share calculation:
Basic		10,201,825			10,141,234			10,088,803			10,361,292			10,272,749			10,201,825
Diluted		10,201,825			10,145,296			10,088,803			10,361,292			10,272,749			10,201,825

See notes to consolidated financial statements.

ADDVANTAGE TECHNOLOGIES GROUP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

Years ended September 30, 2019, 2018 and 2017



	Common Stock				Paid-in			Retained			Treasury
	Shares		Amount		Capital			Earnings			Stock			Total
Balance, September 30, 2016		10,634,893	$	106,349	$	(4,916,791	)	$	47,435,512		$	(1,000,014	)	$	41,625,056

Net loss		–		–		–			(98,116	)		–			(98,116	)
Stock options exercised		33,751		338		(338	)		–			–			–
Restricted stock issuance		58,009		580		104,420			–			–			105,000
Share based compensation expense		–		–		66,243			–			–			66,243

Balance, September 30, 2017		10,726,653	$	107,267	$	(4,746,466	)	$	47,337,396		$	(1,000,014	)	$	41,698,183

Net loss		–		–		–			(7,319,856	)		–			(7,319,856	)
Restricted stock issuance		80,150		801		104,199			–			–			105,000
Share based compensation expense		–		–		43,924			–			–			43,924

Balance, September 30, 2018		10,806,803	$	108,068	$	(4,598,343	)	$	40,017,540		$	(1,000,014	)	$	34,527,251

Net loss		–		–		–			(5,302,443	)		–			(5,302,443	)
Restricted stock issuance		55,147		552		74,448			–			–			75,000
Share based compensation expense		–		–		146,792			–			–			146,792

Balance, September 30, 2019		10,861,950	$	108,620	$	(4,377,103	)	$	34,715,097		$	(1,000,014	)	$	29,446,600

See notes to consolidated financial statements.

ADDVANTAGE TECHNOLOGIES GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Years ended September 30,
	2019			2018			2017
Operating Activities
Net loss	$	(5,302,443	)	$	(7,319,856	)	$	(98,116	)
Net income (loss) from discontinued operations		(1,267,344	)		(1,536,159	)		2,357,629
Net loss from continuing operations		(4,035,099	)		(5,783,697	)		(2,455,745	)
Adjustments to reconcile net loss from continuing operations to net cash provided by (used in) operating activities:
Depreciation		367,492			136,761			151,235
Amortization		1,085,400			1,253,244			1,267,182
Provision for excess and obsolete inventories		681,925			175,712			307,811
Charge for lower of cost or net realizable value for inventories		656,323			246,053			126,822
Gain on disposal of property and equipment		(251,214	)		(1,980	)		–
Deferred income tax provision (benefit)	‒				1,328,000			(463,000	)
Share based compensation expense		199,292			155,174			175,465
Restructuring charge	‒				449,845		‒
(Gain) loss from equity method investment		(135,505	)		258,558		‒
Changes in operating assets and liabilities:
Accounts receivable		(1,419,580	)		609,223			300,933
Unbilled revenue		(2,253,183	)	‒			‒
Income tax receivable\payable		157,416			37,648			226,377
Inventories		(1,590,972	)		(462,051	)		(1,434,314	)
Prepaid expenses and other assets		(205,516	)		25,147			19,163
Accounts payable		180,256			868,779			760,908
Accrued expenses and other liabilities		477,042			36,909			132,166
Deferred revenue		97,478		‒			‒
Net cash used in operating activities – continuing operations		(5,988,445	)		(666,675	)		(884,997	)
Net cash provided by operating activities – discontinued operations		1,179,876			4,492,109			3,873,810
Net cash provided by (used in) operating activities		(4,808,569	)		3,825,434			2,988,813

Investing Activities
Acquisition of net operating assets		(1,264,058	)	‒				(6,643,540	)
Proceeds from sale of business		753,199		‒			‒
Loan repayments from (investment in and loans to) equity method investee		184,505			(208,854	)		2,389,920
Purchases of property and equipment		(601,612	)		(127,257	)		(140,680	)
Disposals of property and equipment		452,245			13,500		‒
Net cash used in investing activities – continuing operations		(475,721	)		(322,611	)		(4,394,300	)
Net cash provided by (used in) investing activities – discontinued operations		7,075,000			10,400			(47,806	)
Net cash provided by (used in) investing activities		6,599,279			(312,211	)		(4,442,106	)

Financing Activities
Change in bank revolving line of credit		(500,000	)		500,000			−
Guaranteed payments for acquisition of business		(667,000	)		(667,000	)		(1,000,000	)
Proceeds on notes payable		–		‒				4,000,000
Debt issuance costs		–		‒				(16,300	)
Payments on notes payable		(1,496,279	)		(4,005,658	)		(1,881,802	)
Principal payments on capital lease obligations		(64,753	)	‒			‒
Net cash provided by (used in) financing activities – continuing operations		(2,728,032	)		(4,172,658	)		1,101,898
Net cash used in financing activities – discontinued operations		(597,906	)		(184,008	)		(184,008	)
Net cash provided by (used in) financing activities		(3,325,938	)		(4,356,666	)		917,890

Net decrease in cash and cash equivalents and restricted cash		(1,535,228	)		(843,443	)		(535,403	)
Cash and cash equivalents and restricted cash at beginning of year		3,129,280			3,972,723			4,508,126
Cash and cash equivalents and restricted cash at end of year	$	1,594,052		$	3,129,280		$	3,972,723

Supplemental cash flow information:
Cash paid for interest	$	126,059		$	220,117		$	360,805
Cash received from income taxes	$	(172,343	)	$	(59,674	)	$	(61,000	)

Supplemental noncash investing activities:
Deferred guaranteed payments for acquisition of business	$	–		$	–		$	(1,836,105	)
Promissory note from disposition of business	$	6,375,000		$	–		$	–

See notes to consolidated financial statements.

2528

~~ADDVANTAGE TECHNOLOGIES GROUP, INC.~~

~~CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY~~

~~Years ended September 30, 2017, 2016 and 2015~~

Common Stock Paid-in Retained Treasury
Shares Amount Capital Earnings Stock Total
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 issuance 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, net of forfeited 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

Net loss – – – (98,116 ) – (98,116 )
Stock options exercised 33,751 338 (338 ) – – –
Restricted stock issuance 58,009 580 104,420 – – 105,000
Share based compensation expense – – 66,243 – – 66,243

Balance, September 30, 2017 10,726,653 $ 107,267 $ (4,746,466 ) $ 47,337,396 $ (1,000,014 ) $ 41,698,183

~~See notes to consolidated financial statements.~~

~~ADDVANTAGE TECHNOLOGIES GROUP, INC.~~

~~CONSOLIDATED STATEMENTS OF CASH FLOWS~~

Years ended September 30,
2017 2016 2015
Operating Activities
Net income (loss) $ (98,116 ) $ 294,163 $ 1,497,900
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation 446,834 421,950 408,703
Amortization 1,267,182 825,804 825,805
Allowance for doubtful accounts – – 50,000
Provision for excess and obsolete inventories 901,599 951,282 600,000
Charge for lower of cost or net realizable value for
inventories

126,822

73,716

12,627

(Gain) loss on disposal of property and equipment – (2,000 ) 30,652
Deferred income tax provision (benefit) (320,000 ) 157,000 (341,000 )
Share based compensation expense 175,465 192,213 239,613
Loss from equity method investment – 184,996 –
Cash provided (used) by changes in operating assets
and liabilities:

Accounts receivable (71,254 ) 115,479 2,057,203
Income tax receivable\payable 233,651 (603,329 ) 342,596
Inventories (688,729 ) 1,067,179 (1,433,100 )
Prepaid expenses 22,097 (165,863 ) (17,359 )
Other assets (2,724 ) (1,310 ) (3,250 )
Accounts payable 951,099 15,514 (1,096,279 )
Accrued expenses (90,003 ) (34,029 ) (451,197 )
Other liabilities 134,890 47,726 120,653
Net cash provided by operating activities 2,988,813 3,540,491 2,843,567

Investing Activities
Acquisition of net operating assets (6,643,540 ) (178,000 ) −
Guaranteed payments for acquisition of business (1,000,000 ) (1,000,000 ) (1,000,000 )
Loan repayments from (investment in and loans to) equity method investee
2,389,920
(2,773,620 )
–

Purchases of property and equipment (190,303 ) (319,810 ) (172,649 )
Disposals of property and equipment 1,817 2,000 –
Net cash used in investing activities (5,442,106 ) (4,269,430 ) (1,172,649 )

Financing Activities
Proceeds on notes payable 4,000,000 − −
Debt issuance costs (16,300 ) − −
Payments on notes payable (2,065,810 ) (873,921 ) (846,029
)
Net cash provided by (used in) financing activities 1,917,890 (873,921 ) (846,029 )

Net increase (decrease) in cash and cash equivalents (535,403 ) (1,602,860 ) 824,889
Cash and cash equivalents at beginning of year 4,508,126 6,110,986 5,286,097
Cash and cash equivalents at end of year $ 3,972,723 $ 4,508,126 $ 6,110,986

Supplemental cash flow information:
Cash paid for interest $ 360,805 $ 195,086 $ 245,051
Cash paid for (received from) income taxes $ (61,000 ) $ 597,200 $ 944,000

Supplemental noncash investing activities:
Deferred guaranteed payments for business acquisition $ (1,836,105 ) – –

~~See notes to consolidated financial statements.~~

ADDVANTAGE TECHNOLOGIES GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1 – Summary of Significant Accounting Policies

Organization and basis of presentation

The consolidated financial statements include the accounts of ADDvantage Technologies Group, Inc. and its subsidiaries, all of which are wholly owned (collectively, the “Company”) ~~as well as an equity-method investment.~~. Intercompany balances and transactions have been eliminated in consolidation. The Company’s reportable segments are Wireless Infrastructure Services (“Wireless”) and Telecommunications (“Telco”). The Cable Television (“Cable TV”) ~~and Telecommunications (“Telco”)~~segment was sold on June 30, 2019, so the Company has classified the Cable TV segment as discontinued operations (see Note 4 – Discontinued Operations).

Cash, ~~and~~ cash equivalents and restricted cash

Cash and cash equivalents includes demand and time deposits, money market funds and other marketable securities with maturities of three months or less when acquired. Restricted cash consists of cash held by a third-party financial institution as a reserve in connection with an agreement to sell certain receivables with recourse in the Wireless segment.

Accounts receivable

Trade receivables are carried at original invoice amount less an estimate made for doubtful accounts. Management determines the allowance for doubtful accounts by regularly evaluating individual customer receivables and considering a customer’s financial condition, credit history and current economic conditions. Trade receivables are written off against the allowance when deemed uncollectible. Recoveries of trade receivables previously written off are recorded when received. The Company generally does not charge interest on past due accounts.

For the Company’s Wireless segment, the Company has entered into various agreements, one 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. The other agreements without recourse are under programs offered by certain customers of the Wireless segment. The Company accounts for these transactions in accordance with Accounting Standards Codification (“ASC”) 860, “Transfers and Servicing” (“ASC 860”). ASC 860 allows for the ownership transfer of accounts receivable to qualify for sale treatment when the appropriate criteria is met, which permits the Company to present the balances sold under the program to be excluded from accounts receivable, net on the consolidated balance sheet. Receivables are considered sold when they are transferred beyond the reach of the Company and its creditors, the purchaser has the right to pledge or exchange the receivables and the Company has surrendered control over the transferred receivables.

Inventories

~~Inventories~~For the Telco segment, inventories consist of new, refurbished and used ~~electronic components for the Cable TV segment and new, refurbished and used~~ telecommunications ~~equipment for the Telco segment.~~equipment. Inventory is stated at the lower of cost or net realizable value. Cost is 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. For ~~both~~ the ~~Cable TV and~~ Telco ~~segments,~~segment, the Company records an inventory reserve provision to reflect inventory at its estimated net realizable value based on a review of inventory quantities on hand, historical sales volumes and technology changes. These reserves are to provide for items that are potentially slow-moving, excess or obsolete.

Property and equipment

Property and equipment consists of software, office equipment, wireless services equipment and warehouse and service equipment ~~and buildings~~ with estimated useful lives generally of 3 years, 5 years, 7 years, and 10 years, respectively. The wireless services equipment includes mobile wireless temporary towers, equipment trailers and ~~40 years, respectively.~~construction

equipment. Depreciation is provided using the straight-line method over the estimated useful lives of the related assets. Leasehold improvements are amortized over the shorter of the useful lives or the remainder of the lease agreement. Gains or losses from the ordinary sale or retirement of property and equipment are recorded in other income (expense). Repairs and maintenance costs are generally expensed as incurred, whereas major improvements are capitalized. Depreciation expense was $0.4 million, $0.1 million and $0.2 million for ~~each of~~ the years ended September 30, 2019, 2018 and 2017, ~~2016 and 2015.~~respectively.

Goodwill

Goodwill represents the excess of ~~the~~ purchase price of acquisitions over the acquisition date fair value of the net ~~identifiable tangible and intangible~~ assets of businesses acquired. ~~In accordance with current accounting guidance, goodwill~~Goodwill is not amortized and is tested at least annually for ~~impairment at the reporting unit level.~~impairment. The Company performs ~~this~~its annual analysis induring the fourth quarter of each fiscal year and in any other period in which indicators of impairment warrant additional analysis.

~~The goodwill analysis is a two-step process.~~ Goodwill is ~~first~~ evaluated for impairment by comparing ~~management’s~~the estimate of the fair value ~~for~~of each ~~of the~~ reporting ~~units~~unit, or operating segment, with the reporting unit’s carrying value, including goodwill. ~~If the carrying value~~The reporting units for purposes of the ~~reporting unit exceeds its fair value, a computation of~~goodwill impairment calculation are aggregated into the ~~implied fair value of goodwill would then be compared to its related carrying value. If~~Wireless operating segment and the ~~carrying value of the reporting unit’s goodwill exceeds~~Telco operating segment.

~~the implied fair value of goodwill, an impairment loss would be recognized in the amount of the excess.~~ Management utilizes a discounted cash flow analysis ~~referred to as an income approach,~~ to determine the estimated fair value of ~~its~~each reporting ~~units. Judgments~~unit. Significant judgments and assumptions including the discount rate, anticipated revenue growth rate, gross margins and operating expenses are inherent in these fair value estimates. As a result, actual results may differ from the ~~estimate of future~~estimates utilized in the discounted cash ~~flows used to determine the estimate of the reporting unit’s fair value.~~flow analysis. The use of alternate judgments and/or assumptions could result in the recognition of different levels of impairment charges in the ~~consolidated~~ financial statements. At September 30, ~~2017~~2019 and ~~2016,~~2018, the estimated fair value of ~~our~~each of the reporting units exceeded ~~its~~their individual carrying ~~value,~~values, so goodwill was not ~~impaired.~~impaired at either of the reporting units.

As a result of the Fulton Technologies acquisition, the Company recorded additional goodwill of $57 thousand as the purchase price exceeded the acquisition date fair value of the net assets based on the final purchase price allocation.

Intangible assets

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. As a result of the Fulton acquisition, the Company has recorded an additional intangible asset for customer relationships of $0.2 million based on the purchase price allocation.

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”)~~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.

Income taxes

The Company provides for income taxes in accordance with the liability method of accounting. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and tax carryforward amounts. Management provides a valuation allowance against deferred tax assets for amounts which are not considered “more likely than not” to be realized.

~~Revenue recognition~~

The Company recognizes revenue for product sales when title transfers, the risks and rewards of ownership have been transferred to the customer, the fee is fixed or determinable and the collection of the related receivable is probable, which is generally at the time of shipment. The stated shipping terms are generally FOB shipping point per the Company's sales agreements with its customers. Accruals are established for expected returns based on historical activity. Revenue for repair services is recognized when the repair is completed and the product is shipped back to the customer. Revenue for recycle services is recognized when title transfers, the risks and rewards of ownership have been transferred to the customer, the fee is fixed or determinable and the collection of the related receivable is probable, which is generally upon acceptance of the shipment at the recycler’s location.

~~Freight~~

Amounts billed to customers for shipping and handling represent revenues earned and are included in sales income in the accompanying consolidated statements of operations. Actual costs for shipping and handling of these sales are included in cost of sales.

Advertising costs

Advertising costs are expensed as incurred. Advertising expense was $0.6 million, $0.5 million ~~$0.2 million~~ and ~~$0.1~~$0.4 million for the years ended September 30, 2019, 2018 and 2017, ~~2016 and 2015,~~ respectively.

	Years Ended September 30,
	2019			2018			2017

Wireless services sales	$	22,918,535		$	‒		$	‒
Equipment sales:
Telco		29,391,223			25,609,108			23,991,879
Intersegment		(54,541	)		(49,414	)		(86,950	)
Telco repair sales		43,442		‒			‒
Telco recycle sales		2,819,638			1,913,588			2,002,642
Total sales	$	55,118,297		$	27,473,282		$	25,907,571


Upfront cash payment	$	6,500,000
Deferred guaranteed payments (a)		1,836,105
Working capital purchase adjustment		143,540
Net purchase price	$	8,479,645

Assets acquired:	(in thousands)		(in thousands)
Accounts receivable	$	1,117	$	828
Inventories		1,149
Property and equipment, net		68
Other non-current assets		1
Unbilled revenue				438
Prepaid expenses				341
Property and equipment				1,201
Intangible assets		4,841		244
Other assets				35
Goodwill		2,060		57
Total assets acquired		9,236		3,144

Liabilities assumed:
Accounts payable		584		1,250
Accrued expenses		172		455
Capital lease obligation				175
Total liabilities assumed		756		1,880
Net purchase price	$	8,480	$	1,264

	(Unaudited)
	Years Ended September 30,
	2019			2018
	(in thousands)
Total net sales	$	58,955		$	41,809
Loss from continuing operations	$	(4,461	)	$	(5,997	)
Net loss	$	(5,728	)	$	(6,474	)

Contract price	$	10,314,141
Less: Real estate sales		2,075,000
Less: Working capital adjustment		1,110,942
Net purchase price		7,128,199

Assets sold:
Accounts receivable		2,038,305
Inventories		10,258,487
Prepaids and other assets		73,073
Property and equipment, net		335,980
		12,705,845
Liabilities transferred:
Accounts payable		1,306,294
Accrued expenses		466,759
		1,773,053
Net assets sold		10,932,792

Pretax loss on sale of net assets of Cable TV segment	$	(3,804,593	)

Aggregate purchase price	$	7,075,000
Less: Book value of real estate facilities		4,762,782

Pretax gain	$	2,312,218

Proceeds:
Cash received from real estate facility sales	$	7,075,000
Cash received from sale of Cable TV segment		753,199
Promissory note from sale of Cable TV segment		6,375,000

Total proceeds		14,203,199

Book value of assets sold:
Cable TV segment		10,932,792
Real estate facilities		4,762,782

Total book value of assets sold		15,695,574

Pretax loss on sale of discontinued operations	$	(1,492,375	)

Fiscal year 2020	$	1,400,000
Fiscal year 2021		1,400,000
Fiscal year 2022		940,000
Fiscal year 2023		940,000
Fiscal year 2024		2,970,000
Total proceeds	$	7,650,000

		September 30, 2019	September 30, 2018
Assets:
Accounts receivable, net	$	‒	$	1,821,870
Inventories		‒		11,425,551
Prepaid expenses		‒		11,352
Assets held for sale		‒		3,666,753
Current assets of discontinued operations	$	‒	$	16,925,526

Property and equipment, at cost:
Land and building	$	‒	$	2,208,676
Machinery and equipment		‒		2,800,835
Leasehold improvements		‒		9,633
Less accumulated depreciation		‒		(3,502,712	)
Net property and equipment		‒		1,516,432
Deposits and other assets		‒		8,540
Non-current assets of discontinued operations	$	‒	$	1,524,972

Liabilities:
Accounts payable	$	‒	$	1,356,800
Accrued expenses		‒		438,074
Notes payable – current portion		‒		597,906
Current liabilities of discontinued operations	$	‒	$	2,392,780

	September 30, 2017			September 30, 2016
New:
Cable TV	$	14,014,188		$	15,087,495
Telco		554,034			–
Refurbished and used:
Cable TV		3,197,426			3,383,079
Telco		7,507,460			5,625,213
Allowance for excess and obsolete inventory:
Cable TV		(2,300,000	)		(2,219,586	)
Telco		(639,288	)		(351,282	)

Total inventories	$	22,333,820		$	21,524,919

	September 30, 2019			September 30, 2018

New equipment	$	1,496,145		$	1,371,545
Refurbished and used equipment		7,404,428			6,905,946
Allowance for excess and obsolete inventory:		(1,275,000	)		(815,000	)

Total inventories, net	$	7,625,573		$	7,462,491

	Gross		Accumulated Amortization			Net
Intangible assets:
Customer relationships – 10 years	$	8,152,000	$	(1,898,691	)	$	6,253,309
Technology – 7 years		1,303,000		(667,009	)		635,991
Trade name – 10 years		2,119,000		(542,480	)		1,576,520
Non-compete agreements – 3 years		374,000		(292,333	)		81,667

Total intangible assets	$	11,948,000	$	(3,400,513	)	$	8,547,487

	September 30, 2019
	Gross		Accumulated Amortization			Net
Intangible assets:
Customer relationships – 10 years	$	8,396,000	$	(3,547,389	)	$	4,848,611
Trade name – 10 years		2,119,000		(966,280	)		1,152,720
Non-compete agreements – 3 years		374,000		(372,333	)		1,667

Total intangible assets	$	10,889,000	$	(4,886,002	)	$	6,002,998

								September 30, 2018
	Gross		Accumulated Amortization			Net		Gross		Accumulated Amortization			Net
Intangible assets:
Customer relationships – 10 years	$	4,257,000	$	(1,099,721	)	$	3,157,279	$	8,152,000	$	(2,713,890	)	$	5,438,110
Technology – 7 years		1,303,000		(480,866	)		822,134
Trade name – 10 years		1,293,000		(334,023	)		958,977		2,119,000		(754,380	)		1,364,620
Non-compete agreements – 3 years		254,000		(218,721	)		35,279		374,000		(332,332	)		41,668

Total intangible assets	$	7,107,000	$	(2,133,331	)	$	4,973,669	$	10,645,000	$	(3,800,602	)	$	6,844,398

2018	$	1,253,243
2019		1,253,243
2020		1,214,910	$	1,053,167
2021		1,104,663		1,051,500
2022		1,027,100		1,051,500
2023				1,051,500
2024				727,757
Thereafter		2,694,328		1,067,574

Total	$	8,547,487	$	6,002,998

	NOL carryforward		Year Expires
Year ended September 30, 2019	$	6,100,000	No expiry
Year ended September 30, 2018	$	2,431,004	No expiry
Year ended September 30, 2016	$	82,820		2036

	Options			Weighted Average Exercise Price		Aggregate Intrinsic Value		Options		Weighted Average Exercise Price		Aggregate Intrinsic Value
Outstanding at September 30, 2016		570,000		$	2.73
Outstanding at September 30, 2018									290,000	$	2.40
Granted		140,000		$	1.80				480,000	$	1.32
Exercised		−		$	–	$	0		−	$	–
Expired		(10,000	)	$	3.45				−	$	–
Forfeited		–		$	–				−	$	−
Outstanding at September 30, 2017		700,000		$	2.54	$	0
Exercisable at September 30, 2017		526,667		$	2.78	$	0
Outstanding at September 30, 2019									770,000	$	1.73	$	352,700
Exercisable at September 30, 2019									443,334	$	1.99	$	146,400

Exercise Price		Stock Options Outstanding		Exercisable Stock Options Outstanding		Remaining Contractual Life	Aggregate Intrinsic Value (a)

$	1.31		150,000	‒		9.5 years	$	103,500
$	1.28		130,000	‒		9.3 years		93,600
$	1.36		200,000		200,000	9.0 years		128,000
$	1.79		50,000		33,334	7.6 years		10,500
$	1.81		90,000		60,000	7.4 years		17,100
$	3.21		100,000		100,000	4.5 years	‒
$	2.45		50,000		50,000	2.5 years	‒
			770,000		443,334		$	352,700

				Exercisable		Remaining
		Stock Options		Stock Options		Contractual
Exercise Price		Outstanding		Outstanding		Life
	$1.790		50,000		–	9.6 years
	$1.810		90,000		–	9.4 years
	$1.750		50,000		16,667	8.6 years
	$3.210		200,000		200,000	6.5 years
	$2.450		250,000		250,000	4.5 years
	$3.001		60,000		60,000	0.9 years
			700,000		526,667

2020	$	1,290,832
2021		1,352,101
2022		1,356,015
2023		1,244,580
2024		622,029
Thereafter		19,699

Total	$	5,885,256

2018	$	758,662
2019		704,380
2020		592,268
2021		568,250
2022		582,456
Thereafter		696,926

Total	$	3,902,942

	Years Ended									Years Ended
	September 30, 2017			September 30, 2016			September 30, 2015			September 30, 2019			September 30, 2018			September 30, 2017
Sales
Cable TV	$	22,806,175		$	22,996,998		$	25,396,779
Wireless										$	22,918,535		$	‒		$	‒
Telco		25,994,521			15,800,424			18,835,116			32,254,303			27,522,696			25,994,521
Intersegment		(86,950	)		(134,158	)		(498,275	)		(54,541	)		(49,414	)		(86,950	)
Total sales	$	48,713,746		$	38,663,264		$	43,733,620		$	55,118,297		$	27,473,282		$	25,907,571

Gross profit
Cable TV	$	7,738,355		$	7,753,735		$	8,025,651
Wireless										$	1,997,041		$	‒		$	‒
Telco		7,072,238			4,687,148			7,273,238			7,095,481			7,417,215			7,072,238
Total gross profit	$	14,810,593		$	12,440,883		$	15,298,889		$	9,092,522		$	7,417,215		$	7,072,238

Operating income (loss)
Cable TV	$	1,834,484		$	1,478,676		$	2,210,414
Operating loss
Wireless										$	(1,513,280	)	$	‒		$	‒
Telco		(1,688,878	)		(1,134,815	)		365,796			(2,462,834	)		(3,797,957	)		(2,916,351	)
Total operating income	$	145,606		$	343,861		$	2,576,210

Segment assets
Cable TV	$	24,116,395		$	25,201,697		$	26,494,430
Telco		24,135,091			15,122,911			17,094,713
Non-allocated		6,596,119			9,943,551			8,097,913
Total assets	$	54,847,605		$	50,268,159		$	51,687,056
Total operating loss										$	(3,976,114	)	$	(3,797,957	)	$	(2,916,351	)

Segment assets
Wireless	$	5,515,793	$	‒	$	‒
Telco		22,619,565		22,173,797		24,135,091
Discontinued operations	‒			18,450,498		24,158,314
Non-allocated		8,692,986		3,770,325		6,554,200
Total assets	$	36,828,344	$	44,394,620	$	54,847,605

	First Quarter		Second Quarter		Third Quarter			Fourth Quarter
Fiscal year ended 2017
Sales	$	12,095,826	$	11,294,756	$	12,989,990		$	12,333,174
Gross profit	$	4,023,629	$	3,764,429	$	3,755,951		$	3,266,584
Net income (loss)	$	217,161	$	10,671	$	(66,863	)	$	(259,085	)
Basic earnings (loss) per common share	$	0.02	$	0.00	$	(0.01	)	$	(0.03	)
Diluted earnings (loss) per common share	$	0.02	$	0.00	$	(0.01	)	$	(0.03	)
Fiscal year ended 2016
Sales	$	8,249,668	$	10,587,187	$	10,060,242		$	9,766,167
Gross profit	$	2,765,380	$	3,584,612	$	3,466,151		$	2,624,740
Net income (loss)	$	23,994	$	145,630	$	316,086		$	(191,547	)
Basic earnings (loss) per common share	$	0.00	$	0.01	$	0.03		$	(0.02	)
Diluted earnings (loss) per common share	$	0.00	$	0.01	$	0.03		$	(0.02	)
Fiscal year ended 2015
Sales	$	10,837,158	$	11,366,539	$	11,902,391		$	9,627,532
Gross profit	$	3,831,803	$	4,243,512	$	4,144,607		$	3,078,967
Net income	$	415,923	$	234,255	$	637,134		$	210,588
Basic earnings per common share	$	0.04	$	0.02	$	0.06		$	0.02
Diluted earnings per common share	$	0.04	$	0.02	$	0.06		$	0.02