See notes to consolidated financial statements.
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.
ADDVANTAGE TECHNOLOGIES GROUP, INC.Notes to Consolidated Financial StatementsCONSOLIDATED 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”) segment was sold on June 30, 2019, so the Company has classified the Cable TV segment as discontinued operations (see Note 4 – Discontinued Operations) in 2019.
Other reclassifications
The Company changed its presentation of cost of sales and Telecommunications (“Telco”).
operating, selling, general and administrative expenses on the unaudited consolidated condensed statements of operations. During fiscal year 2020, the Company reviewed its financial reporting of expenses in connection with its current operating segments in order to enhance the usefulness of the presentation of the Company’s expenses. Based on that review, the Company reclassified certain expenses into operating expenses for presentation purposes. Operating expenses include the indirect costs associated with operating our businesses. Indirect costs are costs that are not directly attributable to projects or products, which would include indirect personnel costs, facility costs, vehicles, insurance, communication, and business taxes, among other less significant cost categories. These costs were previously recorded in either costs of sales or operating, selling, general and administrative expenses in prior years. Additionally, the Company reclassified depreciation and amortization from operating, selling, general and administrative expenses into its own financial statement line item in the consolidated statements of operations. Selling, general and administrative expenses include overhead costs, which primarily consist of personnel costs, insurance, professional services, and communication, among other less significant cost categories. The prior year has been reclassified to conform with the current year’s presentation of costs of sales, operating expenses, selling, general and administrative expenses, and depreciation and amortization. These reclassifications had no effect on previously reported results of operations or retained earnings.
Cash, and cash equivalents
and restricted cash
Cash and cash equivalents includesinclude 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, see Note 5 - Accounts Receivable Agreements.
Revenue recognition
The Company recognizes revenue at the time a good or service is transferred to a customer and the customer, obtains control of that good or receives the service performed. Most of the Company’s sales arrangements with customers are short-term in nature involving single performance obligations related to the delivery of goods or repair of equipment and generally provide for transfer of control at the time of shipment to the customer. The Company generally permits returns of product or repaired equipment due to defects, historically, returns have not been significant.
Additionally, the Company provides services related to the installation and upgrade of technology on cell sites and the construction of new small cells for 5G technology. The work under the purchase orders for wireless infrastructure services are generally completed in less than a month. These services generally consist of a single performance obligation which the Company recognizes as revenue over time. The Company’s principal sales are from Wireless services, sales of Telco equipment and Telco recycled equipment. The Company’s customers include wireless carriers, wireless equipment providers, multiple system operators, resellers and direct sales to end-user customers.
The timing of revenue recognition from the wireless segment results in contract assets and contract liabilities. Generally, billing occurs subsequent to revenue recognition, resulting in contract assets. However, the Company sometimes receives advances or deposits from customers before revenue is recognized, resulting in contract
liabilities. Contract assets and contract liabilities are included in Unbilled revenue and Deferred revenue, respectively, on the consolidated balance sheets.
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. 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. The Company records a recourse obligation if it determines that any portion of the sold receivables with recourse are uncollectible.
Inventories
InventoriesFor 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.
Leases
The Company determines if an arrangement is a lease at inception of the arrangement. To the extent that we determine an arrangement represents a lease, we classify that lease as either a right-of-use ("ROU") lease or a finance lease. We capitalize ROU leases on our consolidated balance sheets through a right-of-use asset and a corresponding right-of-use lease liability. ROU assets represent our right to use an underlying asset for the lease term and ROU lease liabilities represent our obligation to make lease payments arising from the lease.
ROU leases are included in long-term assets and ROU lease liabilities are classified as either current or long-term liabilities in our consolidated balance sheets. ROU assets and liabilities are recognized at the commencement date of an arrangement based on the present value of lease payments over the lease term. Lease expense for ROU lease payments is recognized on a straight-line basis over the lease term. ADDvantage adopted this standard on October 1, 2019.
Property and equipment
Property and equipment consistsconsist 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 are included in other income (expense).operating expense. Repairs and maintenance costs are generally expensed as incurred, whereas major improvements are capitalized. Depreciation expense was $0.9 million and $0.4 million for each of the years ended September 30, 2017, 20162020 and 2015.2019, 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, goodwillGoodwill is not amortized and is tested at least annually for impairment at the reporting unit level.impairment. The Company performs thisits 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’sthe estimate of the fair value forof each of the reporting unitsunit, or operating segment, with the reporting unit’s carrying value, including goodwill. If the carrying valueThe reporting units for purposes of the reporting unit exceeds its fair value, a computation ofgoodwill impairment calculation are aggregated into 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 exceedsWireless segment and ADDvantage Triton LLC (Triton) operating segment, and Nave Communications Company (Nave) 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 itseach reporting units. Judgmentsunit. 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 futureestimates 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
During the year ended September 30, 20172020, due to operating losses and 2016,uncertainties surrounding the estimatedimpact of the COVID-19 pandemic on the overall economy and the resulting impact on the capital budgets of both Customers and our Company, we determined that impairment indicators were present. The Company performed a valuation using a discounted cash flow analysis for the Nave and Triton operating segments to determine if the fair value exceeded their respective carrying values. For both Nave and Triton, the fair value for each was less than their respective carrying values. Therefore, the Company recorded an impairment charges of our reporting units exceeded its carrying$4.8 million as of March 31, 2020, which fully impaired goodwill for both operating segments in the Telco segment. Although the Company does not anticipate a future impairment charge, certain events could occur that might adversely affect the reported value soof the remaining goodwill in the Wireless segment, which was not impaired.
$0.1 million at September 30, 2020.
Intangible assets
Intangible assets consist of customer relationships, trade names, and intellectual property. Intangibles assets that have finite useful lives are amortized on a straight-line basis over their estimated useful lives ranging from 3 years to 10 years.
Impairment of long-lived assets
The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the asset’s carrying amount may not be recoverable. The Company conducts its long-lived asset impairment analyses in accordance with Accounting Standards Codification (“ASC”)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 $0.5 million $0.2 million and $0.1$0.6 million for the years ended September 30, 2017, 20162020 and 2015,2019, respectively.
Management estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States generally accepted accounting principlesof America (GAAP) 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 revenue and expenses during the reporting period. Actual results could differ from those estimates.
Any significant, unanticipated changes in product demand, technological developments or continued economic trends affecting the cablewireless infrastructure or telecommunications industries could have a significant impact on the value of the Company's inventory and operating results.
Concentrations of credit risk
The Company holds cash with one major financial institution, which at times exceeds FDIC insured limits. Historically, the Company has not experienced any losses due to such concentration of credit risk.
Other financial instruments that potentially subject the Company to concentration of credit risk consist principally of trade receivables. Concentrations of credit risk with respect to trade receivables are limited because a large number of geographically diverse customers make up the Company’s customer base, thus spreading the trade credit risk. The Company controls credit risk through credit approvals, credit limits and monitoring procedures. The Company performs credit evaluations for all new customers but does not require collateral to support customer receivables. The Company had no customer in 2017, 2016 or 2015
Share-based compensation
ADDvantage has historically compensated our directors and executives using time-based stock options and restricted shares awards (RSA's). ADDvantage accounts for share-based payment awards under ASC 718 - Compensation - Stock Compensation (ASC 718), which requires that represented in excess of 10%the value of the total net sales. The Company’s sales to foreign (non-U.S. based) customers were approximately $4.3 million, $3.0 million and $3.7 million forawards is established at the years ended September 30, 2017, 2016 and 2015, respectively. In 2017, the Cable TV segment purchased approximately 24% of its inventory from Arris Solutions, Inc. and approximately 16% of its inventory either directly from Cisco or indirectly through their primary stocking distributor. The concentration of suppliersdate of the Company’s inventory subjects the Company to risk. The Telco segment did not purchase over 10% of its total inventory purchases from any one supplier.
Employee stock-based awards
Share-based payments to employees, including grants of employee stock options, are recognized in the consolidated financial statements based on their grant date fair valueand is expensed over the requisite service period.vesting period of the grant. The Company determinesmethod of determining the fair value of share-based payments depends on the options issued,type of award. Share-based awards that vest over a certain service period with no market conditions are valued at the closing market price on the grant date. Option grants are valued using the Black-Scholes valuationBlack-Scholes-Merton model and amortizesusing model inputs that are determined on the calculateddate of the grant. Once the per-share fair value on the grant date is established, the aggregate expense of the grant is recognized on a graded vesting basis over the vesting termperiod of the stock options. Compensation expense for stock-based awards is included in the operating, selling, general and administrative expense section of the consolidated statements of operations.grant.
Earnings per share
Basic earnings per share is computed by dividing the earnings available to common shareholders by the weighted average number of common shares outstanding for the year. Dilutive earnings per share include any dilutive effect of stock options and restricted stock.
Fair value of financial instruments
The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and other current liabilities approximate fair value due to their short maturities.
Financial Accounting Standards Board (“FASB”) ASC 820, Fair Value Measurements and Disclosures, definesThe carrying value of the Company’s variable-rate line of credit approximates its fair value establishes a consistent framework for measuring fair value and establishes a fair value hierarchysince the interest rate fluctuates periodically based on a floating interest rate.
Retirement Plan
The Company sponsors a 401(k) plan that allows participation by all employees who are at least 21 years of age and have completed one year of service. The Company's contributions to the observabilityplan consist of inputs used to measure fair value. The three levels ofa matching contribution as determined by the fair value hierarchy are as follows:
· | Level 1 – Quoted prices for identical assets in active markets or liabilities that we have the ability to access. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis. |
· | Level 2 – Inputs are other than quoted prices in active markets included in Level 1 that are either directly or indirectly observable. These inputs are either directly observable in the marketplace or indirectly observable through corroboration with market data for substantially the full contractual term of the asset or liability being measured. |
· | Level 3 – Inputs that are not observable for which there is little, if any, market activity for the asset or liability being measured. These inputs reflect management’s best estimate of the assumptions market participants would use in determining fair value. |
plan document. Costs recognized under the 401(k) plan were $0.1 million and, $0.3 million for the years ended September 30, 2020 and September 30, 2019, respectively, after temporarily suspending matching contributions during 2020.
Recently issued accounting standards
In May 2014, the FASB issued ASU No. 2014-09: “Revenue from Contracts with Customers (Topic 606)”. This guidance was issued to clarify the principles for recognizing revenue and develop a common revenue standard for U.S. GAAP and International Financial Reporting Standards (“IFRS”). 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 No. 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. The Company is a lessee on certain leases that will need to be reported as right of use assets and liabilities at an estimated amount of $3 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)” 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 No. 2016-09 on October 1, 2017.
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 mayADDvantage expects to adopt earlier asthe standard in the first quarter of the fiscal year beginning after December 15, 2018, including interim periods within those fiscal years. We are currently in2021. Management's initial evaluation is that due to the processnature of evaluatingour customer base, the adoption of 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 materialsignificant impact on the Company’s consolidated financial statements. ASU No. 2017-01 does not change the accounting for previously acquired businesses.our trade accounts receivable and contract assets.
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.
Reclassification
Certain prior period amounts have been reclassified to conform to the current year presentation. These reclassifications had no effect on previously reported results of operations or retained earnings.
Note 2 – AcquisitionRevenue Recognition
As partThe Company’s principal sales are from Wireless services, sales of Telco equipment and Telco recycled equipment, primarily in the United States. Sales to international customers in Central and South America totaled approximately $1.9 million and $2.4 million in the years ended September 30, 2020 and 2019, respectively.
The Company’s customers include wireless carriers, wireless equipment providers, multiple system operators, resellers and direct sales to end-user customers. Sales to the Company’s growth strategy,largest customer totaled approximately 14% of consolidated sales.
Sales by type were as follows, in thousands: | | | | | | | | | | | |
| | Years Ended September 30, |
| | 2020 | | 2019 |
| | | |
| Wireless services sales | $ | 21,354 | | | $ | 22,919 | |
| Equipment sales: | | | |
| Telco | 27,109 | | | 29,391 | |
| Inter-segment | (25) | | | (55) | |
| Telco repair sales | 68 | | | 43 | |
| Telco recycle sales | 1,676 | | | 2,820 | |
| Total sales | $ | 50,182 | | | $ | 55,118 | |
At September 30, 2020 contract assets were $0.6 million and contract liabilities were $0.1 million. There were $2.7 million in contract assets at September 30, 2019, and $0.1 million contract liabilities at September 30, 2019. During the year ended September 30, 2020, the Company has been pursuing an acquisition strategyrecognized $0.1 million of amounts classified as deferred revenue on our consolidated balance sheet at September 30, 2019.
Note 3 – 2019 Acquisition
Purchase of Net Assets of Fulton Technologies, Inc. and Mill City Communications, Inc.
On December 27, 2018, the Company entered into a purchase agreement to expand into the broader telecommunications industry. The Company formed a new subsidiary called ADDvantage Triton, LLC (“Triton Datacom”) which on October 14, 2016 acquiredacquire substantially all of the net assets of Triton Miami,Fulton Technologies, Inc. (“Triton Miami”and Mill City Communications, Ins. (collectively “Fulton”). Triton Datacom is a providerFulton provides turn-key wireless infrastructure services for the 4 major U.S. wireless carriers, communication tower companies, national integrators, and original equipment manufacturers. These services primarily consist of the installation and upgrade of technology on cell sites and the construction of new and refurbished enterprise networking products, including IP desktop phones, enterprise switches and wireless routers.small cells for 5G. This acquisition, along with its retained management team, is part of the overall growth strategy of the Company in that it further diversifies the Company into the broader telecommunications industry by reselling refurbished products into the enterprise customer market.
agreement closed on January 4, 2019. The purchase price for Triton Miami includes the following:
| | | | |
| 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 | |
(a) | This amount represents the present value at the acquisition date of $2.0 million in deferred payments, which will be paid in equal annual installments over the next three years. At September 30, 2017, these deferred payments are recorded in other current liabilities ($0.7 million) and other long-term liabilities ($1.2 million). |
net assets of Fulton was $1.3 million. The Company will also make annual paymentspurchase price was allocated to the Triton Miami owners, if they have not resigned from Triton Datacom, over the next three years equal to 60%major categories of Triton Datacom’s annual EBITDA in excess of $1.2 million per year. The Company will recognize these annual payments as compensation expense.
Under the acquisition method of accounting, the total purchase price is allocated to Triton Miami’s tangible and intangible assets acquired and liabilities assumed based on their estimated fair values as of October 14, 2016,January 4, 2019, the effective date of the acquisition. Any remaining amount isThe Company recorded as goodwill.
32
$0.1 million of Goodwill related to the acquisition.The following summarizes the final purchase price allocation of the fair value of the assets acquired and the liabilities assumed at October 14, 2016:January 4, 2019, in thousands:
| Assets acquired: | | (in thousands) | |
| Accounts receivable | | $ | 1,117 | |
| Inventories | | | 1,149 | |
| Property and equipment, net | | | 68 | |
| Other non-current assets | | | 1 | |
| Intangible assets | | | 4,841 | |
| Goodwill | | | 2,060 | |
| Total assets acquired | | | 9,236 | |
| | | | | |
| Liabilities assumed: | | | | |
| Accounts payable | | | 584 | |
| Accrued expenses | | | 172 | |
| Total liabilities assumed | | | 756 | |
| Net purchase price | | $ | 8,480 | |
| | | | | |
| Assets acquired: | |
| Accounts receivable | $ | 828 | |
| Unbilled revenue | 438 | |
| Prepaid expenses | 341 | |
| Property and equipment | 1,201 | |
| Intangible assets | 244 | |
| Other assets | 35 | |
| Goodwill | 57 | |
| Total assets acquired | 3,144 | |
| |
| Liabilities assumed: | |
| Accounts payable | 1,250 | |
| Accrued expenses | 455 | |
| Capital lease obligation | 175 | |
| Total liabilities assumed | 1,880 | |
| Net purchase price | $ | 1,264 | |
The acquired identifiable intangible assetsasset of approximately $4.8$0.2 million consistconsists of customer relationships, trade name and non-compete agreements with the owners of Triton Miami.
relationships.
The unaudited financial information in the table below summarizes the combined results of operations of ADDvantage Technologies Group, Inc. and Triton MiamiFulton for the yearsyear ended September 30, 2017 and September 30, 2016,2019, on a pro forma basis, as though the companies had been combined as of October 1, 2015. The unaudited pro forma earnings for the years ended September 30, 2017 and September 30, 2016 were adjusted to include intangible amortization expense of $21 thousand and $0.5 million, respectively, and Triton Datacom earn-out expenses of $19 thousand and $0.6 million, respectively. Incremental interest expense of $7 thousand and $0.2 million was included for the years ended September 30, 2017 and September 30, 2016, respectively, as if the $4.0 million term loan used to help fund the acquisition had been entered into on October 1, 2015. In addition, $0.1 million of interest expense was included for the guaranteed payments to the Triton Miami owners for the year ended September 30, 2016. The unaudited pro forma earnings for the year ended September 30, 2016 were adjusted to include $0.2 million of acquisition-related costs recorded as operating, selling, general and administrative expenses in the Consolidated Statements of Operations.2019. The unaudited pro forma financial information is provided for informational purposes only and does not purport to be indicative of the Company’s combined results of operations which would actually have been obtained had the acquisition taken place on October 1, 2015,2019 nor should it be taken as indicative of our future consolidated results of operations.
| | | | | |
| (Unaudited) |
| Year Ended |
| (in thousands) | September 30, 2019 |
| |
| Total net sales | $ | 58,955 | |
| Loss from continuing operations | $ | (4,461) | |
| Net loss | $ | (5,728) | |
| | | Years Ended September 30, | |
| | | 2017 | | | 2016 | |
| | | (in thousands, except per share amounts) | |
| Sales | | $ | 49,152 | | | $ | 44,986 | |
| Income from operations | | $ | 377 | | | $ | 151 | |
| Net income | | $ | 36 | | | $ | 7 | |
| Earnings per share: | | | | | | | | |
| Basic | | $ | 0.00 | | | $ | 0.00 | |
| Diluted | | $ | 0.00 | | | $ | 0.00 | |
Note 34 – InventoriesDiscontinued Operations
In fiscal year 2018, the Board of Directors formed a committee of independent directors, referred to as the strategic direction committee, to consider, negotiate and approve or disapprove a sale transaction of the Cable TV segment ("Cable transaction") to Leveling 8, Inc. (“Leveling 8”), a company controlled by David Chymiak. Mr. Chymiak is a director and substantial shareholder of the Company, and he was the Chief Technology Officer and President of Tulsat LLC until the closing of the sale. After extensive due diligence efforts, in December 2018, the strategic direction committee approved and executed a stock purchase agreement of the Cable TV segment to Leveling 8, which required stockholder approval.
Shareholders voted in favor of the Cable transaction on May 29, 2019 for a selling price of $10.3 million and the sale was completed on June 30, 2019. The purchase price consisted of $3.9 million of cash at closing (subject to a working capital adjustment estimated at $1.1 million), less the $2.1 million of cash proceeds from the sale of the Sedalia, Missouri and Warminster, Pennsylvania facilities already received (see discussion below) 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 calculation of the pretax loss of the Cable transaction was as follows, in thousands:
| | | | | |
| Contract price | $ | 10,314 | |
| Less: Real estate sales | 2,075 | |
| Less: Working capital adjustment | 1,111 | |
| Net purchase price | 7,128 | |
| Assets sold: | |
| Accounts receivable | 2,038 | |
| Inventories | 10,259 | |
| Prepaids and other assets | 73 | |
| Property and equipment, net | 336 | |
| 12,706 | |
| Liabilities transferred: | |
| Accounts payable | 1,306 | |
| Accrued expenses | 467 | |
| 1,773 | |
| Net assets sold | 10,933 | |
| Pretax loss on sale of net assets of Cable TV segment | $ | (3,805) | |
In addition to the real estate sold as part of the Cable transaction, the Company sold the Broken Arrow, Oklahoma facility to Mr. Chymiak, for a purchase price of $5.0 million payable in cash at closing. The sale closed on November 29, 2018, and generated a pretax gain of approximately $1.4 million.
The total pretax gain related to the sale of all real estate facilities, including the Cable transaction and the Broken Arrow facility, is as follows, in thousands:
| | | | | |
| Aggregate purchase price | $ | 7,075 | |
| Less: Book value of real estate facilities | 4,763 | |
| Pretax gain | $ | 2,312 | |
As a result of the Cable transaction and the three real estate facility sales to David Chymiak, the Company received total proceeds of $14.2 million and recorded a pretax loss on the sales of $1.5 million for the year ended September 30, 2019 as follows, in thousands:
| | | | | |
| Proceeds: | |
| Cash received from real estate facility sales | $ | 7,075 | |
| Cash received from sale of Cable TV segment | 753 | |
| Promissory note from sale of Cable TV segment | 6,375 | |
| Total proceeds | 14,203 | |
| Book value of assets sold: | |
| Cable TV segment | 10,932 | |
| Real estate facilities | 4,763 | |
| Total book value of assets sold | 15,695 | |
| Pretax loss on sale of discontinued operations | $ | (1,492) | |
| |
| |
The cash received from the Cable transaction of $0.7 million resulted from the down payment of $1.8 million due at the closing less the working capital adjustment of $1.1 million. The Company received $2.6 million under the promissory note during the year ended September 30, 2020. The remaining promissory note, which is collateral under the Company's note payable with its primary lender, is scheduled to be received by the Company in semi-annual installments over five years including interest of 6% as follows, in thousands:
| | | | | |
| Fiscal year 2021 | $ | 1,400 | |
| Fiscal year 2022 | 940 | |
| Fiscal year 2023 | 940 | |
| Fiscal year 2024 | 495 | |
| Total proceeds | $ | 3,775 | |
The Company did not have income related to the discontinued operations during the year ended September 30, 2020. Loss from discontinued operations, net of tax and the loss on sale of discontinued operations, net of tax, of the Cable TV segment business which are presented in total as loss from discontinued operations, net of tax in the Company’s consolidated statements of operations for the year ended September 30, 2019 is as follows, in thousands:
| | | | | |
| September 30, 2019 |
| Total net sales | $ | 13,743 | |
| |
| Cost of sales | 10,097 | |
| Operating, selling, general and administrative expenses | 3,412 | |
| Other expenses | 2 | |
| Income from discontinued operations | 232 | |
| Loss on sale of discontinued operations | (1,491) | |
| Income tax provision | 8 | |
| Loss from discontinued operations, net of tax | $ | (1,267) | |
Note 5 – Accounts Receivable Agreements
The Company’s Wireless segment has entered into various agreements, one agreement with recourse, to sell certain receivables to unrelated third-party financial institutions. For the agreement with recourse, the Company is responsible for collecting payments on the sold receivables from its customers. Under this agreement, the third-party financial institution advances the Company 90% of the sold receivables and establishes a reserve of 10% of the sold receivables until the Company collects the sold receivables. In addition, the third party financial institution will charge and deduct 1.6% of sold receivables. As the Company collects the sold receivables, the third-party
financial institution will remit the remaining 10% to the Company. At September 30, 2020, the third-party financial institution has a reserve against the sold receivables of $0.1 million, which is reflected as restricted cash. For the receivables sold under the agreement with recourse, the agreement addresses events and conditions which may obligate the Company to immediately repay the institution the outstanding purchase price of the receivables sold. The total amount of receivables uncollected by the institution was $0.6 million at September 30, 20172020, for which there is a limit of $3.5 million. Although the sale of receivables is with recourse, the Company did not record a recourse obligation at September 30, 2020 as the Company determined the sold receivables are collectible. The other agreements without recourse are under programs offered by certain customers of Fulton.
For the year ended September 30, 2020, the Company received proceeds from the sold receivables under all of their various agreements of $18.9 million and 2016included the proceeds in net cash provided by operating activities in the consolidated statements of cash flows. The cost of selling these receivables ranges from 1.0% to 1.8%. The Company recorded costs of $0.3 million for the year ended September 30, 2020, in other expense in the consolidated statements of operations.
Note 6 – Inventories
Inventories, which are all within the Telco segment, at September 30, 2020 and September 30, 2019 are as follows:follows, in thousands:
| | | 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 | |
| | | | | | | | | | | |
| | 2020 | | 2019 |
| New equipment | $ | 1,311 | | | $ | 1,496 | |
| Refurbished and used equipment | 7,499 | | | 7,405 | |
| Allowance for excess and obsolete inventory: | (3,054) | | | (1,275) | |
| | | |
| Total inventories, net | $ | 5,756 | | | $ | 7,626 | |
New inventoryequipment includes products purchased from the manufacturers plus “surplus-new”, which are unused products purchased from other distributors or multiple system operators. Refurbished inventoryand used equipment includes factory refurbished, Company refurbished and used products. Generally, the Company does not refurbish its used inventory until there is a sale of that product or to keep a certain quantity on hand.
The Company regularly reviews the Cable TV and Telco segment inventory quantities on hand, and an adjustment to cost is recognized 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. The Company recorded charges in the Cable TV segment to allow for excess and obsolete inventory, which increased cost of sales by $0.6 million for each ofIn the years ended September 30, 2017, 20162020 and 2015.
For the Telco segment, any obsolete and excess telecommunications inventory is generally processed through its recycling program when it is identified. However, in fiscal years ended September 30, 2017 and September 30, 2016,2019, the Telco segment identified certain inventory that more than likely will not be sold or that the cost will not0t be recovered when it is sold, and had not yet been processed through its recycling program. Therefore, the Company recorded charges which increased cost of sales by $0.3has a $3.1 million and $0.4 million for the years endedallowance at September 30, 2017 and 2016, respectively, to allow for excess and obsolete inventory. For the year ended September 30, 2015, there was not a charge recorded for excess and obsolete inventory. We2020. The Company also reviewed the cost of inventories against estimated net realizable value and recorded a lower of cost or net realizable value charge of $1.8 million and $0.7 million for each of the years ended September 30, 20172020 and September 30, 2016 of $0.1 million2019 respectively, for inventories that have a cost in excess of estimated net realizable value.
Note 4 – Investment In and Loans to Equity Method Investee
The Company entered into a joint venture, YKTG Solutions, LLC (“YKTG Solutions”), in March 2016, whose primary purpose was to support decommission work on cell tower sites across 13 states in the northeast on behalf of a major U.S. wireless provider. YKTG Solutions is owned 51% by YKTG, LLC and 49% by the Company, and YTKG Solutions is certified as a minority-based enterprise. The joint venture is governed by an operating agreement for the purpose of completing the decommission project, but the operating agreement can be expanded to include other projects upon agreement by both owners. The Company accounts for its investment in YKTG Solutions using the equity-method of accounting.
In 2017, the U.S. wireless provider changed the process for assigning the various sites within the decommission project, which YKTG Solutions believed 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.
The Company’s carrying value in YKTG Solutions was $0.1 million at September 30, 2017 and is reflected in investment in and loans to equity method investee in the Consolidated Balance Sheets. During the year ended September 30, 2017, the Company received payments, net of advances, totaling $2.4 million from YKTG Solutions.
YKTG Solutions entered into a $2.0 million surety payment bond whereby the Company and YKTG, LLC are guarantors under the surety payment bond. Therefore, the Company’s total estimate of maximum exposure to loss as a result of its relationship with YKTG Solutions was the $0.1 million carrying value and the $2.0 million surety payment bond.
To date, this joint venture has incurred net operating losses, and, as of September 30, 2017, the total assets of the joint venture are less than the amount it owes to the Company under a line of credit that the Company provided to YKTG Solutions. Since YKTG Solutions has suspended any additional work for the U.S. wireless provider and YKTG Solutions will not have sufficient assets to repay the line of credit owed to the Company, the Company is pursuing collecting the outstanding line of credit from the YKTG, LLC owners under the personal guarantees they each have with the Company. After considering the personal guarantees the Company has with the joint venture partners and the equity losses already recorded, the Company has adjusted the investment in and loans to equity method investee to the estimated net realizable amount of $0.1 million by recording an allowance against the loan of $0.1 million.
Note 57 – Intangible 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 groups 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 future 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.
As a result of the Fulton acquisition, the Company recorded an additional intangible asset for customer relationships of $0.2 million, see Note 3 ‒ Acquisition.
The intangible assets with their associated accumulated amortization amounts at September 30, 20172020 and September 30, 2019 are as follows:follows, in thousands:
| | | | | September 30, 2020 |
| | | Gross | | | Accumulated Amortization | | | Net | | | Gross | | Accumulated
Amortization | | Impairment | | Net |
| Intangible assets: | | | | | | | | | | Intangible assets: | | | | | | | |
| Customer relationships – 10 years | | $ | 8,152,000 | | | $ | (1,898,691 | ) | | $ | 6,253,309 | | Customer relationships – 10 years | $ | 8,396 | | | $ | (4,021) | | | $ | (3,894) | | | $ | 481 | |
| Technology – 7 years | | | 1,303,000 | | | | (667,009 | ) | | | 635,991 | | |
| Trade name – 10 years | | | 2,119,000 | | | | (542,480 | ) | | | 1,576,520 | | Trade name – 10 years | 2,122 | | | (1,178) | | | 0 | | | 944 | |
| Non-compete agreements – 3 years | | | 374,000 | | | | (292,333 | ) | | | 81,667 | | Non-compete agreements – 3 years | 374 | | | (374) | | | 0 | | | 0 | |
| | | | | | | | | | | | | | | | | | | | | |
| Total intangible assets | | $ | 11,948,000 | | | $ | (3,400,513 | ) | | $ | 8,547,487 | | Total intangible assets | $ | 10,892 | | | $ | (5,573) | | | $ | (3,894) | | | $ | 1,425 | |
The
| | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2019 |
| | Gross | | Accumulated
Amortization | | Impairment | | Net |
| Intangible assets: | | | | | | | |
| Customer relationships – 10 years | $ | 8,396 | | | $ | (3,548) | | | $ | 0 | | | $ | 4,848 | |
| Trade name – 10 years | 2,119 | | | (966) | | | 0 | | | 1,153 | |
| Non-compete agreements – 3 years | 374 | | | (372) | | | 0 | | | 2 | |
| | | | | | | |
| Total intangible assets | $ | 10,889 | | | $ | (4,886) | | | $ | 0 | | | $ | 6,003 | |
As of March 31, 2020, the Company determined that changes in the economy related to the COVID-19 pandemic and the continued losses experienced in the Telco segment may cause the carrying amounts of its intangible assets withto exceed their associated accumulated amortization amounts atfair values. The Company performed an assessment of its intangible assets and determined that the carrying value of its customer relationships were in fact impaired based on valuation appraisals performed by the Company using a multi-period excess earnings model. Therefore, the Company recorded a $3.9 million impairment charge in the Telco segment as of March 31, 2020. As of September 30, 2016 are as follows:
| | | Gross | | | Accumulated Amortization | | | Net | |
| Intangible assets: | | | | | | | | | |
| Customer relationships – 10 years | | $ | 4,257,000 | | | $ | (1,099,721 | ) | | $ | 3,157,279 | |
| Technology – 7 years | | | 1,303,000 | | | | (480,866 | ) | | | 822,134 | |
| Trade name – 10 years | | | 1,293,000 | | | | (334,023 | ) | | | 958,977 | |
| Non-compete agreements – 3 years | | | 254,000 | | | | (218,721 | ) | | | 35,279 | |
| | | | | | | | | | | | | |
| Total intangible assets | | $ | 7,107,000 | | | $ | (2,133,331 | ) | | $ | 4,973,669 | |
2020, no further indicators of potential impairment were present. Amortization expense was $1.3 million, $0.8$0.7 million and $0.8$1.1 million for the years ended September 30, 2017, 20162020 and 2015,2019, respectively.
The estimated aggregate amortization expense for each of the next five fiscal years is as follows:follows, in thousands:
| | | | | |
| 2021 | $ | 319 | |
| 2022 | 319 | |
| 2023 | 319 | |
| 2024 | 195 | |
| 2025 | 107 | |
| Thereafter | 166 | |
| |
| Total | $ | 1,425 | |
| 2018 | | $ | 1,253,243 | |
| 2019 | | | 1,253,243 | |
| 2020 | | | 1,214,910 | |
| 2021 | | | 1,104,663 | |
| 2022 | | | 1,027,100 | |
| Thereafter | | | 2,694,328 | |
| | | | | |
| Total | | $ | 8,547,487 | |
Note 6 – Income Taxes
The provision (benefit) for income taxes for the years ended September 30, 2017, 2016 and 2015 consists of:
| | | 2017 | | | 2016 | | | 2015 | |
| Current | | $ | 174,000 | | | $ | 22,000 | | | $ | 1,114,000 | |
| Deferred | | | (320,000 | ) | | | 157,000 | | | | (341,000 | ) |
Total provision (benefit) for income taxes | | $ | (146,000 | ) | | $ | 179,000 | | | $ | 773,000 | |
The following table summarizes the differences between the U.S. federal statutory rate and the Company’s effective tax rate for continuing operations financial statement purposes for the years ended September 30, 2017, 2016 and 2015:
| | | 2017 | | | 2016 | | | 2015 | |
| Statutory tax rate | | | 34.0 | % | | | 34.0 | % | | | 34.0 | % |
| State income taxes, net of U.S. federal tax benefit | | | 43.7 | % | | | (4.4 | %) | | | 2.1 | % |
| Return to accrual adjustment | | | (9.8 | %) | | | 1.5 | % | | | (3.0 | %) |
| Tax credits | | | 8.2 | % | | | − | | | | (0.9 | %) |
| Charges without tax benefit | | | (16.2 | %) | | | 6.8 | % | | | 1.6 | % |
| Other exclusions | | | (0.1 | %) | | | (0.1 | %) | | | 0.2 | % |
| | | | | | | | | | | | | |
| Company’s effective tax rate | | | 59.8 | % | | | 37.8 | % | | | 34.0 | % |
The charges without tax benefit rate for fiscal year 2017 includes, among other things, the impact of officer life insurance and nondeductible meals and entertainment.
The tax effects of temporary differences related to deferred taxes at September 30, 2017 and 2016 consist of the following:
| | | 2017 | | | 2016 | |
| Deferred tax assets: | | | | | | |
| Net operating loss carryforwards | | $ | 29,000 | | | $ | 281,000 | |
| Accounts receivable | | | 58,000 | | | | 97,000 | |
| Inventory | | | 1,432,000 | | | | 1,269,000 | |
| Intangibles | | | 560,000 | | | | 351,000 | |
| Accrued expenses | | | 175,000 | | | | 169,000 | |
| Stock options | | | 246,000 | | | | 226,000 | |
| Investment in equity method investee | | | 174,000 | | | | – | |
| Other | | | 179,000 | | | | 76,000 | |
| | | | 2,853,000 | | | | 2,469,000 | |
| | | | | | | | | |
| Deferred tax liabilities: | | | | | | | | |
| Financial basis in excess of tax basis of certain assets | | | 1,156,000 | | | | 926,000 | |
| Investment in equity method investee | | | – | | | | 143,000 | |
| Other | | | 44,000 | | | | 67,000 | |
| | | | | | | | | |
| Net deferred tax asset | | $ | 1,653,000 | | | $ | 1,333,000 | |
The Company’s net operating loss carryforward totals approximately $0.1 million at September 30, 2017. The net operating loss carryforward expires in 2036.
The Company records net deferred tax assets to the extent the Company believes these assets will more likely than not be realized. In making such determination, the Company considers all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and
recent financial performance. The Company has concluded, based on its historical earnings and projected future earnings, that it will be able to realize the full effect of the deferred tax assets and no valuation allowance is needed.
Based upon a review of its income tax positions, the Company believes that its positions would be sustained upon an examination by the Internal Revenue Service and does not anticipate any adjustments that would result in a material change to its financial position. Therefore, no reserves for uncertain income tax positions have been recorded. Generally, the Company is no longer subject to examinations by the U.S. federal, state or local tax authorities for tax years before 2014.
Note 78 – Accrued Expenses
Accrued expenses at September 30, 20172020 and 20162019 are as follows:follows, in thousands:
| | | | | | | | | | | |
| 2020 | | 2019 |
| Employee costs | $ | 942 | | | $ | 1,192 | |
| Taxes other than income tax | 91 | | | 69 | |
| Interest | 23 | | | 0 | |
| Other, net | 443 | | | 357 | |
| | | |
| Total accrued expenses | $ | 1,499 | | | $ | 1,618 | |
| | | 2017 | | | 2016 | |
| Employee costs | | $ | 884,390 | | | $ | 1,123,940 | |
| Triton Datacom earn-out | | | 222,611 | | | | − | |
| Taxes other than income tax | | | 163,016 | | | | 120,455 | |
| Interest | | | 22,121 | | | | 13,836 | |
| Other, net | | | 114,584 | | | | 66,421 | |
| | | | | | | | | |
| | | $ | 1,406,722 | | | $ | 1,324,652 | |
Note 9 – Debt
Loan Agreement
On March 10, 2020, the Company entered into a loan agreement with its primary lender for $3.5 million, bearing interest at 6% per annum. The loan is payable in 7 semi-annual installments of principal and interest with the first payment occurring June 30, 2020, and the final payment due June 30, 2023. Payment of the loan may be accelerated in the event of a default. The principal and interest payments correlate to the payment schedule for the promissory note with Leveling 8. The balance under this loan is now $1.2 million and the final payment will be June 30, 2023. The loan is secured by substantially all of the assets of the Company, including, without limitation, the promissory note that the Company received in connection with the sale of its Cable TV segment in 2019 to Leveling 8, – Inc.
Line of Credit and Notes Payable
Notes Payable
Credit Agreement
The Company has an Amended and Restated Revolving Credit and Term Loan Agreement (“Credit and Term Loan Agreement”a line of credit ("LOC") agreement with its primary financial lender. RevolvingThis credit agreement contains a $4.0 million revolving line of credit and term loans created underhad a maturity date of December 17, 2020. The Company renewed the Creditline of credit for another year subsequent to September 30, 2020. During the fiscal year 2020, the line of credit required quarterly interest payments based on the prevailing Wall Street Journal Prime Rate ("WSJP") (3.25% at September 30, 2020), and Term Loan Agreement are collateralized by inventory, accounts receivable, equipment and fixtures, general intangibles and a mortgage on certain property. Among other financial covenants, the Credit and Term Loan Agreementinterest rate was reset monthly. The credit agreement provides that the Company maintain a fixed charge coverage ratio (net cash flow to total fixed charges) of not less than 1.25 to 1.0 and a leverage ratio (total funded debt to EBITDA) of not more than 2.50 to 1.0. Both financial covenants are determined quarterly. The1.00 measured annually. At September 30, 2020, the Company was not in compliance with the fixed charge ratio at September 30, 2017. The Company notified its primary financial lender of the covenant violation, and on December 1, 2017, the primary financial lender granted a waiver of the covenant violation under the Credit and Term Loan Agreement. Subsequent to September 30, 2017, the Company elected to extinguish its second term loan in December 2017 as part of the Company’s overall plan to become compliant with its financial covenants. As a result, the Company believes it will be in compliance with its financial covenants at December 31, 2017.
this ratio. At September 30, 2017, the Company has three term loans2020, there was $2.8 million outstanding under the Credit and Term Loan Agreement. The first outstanding term loan has an outstanding balanceline of $0.8 million at September 30, 2017 and is due on November 30, 2021, with monthly principal payments of $15,334 plus accrued interest. The interest rate is the prevailing 30-day LIBOR rate plus 1.4% (2.63% at September 30, 2017) and is reset monthly.
The second outstanding term loan has an outstanding balance of $2.7 million at September 30, 2017 and is due March 4, 2019, with monthly principal and interest payments of $68,505, with the balance due at maturity. It is a five year term loan with a seven year amortization payment schedule with a fixed interest rate of 4.07%. Subsequent to September 30, 2017, the Company extinguished the second term loan by paying the outstanding balance plus a prepayment penalty of $25 thousand. As a result, the Company has classified the second term loan balance at September 30, 2017 in Notes payable – current portion in the Company’s Consolidated Balance Sheet.
In connection with the acquisition of Triton Miami, the Company entered into a third term loan under the Credit and Term Loan Agreement in the amount of $4.0 million. This term loan has an outstanding balance of $2.8 million at September 30, 2017 and is due on October 14, 2019, with monthly principal and interest payments of $118,809. The interest rate on the term loan is a fixed interest rate of 4.40%.
The aggregate minimum maturities of notes payable for each of the next five years are as follows:
| 2018 | | $ | 4,189,605 | |
| 2019 | | | 1,565,476 | |
| 2020 | | | 298,880 | |
| 2021 | | | 184,008 | |
| 2022 | | | 45,882 | |
| Thereafter | | | – | |
| | | | | |
| Total | | $ | 6,283,851 | |
Line of Credit
The Company has a $7.0 million Revolving Line of Credit (“Line of Credit”) under the Credit and Term Loan Agreement. On March 31, 2017, the Company executed the Eighth Amendment under the Credit and Term Loan Agreement. This amendment extended the Line of Credit maturity to March 30, 2018, while other terms of the Line of Credit remained essentially the same. At September 30, 2017, the Company had no balance outstanding under the Line of Credit. The Line of Credit requires quarterly interest payments based on the prevailing 30-day LIBOR rate plus 2.75% (3.99% at September 30, 2017), and the interest rate is reset monthly. Any future borrowings under the Line of Credit are due on March 30, 2018.credit. Future borrowings under the Lineline of Creditcredit are limited to the lesser of $7.0$4.0 million or the net balancesum of 80% of qualifiedeligible accounts receivable plus 50%and 60% of qualifiedeligible Telco segment inventory. Under these limitations, the Company’s total available Lineline of Creditcredit borrowing basecapacity was $7.0$3.3 million at September 30, 2017.2020, and remaining availability was $0.5 million.
Fair ValueSubsequent to September 30, 2020, the Company renewed its revolving bank line of Debtcredit for one year to a maturity date of December 17, 2021. As part of this renewal, the revolving bank line of credit remained $4.0 million, or the sum of 80% of eligible accounts receivable and 25% of eligible inventory. Quarterly interest payments are based on WSJP, floating, with the addition of a 4% floor rate and a fixed charge coverage ratio of 1.25 to be tested quarterly beginning June 30, 2021.
Paycheck Protection Program Loan
On April 14, 2020, the Company received a SBA Payroll Protection Program (“PPP”) loan pursuant to the Paycheck Protection Program under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), with its primary lender for $2.9 million. The carryingPPP loan bears interest at 1% per annum, with monthly payments of principal and interest in the amount of $164,045 commencing on November 10, 2020, and matures on April 10, 2022. The Paycheck Protection Program provides that the PPP loan may be partially or fully forgiven if the funds are used for certain qualifying expenses as described in the CARES Act. The Company has applied for forgiveness of the PPP loan in accordance with the requirements and limitations under the CARES Act, the PPP Flexibility Act and SBA regulations and requirements.
As of September 30, 2020, the aggregate maturities of debt for the next five years and thereafter are as follows (in thousands):
| | | | | | | |
| | | |
| 2021 | $ | 4,509 | | | |
| 2022 | 2,440 | | | |
| Thereafter | 0 | | | |
| | | |
| | | |
| Total | $ | 6,949 | | | |
Note 10 – Leases
ADDvantage adopted ASU No. 2016-02, Topic 842 (ASC 842) - Leases, effective October 1, 2019. This ASU requires lessees to recognize an operating lease or right-of-use ("ROU") asset and liability on the balance sheet for all right-of-use leases with an initial lease term greater than twelve months.
ASU 2018-11 Leases – Targeted Improvements, allows for a practical expedient wherein all periods previously reported under ASC 840 will continue to be reported under ASC 840, and periods beginning October 1, 2019 and after are reported under ASC 842. ADDvantage elected to adopt this practical expedient along with the package of practical expedients, which allows the Company to combine lease and non-lease costs.
Under this transition option, ADDvantage will continue to apply the legacy guidance in ASC 840, including its disclosure requirements, in the comparative periods presented and will make only annual disclosures for the comparative periods because ASC 840 does not require interim disclosures. Prior period amounts have not been adjusted and continue to be reflected in accordance with ADDvantage historical accounting. The adoption of this standard on October 1, 2019, had no impact on the Company's consolidated statement of shareholders' equity or consolidated statement of operations.
As a lessee, ADDvantage leases its corporate office headquarters in Carrollton, Texas, and conducts its business operations through various regional offices located throughout the United States. These operating locations typically
include regional offices, storage and maintenance facilities sufficient to support its operations in the area. ADDvantage leases these properties under either non-cancelable term leases many of which contain renewal options that can extend the lease term from one to five years and some of which contain escalation clauses, or month-to-month operating leases. Options to renew these leases are generally not considered reasonably certain to be exercised. Therefore, the periods covered by such optional periods are not included in the determination of the term of the lease. ADDvantage may lease equipment under cancellable short-term or contracts which are less than 30 days. Due to the nature of the Company's business, any option to renew these short-term leases is generally not considered reasonably certain to be exercised. Therefore, the periods covered by such optional periods are not included in the determination of the term of the lease, and the lease payments during these periods are similarly excluded from the calculation of right-of-use lease asset and lease liability balances.
ROU lease expense consists of rent expense related to leases that were included in ROU assets under ASC 842. ADDvantage recognizes right-of-use lease expense on a straight-line basis, except for certain variable expenses that are recognized when the variability is resolved, typically during the period in which they are paid. Variable right-of-use lease payments typically include charges for property taxes and insurance, and some leases contain variable payments related to non-lease components, including common area maintenance and usage of facilities or office equipment (for example, copiers).
As a result of adopting ASC 842, on the effective date, the Company recognized right-of-use assets and liabilities of $4.6 million, and financing lease assets and liabilities of $1.4 million. Right-of-use leases are included in right-of-use assets and current or long-term right-of-use obligations on the consolidated balance sheets. Finance leases are included in net property and equipment, and current or long-term finance lease obligations in the consolidated balance sheets.
Right-of-use assets and liabilities are recognized at the commencement date based on the present value of lease payments over the Company’s variable-ratelease term. The Company uses a discount rate that approximates the rate of interest for a
collateralized loan over a similar term loan approximatesas the discount rate for present value of lease payments when the rate implicit in the contract is not readily determinable.
Impairment of right-of-use asset - The Company has a right-of-use for a building in Jessup, Maryland for Nave Communications. The Company ceased operations in Jessup, Maryland in May 2020, and vacated the Jessup, Maryland building. The building was partially subleased during fiscal year 2020. During the third quarter of 2020, the Company determined that the right-of-use asset was not recoverable and used an income approach to estimate its fair value, sincedetermining that the interest rate fluctuates periodically based on a floating interest rate.
Thecarrying value was partially impaired. Therefore, the Company has determinedrecorded $0.7 million of impairment charges related to the fair value of its fixed-rate term loan utilizinglease in the Level 2 hierarchy asTelco segment during the fair value can be estimated from broker quotes corroborated by other market data. These broker quotes are based on observable market interest rates at which loans with similar terms and maturities could currently be executed. The Company then estimated the fair value of the fixed-rate term loan using cash flows discounted at the current market interest rate obtained. The fair value of the Company’s second term loan was approximately $2.7 million as ofyear ended September 30, 2017. The fair value2020.
| | | | | |
| The components of lease expense were as follows for the year ended September 30, 2020, in thousands: |
| September 30, 2020 |
| Right-of-use lease cost | |
| Impairment of right-of-use asset | $ | 660 | |
| Right-of-use lease cost | 1,586 | |
| Total right-of-use lease cost | $ | 2,246 | |
| Finance lease costs | |
| Amortization assets under finance leases | $ | 335 | |
| Interest on finance lease liabilities | 59 | |
| Total finance lease cost | $ | 394 | |
| |
| | | | | |
| Supplemental cash flow information related to leases are as follows for the year ended September 30, 2020, in thousands: |
| September 30, 2020 |
| Cash paid for amounts included in the measurement of lease liabilities: | |
| Operating cash flows from right-of-use leases | $ | 1,586 | |
| Operating cash flows from finance leases | $ | 59 | |
| Financing cash flows from finance leases | $ | 387 | |
| | | | | |
| Supplemental balance sheet information related to leases are as follows, in thousands: |
| September 30, 2020 |
| Right-of-use leases | |
| Right-of-use lease assets | $ | 3,758 | |
| |
| Right-of-use lease obligations - current | $ | 1,275 | |
| Right-of-use lease obligations | 3,310 | |
| Total right-of-use lease liabilities | $ | 4,585 | |
| |
| Finance leases | |
| Property and equipment, gross | $ | 1,463 | |
| Accumulated depreciation | (393) | |
| Property and equipment, net | $ | 1,070 | |
| |
| Financing lease obligations - current | $ | 285 | |
| Financing lease obligations | 791 | |
| Total finance lease liabilities | $ | 1,076 | |
| |
| Weighted Average Remaining Lease Term | |
| Right-of-use leases | 3.75 years |
| Finance leases | 3.88 years |
| Weighted Average Discount Rate | |
| Right-of-use leases | 5.00% |
| Finance leases | 4.96% |
Maturities of lease liabilities are as follows for the Company’s third outstanding fixed rate loan was $2.8 million atyear ending September 30, 2017.2020, in thousands:
| | | | | | | | | | | |
| Right-of-Use Leases | | Finance Leases |
| 2021 | $ | 1,441 | | | $ | 325 | |
| 2022 | 1,341 | | | 292 | |
| 2023 | 1,328�� | | | 278 | |
| 2024 | 802 | | | 234 | |
| 2025 | 150 | | | 44 | |
| | | |
| Total lease payments | 5,062 | | | 1,173 | |
| Less imputed interest | 477 | | | 98 | |
| Total lease obligations | $ | 4,585 | | | $ | 1,075 | |
Note 911 – Stock-Based Compensation
Plan Information
The 2015 Incentive Stock Plan (the “Plan”) provides for awards of stock options and restricted stock to officers, directors, key employees and consultants. Under the Plan, option prices will be set by the Compensation Committee and may not be less than the fair market value of the stock on the grant date.
At September 30, 2017, 1,100,4152020, 2,100,415 shares of common stock were reserved for stock award grants under the Plan. Of these reserved shares, 212,451789,630 shares were available for future grants.
Stock Options
All share-based payments to employees, including grants of employee stock options, are recognized in the consolidated financial statements based on their grant date fair value over the requisite service period.
Compensation expense for stock-based awards is included in the operating, selling, general and administrative expense section of the Consolidated Statementsconsolidated statements of Operations.operations.
Stock options are valued at the date of the award, which does not precede the approval date, and compensation cost is recognized on a straight-line basis over the vesting period. Stock options granted to employees generally become exercisable over a three, four or five-year periodfive years from the date of grant and generally expire ten years after the date of grant. Stock options granted to the Board of Directors generally become exercisable on the date of grant and generally expire ten years after the date of grant.
A summary of the status of the Company's stock options at September 30, 20172020 and changes during the year then ended is presented below:below in thousands, except share and per share amounts:
| | | Options | | | Weighted Average Exercise Price | | | Aggregate Intrinsic Value | | | | | | | | | | | | | | | | |
| Outstanding at September 30, 2016 | | | 570,000 | | | $ | 2.73 | | | | | |
| | | | Options (Shares) | | Weighted Average
Exercise
Price | | Aggregate
Intrinsic
Value |
| Outstanding at September 30, 2019 | | Outstanding at September 30, 2019 | 770,000 | | | $ | 1.73 | | | $ | 353 | |
| Granted | | | 140,000 | | | $ | 1.80 | | | | | Granted | 0 | | | 0 | | | — | |
| Exercised | | | − | | | $ | – | | | $ | 0 | | Exercised | (123,334) | | | 1.67 | | | 304 | |
| Expired | | | (10,000 | ) | | $ | 3.45 | | | | | | Expired | 0 | | | 0 | | | — | |
| Forfeited | | | – | | | $ | – | | | | | | Forfeited | (546,666) | | | 0 | | | 606 | |
| Outstanding at September 30, 2017 | | | 700,000 | | | $ | 2.54 | | | $ | 0 | | |
| Exercisable at September 30, 2017 | | | 526,667 | | | $ | 2.78 | | | $ | 0 | | |
| Outstanding at September 30, 2020 | | Outstanding at September 30, 2020 | 100,000 | | | $ | 1.55 | | | $ | 38 | |
| Exercisable at September 30, 2020 | | Exercisable at September 30, 2020 | 66,667 | | | $ | 1.68 | | | $ | 16 | |
There were noThe intrinsic value of exercised options exercised under the Plan for the years ended September 30, 2017, 20162020 and 2015.2019, in thousands:
| | | | | | | | | | | |
| |
| 2020 | | 2019 |
| | | |
| Value at exercise date | $ | 510 | | | $ | 0 | |
| Exercise price | 206 | | | 0 | |
| Intrinsic value | $ | 304 | | | $ | 0 | |
Information about the Company’s outstanding and exercisable stock options at September 30, 20172020 is as follows:follows, in thousands except share and per share amounts:
| | | | | | | 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 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Exercise Price | | Stock Options
Outstanding | | Exercisable
Stock Options
Outstanding | | Remaining Contractual Life | | Aggregate
Intrinsic
Value |
| $ | 1.28 | | | 50,000 | | | 16,667 | | | 8.25 | | $ | 32 | |
| $ | 1.81 | | | 50,000 | | | 50,000 | | | 6.42 | | 6 | |
| | 100,000 | | | 66,667 | | | | | $ | 38 | |
The Company granted nonqualified stock options of 140,000 shares0 and 50,000 shares480,000 options for the yearyears ended September 30, 20172020 and September 30, 2016,2019, respectively. No nonqualified stock options were granted in 2015. The Company estimated the fair value of the options granted using the Black-Scholes option valuation model and the assumptions shown in the table below. The Company estimated the expected term of options granted based on the historical grants and exercises of the Company's options. The Company estimated the volatility of its common stock at the date of the grant based on both the historical volatility as well as the implied volatility on its common stock. The Company based the risk-free rate that was used in the Black-Scholes option valuation model on the implied yield in effect at the time of the option grant on U.S. Treasury zero-coupon issues with equivalent expected terms. The Company has never paid cash dividends on its common stock and does not anticipate paying any cash dividends in the foreseeable future. Consequently, the Company used an expected dividend yield of zero0 in the Black-Scholes option valuation model. The Company amortizes the resulting fair value of the options ratably over the vesting period of the awards. The Company used historical data to estimate the pre-vesting options forfeitures and records share-based expense only for those awards that are expected to vest.
The estimated fair value at date of grant for stock options utilizing the Black-Scholes option valuation model and the assumptions that were used in the Black-Scholes option valuation model for the fiscal years 2017 and 2016year 2019 stock option grants are as follows:
| | | 2017 | | | 2016 | |
| Estimated fair value of options at grant date | | $ | 96,690 | | | $ | 34,350 | |
| Black-Scholes model assumptions: | | | | | | | | |
| Average expected life (years) | | | 6 | | | | 6 | |
| Average expected volatile factor | | | 35 | % | | | 38 | % |
| Average risk-free interest rate | | | 2.4 | % | | | 1.75 | % |
| Average expected dividend yield | | | – | | | | – | |
| | | | | | | | |
| | |
| Estimated fair value of options at grant date | | $196,970 |
| Black-Scholes model assumptions: | | |
| Average expected life (years) | | 6 |
| Average expected volatile factor | | 29% |
| Average risk-free interest rate | | 2.8% |
| Average expected dividend yield | | 0 |
The Company realized a net benefit related to the recognition of forfeitures of stock options during the year ended September 30, 2020. Compensation expense related to stock options recorded for the years ended September 30, 2017, 20162020 and 20152019 is as follows:
| | | 2017 | | | 2016 | | | 2015 | |
| Fiscal year 2012 grant | | $ | 5,359 | | | $ | 17,417 | | | $ | 33,044 | |
| Fiscal year 2014 grant | | | 13,575 | | | | 47,522 | | | | 108,624 | |
| Fiscal year 2016 grant | | | 16,221 | | | | 8,745 | | | | – | |
| Fiscal year 2017 grant | | | 31,088 | | | | – | | | | – | |
| | | | | | | | | | | | | |
| Total compensation expense | | $ | 66,243 | | | $ | 73,684 | | | $ | 141,668 | |
| | | | | | | | | | | |
| | 2020 | | 2019 |
| Fiscal year 2017 grant | $ | (6) | | | $ | 18 | |
| | | |
| Fiscal year 2019 grant | 0 | | | 128 | |
| | | |
| | | |
| Total compensation expense | $ | (6) | | | $ | 146 | |
The Company records compensation expense over the vesting term of the related options. At September 30, 2017,2020, compensation costs related to these unvested stock options not yet recognized in the statements of operations was $74,985.
$2,945 which will be fully amortized by 2022.
Restricted stock awards
TheIn fiscal year 2019, the Company granted restricted stock in March 2017, 2016 and 2015share awards to its BoardChairman of Directors and a Company officer totaling 58,009, 62,874 shares and 31,915 shares, respectively. The restricted stock grants were valued at market value on the date of grant. The restricted shares are delivered to the directors and employees at the end of the 12 month holding period. For the shares granted in March 2015, a director resigned from the Board of Directors prior to the expiration of the respective holding period, so their individual share grant of 6,383 shares for 2015 was forfeited. The fair value of the shares upon issuance totaled $105,000, $105,000 and $60,000 for the 2017, 2016 and 2015 fiscal year grants, respectively. The grants are amortized over the 12 month holding period as compensation expense. The Company granted restricted stock in December 2015 and October 2015 to two new Directors totaling 3,333 and 4,465 shares, respectively which were valued at market value on the date of the grants. The holding restriction on these shares expired the first week of March 2016. The fair value of the shares issued December 2015 and October 2015 totaled $7,500 and $10,000, respectively and was amortized over the holding period as compensation expense.
The Company granted restricted stock in April of 2014 to certain employees totaling 23,67655,147 shares, which were valued at market value on the date of grant. The shares have a holding restriction, which will expire in equal annual installmentsvest 20% per year with the first installment vesting on the first anniversary of 7,892 shares over three years starting in April 2015.the grant date. The fair value of thesethe shares upon issuance totaled $76,000$0.1 million.
In fiscal year 2020, the Company granted a total of 298,974 shares to its board members, which were valued at market value on the date of grant. The shares ranged in vesting periods from immediate to three years. The fair value of the shares upon issuance totaled $0.6 million.
In fiscal year 2020, the Company granted a total of 220,937 shares to certain members of management, which were valued at market value on the date of grant. The shares ranged in vesting periods from immediate to three years. The fair value of the shares upon issuance totaled $0.6 million.
A summary of the Company's non-vested restricted share awards (RSA) at September 30, 2020 and changes during the year ended September 30, 2020 is being amortized overpresented in the respectivefollowing table:
| | | | | | | | | | | |
| Shares | | Fair Value |
| Non-vested at September 30, 2019 | 44,118 | | | $ | 60 | |
| Granted | 764,184 | | | 1,569 | |
| Vested | (333,278) | | | (571) | |
| Forfeited | 0 | | | 0 | |
| Non-vested at September 30, 2020 | 475,024 | | | $ | 1,058 | |
In addition, certain outstanding stock options held by 2 members of management and one twodirector were converted to stock grants based on a fair value calculation of the outstanding stock options. As a result, the options outstanding, which totaled 330,000 options, were forfeited and three year holding periods as compensation expense.244,273 shares of common stock were granted based on the fair value calculation of $0.6 million. Since this was considered a modification of a stock award, the Company recognized the difference between the stock grant fair value and the immediate fair value of the stock option award, before modification which totaled $0.2 million.
Compensation expense related to restricted stock recorded for the years ended September 30, 2017, 20162020 and 20152019 is as follows:follows, in thousands:
| | | 2017 | | | 2016 | | | 2015 | |
| Fiscal year 2014 grants | | $ | 4,222 | | | $ | 14,779 | | | $ | 58,778 | |
| Fiscal year 2015 grants | | | – | | | | 25,000 | | | | 39,167 | |
| Fiscal year 2016 grants | | | 43,750 | | | | 78,750 | | | | − | |
| Fiscal year 2017 grant | | | 61,250 | | | | − | | | | – | |
| | | | | | | | | | | | | |
| | | $ | 109,222 | | | $ | 118,529 | | | $ | 97,945 | |
| | | | | | | | | | | |
| | 2020 | | 2019 |
| Fiscal year 2019 grant | 15 | | | 38 | |
| Fiscal year 2020 grant | 565 | | | 15 | |
| | | |
| Total compensation expense | $ | 580 | | | $ | 53 | |
Valuation of time vesting restricted stock awards for all periods presented is equal to the quoted market price for the shares on the date of the grant. The Company amortizes the fair value of the restricted share awards, graded, over the vesting period of the awards.
Note 1012 – Retirement PlanEquity Distribution Agreement and Sale of Common Stock
On April 24, 2020, the Company entered into an Equity Distribution Agreement (the “Sales Agreement”) with Northland Securities, Inc., as agent (“Northland”), pursuant to which the Company may offer and sell, from time to time, through Northland, shares of the Company’s common stock, par value $0.01 per share, having an aggregate offering price of up to $13.9 million.
The offer and sale of the Shares will be made pursuant to a shelf registration statement on Form S-3 and the related prospectus filed by the Company with the SEC on March 3, 2020, as amended on March 23, 2020, and declared effective by the SEC on April 1, 2020.
Pursuant to the Sales Agreement, Northland may sell the Shares by any method permitted by law deemed to be an “at the market offering” as defined in Rule 415 of the Securities Act of 1933 (the “Securities Act”), including sales made by means of ordinary brokers’ transactions, including on The Nasdaq Global Market, at market prices or as otherwise agreed with Northland. Northland will use commercially reasonable efforts consistent with its normal trading and sales practices to sell the Shares from time to time, based upon instructions from the Company, including any price or size limits or other customary parameters or conditions the Company may impose. The sales agreement may be terminated without prior notice at any time prior to the fulfillment of the Sales Agreement if additional sales are deemed not warranted.
The Company sponsorswill pay Northland a 401(k) plan that allows participation by all employees who are at least 21 yearscommission rate equal to an aggregate of age3.0% of the aggregate gross proceeds from each sale of Shares and have completed one year of service.agreed to provide Northland with customary indemnification and contribution rights. The Company's contributionsCompany will also reimburse Northland for certain specified expenses in connection with entering into the Sales Agreement. The Sales Agreement contains customary representations and warranties and conditions to the plan consist of a matching contribution as determined by the plan document. Costs recognized under the 401(k) plan were $0.3 million for eachplacements of the yearsShares pursuant thereto.
During the year ended September 30, 2017, 20162020, 573,199 shares were sold by Northland on behalf of the Company with gross proceeds of $2.2 million, and 2015.
net proceeds after commissions and fees of $2.1 million.
Note 13 - Supplemental Cash Flow Information
| | | | | | | | | | | |
| (in thousands) | Years ended September 30, |
| 2020 | | 2019 |
| | | |
| Supplemental cash flow information: | | | |
| Cash paid for interest | $ | 230 | | | $ | 126 | |
| Cash received from income taxes | $ | 0 | | | $ | (172) | |
| | | |
| Supplemental noncash investing activities: | | | |
| Assets acquired under financing leases | $ | 1,352 | | | $ | 0 | |
| Promissory note from disposition of business | $ | 0 | | | $ | 6,375 | |
Note 1114 – Earnings per Share
Basic and diluted earnings per share for the years ended September 30, 2017, 20162020 and 2015 are:2019, in thousands:
| | | 2017 | | | 2016 | | | 2015 | |
Net income (loss) attributable to common shareholders | | $ | (98,116 | ) | | $ | 294,163 | | | $ | 1,497,900 | |
| Basic weighted average shares | | | 10,201,825 | | | | 10,141,234 | | | | 10,088,803 | |
| Effect of dilutive securities: | | | | | | | | | | | | |
| Stock options | | | – | | | | 4,062 | | | | – | |
| Diluted weighted average shares | | | 10,201,825 | | | | 10,145,296 | | | | 10,088,803 | |
| | | | | | | | | | | | | |
| Earnings (loss) per common share: | | | | | | | | | | | | |
| Basic | | $ | (0.01 | ) | | $ | 0.03 | | | $ | 0.15 | |
| Diluted | | $ | (0.01 | ) | | $ | 0.03 | | | $ | 0.15 | |
| | | | | | | | | | | |
| | 2020 | | 2019 |
| Loss from continuing operations | $ | (17,333) | | | $ | (4,035) | |
| Discontinued operations, net of tax | 0 | | | (1,267) | |
| Net loss attributable to common shareholders | $ | (17,333) | | | $ | (5,302) | |
| | | |
| Basic weighted average shares | 11,164 | | | 10,361 | |
| | | |
| | | |
| Diluted weighted average shares | 11,164 | | | 10,361 | |
| | | |
| Loss per common share: | | | |
| Basic | | | |
| Continuing operations | $ | (1.55) | | | $ | (0.39) | |
| Discontinued operations | 0 | | | (0.12) | |
| Net loss | $ | (1.55) | | | $ | (0.51) | |
| | | |
| Continuing operations | $ | (1.55) | | | $ | (0.39) | |
| Discontinued operations | 0 | | | (0.12) | |
| Net loss | $ | (1.55) | | | $ | (0.51) | |
The table below includes information related to stock options that were outstanding at the end of each respective year but have been excluded from the computation of weighted-average stock options for dilutive securities due to the option exercise price exceeding the average market price per share of ourthe Company’s common stock for the fiscal year as their effect would be anti-dilutive.anti-dilutive, or the exercise of the option is antidilutive.
| | | | | | | | | | | |
| | 2020 | | 2019 |
| Stock options excluded | 100,000 | | | 770,000 | |
| Weighted average exercise price of | | | |
| stock options | $ | 1.55 | | | $ | 1.73 | |
| Average market price of common stock | $ | 2.44 | | | $ | 1.49 | |
| | | 2017 | | | 2016 | | | 2015 | |
| Stock options excluded | | | 700,000 | | | | 520,000 | | | | 535,000 | |
| Weighted average exercise price of | | | | | | | | | | | | |
| stock options | | $ | 2.54 | | | $ | 2.83 | | | $ | 2.88 | |
| Average market price of common stock | | $ | 1.70 | | | $ | 1.90 | | | $ | 2.38 | |
Note 1215 – Related Parties
Income Taxes
The Company leases three facilities in Florida from a company owned by two employees. The total payments made on the leases were $0.1 millionbenefit for the year ended September 30, 2017. The three leases terms extend through December 31, 2019.
David E. Chymiak and Kenneth A. Chymiak beneficially owned 26% and 19%, respectively, of the Company’s outstanding common stock at September 30, 2017.
Note 13 – Commitments and Contingencies
The Company leases and rents various office and warehouse properties in Florida, Georgia, Maryland, North Carolina, Pennsylvania, and Tennessee. The terms on its operating leases vary and contain renewal options or are rented on a month-to-month basis. Rental payments associated with leased properties totaled $0.8 million, $0.7 million and $0.6 millionincome taxes for the years ended September 30, 2017, 20162020 and 2015, respectively. 2019 consists of, in thousands:
| | | | | | | | | | | |
| | 2020 | | 2019 |
| Continuing operations: | | | |
| Current | $ | (1,249) | | | $ | (13) | |
| Deferred | 0 | | | 0 | |
| | (1,249) | | | (13) | |
| Discontinued operations – current | 0 | | | 8 | |
| Total benefit for income taxes | $ | (1,249) | | | $ | (5) | |
The following table summarizes the differences between the U.S. federal statutory rate and the Company’s effective tax rate for continuing operations financial statement purposes for the years ended September 30, 2020 and 2019:
| | | | | | | | | | | |
| | 2020 | | 2019 |
| Statutory tax rate | 21.0 | % | | 21.0 | % |
| State income taxes, net of U.S. federal tax benefit | 4.8 | % | | 6.6 | % |
| Return to accrual adjustment | 0 | % | | (0.6 | %) |
| Tax credits | 0 | % | | 0 | % |
| Charges without tax benefit | 0.1 | % | | (5.3 | %) |
| | | |
| Valuation allowance | (19.4 | %) | | (22.1 | %) |
| Other exclusions | 0.1 | % | | 0.7 | % |
| | | |
| Company’s effective tax rate | 6.6 | % | | 0.3 | % |
The charges without tax benefit rate includes, among other things, the impact of officer life insurance, nondeductible meals and entertainment and permanent basis differences in goodwill.
As a result of the CARES Act, the Company can carryback net operating losses (NOL) generated in 2018 through 2020 for a period of five years. As a result, the Company’s effective tax rate included an income tax benefit recognized during the fiscal year ended September 30, 2020 related to tax losses generated during the fiscal year up to the amount that the Company estimates is realizable based upon taxable income in the carryback periods. Therefore, as of September 30, 2020, the Company recorded a $1.2 million income tax receivable and a corresponding current benefit for income taxes. The Company continues to provide a valuation allowance of $6.4 million for all net deferred tax assets where the Company believes it is more likely than not that those deferred taxes will not be realized.
The tax effects of temporary differences related to deferred taxes at September 30, 2020 and 2019 consist of the following, in thousands:
| | | | | | | | | | | |
| | 2020 | | 2019 |
| Deferred tax assets: | | | |
| Net operating loss carryforwards | $ | 4,659 | | | $ | 2,632 | |
| Accounts receivable | 69 | | | 41 | |
| Inventory | 883 | | | 393 | |
| Intangibles | 1,259 | | | 707 | |
| Accrued expenses | 132 | | | 53 | |
| Stock options | 14 | | | 109 | |
| Investment in equity method investee | 100 | | | 112 | |
| Other | 0 | | | 0 | |
| Total deferred tax assets | 7,116 | | | 4,047 | |
| | | |
| Deferred tax liabilities: | | | |
| Financial basis in excess of tax basis of certain assets | 416 | | | 705 | |
| Other | 323 | | | 95 | |
| Total deferred tax liabilities | 739 | | 800 |
| Less valuation allowance | 6,377 | | | 3,247 | |
| | | |
| Net deferred taxes | $ | 0 | | | $ | 0 | |
The Company’s minimum annual future obligations under all existingU.S. Federal net operating leases for eachloss (“NOL”) carryforwards consist of the next fivefollowing, in thousands:
| | | | | | | | | | | |
| | NOL carryforward | | Year Expires |
| Year ended September 30, 2020 | $ | 10,100,000 | | | No expiry |
| Year ended September 30, 2019 | $ | 2,569,000 | | | No expiry |
| Year ended September 30, 2018 | $ | 2,431,000 | | | No expiry |
| Year ended September 30, 2016 | $ | 82,820 | | | 2036 |
The Company records net deferred tax assets to the extent the Company believes these assets will more likely than not be realized. In making such determination, the Company considers all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial performance. The Company has concluded, based on its recent cumulative losses, that it is more likely than not that the Company will not be able to realize the full effect of the deferred tax assets and a valuation allowance of $6.4 million is needed.
Based upon a review of its income tax positions, the Company believes that its positions would be sustained upon an examination by the Internal Revenue Service and does not anticipate any adjustments that would result in a material change to its financial position. Therefore, 0 reserves for uncertain income tax positions have been recorded. Generally, the Company is no longer subject to examinations by the U.S. federal, state or local tax authorities for tax years are as follows:before 2017.
| 2018 | | $ | 758,662 | |
| 2019 | | | 704,380 | |
| 2020 | | | 592,268 | |
| 2021 | | | 568,250 | |
| 2022 | | | 582,456 | |
| Thereafter | | | 696,926 | |
| | | | | |
| Total | | $ | 3,902,942 | |
Note 1416 – Segment Reporting
The Company has twois reporting its financial performance based on its external reporting segments: Wireless Infrastructure Services and Telecommunications. These reportable segments Cable Television and Telecommunications, asare described below.
Wireless Infrastructure Services (“Wireless”) On January 4, 2019, the Company purchased substantially all of the net assets of Fulton, which comprises the Wireless segment. Fulton provides turn-key wireless infrastructure services for the 4 major U.S. wireless carriers, communication tower companies, national integrators, and original equipment manufacturers that support these wireless carriers. These services primarily consist of the installation and upgrade of technology on cell sites and the construction of new small cells for 5G.
Cable Television (“Cable TV”)
The Company’s Cable TV segment sells new, surplus and re-manufactured cable television equipment throughout North America, Central America, South America and, to a substantially lesser extent, other international regions that utilize the same technology. In addition, this segment repairs cable television equipment for various cable companies.
Telecommunications (“Telco”)
The Company’s Telco segment sells new and usedrefurbished telecommunications networking equipment, including both central office and customer premise equipment, to its customer base of telecommunications providers, enterprise customers and resellers located primarily in North America. This segment also offers its customers repair and testing services for telecommunications networking equipment. In addition, this segment offers its customers decommissioning services for surplus and obsolete equipment, which it in turn processes through its recycling services. As a result of the Triton Miami acquisition (see Note 2), this segment includes the Company’s newly formed Triton Datacom subsidiary, a provider of new and refurbished enterprise networking products, including IP desktop phones, enterprise switches and wireless routers.
program.
The Company evaluates performance and allocates its resources based on operating income. The accounting policies of its reportable segments are the same as those described in the summary of significant accounting policies.
Segment assets consist primarily of cash and cash equivalents, accounts receivable, inventory, property and equipment, goodwill and intangible assets.
| | | | | | | | | | | |
| (in thousands) | Twelve months ended September 30, |
| | 2020 | | 2019 |
| Sales | | | |
| Wireless | $ | 21,354 | | | $ | 22,969 | |
| Telco | 28,853 | | | 32,204 | |
| Intersegment | (25) | | | (55) | |
| Total sales | $ | 50,182 | | | $ | 55,118 | |
| | | |
| Gross profit | | | |
| Wireless | $ | 6,580 | | | $ | 6,362 | |
| Telco | 5,100 | | | 7,096 | |
| Total gross profit | $ | 11,680 | | | $ | 13,458 | |
| | | |
| Operating loss | | | |
| Wireless | $ | (2,842) | | | $ | (882) | |
| Telco | (11,341) | | | 134 | |
| Corporate | (4,347) | | | $ | (3,228) | |
| Total operating loss | $ | (18,530) | | | $ | (3,976) | |
| | | |
| Segment assets | | | |
| Wireless | $ | 5,324 | | | $ | 5,516 | |
| Telco | 12,478 | | | 22,619 | |
| | | |
| Non-allocated | 14,880 | | | 8,693 | |
| Total assets | $ | 32,683 | | | $ | 36,828 | |
| | | Years Ended | |
| | | September 30, 2017 | | | September 30, 2016 | | | September 30, 2015 | |
| Sales | | | | | | | | | |
| Cable TV | | $ | 22,806,175 | | | $ | 22,996,998 | | | $ | 25,396,779 | |
| Telco | | | 25,994,521 | | | | 15,800,424 | | | | 18,835,116 | |
| Intersegment | | | (86,950 | ) | | | (134,158 | ) | | | (498,275 | ) |
Total sales | | $ | 48,713,746 | | | $ | 38,663,264 | | | $ | 43,733,620 | |
| | | | | | | | | | | | | |
| Gross profit | | | | | | | | | | | | |
| Cable TV | | $ | 7,738,355 | | | $ | 7,753,735 | | | $ | 8,025,651 | |
| Telco | | | 7,072,238 | | | | 4,687,148 | | | | 7,273,238 | |
Total gross profit | | $ | 14,810,593 | | | $ | 12,440,883 | | | $ | 15,298,889 | |
| | | | | | | | | | | | | |
| Operating income (loss) | | | | | | | | | | | | |
| Cable TV | | $ | 1,834,484 | | | $ | 1,478,676 | | | $ | 2,210,414 | |
| Telco | | | (1,688,878 | ) | | | (1,134,815 | ) | | | 365,796 | |
| 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 | |
Note 1517 – Quarterly Results of Operations (Unaudited)
The following is a summary of the quarterly results of operations for the years ended September 30, 2017, 20162020 and 2015:2019:
| | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | First
Quarter | | Second
Quarter | | Third
Quarter | | Fourth
Quarter |
| Fiscal year ended 2020 | | | | | | | |
| Sales | $ | 13,962 | | | $ | 11,959 | | | $ | 12,022 | | | $ | 12,239 | |
| Gross profit | 3,592 | | | (439) | | | 4,171 | | | 4,356 | |
| Loss from continuing operations | (1,718) | | | (14,661) | | | 23 | | | (978) | |
| Basic and diluted loss from continuing operations per common share | $ | (0.17) | | | $ | (1.41) | | | $ | 0 | | | $ | (0.09) | |
| | | | | | | |
| Fiscal year ended 2019 | | | | | | | |
| Sales | $ | 6,810 | | | $ | 12,890 | | | $ | 17,559 | | | $ | 17,859 | |
| Gross profit | 1,723 | | | 3,477 | | | 4,587 | | | 3,671 | |
| Loss from continuing operations | (1,203) | | | (1,211) | | | (58) | | | (1,562) | |
| Basic and diluted loss from continuing operations per common share | $ | (0.12) | | | $ | (0.12) | | | $ | 0 | | | $ | (0.15) | |
| | | | | | | |
| | | 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 | |
The sum of individual quarterly net loss per share may not agree to the total for the year due to each period's computation being based on the weighted average number of common shares outstanding during such period.
43
Note 18 – Subsequent events
During the period December 8, 2020 through December 15, 2020, the Company sold 209,371 shares of stock under our ATM for an average price of $3.82 pursuant to our agreement with Northland Securities, Inc. as described in Note 12 – Equity Distribution Agreement and Sale of Common Stock.
On December 16, 2020, the Company renewed its revolving bank line of credit for one year to a maturity date of December 17, 2021. As part of this renewal, the revolving bank line of credit remained $4.0 million, or the sum of 80% of eligible accounts receivable and 60% of eligible inventory, as defined in the loan agreement. Quarterly interest payments are based on WSJP, floating, with the addition of a 4% floor rate and a fixed charge coverage ratio of 1.25 to be tested quarterly beginning June 30, 2021.
Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A.Controls and Procedures.
Changes in Internal Control Over Financial Reporting
During the year ended September 30, 2020, the Company completed the full integration of Fulton Technologies, Inc., into our internal control over financial reporting processes.
Other than the changes described above, during the most recent fiscal year, there have been no changes, including the impact of COVID-19, in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Evaluation of Disclosure Controls and Procedures.
We maintain disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e) and 15d-15(e)) that are designed to ensure that information required to be disclosed by us in the reports that we file or submit to the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified by the Commission’s rules and forms, and that information is accumulated and communicated to our management, including our Chief Executive Officer and
our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Our Chief Executive Officer and Chief Financial Officer evaluated our disclosure controls and procedures as of September 30, 2017.2020. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective.
Management’s Annual Report on Internal Control over Financial Reporting.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) and for the assessment of the effectiveness of internal control over financial reporting. Our internal control system was designed to provide reasonable assurance to our management and board of directors regarding the preparation and fair presentation of financial statements in accordance with accounting principles generally accepted in the United States. Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorization of our management and board of directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management assessed the effectiveness of our internal control over financial reporting as of September 30, 2017.2020. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework (2013).
During fiscal year 2019, the Company acquired Fulton. See Note 3. Acquisitions for additional information on this acquisition. Management has included this business in its evaluation of the effectiveness of the Company’s internal control over financial reporting as of September 30, 2020.
Based on our assessment, we believe that, as of September 30, 2017,2020, our internal control over financial reporting is effective based on those criteria.
effective.
This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit us to provide only management’s report in this annual report.
Changes in Internal Control over Financial Reporting.
During the fourth quarteryear ended September 30, 2017, there has been no change in our internal controls over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal2020, the Company integrated the acquisition of Fulton Technologies, Inc. fully into its control over financial reporting.environment.
Item 9B.Other Information.
None.
PART III
Item 10.Directors, Executive Officers and Corporate Governance.
Identification of Directors
Our bylaws provide that our Board shall consist of not less than one nor more than nine directors, as determined from time to time by board resolution. The information requiredBoard is presently comprised of five directors, each of whom serves for a term of one year. The Directors are as follows:
David E. Chymiak Director since 1999
Mr. Chymiak, 75, served as ADDvantage's Chief Technology Officer from April 2, 2012 through June 30, 2019, which was the effective date of the sale of the Cable Television segment to Mr. Chymiak’s affiliated company, Leveling 8, Inc. (see Certain Relationships and Related Transactions section). Mr. Chymiak oversaw the operations of the Cable Television segment he co-founded Tulsat in 1985. Upon the sale of the Cable Television segment to Leveling 8, Mr. Chymiak is no longer an employee of the Company, but remains on the Company’s Board of Directors and is a member of the audit committee. Mr. Chymiak served as our Company’s Chairman of the Board from during the years 1999 to 2012 and 2014 to 2018.
Joseph E. HartDirector since 2015
Mr. Hart, 70, has served as our President and Chief Executive Officer in October 2018. Prior to joining the Company, Mr. Hart was the CEO of Aero Communications, Inc., a company specializing in installation, maintenance, and network design and construction for the telecommunications industry (2015 to 2018). From 2006 to 2014, Mr. Hart served as the Executive Vice President of Network Infrastructure Services and Operations for Goodman Networks, Inc., a provider of end-to-end network infrastructure, professional services and field deployment to the wireless telecommunications and satellite television industry. For the previous 20 years, Mr. Hart served in various executive leadership positions for AT&T and other various telecommunication and wireless companies. Mr. Hart holds a Master of Science degree in systems management from the University of Southern California and Bachelor of Business Administration degree from Baldwin-Wallace College.
Timothy S. HardenIndependentDirector since 2019
Mr. Harden, 67, has broad Communication Industry experience in various positions of leadership. He currently sits on a number of advisory boards focused on providing products and services in the Communication space. Mr. Harden spent 33 years with AT&T in various operating executive positions, the last of which was President of AT&T’s Worldwide Supply Chain. A few of his previous areas of responsibility included President and CEO of AT&T West, President of network services for AT&T Southwest, and President of Data and Network Services for SBC Operations. Mr. Harden also gained broad telecommunications experience from a series of executive assignments within AT&T’s predecessor companies SBC and Pacific Telesis, including President of SBC Telecom, Inc., President and Chief Executive Officer of Pacific Telesis Business Systems, Chief Operating Officer of Pacific Bell’s Advanced Communications Network, and Senior VP – Network Engineering and Planning of SBC Data Services. Mr. Harden has served as Chairman of the QuEST/TIA Forum Executive Board, managing the quality standard TL 9000 through 200+ companies worldwide. He is a former member of Supply Chain 50 representing the top Supply Chains in the U.S., and a member of Supply Chain World representing the top 200 Supply Chains worldwide.
Mr. Harden is an inductee in the National Football Foundation and College Hall of Fame as a scholar athlete. He currently serves on the board of directors for the San Francisco Chapter of this national organization. In 2007 he was named as a Distinguished American by this item concerninggroup for his efforts in support of their mission to promote and develop the qualities of leadership, sportsmanship, competitive zeal and the drive for academic excellence in America’s young people. This was only the 9th time this honor has been awarded in the 70 year history of the organization. Mr. Harden is a retired Captain in the USN Reserve and a past Associate Professor at the University of Utah. Mr. Harden started his career as an officer in the US Navy after his graduation from the US Naval Academy.
Thomas J. FranzIndependentDirector since 2007
Mr. Franz, 62, is the head of TJ Franz & Associates, a firm specializing in profitability and contract CFO consulting for small and medium sized businesses, which he founded in 2003. For ten years prior, he served as Chief Financial Officer or Chief Operating Officer roles. From 1983 to 1993 Mr. Franz practiced public accounting for clients in the banking, government, venture capital, not for profit and financial services industries. Mr. Franz is a certified public
accountant with a Bachelor of Business Administration and a Master of Science in accounting from Oklahoma State University.
James C. McGill IndependentDirector since 2007
Mr. McGill, 77, has served as our Company’s Chairman of the Board since October 2018. Mr. McGill is currently the President of McGill Resources, a venture capital investment company, a position he has held since 1987. In 2015, Mr. McGill formed and owns Ediche, LLC, a clothing importer. He also served in various executive leadership roles and as Chairman of the Board of Directors of MacroSolve, Inc., a technology company focused on wireless data collection (2002 to 2013). Mr. McGill serves on boards of organizations in the Tulsa, Oklahoma area, and has served on public company boards with many years serving as audit committee or board chair.
During his career, Mr. McGill has received 25 U.S. and foreign patents in the field of pollution control and has extensive experience in helping to develop early-stage and emerging companies. Mr. McGill is a registered professional engineer with a Bachelor of Science degree in chemical engineering from The University of Tulsa where he graduated cum laude. He is a member of the University’s College of Engineering and Applied Sciences Hall of Fame and was named a Distinguished Alumni in 2005. In 2013, he was named to the Collins College Business Hall of Fame.
John M. ShelnuttIndependent Director since 2019
Mr. Shelnutt, 58, is the Vice President of Blue Danube Systems, a company that designs intelligent wireless access solutions to deliver high-definition active antenna systems technology to the wireless industry. Prior to 2017 when he joined Blue Danube Systems, Mr. Shelnutt served in executive capacities at Cisco from 2011 to 2016, leading their Mobility Division. Prior to that, Mr. Shelnutt spent 12 years in 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, and Broadband Forum and was an advisor to Tech Titans of Dallas, Texas and the City of New York Public Schools Technology group.
David W. SparkmanIndependent Director since 2015
Mr. Sparkman, 63, is the Chief Financial Officer of Oklahoma Capital Bank, a position he has held since 2017. Mr. Sparkman was the Chief Financial Officer for a group of oil field service companies: Acid Specialists, LLC; Frac Specialists, LLC; and Cement Specialists, LLC (2014 to 2016), for Great White Energy Services (2010 to 2011) and North America Director of Finance for Archer Well Company (2011 to 2013) after Great White was acquired by Archer Well Company. Prior to that, he was President of the financial consulting firm, Ulysses Enterprises, LLC. (2009 to 2010). Mr. Sparkman spent 12 years with Dollar Thrifty Automotive Group serving in senior management positions in accounting and finance. Mr. Sparkman is a certified public accountant (inactive) and holds a Bachelor of Business Administration in accounting from the University of Arkansas where he graduated cum laude.
Identification of Executive Officers
We have five executive officers. Our officers directors, complianceare elected by our Board of Directors and serve at the pleasure of the Board of Directors.
Joseph E. Hart
Biographical information for Mr. Hart, President and Chief Executive Officer, is set forth above.
Scott A. Francis
Mr. Francis, 53, has been a Vice President since September 15, 2008, our corporate secretary since August 6, 2009, and our Chief Accounting Officer since March 2019. From September 15, 2008 through March, 2019, Mr. Francis served as our Chief Financial Officer. Mr. Francis has over 25 years of finance and management experience. Prior to joining ADDvantage, he served as a controller of accounting at Vanguard Car Rental USA, Inc. from June 2004 until September 2008. Prior to that, he served as manager of financial reporting for WilTel Communications, Inc. from 1997 through May 2004. Mr. Francis is a certified public accountant with a Bachelor of Business Administration degree in accounting from Oklahoma State University.
Reginald Jaramillo
Mr. Jaramillo, 44, President of Telecommunications, began his career with ADDvantage Technologies in 2019 serving as the company’s Director of Financial Planning and Analysis where he developed planning and analysis processes from the ground up. He was born into an entrepreneurial family and grew up working in the Leal’s Mexican Foods family restaurant businesses located in West Texas and Eastern New Mexico. Subsequently, he spent five years working in the financial services industry for Wells Fargo Financial and American General Financial Services. Prior to joining the company, Mr. Jaramillo worked for 15 years in the telecommunications industry for Cox Communications, Time Warner Cable and most recently Suddenlink Communications (Operated by Altice USA NYSE: ATUS) where he spent 10 years serving in various fiscal and operational leadership role, which included VP of Fiscal Operations, VP of Business Planning, and VP of Field Operations. Mr. Jaramillo graduated from New Mexico Military Institute. He holds a Bachelor of Business Administration from Midwestern State University, an MBA from Texas Tech University, and is nearing completion of a Master of Science in Accounting from Texas A&M University-Commerce.
Jimmy Taylor
Mr. Taylor, 64, President of our Wireless Segment since July 2020, is a 35-year veteran of the wireless infrastructure and telecommunications industries. He has extensive experience in both operational leadership and business development, creating a solid foundation for process improvement as well as organic and transactional growth. Mr. Taylor has held multiple senior leadership roles, especially in site development and deployment. He started his career at Houston Cellular and PrimeCo PCS and then joined Crown Castle International, one of the world’s largest tower asset management companies. He was the Regional VP of Southwest Operations for Crown Castle for almost 10 years, where he was responsible for site development, deployment and leasing operations. He was VP of Site Development at Goodman Networks and President of the Teltech Group and Cotton Telecom. His robust experience and contacts in the wireless infrastructure services industry will help Fulton reach its full potential as the industry prepares for significant growth related to 5G. Mr. Taylor holds a Bachelor of Business Administration from the University of Texas at Austin and a Bachelor of Arts from Angelo State University.
Jarrod M. Watson
Mr. Watson, 45, has served as the Company's Chief Financial Officer since July 2020. Mr. Watson joined the company with more than 20 years of corporate financial leadership experience with large organizations including Fortune 500 companies Yum Brands (NYSE: YUM) and McKesson (NYSE: MCK). Prior to joining ADDvantage Technologies, Mr. Watson served as Chief Financial Officer of Southland Holdings, a large privately held heavy civil construction company. In that role, he led all departments of finance, accounting, treasury and human resources. During his time there, he led several large transformation initiatives designed to position the company for growth. Prior to that, he served as Head of Business Analytics & Forecasting for Pizza Hut US, a Yum! Brands subsidiary, the largest restaurant company in the world. In that role he led all areas of financial analysis and forecasting. Mr. Watson has also held financial leadership roles with increasing levels of responsibility for several companies prior to that. One notable example includes ADC Telecommunications (currently operating as part of Commscope NASDAQ: COMM), a publicly traded telecommunications equipment manufacturer. Mr. Watson received an MBA from the Owen Graduate School of Management at Vanderbilt University and is licensed as a certified public accountant.
Compliance with Section 16(a)
Section 16(a) of the Securities Exchange Act of 1934 as amended,requires our directors and executive officers, and persons who own more than 10% of our common stock to report their initial ownership of our common stock and any subsequent changes in that ownership to the SEC and to furnish us with a copy of each of these reports. SEC regulations impose specific due dates for these reports and we are required to disclose in this proxy statement any failure to file by these dates during fiscal year 2020.
Based solely on the review of the copies of these reports furnished to us and written representations that no other reports were required, during and with respect to the fiscal year ended September 30, 2020, we believe that these persons have complied with all applicable filing requirements.
Code of Ethics
We have adopted a Code of Business Conduct and Ethics and Audit Committeewhich is incorporated by referenceapplicable to the information in the sections entitled “Identification of Officers,” “Election of Directors,” “Section 16(a) Beneficial Ownership Reporting Compliance,” “Code of Ethics” and “Audit Committee,” respectively,all of our Proxy Statement for the 2018 Annual Meeting of Shareholders to be filed with the Securitiesdirectors, officers and Exchange Commission within 120 days after the end of our fiscal year ended September 30, 2017 (the “Proxy Statement”).employees. A copy of our Code of Business Conduct and Ethics is posted on our website at www.addvantagetechnologies.com.www.addvantagetechnologies.com. We intend to satisfy the disclosure requirements, including those of Item 406 of Regulation S-K, regarding certain amendments to, or waivers from, provisions of our Code of Business Conduct and Ethics by posting such information on our website.
Audit Committee
The functions and members of our Audit Committee are set forth below. The members of the Audit Committee are David W. Sparkman (Chairman), Thomas J. Franz and James C. McGill. Each of the committee members is independent as defined under the rules and listing standards of the NASDAQ Stock Market (“NASDAQ”) and the rules of the Securities and Exchange Commission implemented pursuant to the Sarbanes-Oxley Act of 2002. The Audit Committee met four times during fiscal year 2020. All of the meetings were held prior to the reporting of our quarterly financial results.
Audit Committee Financial Expert
The SEC has adopted rules pursuant to the provisions of the Sarbanes-Oxley Act requiring audit committees to include an “audit committee financial expert,” defined as a person who has the following attributes:
1) an understanding of generally accepted accounting principles and financial statements;
2) the ability to assess the general application of such principles in connection with the accounting for estimates, accruals and reserves;
3) experience preparing, auditing, analyzing or evaluating financial statements that present a breadth and level of complexity of accounting issues that are generally comparable to the breadth and complexity of issues that can reasonably be expected to be raised by the registrant’s financial statements, or experience actively supervising one or more persons engaged in such activities;
4) an understanding of internal control over financial reporting; and
5) an understanding of audit committee functions.
The financial expert will have to possess all of the attributes listed above to qualify as an audit committee financial expert.
Our Board of Directors has determined that each of Thomas J. Franz, James C. McGill and David W. Sparkman meets the definitions of an audit committee financial expert.
Item 11.Executive Compensation.Compensation
Summary Compensation Table
The following information requiredrelates to compensation paid by this item concerning executive compensation is incorporated by referencethe Company for the fiscal years ended 2020 and 2019 to the information set forthCompany’s Chief Executive Officer and the two other most highly compensated executive officers of the Company :
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| | | | | | | | | | | | | Non-Equity | | | | |
| | | | | | | | | Stock | | Option | | Incentive Plan | | All Other | | Total |
| Name and Principal Position | | Year | | Salary | | Bonus | | Awards | | Awards | | Compensation | | Compensation | | Compensation |
| | | | | ($)(1) | | ($)(2) | | ($) (3) | | ($) (4) | | ($) | | ($)(5) | | ($) |
| Joseph E. Hart | | 2020 | | $ | 290,769 | | | 105,000 | | | $ | 87,898 | | | $ | — | | | $ | — | | | $ | 25,173 | | | $ | 508,840 | |
| Principal Executive Officer | | 2019 | | 303,846 | | | — | | | — | | | 84,000 | | | — | | | 28,192 | | | 416,038 | |
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| Scott A. Francis | | 2020 | | 174,462 | | | 36,000 | | | 50,988 | | | — | | | — | | | 10,000 | | | 271,450 | |
| Vice President, Chief Accounting Officer | | 2019 | | 182,885 | | | — | | | — | | | 11,220 | | | — | | | 15,144 | | | 209,249 | |
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| Donald E. Kinison | | 2020 | | 169,231 | | | 55,000 | | | — | | | — | | | — | | | 112,891 | | | 337,122 | |
| President, Telco Segment (6) | | 2019 | | 210,769 | | | — | | | — | | | 18,700 | | | — | | | 16,538 | | | 246,007 | |
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| (1) | | Messrs. Hart and Francis are entitled to the compensation under employment or severance agreements which are described below. |
| (2) | | Bonus amounts paid in 2020 represent amounts earned in 2019. There was no executive bonus awarded in 2020. There were no 2019 bonus payments related to 2018. |
| (3) | | The amounts shown are Company officer compensation and represent the total fair value of the stock awards shares on the date of the grant to officers for fiscal years 2020 and 2019. The fair value of the stock awards is amortized over the vesting period to compensation expense in the Consolidated Statements of Operations contained in this Annual Report on Form 10-K. The fair value of the stock awards was based on the closing market prices of the stock on the dates of the grants. The actual value that an executive officer will realize upon vesting of performance or time-based awards will depend upon the market price of the Company’s stock on the vesting date, so there is no assurance that the value realized by an executive officer will be at or near the value of the market price of the Company’s stock on the grant date. In addition, certain outstanding stock options held by Mr. Hart and Mr. Francis were converted to stock grants based on a the fair value of the outstanding stock options on the conversion date. As a result, the options were forfeited and the officer's compensation is shown net of the value of the forfeited options. |
| (4) | | The amounts shown represent expenses recognized in the Consolidated Financial Statements contained in the Part II of the Company’s Annual Report on Form 10-K for the year ended September 30, 2020. All assumptions utilized to calculate the expense amounts shown above are set forth in Note 11 - Stock Based Compensation of the Notes to Consolidated Financial Statements in Part II of this Annual Report on From 10-K.
|
| (5) | | Represents amounts paid by the Company on behalf of an officer for matching contributions to the Company’s qualified 401(k) plan, and auto allowance received during the year. Mr. Kinison's other compensation includes $67,700 of severance and $28,300 of COBRA payments. |
| (6) | | Mr. Kinison's salary for 2020 prorated based on his departure from the Company on May 31, 2020, and includes payout of unused vacation time at separation. |
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Potential Payments Upon Termination or Change of Control
We have entered into employment/severance agreements with Mr. Hart and Mr. Francis. These agreements are designed to promote stability, continuity and focus for key members of leadership during periods of uncertainty that may be created by change of control situations. Additionally, the use of such agreements is a competitive practice that enhances our ability to attract and retain leadership talent.
Under these agreements, payment of benefits will occur in most situations where the employee is terminated without cause or is terminated or resigns in connection with a Change in Control of the Company. Mr. Hart, in this event, will be paid the amount of his annual base salary immediately preceding the termination without cause or Change of Control and Mr. Francis will be paid the amount of 50% of his annual base salary immediately preceding the termination without cause or Change of Control. Most executive equity awards which are subject to vesting provide for accelerated vesting upon the occurrence of a change in control.Mr. Kinison was a party to a similar employment agreement prior to his departure from the Company.
“Change of Control” as used in these agreements has a fairly customary definition designed to reflect that a fundamental change in beneficial ownership or control of the Company has occurred. Specifically, the agreements incorporate the term a “change of control event”, as defined in United States Treasury Regulations (“Regulations”) promulgated under section 409A of the Internal Revenue Code of 1986, as amended (“Section 409A”) that results from an event in which a person comes to be the owner, directly or indirectly, of 50% or more of outstanding voting
securities of the Company or its parent company or the transfer or disposition of all or substantially all of the assets of the Company, its parent or their successor or a person, acquires, directly or indirectly, the voting power to elect a majority of the members of the Board of the Company or its parent (other than in the section entitled “Compensationnormal course) or any other similar transaction or series of Directors and Executive Officers”related transactions.
Outstanding Equity Awards at September 30, 2020
The named executive officers of the Proxy Statement.Company did not have any unvested equity awards as of September 30, 2020.
Compensation of Directors
We paid our non-employee directors $500 per quarter and $750 for each board meeting and $375 for each committee meeting or telephonic board or committee meeting the director attended. The chairman of the Audit Committee receives an additional $375 per meeting, and the chairmen of the Compensation and Governance and Nominating Committees receive an additional $150 per meeting. In addition, all directors are eligible to receive awards of restricted shares, which are subject to a 12-month holding period, or options to purchase shares of our common stock each year after the annual shareholders meeting. We reimburse all directors for out-of-pocket expenses incurred by them in connection with their service on our Board and any Board committee. The following table reflects the total compensation earned by each non-employee director during the last fiscal year:
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| Fiscal Year 2020 Director Compensation | | Fees Paid in Cash | | | Fair Value of Share Awards | | | Total Compensation |
| David E. Chymiak (1) (3) (7) | | $ | 12,000 | | (7) | | $ | 32,154 | | (5) | | $ | 44,154 | |
| Thomas J. Franz (1) (2) | | 12,000 | | | | 67,154 | | (5) | | 79,154 | |
| Timothy S. Harden (3) (4) | | 10,000 | | | | 153,500 | | (5) | | 163,500 | |
| James C. McGill (1) (2) (3) (4) (6) | | 50,000 | | (6) | | 62,500 | | (5) | | 112,500 | |
| John M. Shelnutt (2) (3) (4) | | 12,300 | | (6) | | 170,654 | | (5) | | 182,954 | |
| David W. Sparkman (1) | | 12,000 | | | | 67,154 | | (5) | | 79,154 | |
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| (1) | Member of the Audit Committee. |
| (2) | Member of the Corporate Governance and Nominating Committee. |
| (3) | Member of the Compensation Committee. |
| (4) | Member of the Strategic Direction Committee. |
| (5) | In fiscal year 2020, the directors received their stock grant from 2019 as there were not enough shares available under the 2015 Incentive Stock Plan until after the March shareholders' meeting where the shareholders approved additional shares to be added to the Plan. The grant was for 8,287 shares using the closing stock price on the date of the 2019 annual meeting of shareholders. |
| (6) | Mr. McGill and the Company entered into a Letter Agreement on October 8, 2018, which provides that Mr. McGill will receive annual compensation in the form of $75,000 cash and $75,000 in shares of restricted stock, which vest over five years, for serving as Chairman of the Board. On July 16, 2020, this Agreement was amended to provide that Mr. McGill will receive annual compensation in the form of $25,000 of cash and $50,000 shares of restricted, which will have a one year vesting period. In addition, his previous shares granted in October 2018 fully vested in October 2020. |
| (7) | In fiscal year 2020, the shareholders approved a new director compensation plan for which the directors would receive $50,000 of stock after the annual meeting of shareholders. Mr. Chymiak and Mr. McGill do not participate in this plan. |
Item 12. | Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. |
The information required by this item regarding security ownership and equity compensation plans is incorporated by reference to the information set forth in the section entitled “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters”Matters.
The following table shows the number of shares of common stock beneficially owned (as of November 30, 2020) by:
• each person known by us who beneficially owns more than 5% of any class of our voting stock;
• each director and nominee for director;
• each executive officer named in the Summary Compensation Table; and
• our directors and executive officers as a group.
Except as otherwise indicated, the beneficial owners listed in the table have sole voting and investment powers of their shares.
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| Name of Beneficial Owner | | Number of Shares of Common Stock Beneficially Owned (1) | | Percent of Class (1) |
| Directors and Officers: | | | | |
| Dave Chymiak | | 2,709,230 | | (2) | 22.90% |
| Joseph Hart | | 196,122 | | | 1.70% |
| James McGill | | 133,299 | | | * |
| Tom Franz | | 102,505 | | | * |
| Scott Francis | | 112,120 | | | * |
| Jarrod Watson | | 99,937 | | | * |
| Jimmy Taylor | | 75,000 | | | * |
| Reginald Jaramillo | | 65,000 | | | * |
| David Sparkman | | 64,494 | | | * |
| Timothy Harden | | 74,155 | | | * |
| John Shelnutt | | 82,442 | | | * |
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| All Executive Officers and Directors as a group (11 persons) | | 3,714,304 | | | 31% |
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| Others > 5% ownership: | | | | |
| Ken Chymiak | | 1,475,169 | | (3) | 13% |
| Thomas A Satterfield, Jr. | | 890,645 | | (4) | 8% |
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| * Less than one percent | | |
(1) Shares which an individual has the right to acquire within 60 days pursuant to the exercise of options are deemed to be outstanding for the purpose of computing the percentage ownership of such individual, but are not deemed to be outstanding for the purpose of computing the percentage ownership of any other person shown in the table. Includes shares for which the person has sole voting and investment power, or has shared voting and investment power with his/her spouse.
(2) Substantially all of these shares are pledged to the Company to secure the promissory note issued by the buyer in connection with the sale of the Proxy Statement.Company’s cable television segment.
(3) Based on a Form 4, filed on September 17, 2020, of the shares beneficially owned by Mr. Chymiak, 1,475,169 are held of record by his spouse, Susan C. Chymiak as trustee of the Susan Chymiak Revocable Trust. Mr. Chymiak has sole voting and investment power over those shares held of record by him. Mr. Chymiak disclaims beneficial ownership of the shares held by his wife
(4) Based on a Schedule 13G/A, filed on February 13, 2019, of Mr. Satterfield’s reported ownership, 30,000 shares are held jointly with Mr. Satterfield’s spouse; 3,400 shares are held individually by Mr. Satterfield’s spouse; 75,000 shares are held by Tomsat Investment & Trading Co., Inc., a corporation wholly-owned by Mr. Satterfield and of which he serves as President; and 380,000 shares are held by Caldwell Mill Opportunity Fund, which fund is managed by an entity of which Mr. Satterfield owns a 50% interest and serves as Chief Investment Manager. Additionally, Mr. Satterfield has limited powers of attorney for voting and disposition purposes with respect to the following shares: A.G. Family L.P. (375,000 shares); Jeanette Satterfield Kaiser (28,000 shares); Richard W. Kaiser, III (15,000 shares); and David Satterfield (18,000 shares). These individuals and entities have the right to receive or the power to direct the receipt of the proceeds from the sale of their respective shares.
Item 13.Certain Relationships and Related Transactions, and Director Independence.
Securities authorized for issuance under equity compensation plans
The information requiredin the following table is as of September 30, 2020:
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| 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) |
| Equity compensation plans approved by security holders | 100,000 | $1.55 | 789,630 |
| Equity compensation plans not approved by security holders | — | $— | — |
| Total | 100,000 | $1.55 | 789,630 |
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Item 13. Related Parties
In fiscal year 2020, our related party transactions with Mr. David Chymiak or affiliates owned by this item regarding certain relationships andhim have consisted of receiving proceeds on the secured note receivable outstanding from Mr. Chymiak related transactions and director independence is incorporated by reference to the information set forthsale of our Cable Segment to Leveling 8, Inc., in the section entitled “Certain Relationships and Related Transactions” and “BoardJune 2019, as described in Note 4. Discontinued Operations in Part II of Directors,” respectively,this Annual Report.
As part of the Proxy Statement.sale agreement, Mr. Chymiak personally guaranteed the promissory note due to the Company and pledged certain assets (directly and indirectly owned) to secure the payment of the promissory note, including substantially all of Mr. Chymiak’s Company common stock. Mr. Chymiak also entered into a standstill agreement with the Company under which he is limited in taking action with respect to the Company or its management for a period of three years after the closing of the cable sale. As of December 15, 2020, Mr. Chymiak has repaid $4.1 million of the loan, with $2.3 million outstanding.
Item 14.Principal Accounting Fees and Services.
HoganTaylor audited our financial statements for the fiscal years ended September 30, 2020 and 2019. Our Audit Committee considered whether the provisions for the tax services and other services by HoganTaylor were compatible with maintaining their independence and determined that they were.
Fees Incurred by the Company for Services Performed by Audit Firms
The information requiredfollowing table shows the fees incurred for the years ended September 30, 2020 and 2019 for professional services provided by this item regarding principal accountingHoganTaylor for the audits of our annual financial statements as well as other professional services.
| | | | | | | | | | | |
| 2020 | | 2019 |
Audit Fees(1) | $ | 117,000 | | | $ | 137,400 | |
Audit-Related Fees(2) | 14,150 | | | 65,000 | |
Tax Fees(3) | 27,250 | | | 37,250 | |
| | | |
| Total | $ | 158,400 | | | $ | 239,650 | |
(1) Audit Fees represent fees for professional services provided in connection with the audit of our annual financial statements and review of our quarterly financial statements and audit services is incorporated by reference toprovided in connection with the information set forth inissuance of comfort letters, consents, and assistance with review of documents filed with the section entitled “Principal AccountingSEC.
(2) Audit-Related Fees represent reimbursements of travel and Services”other costs associated with audit services such as consent.
(3) Tax Fees represent fees for annual tax return preparation and research of the Proxy Statement.tax related matters.
PART IV
Item 15.Exhibits, Financial Statement Schedules.
Financial Statements, Schedules and Exhibits
(a)1.Financial Statements — ADDvantage Technology Group, Inc. and Subsidiaries:
The following financial statementsFinancial Statements listed in the Index to Consolidated Financial Statements are filed as part of this report inon Form 10-K (see Part II, Item 8.8, Financial Statements and Supplementary Data).
Report of Independent Registered Public Accounting Firm as of September 30, 2017 and 2016, and for each ofFinancial Statement Schedules
All consolidated financial statement schedules have been omitted because they are not required, are not applicable, or the three years in the period ended September 30, 2017, 2016 and 2015.
Consolidated Balance Sheets as of September 30, 2017 and 2016.
Consolidated Statements of Operations for the years ended September 30, 2017, 2016 and 2015.
Consolidated Statements of Changes in Shareholders’ Equity for the years ended September 30, 2017, 2016 and 2015.
Consolidated Statements of Cash Flows for the years ended September 30, 2017, 2016 and 2015.
Notes to Consolidated Financial Statements.
2. The following documents arerequired information has been included as exhibits toelsewhere within this Form 10-K.
ExhibitDescriptionExhibits
The information required by this Section (a)(3) of Item 15 is set forth on the exhibit index following this page.
Item 16. Form 10-K Summary
Not applicable.
| 10.1810.8* | |
| 10.9* | |
| 10.10* | |
| 10.11* | |
| 10.12* | |
| 10.19 | | | | |
| 10.13* | |
| 10.14* | |
| 10.15* | |
| 10.16* | |
| 10.17* | |
| 10.18* | 21.1 |
| 10.19* | |
| 10.20* | |
| 10.21* | |
| 10.22* | |
| 10.23* | Financial Institution Business Loan Agreement by and between Company and Vast Bank, N.A. dba Valley National Bank, dated March 10, Financial Institution Business Loan Agreement by and between Company and Vast Bank, N.A. dba Valley National Bank, dated March 10, 2020, incorporated by reference to Exhibit 10.1 to the Company’s Form 10-Q filed with the Securities and Exchange Commission on May 14, 2020 (File No. 001-10799)., incorporated by reference to Exhibit 10.1 to the Company’s Form 10-Q filed with the Securities and Exchange Commission on May 14, 2020 (File No. 001-10799). |
| 10.24* | |
| 10.25 | |
| 21.1 | |
| 101.INS | 101.INS | XBRL Instance Document. |
| 101.SCH | 101.SCH | XBRL Taxonomy Extension Schema. |
| 101.CAL | 101.CAL | XBRL Taxonomy Extension Calculation Linkbase. |
| 101.DEF | 101.DEF | XBRL Taxonomy Extension Definition Linkbase. |
| 101.LAB | 101.LAB | XBRL Taxonomy Extension Label Linkbase. |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase. |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ADDvantage Technologies Group, Inc.
| | | | | | | | |
| Date: December 17, 2020 | By: | /s/ Joseph E. Hart |
| | Joseph E. Hart, President and Chief Executive Officer |
Date: December 14, 2017 By:/s/ David L. Humphrey
David L. Humphrey, President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Date: December 14, 2017 /s/ David E. Chymiak
David E. Chymiak, Chairman of the Board of Directors and Chief Technology Officer
Date: December 14, 2017 /s/ Scott A. Francis
Scott A. Francis, Chief Financial Officer (Principal Financial
Officer)
Date: December 14, 2017 /s/ Thomas J. Franz
Thomas J. Franz, Director
Date: December 14, 2017 /s/ Joseph E. Hart
Joseph E. Hart, Director
Date: December 14, 2017 /s/ James C. McGill
James C. McGill, Director
Date: December 14, 2017 /s/ David W. Sparkman
David W. Sparkman, Director
The following documents are included as exhibits to this Form 10-K.
ExhibitDescription
| Date: December 17, 2020 | By: | /s/ Jarrod M. Watson |
| 3.2 | Jarrod M. Watson, Chief Financial Officer (Principal Financial Officer) |
| Date: December 17, 2020 | | /s/ David E. Chymiak |
| 10.1 | David E. Chymiak, Director |
| Date: December 17, 2020 | | /s/ Thomas J. Franz |
| 10.3 | |
| | |
| Date: December 17, 2020 | | /s/ Timothy S. Harden |
| | Timothy S. Harden, Director |
| | |
| Date: December 17, 2020 | | /s/ James C. McGill |
| | James C. McGill, Chairman of the Board of Directors dated September 1, 2009, incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed with the Securities and Exchange Commission by the Company on September 1, 2009 (File No. 001-10799). |
| | |
| Date: December 17, 2020 | | /s/ John M. Shelnutt |
| | John M. Shelnutt, Director |
| | |
| Date: December 17, 2020 | | /s/ David W. Sparkman |
| | David W. Sparkman, Director |
| 21.1 | Listing of the Company's subsidiaries. |
| 23.1 | Consent of HoganTaylor LLP. |
| 31.1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002. |
| 31.2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002. |
| 32.1 | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| 32.2 | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| 101.INS | XBRL Instance Document. |
| 101.SCH | XBRL Taxonomy Extension Schema. |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase. |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase. |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase. |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase. |
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