See notes to consolidated financial statements.
ADDVANTAGE TECHNOLOGIES GROUP, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | Years ended September 30, | |
| | | 2017 | | | 2016 | | | 2015 | |
| Operating Activities | | | | | | | | | |
| Net income (loss) | | $ | (98,116 | ) | | $ | 294,163 | | | $ | 1,497,900 | |
| Adjustments to reconcile net income (loss) to net cash | | | | | | | | | | | | |
| provided by (used in) operating activities: | | | | | | | | | | | | |
| Depreciation | | | 446,834 | | | | 421,950 | | | | 408,703 | |
| Amortization | | | 1,267,182 | | | | 825,804 | | | | 825,805 | |
| Allowance for doubtful accounts | | | – | | | | – | | | | 50,000 | |
| Provision for excess and obsolete inventories | | | 901,599 | | | | 951,282 | | | | 600,000 | |
Charge for lower of cost or net realizable value for inventories | | | 126,822 | | | | 73,716 | | | | 12,627 | |
| (Gain) loss on disposal of property and equipment | | | – | | | | (2,000 | ) | | | 30,652 | |
| Deferred income tax provision (benefit) | | | (320,000 | ) | | | 157,000 | | | | (341,000 | ) |
| Share based compensation expense | | | 175,465 | | | | 192,213 | | | | 239,613 | |
| Loss from equity method investment | | | – | | | | 184,996 | | | | – | |
Cash provided (used) by changes in operating assets and liabilities: | | | | | | | | | | | | |
| Accounts receivable | | | (71,254 | ) | | | 115,479 | | | | 2,057,203 | |
| Income tax receivable\payable | | | 233,651 | | | | (603,329 | ) | | | 342,596 | |
| Inventories | | | (688,729 | ) | | | 1,067,179 | | | | (1,433,100 | ) |
| Prepaid expenses | | | 22,097 | | | | (165,863 | ) | | | (17,359 | ) |
| Other assets | | | (2,724 | ) | | | (1,310 | ) | | | (3,250 | ) |
| Accounts payable | | | 951,099 | | | | 15,514 | | | | (1,096,279 | ) |
| Accrued expenses | | | (90,003 | ) | | | (34,029 | ) | | | (451,197 | ) |
| Other liabilities | | | 134,890 | | | | 47,726 | | | | 120,653 | |
| Net cash provided by operating activities | | | 2,988,813 | | | | 3,540,491 | | | | 2,843,567 | |
| | | | | | | | | | | | | |
| Investing Activities | | | | | | | | | | | | |
| Acquisition of net operating assets | | | (6,643,540 | ) | | | (178,000 | ) | | | − | |
| Guaranteed payments for acquisition of business | | | (1,000,000 | ) | | | (1,000,000 | ) | | | (1,000,000 | ) |
| Loan repayments from (investment in and loans to) equity method investee | | | 2,389,920 | | | | (2,773,620 | ) | | | – | |
| Purchases of property and equipment | | | (190,303 | ) | | | (319,810 | ) | | | (172,649 | ) |
| Disposals of property and equipment | | | 1,817 | | | | 2,000 | | | | – | |
| Net cash used in investing activities | | | (5,442,106 | ) | | | (4,269,430 | ) | | | (1,172,649 | ) |
| | | | | | | | | | | | | |
| Financing Activities | | | | | | | | | | | | |
| Proceeds on notes payable | | | 4,000,000 | | | | − | | | | − | |
| Debt issuance costs | | | (16,300 | ) | | | − | | | | − | |
| Payments on notes payable | | | (2,065,810 | ) | | | (873,921 | ) | | | (846,029 | ) |
| Net cash provided by (used in) financing activities | | | 1,917,890 | | | | (873,921 | ) | | | (846,029 | ) |
| | | | | | | | | | | | | |
| Net increase (decrease) in cash and cash equivalents | | | (535,403 | ) | | | (1,602,860 | ) | | | 824,889 | |
| Cash and cash equivalents at beginning of year | | | 4,508,126 | | | | 6,110,986 | | | | 5,286,097 | |
| Cash and cash equivalents at end of year | | $ | 3,972,723 | | | $ | 4,508,126 | | | $ | 6,110,986 | |
| | | | | | | | | | | | | |
| Supplemental cash flow information: | | | | | | | | | | | | |
| Cash paid for interest | | $ | 360,805 | | | $ | 195,086 | | | $ | 245,051 | |
| Cash paid for (received from) income taxes | | $ | (61,000 | ) | | $ | 597,200 | | | $ | 944,000 | |
| | | | | | | | | | | | | |
| Supplemental noncash investing activities: | | | | | | | | | | | | |
| Deferred guaranteed payments for business acquisition | | $ | (1,836,105 | ) | | | – | | | | – | |
See notes to consolidated financial statements.
ADDvantage Technologies Group, Inc.
ADDVANTAGE TECHNOLOGIES GROUP, INC.Notes to Consolidated Financial StatementsNOTES 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 Cable TelevisionWireless Infrastructure Services (“Cable TV”Wireless”) and Telecommunications (“Telco”).
Change in year end
In September 2022, the Company's Board of Directors approved a change in the Company's fiscal year end from September 30 to December 31. The Company's current fiscal year runs from January 1, 2022 through December 31, 2022 (fiscal 2022). As a result of the change in year end, the Company filed a Transition Report on Form 10-Q for the period from October 1, 2021 through December 31, 2021.
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, see Note 3 - Accounts Receivable Agreements.
Revenue recognition
The Company recognizes revenue at the time a good or service is transferred to the 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 uses an input method based upon a ratio of direct costs incurred to date compared to management’s estimate of the total direct costs to be incurred on each contract, since it best depicts the transfer of control to the customer. The Company’s principal sales are from Wireless services, sales of Telco new and refurbished 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 both the Company’s Wireless and Telco segments, the Company has entered into various agreements 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 sheets. Receivables are considered sold when they are transferred beyond the reach of the Company and its creditors, the purchaser has the right to pledge or exchange the receivables and the Company has surrendered control over the transferred receivables. 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 ROU asset and a corresponding ROU 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 assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. The Company uses a discount rate that approximates the rate of interest for a collateralized loan over a similar term as the discount rate for present value of lease payments when the rate implicit in the contract is not readily determinable.
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. Finance leases are included in net property and equipment, and current or long-term finance lease obligations in the 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, except for certain variable expenses that are recognized when the variability is resolved, typically during the period in which they are paid. Variable ROU 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).
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 and included in other income (expense).operating expense. Repairs and maintenance costs are generally expensed as incurred, whereas major improvements are capitalized. Depreciation expense was $0.4$0.9 million, $0.3 million and $0.9 million for eachthe year ended December 31, 2022, the transition period of three months ended December 31, 2021, and the yearsyear ended September 30, 2017, 2016 and 2015.
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 acquired. In accordance with current accounting guidance, goodwill is not amortized and is tested at least annually for impairment at the reporting unit level. The Company performs this annual analysis in the fourth quarter of each fiscal year and in any other period in which indicators of impairment warrant additional analysis.
The goodwill analysis is a two-step process. Goodwill is first evaluated for impairment by comparing management’s estimate of the fair value for each of the reporting units with the reporting unit’s carrying value, including goodwill. If the carrying value of the reporting unit exceeds its fair value, a computation of the implied fair value of goodwill would then be compared to its related carrying value. If the carrying value of the reporting unit’s goodwill exceeds
the implied fair value of goodwill, an impairment loss would be recognized in the amount of the excess. Management utilizes a discounted cash flow analysis, referred to as an income approach, to determine the estimated fair value of its reporting units. Judgments and assumptions are inherent in the estimate of future cash flows used to determine the estimate of the reporting unit’s fair value. The use of alternate judgments and/or assumptions could result in the recognition of different levels of impairment charges in the consolidated financial statements. At September 30, 2017 and 2016, the estimated fair value of our reporting units exceeded its carrying value, so goodwill was not impaired.
2021, respectively.
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$0.3 million, $0.2$0.1 million and $0.1$0.4 million for the yearsyear ended December 31, 2022, the transition period of three months ended December 31, 2021, and the year ended September 30, 2017, 2016 and 2015,2021, 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. As of December 31, 2022, two Telco customers accounted for 24% and 11% of trade accounts receivable, respectively. 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 compensates 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 foraward 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.
Retirement Plan
Financial Accounting Standards Board (“FASB”) ASC 820, Fair Value MeasurementsThe Company sponsors a 401(k) plan that allows participation by all employees who are at least 21 years of age and Disclosures, defines fair value, establisheshave completed over 60 days of service. The Company's contributions to the plan consist of a consistent frameworkmatching contribution as determined by the plan document. Costs recognized under the 401(k) plan were $0.1 million, $34 thousand and $0.2 million for measuring fair valuethe year ended December 31, 2022, the transition period of three months ended December 31, 2021, and establishes a fair value hierarchy based on the observability of inputs used to measure fair value. The three levels of 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. |
year ended September 30,
2021, respectively.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 FASBFinancial Accounting Standards Board (FASB) issued ASUAccounting Standards Update (ASU) 2016-13: “Financial Instruments —– Credit Losses (Topic 326) – Measurement of Credit Losses on Financial Instruments.” This ASU requires entities to measure all expected credit losses for most financial assets held at the reporting date based on an expected loss model which includes historical experience, current conditions, and reasonable and supportable forecasts. EntitiesUpon adoption, 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 isOn November 15, 2019, the FASB delayed the effective date of the standard for annual periodscompanies that qualify under smaller reporting company reporting rules. As amended, the effective date of ASC Topic 326 was delayed until fiscal years beginning after December 15, 2019, including interim periods within those fiscal periods. Entities may adopt earlier as of2022 for SEC filers that are eligible to be smaller reporting companies under the fiscal year beginning after December 15, 2018, including interim periods within those fiscal years.Securities and Exchange Commission definition. We are currently in the process of evaluating this new standard update.
In August 2016,update, however we do not anticipate the FASB issued ASU 2016-15: “Statement of Cash Flows (Topic 230) – Classification of Certain Cash Receipts and Cash Payments.” This ASU addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. The amendments in this ASU are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. Based on management’s initial assessment of ASU No. 2016-15, the cash flows associated with guaranteed payments for acquisition of businesses will be reported as a financing activity in the Statement of Cash Flows, as opposed to an investing activity where it is currently reported.
In January 2017, the FASB issued ASU No. 2017-01: “Business Combinations (Topic 805) – Clarifying the definition of a Business.” This ASU clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The guidance is effective for annual periods beginning after December 15, 2017, including interim periods within those periods. This ASU 2017-01 was issued to clarify guidance and will not have a material impact on the Company’s consolidated financial statements. ASU No. 2017-01 does not change the accounting for previously acquired businesses.our results.
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 – Acquisition
As part of the Company’s growth strategy, the Company has been pursuing an acquisition strategy to expand into the broader telecommunications industry. The Company formed a new subsidiary called ADDvantage Triton, LLC (“Triton Datacom”) which on October 14, 2016 acquired substantially all of the net assets of Triton Miami, Inc. (“Triton Miami”). Triton Datacom is a provider of new and refurbished enterprise networking products, including IP desktop phones, enterprise switches and wireless routers. 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.
Revenue Recognition
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 paymentsCompany’s principal sales are recorded in other current liabilities ($0.7 million) and other long-term liabilities ($1.2 million). |
The Company will also make annual payments to the Triton Miami owners, if they have not resigned from Triton Datacom, over the next three years equal to 60%Wireless services, sales 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 tangibleTelco equipment and intangible assets acquired and liabilities assumed based on their fair values as of October 14, 2016, the effective date of the acquisition. Any remaining amount is recorded as goodwill.
The following summarizes the final purchase price allocation of the fair value of the assets acquired and the liabilities assumed at October 14, 2016:
| 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 | |
The acquired identifiable intangible assets of approximately $4.8 million consist of customer relationships, trade name and non-compete agreements with the owners of Triton Miami.
The unaudited financial informationTelco recycled equipment, primarily in the table below summarizes the combined results of operations of ADDvantage Technologies GroupUnited States. Sales to international customers totaled approximately $6.2 million, $1.1 million, and Triton Miami$4.7 million for the yearsyear ended September 30, 2017December 31, 2022, the transition period of three months ended December 31, 2021, and September 30, 2016, 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. 2021, respectively.
The unaudited pro forma earningsCompany’s customers include wireless carriers, wireless equipment providers, multiple system operators, resellers and direct sales to end-user customers. Sales, which individually amounted to 10% or greater of the Company's revenue, to two customers totaled approximately 28%, 37%, and 28% of consolidated sales for the year ended December 31, 2022, the transition period of three months ended December 31, 2021, and the year ended September 30, 20162021, respectively.
Sales by type for the year ended December 31, 2022, the transition period of three months ended December 31, 2021, and the year ended September 30, 2021 were adjusted to includeas follows, in thousands:
| | | | | | | | | | | | | | | | | |
| Year Ended | | Three Months Ended | | Year Ended |
| December 31, | | December 31, | | September 30, |
| 2022 | | 2021 | | 2021 |
| | | | | |
| Wireless services sales | $ | 30,813 | | | $ | 7,119 | | | $ | 20,708 | |
| Equipment sales: | | | | | |
| Telco | 66,016 | | | 11,424 | | | 40,663 | |
| Inter-segment | (5) | | | — | | | (101) | |
| Telco repair sales | 12 | | | 11 | | | 27 | |
| Telco recycle sales | 192 | | | 136 | | | 863 | |
| Total sales | $ | 97,028 | | | $ | 18,690 | | | $ | 62,160 | |
Contract assets and contract liabilities are included in unbilled revenue and deferred revenue, respectively, in the consolidated balance sheets. Contract assets were $5.0 million, $2.2 million and $2.5 million at December 31, 2022, 2021, and September 30, 2021, respectively. Contract liabilities were were $0.1 million, $0.2 million of acquisition-related costs recordedand $0.2 million at December 31, 2022, 2021, and September 30, 2021, respectively. During the year ended December 31, 2022, the Company recognized $0.2 million as operating, selling, general and administrative expenses inrevenue from amounts classified as deferred revenue on our consolidated balance sheet at December 31, 2021. During the Consolidated Statements of Operations. The unaudited pro forma financial information is provided for informational purposes only and does not purport to be indicative ofthree months ended ended December 31, 2021, the Company’s combined results of operations which would actually have been obtained had the acquisition taken placeCompany recognized $0.2 million as revenue from amounts classified as deferred revenue on October 1, 2015, nor should it be taken as indicative of our future consolidated results of operations.balance sheet at September 30, 2021.
| | | 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 3 – InventoriesAccounts Receivable Agreements
On March 17, 2022, the Company replaced its $3.0 million credit facility for its Nave and Triton subsidiaries with its primary financial lender with new accounts receivable purchase facilities with capacities of $13.0 million for Nave and $3.0 million for Triton. The lender charges a fee of 1.3% of sold receivables.
On March 17, 2022, the Company also restructured its accounts receivable purchase facilities secured by the Company’s Fulton subsidiary’s receivables. Effective December 17, 2022, the modified Fulton facilities provide a credit capacity excluding a major customer of $1.5 million, with a fee of 2.0% of sold receivables, and credit capacity secured by receivables of a major customer of $1.5 million, with a fee of 1.6% of sold receivables.
For all four facilities, the lender advances 90% of sold receivables and establishes a reserve of 10% of the sold receivables at initial sale, which increases to 100% over time after 120 days, until the Company collects the sold receivables. All four facilities mature on December 17, 2023.
The Company has a total capacity under all four facilities of $19.0 million. As of December 31, 2022, the lender has a reserve against the sold receivables of $1.1 million, which is reflected as restricted cash on the consolidated balance sheets. The facilities agreements address 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 $7.0 million at December 31, 2022. Although the sale of receivables is with recourse, the Company did not record a recourse obligation at December 31, 2022 as the Company concluded that the sold receivables are collectible.
For the year ended December 31, 2022, the Company received proceeds from the sold receivables under all of their various agreements of $71.6 million and included the proceeds in net cash provided by operating activities in the consolidated statements of cash flows. The Company recorded related costs of $1.0 million for the year ended December 31, 2022, in other expense in the consolidated statements of operations.
Note 4 – Inventories
Inventories, which are all within the Telco segment, at December 31, 2022, 2021, and September 30, 2017 and 20162021 are as follows:follows, in thousands:
27
| | | 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 | |
| | | | | | | | | | | | | | | | | |
| December 31, | | December 31, | | September 30, |
| | 2022 | | 2021 | | 2021 |
| New equipment | $ | 2,286 | | | $ | 1,396 | | | $ | 1,295 | |
| Refurbished and used equipment | 11,148 | | | 7,824 | | | 8,103 | |
| Allowance for excess and obsolete inventory: | (3,871) | | | (3,567) | | | (3,476) | |
| | | | | |
| Total inventories, net | $ | 9,563 | | | $ | 5,653 | | | $ | 5,922 | |
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 reviewsIn the Cable TVyear ended December 31, 2022, the transition period of three months ended December 31, 2021, 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 of the yearsyear ended September 30, 2017, 2016 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, 2016,2021, the Telco segment identified certain inventory that more than likely will not be sold or that the cost will not be recovered when it is sold, and had not yet been processed through its recycling program. Therefore, the CompanyThe Telco segment recorded inventory obsolescence charges which increased cost of sales by $0.3 million, $0.1 million and $0.4 million for the yearsyear ended September 30, 2017December 31, 2022, the transition period of three months ended December 31, 2021, and 2016, respectively, to allow for excess and obsolete inventory. For the year ended September 30, 2015, there was not2021, respectively and the Company has a charge recorded for excess and obsolete inventory. We$3.9 million allowance at December 31, 2022. The Company also reviewed the cost of inventories against estimated net realizable value and for the years ended December 31, 2022 and September 30, 2021, recorded a lower of cost or net realizable value charge for each of the years ended September 30, 2017$0.2 million and September 30, 2016 of $0.1 million, respectively. There were no adjustments for inventories that have alower of cost in excess of estimatedor 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 agreementvalue recorded for the purposetransition period 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.three months ended December 31, 2021.
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 5 – Intangible Assets
The intangible assets with their associated accumulated amortization amounts at December 31, 2022, 2021, and September 30, 20172021 are as follows:follows, in thousands:
| | | | Gross | | | Accumulated Amortization | | | Net | | | December 31, 2022 |
| Intangible assets: | | | | | | | | | | Intangible assets: | Gross | | Accumulated Amortization | | | Net |
| Customer relationships – 10 years | | $ | 8,152,000 | | | $ | (1,898,691 | ) | | $ | 6,253,309 | | Customer relationships – 10 years | $ | 3,155 | | | $ | (2,913) | | | | $ | 242 | |
| 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 | | | (1,655) | | | | 467 | |
| Non-compete agreements – 3 years | | | 374,000 | | | | (292,333 | ) | | | 81,667 | | |
| | | | | | | | | | | | | | |
| Total intangible assets | | $ | 11,948,000 | | | $ | (3,400,513 | ) | | $ | 8,547,487 | | Total intangible assets | $ | 5,277 | | | $ | (4,568) | | | | $ | 709 | |
The intangible assets with their associated accumulated amortization amounts at September 30, 2016 are as follows: | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| Intangible assets: | Gross | | Accumulated Amortization | | | | Net |
| Customer relationships – 10 years | $ | 3,155 | | | $ | (2,807) | | | | | $ | 348 | |
| Trade name – 10 years | 2,122 | | | (1,443) | | | | | 679 | |
| Total intangible assets | $ | 5,277 | | | $ | (4,250) | | | | | $ | 1,027 | |
| | | | | | | | | | | | | | | | | | | |
| September 30, 2021 |
| Intangible assets: | Gross | | Accumulated
Amortization | | | | Net |
| Customer relationships – 10 years | $ | 3,155 | | | $ | (2,780) | | | | | $ | 375 | |
| Trade name – 10 years | 2,122 | | | (1,390) | | | | | 732 | |
| Total intangible assets | $ | 5,277 | | | $ | (4,170) | | | | | $ | 1,107 | |
| | | 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 | |
Amortization expense was $1.3$0.3 million, $0.8$0.1 million and $0.8$0.3 million for the yearsyear ended December 31, 2022, the transition period of three months ended December 31, 2021, and the year ended September 30, 2017, 2016 and 2015,2021, respectively.
The estimated aggregate amortization expense for each of the next five fiscal years is as follows:follows, in thousands:
| 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 | |
| | | | | |
| 2023 | $ | 319 | |
| 2024 | 142 | |
| 2025 | 107 | |
| 2026 | 90 | |
| 2027 | 25 | |
| Thereafter | 26 | |
| |
| Total | $ | 709 | |
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 76 – Accrued Expenses
Accrued expenses at December 31, 2022, 2021, and September 30, 2017 and 20162021 are as follows:follows, in thousands:
| | | | | | | | | | | | | | | | | |
| December 31, | | December 31, | | September 30, |
| 2022 | | 2021 | | 2021 |
| Employee costs | $ | 915 | | | $ | 945 | | | $ | 1,255 | |
| Taxes other than income tax | 54 | | | 3 | | | (13) | |
| Other, net | 476 | | | 236 | | | 339 | |
| | | | | |
| Total accrued expenses | $ | 1,445 | | | $ | 1,184 | | | $ | 1,581 | |
| | | 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 87 – Line of Debt
Credit Agreement
On December 28, 2021, the Company renewed its credit facility for its Nave and Notes Payable
Notes Payable
The Company has an Amended and Restated Revolving Credit and Term Loan Agreement (“Credit and Term Loan Agreement”)Triton subsidiaries with its primary financial lender. Revolving credit and term loans created under the Credit and Termlender by entering into a Business Loan Agreement are collateralizedand various ancillary debt and collateral agreements. The renewed Nave and Triton credit facility was for a maximum of $3.0 million and was secured by inventory,the Company’s Nave and Triton Subsidiaries’ accounts receivable equipment and fixtures, general intangiblesinventory. As renewed, the previous Nave and a mortgage on certain property. Among other financial covenants, the CreditTriton credit facility was reduced by $1.0 million and Term Loan 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. 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.
At September 30, 2017, the Company has three term loans outstanding under the Credit and Term Loan Agreement. The first outstanding term loan has an outstanding balance 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 requiresrequired quarterly interest payments based on the prevailing 30-day LIBORWall Street Journal Prime Rate floating rate (3.25% at December 31, 2021) plus 2.75% (3.99% at0.75%. At December 31, 2021, there was $2.1 million outstanding under the line of credit.
On March 17, 2022, the Company closed its $3.0 million credit facility for its Nave and Triton subsidiaries with its primary financial lender. See Note 3 - Accounts Receivable Agreements for more information about the Company's receivables purchase facilities.
Note 8 – Leases
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 ROU lease asset and lease liability balances.
The components of lease expense for the year ended December 31, 2022, the transition period of three months ended December 31, 2021, and the year ended September 30, 2017),2021 are as follows, in thousands:
| | | | | | | | | | | | | | | | | |
| Year Ended | | Three Months Ended | | Year Ended |
| December 31, | | December 31, | | September 30, |
| 2022 | | 2021 | | 2021 |
| Right-of-use lease cost | | | | | |
| Right-of-use lease cost | $ | 1,087 | | | $ | 319 | | | $ | 1,160 | |
| Finance lease costs | | | | | |
| Amortization assets under finance leases | $ | 604 | | | $ | 139 | | | $ | 412 | |
| Interest on finance lease liabilities | 155 | | | 37 | | | 75 | |
| Total finance lease cost | $ | 759 | | | $ | 176 | | | $ | 487 | |
Supplemental cash flow information related to leases for the year ended December 31, 2022, the transition period of three months ended December 31, 2021, and the interest rate is reset monthly. Any future borrowings under the Line of Credit are due on March 30, 2018. Future borrowings under the Line of Credit are limited to the lesser of $7.0 million or the net balance of 80% of qualified accounts receivable plus 50% of qualified inventory. Under these limitations, the Company’s total available Line of Credit borrowing base was $7.0 million atyear ended September 30, 2017.2021 are as follows, in thousands:
Fair Value of Debt
| | | | | | | | | | | | | | | | | |
| Year Ended | | Three Months Ended | | Year Ended |
| December 31, | | December 31, | | September 30, |
| 2022 | | 2021 | | 2021 |
| Cash paid for amounts included in the measurement of lease liabilities: | | | | | |
| Operating cash flows from right-of-use leases | $ | 1,087 | | | $ | 319 | | | $ | 1,160 | |
| Operating cash flows from finance leases | $ | 155 | | | $ | 37 | | | $ | 75 | |
| Financing cash flows from finance leases | $ | 899 | | | $ | 155 | | | $ | 484 | |
The carrying value of the Company’s variable-rate term loan approximates its fair value since the interest rate fluctuates periodically based on a floating interest rate.
The Company has determined the fair value of its fixed-rate term loan utilizing the Level 2 hierarchy as the fair value can be estimated from broker quotes corroborated by other market data. These broker quotes are based on observable market interest ratesSupplemental balance sheet information related to leases at which loans with similar termsDecember 31, 2022, 2021, 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 of September 30, 2017. The fair value2021 are as follows, in thousands:
| | | | | | | | | | | | | | | | | |
| December 31, | | December 31, | | September 30, |
| 2022 | | 2021 | | 2021 |
| Right-of-use leases | | | | | |
| Right-of-use lease assets | $ | 1,540 | | | $ | 2,466 | | | $ | 2,730 | |
| | | | | |
| Right-of-use lease obligations - current | $ | 1,204 | | | $ | 1,177 | | | $ | 1,198 | |
| Right-of-use lease obligations | 635 | | | 1,839 | | | 2,141 | |
| Total right-of-use lease liabilities | $ | 1,839 | | | $ | 3,016 | | | $ | 3,339 | |
| | | | | |
| Finance leases | | | | | |
| Property and equipment, gross | $ | 3,409 | | | $ | 3,115 | | | $ | 2,843 | |
| Accumulated depreciation | (1,244) | | | (846) | | | (707) | |
| Property and equipment, net | $ | 2,165 | | | $ | 2,269 | | | $ | 2,136 | |
| | | | | |
| Financing lease obligations - current | $ | 636 | | | $ | 652 | | | $ | 582 | |
| Financing lease obligations | 1,254 | | | 1,484 | | | 1,429 | |
| Total finance lease liabilities | $ | 1,890 | | | $ | 2,136 | | | $ | 2,011 | |
| | | | | |
| Weighted Average Remaining Lease Term | | | | | |
| Right-of-use leases | 1.64 years | | 2.63 years | | 2.78 years |
| Finance leases | 3.25 years | | 3.47 years | | 3.75 years |
| Weighted Average Discount Rate | | | | | |
| Right-of-use leases | 5.00 | % | | 5.00 | % | | 5.00 | % |
| Finance leases | 7.77 | % | | 6.76 | % | | 6.72 | % |
Maturities of lease liabilities are as follows for the Company’s third outstanding fixed rate loan was $2.8 million at September 30, 2017.year ending December 31, 2022, in thousands:
| | | | | | | | | | | |
| Right-of-use Leases | | Finance Leases |
| 2023 | $ | 1,316 | | | $ | 760 | |
| 2024 | 621 | | | 675 | |
| 2025 | 65 | | | 415 | |
| 2026 | — | | | 223 | |
| 2027 | — | | | 78 | |
| Thereafter | — | | | — | |
| Total lease payments | 2,002 | | | 2,151 | |
| Less: imputed interest | 163 | | | 261 | |
| Total lease obligations | $ | 1,839 | | | $ | 1,890 | |
Note 9 – Stock-Based Compensation
Plan Information
The 2015 Incentive Stock Plan (the “Plan”) provides for awards of stock options and restricted stock to officers, directors, key employees and consultants. UnderIn September 2022, at the Plan, option prices willCompany's annual meeting of shareholders, the shareholders authorized an additional 1,000,000 shares of common stock be set byadded to the Compensation Committee and may not be less than the fair market value of the stock on the grant date.
Plan.
At September 30, 2017, 1,100,415December 31, 2022, 3,100,415 shares of common stock were reserved for stock award grants under the Plan. Of these reserved shares, 212,4511,072,304 shares were available for future grants.
Stock Options
All share-based payments to employees, including grantsAs of employeeSeptember 30, 2021 there were 50,000 stock options are recognized inwith a weighted average exercise price of $1.28 per share and an aggregate intrinsic value of $54 thousand outstanding under the consolidated financial statements based on their grant date fairPlan. As of December 31, 2021, there were 50,000 stock options with a weighted average exercise price of $1.28 per share and an aggregate intrinsic value overof $22 thousand outstanding under the requisite service period. Compensation expense for stock-basedPlan. There were 50,000 stock options exercised during the year ended December 31, 2022 with a weighted average exercise price of $1.28 per share and an aggregate intrinsic value of $47 thousand. As of December 31, 2022, no stock options remained outstanding.
Restricted stock awards is included in the operating, selling, general and administrative expense section of the Consolidated Statements of Operations.
Stock options are valued at the date of the award, which does not precede the approval date, and compensation cost is recognized on a straight-line basis over the vesting period. Stock options granted to employees generally become exercisable over a three, four or five-year period from the date of grant and generally expire ten years after the date of grant. Stock options granted to the Board of Directors generally become exercisable on the date of grant and generally expire ten years after the date of grant.
A summary of the status of the Company's stock optionsnon-vested restricted share awards at September 30, 2017December 31, 2022 and changes during the year thentransition period of three months ended is presented below:
| | | Options | | | Weighted Average Exercise Price | | | Aggregate Intrinsic Value | |
| Outstanding at September 30, 2016 | | | 570,000 | | | $ | 2.73 | | | | |
| Granted | | | 140,000 | | | $ | 1.80 | | | | |
| Exercised | | | − | | | $ | – | | | $ | 0 | |
| Expired | | | (10,000 | ) | | $ | 3.45 | | | | | |
| Forfeited | | | – | | | $ | – | | | | | |
| Outstanding at September 30, 2017 | | | 700,000 | | | $ | 2.54 | | | $ | 0 | |
| Exercisable at September 30, 2017 | | | 526,667 | | | $ | 2.78 | | | $ | 0 | |
There were no options exercised under the Plan for the years ended September 30, 2017, 2016December 31, 2021 and 2015.
Information about the Company’s outstanding and exercisable stock options at September 30, 2017 is as follows:
| | | | | | | 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 |
| | $3.001 | | | | 60,000 | | | | 60,000 | | 0.9 years |
| | | | | | 700,000 | | | | 526,667 | | |
The Company granted nonqualified stock options of 140,000 shares and 50,000 shares for the year ended September 30, 2017 and September 30, 2016, respectively. No nonqualified stock options were granted in 2015. The Company estimated the fair value of the options granted using the Black-Scholes option valuation model and the assumptions shownDecember 31, 2022 is presented in the following table below. The Company estimated the expected term of options granted based on the historical grants and exercises of the Company's options. The Company estimated the volatility of its common stock at the date of the grant based on both the historical volatility as well as the implied volatility on its common stock. The Company based the risk-free rate that was used($ 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 zero in the Black-Scholes option valuation model. The Company amortizes the resulting fair value of the options ratably over the vesting period of the awards. The Company used historical data to estimate the pre-vesting options forfeitures and records share-based expense only for those awards that are expected to vest.thousands):
| | | | | | | | | | | |
| Shares | | Fair Value |
| Non-vested at September 30, 2021 | 739,913 | | | $ | 1,706 | |
| Granted | 130,111 | | | $ | 333 | |
| Vested | (112,390) | | | $ | (230) | |
| Forfeited | (20,000) | | | $ | (41) | |
| Non-vested at December 31, 2021 | 737,634 | | | $ | 1,768 | |
| Granted | 260,391 | | | 361 | |
| Vested | (354,634) | | | (857) | |
| Forfeited | (111,666) | | | (256) | |
| Non-vested at December 31, 2022 | 531,725 | | | $ | 1,016 | |
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 2016 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 | | | – | | | | – | |
Compensation expense related to stock options recorded for the years ended September 30, 2017, 2016 and 2015 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 | |
The Company records compensation expense over the vesting term of the related options. At September 30, 2017, compensation costs related to these unvested stock options not yet recognized in the statements of operations was $74,985.
Restricted stock
The Company granted restricted stock in March 2017, 2016 and 2015 to its Board 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 23,676 shares, which were valued at market value on the date of grant. The shares have a holding restriction, which will expire in equal annual installments of 7,892 shares over three years starting in April 2015. The fair value of these shares upon issuance totaled $76,000 and is being amortized over the respective one, two and three year holding periods as compensation expense.
Compensation expense related to restricted stock recorded for the yearsyear ended December 31, 2022, the transition period of three months ended December 31, 2021, and the year ended September 30, 2017, 2016 and 20152021 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 | |
| | | | | | | | | | | | | | | | | |
| Year Ended | | Three Months Ended | | Year Ended |
| December 31, | | December 31, | | September 30, |
| | 2022 | | 2021 | | 2021 |
| Fiscal year 2020 grant | $ | 36 | | | $ | 37 | | | $ | 450 | |
| Fiscal year 2021 grant | 252 | | | 125 | | | 556 | |
| 2021 Transition period grant | 87 | | | 119 | | | — | |
| Fiscal year 2022 grant | 195 | | | — | | | — | |
| | | | | |
| Total restricted stock compensation expense | $ | 570 | | | $ | 281 | | | $ | 1,006 | |
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.
The Company did not recognize a tax benefit for compensation expense recognized during the year ended December 31, 2022, the transition period of three months ended December 31, 2021, and the year ended September 30, 2021.
At December 31, 2022, unrecognized compensation expense related to non-vested stock-based compensation awards not yet recognized in the consolidated statements of operations was $0.4 million. That cost is expected to be recognized over a period of 2.50 years.
Note 10 – 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 ("Shares").
The offer and sale of the Shares were made pursuant to a shelf registration statement on Form S-3 and the related prospectus filed by the Company with the Securities and Exchange Commission (the "SEC") on March 3, 2020, as amended on March 23, 2020, and declared effective by the SEC on April 1, 2020.
Pursuant to the Sales Agreement, Northland sold 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 Capital Market, at market prices or as otherwise agreed with Northland. Northland used 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 have imposed.
The Company sponsorspaid 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 also reimbursed Northland for certain specified expenses in connection with entering into the Sales Agreement. The Sales Agreement contained 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 three months ended September 30, 2017, 2016December 31, 2021, 320,787 Shares were sold by Northland on behalf of the Company with gross proceeds of $0.7 million, and 2015.
net proceeds after commissions and fees of $0.6 million. During the year ended December 31, 2022, 892,181 shares were sold by Northland on behalf of the Company with gross proceeds of $1.7 million, and net proceeds after commissions and fees of $1.6 million.
On November 28, 2022, the Company terminated the Sales Agreement with Northland. There were no penalties associated with the termination of the Sales Agreement.
Note 11 - Supplemental Cash Flow Information
| | | | | | | | | | | | | | | | | |
| (in thousands) | Year Ended | | Three Months Ended | | Year Ended |
| December 31, | | December 31, | | September 30, |
| 2022 | | 2021 | | 2021 |
| Supplemental cash flow information: | | | | | |
| Cash paid for interest | $ | 176 | | | $ | 59 | | | $ | 257 | |
| | | | | |
| | | | | |
| Supplemental noncash investing activities: | | | | | |
| Assets acquired under financing leases | $ | 653 | | | $ | 272 | | | $ | 1,623 | |
| | | | | |
Note 1112 – Earnings per Share
Basic and diluted earnings per share for the yearsyear ended December 31, 2022, the transition period of three months ended December 31, 2021, and the year ended September 30, 2017, 2016 and 2015 are:2021, in thousands:
| | | 2017 | | | 2016 | | | 2015 | | | | | | | | | | | | | | | | |
Net income (loss) attributable to common shareholders | | $ | (98,116 | ) | | $ | 294,163 | | | $ | 1,497,900 | | |
| | | Year Ended | | Three Months Ended | | Year Ended |
| | | December 31, | | December 31, | | September 30, |
| | | | 2022 | | 2021 | | 2021 |
| | Net loss attributable to common shareholders | | Net loss attributable to common shareholders | $ | 471 | | | $ | (2,029) | | | $ | (6,502) | |
| | Basic weighted average shares | | | 10,201,825 | | | | 10,141,234 | | | | 10,088,803 | | Basic weighted average shares | 13,484 | | | 12,683 | | | 12,401 | |
| Effect of dilutive securities: | | | | | | | | | | | | | Effect of dilutive securities: | |
| Stock options | | | – | | | | 4,062 | | | | – | | Stock options | — | | | — | | | — | |
| Diluted weighted average shares | | | 10,201,825 | | | | 10,145,296 | | | | 10,088,803 | | Diluted weighted average shares | 13,484 | | | 12,683 | | | 12,401 | |
| | | | | | | | | | | | | | | | | | | |
| Earnings (loss) per common share: | | | | | | | | | | | | | |
| Loss per common share: | | Loss per common share: | |
| Basic | | $ | (0.01 | ) | | $ | 0.03 | | | $ | 0.15 | | Basic | $ | 0.03 | | | $ | (0.16) | | | $ | (0.52) | |
| Diluted | | $ | (0.01 | ) | | $ | 0.03 | | | $ | 0.15 | | Diluted | $ | 0.03 | | | $ | (0.16) | | | $ | (0.52) | |
|
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 our common stock for the fiscal year, asbecause their effect would be anti-dilutive.
| | | | | | | | | | | | | | | | | |
| December 31, | | December 31, | | September 30, |
| | 2022 | | 2021 | | 2021 |
| Stock options excluded | — | | | 50,000 | | | 50,000 | |
| Weighted average exercise price of stock options | | | $ | 1.28 | | | $ | 1.28 | |
| Average market price of common stock | | | $ | 2.05 | | | $ | 2.57 | |
| | | 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 1213 – Related Parties
Income Taxes
The Company leasesprovision (benefit) for income taxes for the year ended December 31, 2022, the transition period of three facilities in Florida from a company owned by two employees. The total payments made on the leases were $0.1 million formonths ended December 31, 2021, and the year ended September 30, 2017. 2021 consists of, in thousands:
| | | | | | | | | | | | | | | | | |
| Year Ended | | Three Months Ended | | Year Ended |
| December 31, | | December 31, | | September 30, |
| | 2022 | | 2021 | | 2021 |
| | | | | |
| Current | $ | 8 | | | $ | — | | | $ | (53) | |
| Deferred | — | | | — | | | — | |
| | | | | |
| | | | | |
| Total provision (benefit) for income taxes | $ | 8 | | | $ | — | | | $ | (53) | |
The three leases terms extend throughfollowing 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 year ended December 31, 2019.
David E. Chymiak2022, the transition period of three months ended December 31, 2021, and Kenneth A. Chymiak beneficially owned 26% and 19%, respectively, of the Company’s outstanding common stock atyear ended September 30, 2017.2021:
Note 13 – Commitments and Contingencies
| | | | | | | | | | | | | | | | | |
| Year Ended | | Three Months Ended | | Year Ended |
| December 31, | | December 31, | | September 30, |
| | 2022 | | 2021 | | 2021 |
| Statutory tax rate | 21.0 | % | | 21.0 | % | | 21.0 | % |
| State income taxes, net of U.S. federal tax benefit | (3.2) | % | | 1.9 | % | | 5.4 | % |
| Return to accrual adjustment | — | % | | — | % | | 5.8 | % |
| Change in rate | (4.1 | %) | | — | % | | — | % |
| | | | | |
| Permanent differences | (14.5) | % | | — | % | | — | % |
| Valuation allowance | 20.5 | % | | (21.4 | %) | | (32.7 | %) |
| Other exclusions | (18.0) | % | | (1.5) | % | | 1.3 | % |
| Company’s effective tax rate | 1.7 | % | | 0.0% | | 0.8 | % |
The Company leasescontinues to provide a valuation allowance of $9.1 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 December 31, 2022, 2021, and rents various officeSeptember 30, 2021 consist of the following, in thousands:
| | | | | | | | | | | | | | | | | |
| December 31, | | December 31, | | September 30, |
| | 2022 | | 2021 | | 2021 |
| Deferred tax assets: | | | | | |
| Net operating loss carryforwards | $ | 6,376 | | | $ | 6,382 | | | $ | 5,895 | |
| Accounts receivable | 72 | | | 69 | | | 69 | |
| Inventory | 1,071 | | | 994 | | | 966 | |
| Intangibles | 2,079 | | | 2,320 | | | 2,370 | |
| Accrued expenses | 312 | | | 271 | | | 334 | |
| Stock options | — | | | 5 | | | 5 | |
| | | | | |
| Other | 64 | | | 64 | | | 64 | |
| Total deferred tax assets | 9,974 | | | 10,105 | | | 9,703 | |
| Deferred tax liabilities: | | | | | |
| Financial basis in excess of tax basis of certain assets | 803 | | | 855 | | | 815 | |
| Other | 120 | | | 294 | | | 365 | |
| Total deferred tax liabilities | 923 | | | 1,149 | | | 1180 |
| Less valuation allowance | 9,051 | | | 8,956 | | | 8,523 | |
| Net deferred taxes | $ | — | | | $ | — | | | $ | — | |
The Company’s U.S. Federal net operating loss (“NOL”) carryforwards consist of the following, in thousands:
| | | | | | | | | | | |
| NOL carryforward | | Year Expires |
| Year ended December 31, 2022 | — | | | |
| Transition period ended December 31, 2021 | 2,100 | | | No expiry |
| Year ended September 30, 2021 | 9,500 | | | No expiry |
| Year ended September 30, 2020 | 9,270 | | | No expiry |
| Year ended September 30, 2019 | 1,495 | | | No expiry |
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 warehouse properties in Florida, Georgia, Maryland, North Carolina, Pennsylvania,negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and Tennessee.recent financial performance. The termsCompany has concluded, based 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 million forrecent cumulative losses, that it is more likely than not that the years ended September 30, 2017, 2016 and 2015, respectively. The Company’s minimum annual future obligations under all existing operating leases for eachCompany will not be able to realize the full effect of the next fivedeferred tax assets and a valuation allowance of $9.1 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, 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 are as follows:before 2019.
| 2018 | | $ | 758,662 | |
| 2019 | | | 704,380 | |
| 2020 | | | 592,268 | |
| 2021 | | | 568,250 | |
| 2022 | | | 582,456 | |
| Thereafter | | | 696,926 | |
| | | | | |
| Total | | $ | 3,902,942 | |
Note 14 – 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”) The Company's Wireless segment provides turn-key wireless infrastructure services for the four major U.S. wireless carriers, communication tower companies, national integrators, and original equipment manufacturers that support these wireless carriers. These services primarily consist of the installation and upgrade of technology on cell sites and the construction of new small cells for 5G.
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 decommissioningrepair and testing 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 enterprisetelecommunications networking products, including IP desktop phones, enterprise switches and wireless routers.
equipment.
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. The Company allocates its corporate general and administrative expenses to the reportable segments.
| | | | | | | | | | | | | | | | | |
| (in thousands) | Year Ended | | Three Months Ended | | Year Ended |
| December 31, | | December 31, | | September 30, |
| | 2022 | | 2021 | | 2021 |
| Sales | | | | | |
| Wireless | $ | 30,813 | | | $ | 7,119 | | | $ | 20,708 | |
| Telco | 66,220 | | | 11,571 | | | 41,553 | |
| Intersegment | (5) | | | — | | | (101) | |
| Total sales | $ | 97,028 | | | $ | 18,690 | | | $ | 62,160 | |
| | | | | |
| Gross profit | | | | | |
| Wireless | $ | 8,611 | | | $ | 1,507 | | | $ | 6,277 | |
| Telco | 19,178 | | | 3,124 | | | 9,850 | |
| Total gross profit | $ | 27,789 | | | $ | 4,631 | | | $ | 16,127 | |
| | | | | |
| Income (loss) from operations | | | | | |
| Wireless | $ | (4,792) | | | $ | (2,326) | | | $ | (6,864) | |
| Telco | 6,269 | | | 424 | | | (2,433) | |
| Total operating income ( loss) | $ | 1,477 | | | $ | (1,902) | | | $ | (9,297) | |
| | | | | |
| (in thousands) | December 31, | | December 31, | | September 30, |
| 2022 | | 2021 | | 2021 |
| Segment assets | | | | | |
| Wireless | $ | 9,790 | | | $ | 7,640 | | | $ | 7,867 | |
| Telco | 13,217 | | | 14,545 | | | 14,472 | |
| Non-allocated | 4,211 | | | 3,241 | | | 4,973 | |
| Total assets | $ | 27,218 | | | $ | 25,426 | | | $ | 27,312 | |
| | | 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 15 – Quarterly Results of Operations (Unaudited)Subsequent events
The following is a summaryCompany has evaluated subsequent events through the filing of this Form 10-K, and determined that there have been no events that have occurred that would require adjustments to our disclosures in the quarterly results of operations for the years ended September 30, 2017, 2016 and 2015:consolidated financial statements.
| | | 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 | |
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 December 31, 2022, 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.December 31, 2022. 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.December 31, 2022. 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).
Based on our assessment, we believe that, as of September 30, 2017,December 31, 2022, 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.
None.
During the fourth quarter 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 internal control over financial reporting.
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 six directors, each of whom serves for a term of one year. The Directors are as follows:
David E. Chymiak Director since 1999
Mr. Chymiak, 77, 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 which he co-founded as 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. 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, 72, has served as our President and Chief Executive Officer since 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, 69, 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.
James C. McGill IndependentDirector since 2007
Mr. McGill, 79, 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, from 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, 60, is the Vice President of Blue Danube Systems, a company that designs intelligent wireless access solutions using cloud-based analytics and machine learning 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 with global responsibility for all of the mobile product offerings of the company and managing one of their largest global customers. 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 is also currently a partner since March 2021 in NASH21, a company that invests in real estate and rental properties primarily in Florida. Mr. Shelnutt has also served on various boards within the telecommunications industry including the QuEST Forum, ATIS, Broadband Forum and was an advisor to Tech Titans of Dallas, Texas and the City of New York Public Schools Technology group.
David W. SparkmanIndependent Director since 2015
Mr. Sparkman, 65, recently retired as the Chief Financial Officer of Oklahoma Capital Bank. Prior to that, he was the President of the financial consulting firm, Ulysses Enterprises, in which he also served in 2009-2010. Until the sale of the companies in October 2016, he was the Chief Financial Officer for a group of oil field service companies: Acid Specialists, LLC; Frac Specialists, LLC; and Cement Specialists, LLC. Mr. Sparkman served in that capacity beginning in September 2014, and prior to joining this group full-time in this capacity, he provided accounting and financial consulting services to these companies starting in April 2014. From 2010 to 2011, Mr. Sparkman was the CFO for Great White Energy Services until this company was acquired by Archer Well Company in 2011, and then served as the North America Director of Finance for Archer Well Company until 2013. Mr. Sparkman also spent 12 years with Dollar Thrifty Automotive Group serving in various accounting and finance-related senior management positions. Mr. Sparkman is a certified public accountant (inactive) and holds a bachelor of business administration degree in accounting from the University of Arkansas where he graduated cum laude.
Identification of Executive Officers
We have two 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.
Michael A. Rutledge
Mr. Rutledge, 52, Chief Financial Officer, began his career with ADDVantage Technologies in September 2021. Mr. Rutledge served as Vice President, Finance at SomnoMed Group for the past five years. Previously, he spent two years as the Chief Financial Officer at BG Staffing, where he played a key role in taking the company public and raising $16 million. Prior to that, he spent three years as Vice President of Finance with Cantel Medical Corporation, a publicly owned manufacturer of medical products, which acquired Byrne Medical, Inc., where he was the Chief Financial Officer. He joined Byrne Medical from N.F. Smith & Associates, a privately owned distributor of electronic components, where he spent four years as the Chief Financial Officer. He began his career at Ernst & Young, where he spent 12 years ultimately as Senior Audit Manager and was involved in several IPOs. He is a CPA in the State of Texas and holds a Bachelor of Business Administration in Accounting from Texas A&M University.
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 2022.
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 December 31, 2022, 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. 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), John M. Shelnutt, 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 2022. All of the meetings were held prior to the reporting of our quarterly financial results.
Functions
•Selects the firm that will serve as our independent registered public accounting firm;
•Reviews scope and results of audits with our independent registered public accounting firm, compliance with any of our accounting policies and procedures and the adequacy of our system of internal controls;
•Oversees quarterly reporting; and
•Performs the other functions listed in the Charter of the Audit Committee, a current copy of which may be found on our website at www.addvantagetechnologies.com.
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 David W. Sparkman, John M. Shelnutt, and James C. McGill meets the definitions of an audit committee financial expert.
Item 11.Executive Compensation.
Compensation
The following information requiredrelates to compensation paid by this item concerning executive compensation is incorporated by referencethe Company for the fiscal years ended December 31, 2022 and September 30, 2021 to the information set forthCompany’s Chief Executive Officer, Chief Financial Officer and the next most highly compensated executive officer of the Company:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | Non-Equity | | | | |
| | | | | | | | | Stock | | Option | | Incentive Plan | | All Other | | Total |
| Name and Principal Position | | Year | | Salary | | Bonus | | Awards | | Awards | | Compensation | | Compensation | | Compensation |
| | | | | ($) | | ($)(1) | | ($) (2) | | ($) | | ($) | | ($)(3) | | ($) |
| Joseph E. Hart | | 2022 | | $ | 300,000 | | | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 32,505 | | | $ | 332,505 | |
| Principal Executive Officer | | 2021 | | $ | 300,000 | | | — | | | $ | 446,450 | | | $ | — | | | $ | — | | | $ | 26,419 | | | $ | 772,869 | |
| | | | | | | | | | | | | | | | | |
| Michael A. Rutledge | | 2022 | | 250,000 | | | — | | | 106,839 | | | — | | | — | | | 24,662 | | | 381,501 | |
| Chief Financial Officer (4) | | 2021 | | 15,050 | | | — | | | — | | | — | | | — | | | — | | | 15,050 | |
| | | | | | | | | | | | | | | | | |
| Scott A. Francis | | | | | | | | | | | | | | | | |
| Chief Accounting Officer (5) | | 2021 | | 108,632 | | | — | | | 222,858 | | | — | | | — | | | 94,660 | | | 426,150 | |
| | | | | | | | | | | | | | | | | |
| Jimmy Taylor | | 2022 | | 128,041 | | | — | | | 43,875 | | | — | | | — | | | 8,017 | | | 179,933 | |
| President, Wireless Segment (6) | | 2021 | | 235,383 | | | — | | | 78,325 | | | — | | | — | | | 14,116 | | | 327,824 | |
| | | | | | | | | | | | | | | | | |
| (1) | | There were no executive bonuses awarded in 2022 or 2021. |
| (2) | | 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 2022 and 2021. 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. Mr. Hart's amount for fiscal year 2021 was inadvertently omitted from the 10-K/A and the Proxy statement filed on January 27, 2022 and August 12, 2022, respectively. |
| (3) | | Represents amounts paid by the Company on behalf of an officer for matching contributions to the Company’s qualified 401(k) plan, group term life, and auto allowance received during the year. Mr. Francis's other compensation includes severance payments. |
| (4) | | Mr. Rutledge's salary for 2021 represents his prorated annual salary of $250,000 as per the terms of his employment agreement from his September 2021 start date. |
| (5) | | Mr. Francis was the Vice President and Chief Accounting Officer of the Company until his departure in March 2021. Mr. Francis served as the interim Chief Accounting Officer through August 2021 as an independent contractor. |
| (6) | | Mr. Taylor retired in July, 2022. |
| |
Potential Payments Upon Termination or Change of Control
We have entered into employment/severance agreements with Mr. Hart and Mr. Rutledge. 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.
These agreements have no stated term but provide for the payment of severance benefits 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. Mr. Rutledge 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.
“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 December 31, 2022
The named executive officers of the Proxy Statement.Company did not have any unvested stock option awards as of December 31, 2022.
The following table reflects the number of shares of unvested restricted stock awards of our named executive officers of the Company as of December 31, 2022:
| | | | | |
| Unvested Restricted Stock |
| Joseph E. Hart | — | |
| Michael A. Rutledge | 37,500 | |
Compensation of Directors
The director compensation plan compensates each director, with the exception of Mr. McGill, $20,000 per year and the Chairman of the Audit Committee $30,000. Mr. McGill receives $25,000 annually in cash paid in monthly installments per his agreement with the Company.
All directors are eligible to receive awards of restricted shares, which are subject to a 12-month holding period, after the annual shareholders meeting. Each director, with the exception of Messrs. McGill and Chymiak, is to be awarded $50,000 of restricted stock upon each election to the board, which would be subject to a holding period equal to their board term. Mr. McGill is to receive $50,000 of restricted stock each October, subject to a twelve month holding period, per his agreement with the Company. Mr. Chymiak is to receive $15,000 of restricted stock upon his election to the board, which would be subject to a holding period equal to his board term.
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 2022 Director Compensation | | Fees Earned or Paid in Cash | | | Restricted Stock Awards (5) (6) | | | Total Compensation |
| James C. McGill (1) (2) (3) (4) (7) | | $ | 25,000 | | | | $ | 50,000 | | | | $ | 75,000 | |
| David E. Chymiak (4) | | 20,000 | | | | 15,000 | | | | 35,000 | |
| Timothy S. Harden (2) (3) (4) | | 20,000 | | | | 50,000 | | | | 70,000 | |
| John M. Shelnutt (1) (2) (3) (4) | | 20,000 | | | | 50,000 | | | | 70,000 | |
| David W. Sparkman (1) (4) | | 30,000 | | | | 50,000 | | | | 80,000 | |
| | | | | | | | | |
| (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 Strategy and Corporate Planning Committee. |
| (5) | The fair value of the stock awards are amortized over the estimated period until the next annual shareholders meeting to compensation expense in the Consolidated Financial Statements contained in the Company’s Annual Report on Form 10-K. The fair value of the stock award was based on the closing market price of the stock on the date of grant. |
| (6) | The directors received their fiscal 2022 awards in December, 2022, with a total fair value of $215,000 as of the original dates of the awards. |
| (7) | James C. McGill and the Company entered into an amended Letter Agreement on July 16, 2020, which amended his previous agreement dated October 8, 2018. This amended agreement provides that, for serving as Chairman of the Board, Mr. McGill will receive annual compensation in the form of $25,000 in cash and $50,000 in shares of stock, which will vest vest over a 12-month period. |
Item 12. | Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. |