UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE    SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED June 30,December 31, 2016

OR

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

            FOR THE TRANSITION PERIOD FROM________________ TO ______________

Commission File number 1‑10799

ADDvantage Technologies Group, Inc.
(Exact name of registrant as specified in its charter)

OKLAHOMA73‑1351610
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)

1221 E. Houston
Broken Arrow, Oklahoma 74012
(Address of principal executive office)
(918) 251-9121
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
 
 
Yes ☒    No  ☐
  
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 
 
 
Yes ☒    No  ☐
  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule12b-2 of the Exchange Act.
Large accelerated filer ☐Accelerated filer ☐
Non-accelerated filer ☐ (do not check if a smaller reporting company) Smaller reporting company ☒
  
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes ☐    No  ☒
  
Shares outstanding of the issuer's $.01 par value common stock as of JulyJanuary 31, 20162017 were
10,134,235.
 



ADDVANTAGE TECHNOLOGIES GROUP, INC.
Form 10-Q
For the Period Ended June 30,December 31, 2016


 PART I.    FINANCIAL INFORMATION
  
Page
Item 1.Financial Statements. 
   
 Consolidated Condensed Balance Sheets (unaudited)
2
 
June 30,December 31, 2016 and September 30, 2015
2016		 
   
 Consolidated Condensed Statements of Income (unaudited)
4
 Three and Nine Months Ended June 30,December 31, 2016 and 2015 
   
 
Consolidated Condensed Statements of Cash Flows (unaudited)
5
 NineThree Months Ended June 30,December 31, 2016 and 2015 
   
 Notes to Unaudited Consolidated Condensed Financial Statements
6
   
Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations.
 
1416
   
Item 4.
Controls and Procedures.
21
   
 PART II.II - OTHER INFORMATION
   
Item 6.Exhibits.
2223
   
 SIGNATURES 













1
PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements.

ADDVANTAGE TECHNOLOGIES GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)


  
December 31,
2016
  
September 30,
2016
 
Assets      
Current assets:      
Cash and cash equivalents $4,103,337  $4,508,126 
Accounts receivable, net of allowance for doubtful accounts of
$250,000
  
5,200,673
   
4,278,855
 
Income tax receivable  361,491   480,837 
Inventories, net of allowance for excess and obsolete        
inventory of $2,737,488 and $2,570,868, respectively  21,823,255   21,524,919 
Prepaid expenses  267,051   323,289 
Total current assets  31,755,807   31,116,026 
         
Property and equipment, at cost:        
Land and buildings  7,218,678   7,218,678 
Machinery and equipment  3,921,159   3,833,230 
Leasehold improvements  202,017   151,957 
Total property and equipment, at cost  11,341,854   11,203,865 
Less: Accumulated depreciation  
(5,096,889
)  
(4,993,102
)
Net property and equipment  6,244,965   6,210,763 
         
Investment in and loans to equity method investee  1,618,124   2,588,624 
Intangibles, net of accumulated amortization  9,502,683   4,973,669 
Goodwill  6,031,511   3,910,089 
Deferred income taxes  1,337,000   1,333,000 
Other assets  136,412   135,988 
         
Total assets 
$
56,626,502
  
$
50,268,159
 
  
June 30,
2016
  
September 30,
2015
 
Assets      
Current assets:      
Cash and cash equivalents $5,143,774  $6,110,986 
Accounts receivable, net of allowance for doubtful accounts of
$250,000
  5,839,088   4,286,377 
Inventories, net of allowance for excess and obsolete 
inventory of $3,206,628 and $2,756,628, respectively
  21,667,539   23,600,996 
Prepaid expenses  241,498   153,454 
Deferred income taxes  1,824,000   1,776,000 
Total current assets  34,715,899   35,927,813 
         
Property and equipment, at cost:        
Land and buildings  7,218,678   7,218,678 
Machinery and equipment  3,713,134   3,415,164 
Leasehold improvements  151,957   151,957 
Total property and equipment, at cost  11,083,769   10,785,799 
Less: Accumulated depreciation  (4,883,554)  (4,584,796)
Net property and equipment  6,200,215   6,201,003 
         
Investment in and loans to equity method investee  1,515,721   – 
Intangibles, net of accumulated amortization  5,180,120   5,799,473 
Goodwill  3,910,089   3,910,089 
Other assets  135,988   134,678 
         
Total assets $51,658,032  $51,973,056 






See notes to unaudited consolidated condensed financial statements.
2



ADDVANTAGE TECHNOLOGIES GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)


  
December 31,
2016
  
September 30,
2016
 
Liabilities and Shareholders’ Equity      
Current liabilities:      
Accounts payable $2,621,277  $1,857,953 
Accrued expenses  1,218,118   1,324,652 
Notes payable – current portion  2,178,335   899,603 
Other current liabilities  
1,626,220
   963,127 
Total current liabilities  7,643,950   5,045,335 
         
Notes payable, less current portion  5,734,439   3,466,358 
Other liabilities  
1,392,373
   131,410 
Total liabilities  14,770,762   8,643,103 
         
Shareholders’ equity:        
Common stock, $.01 par value; 30,000,000 shares authorized; 
10,634,893 shares issued; and 10,134,235 shares
outstanding
  
106,349
   
106,349
 
Paid in capital  (4,903,268)  (4,916,791)
Retained earnings  
47,652,673
   
47,435,512
 
Total shareholders’ equity before treasury stock  42,855,754   42,625,070 
         
Less: Treasury stock, 500,658 shares, at cost  
(1,000,014
)  
(1,000,014
)
Total shareholders’ equity  
41,855,740
   
41,625,056
 
         
Total liabilities and shareholders’ equity 
$
56,626,502
  
$
50,268,159
 
























See notes to unaudited consolidated condensed financial statements.
23
ADDVANTAGE TECHNOLOGIES GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETSSTATEMENTS OF INCOME
(UNAUDITED)

  
June 30,
2016
  
September 30,
2015
 
Liabilities and Shareholders’ Equity      
Current liabilities:      
Accounts payable $2,483,707  $1,784,482 
Accrued expenses  1,352,554   1,358,681 
Income tax payable  52,895   122,492 
Notes payable – current portion  896,330   873,752 
Other current liabilities  952,331   982,094 
Total current liabilities  5,737,817   5,121,501 
         
Notes payable, less current portion  3,690,640   4,366,130 
Deferred income taxes  314,000   286,000 
Other liabilities  120,256   1,064,717 
Total liabilities  9,862,713   10,838,348 
         
Shareholders’ equity:        
Common stock, $.01 par value; 30,000,000 shares authorized;
10,634,893 and 10,564,221 shares issued, respectively;
10,134,235 and 10,063,563 shares outstanding, respectively
  106,349     105,642 
Paid in capital  (4,938,075)  (5,112,269)
Retained earnings  
47,627,059
   47,141,349 
Total shareholders’ equity before treasury stock  42,795,333   42,134,722 
         
Less: Treasury stock, 500,658 shares, at cost  (1,000,014)  (1,000,014)
Total shareholders’ equity  
41,795,319
   41,134,708 
         
Total liabilities and shareholders’ equity $51,658,032  $51,973,056 


  Three Months Ended December 31, 
  
2016
  
2015
 
Sales $12,095,826  $8,249,668 
Cost of sales  
8,072,197
   5,484,288 
Gross profit  4,023,629   2,765,380 
Operating, selling, general and administrative expenses  
3,596,824
   2,668,625 
Income from operations  426,805   96,755 
Interest expense  96,644   67,761 
Income before income taxes  330,161   28,994 
Provision for income taxes  113,000   5,000 
         
Net income 
$
217,161
  
$
23,994
 
         
Earnings per share:        
Basic $0.02  $0.00 
Diluted $0.02  $0.00 
Shares used in per share calculation:        
Basic  10,134,235   10,069,139 
Diluted  10,134,559   10,069,139 



























See notes to unaudited consolidated condensed financial statements.
3
ADDVANTAGE TECHNOLOGIES GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED)

  Three Months Ended June 30,  Nine Months Ended June 30, 
  2016  2015  2016  2015 
Sales $10,060,242  $11,902,391  $28,897,097  $34,106,088 
Cost of sales  
6,594,091
   
7,757,784
   
19,080,954
   
21,886,166
 
Gross profit  3,466,151   4,144,607   9,816,143   12,219,922 
Operating, selling, general and administrative expenses  
3,062,288
   
3,202,402
   
8,987,316
   
10,081,016
 
Income from operations  403,863   942,205   828,827   2,138,906 
Other income (expense):                
Other income  70,517   –   180,071   – 
Interest income  28,950   –   31,122   – 
Income (loss) from equity method investment  63,977  –   (77,021)  – 
Interest expense  
(54,221
)  (71,071)  
(184,289
)  
(235,594
)
Total other income (expense), net  
109,223
  (71,071)  
(50,117
)  
(235,594
)
                 
Income before provision for income taxes  513,086   871,134   778,710   1,903,312 
Provision for income taxes  
197,000
   
234,000
   
293,000
   
616,000
 
                 
Net income $
316,086
  $
637,134
  $
485,710
  $
1,287,312
 
                 
Earnings per share:                
Basic $0.03  $0.06  $0.05  $0.13 
Diluted $0.03  $0.06  $0.05  $0.13 
Shares used in per share calculation:                
Basic  10,134,235   10,073,121   10,098,564   10,055,390 
Diluted  10,135,607   10,073,121   10,103,054   10,055,390 








See notes to unaudited consolidated condensed financial statements.

4
ADDVANTAGE TECHNOLOGIES GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)


  Three Months Ended December 31, 
  
2016
  
2015
 
Operating Activities      
Net income $217,161  $23,994 
Adjustments to reconcile net income to net cash        
provided by operating activities:        
Depreciation  103,787   95,180 
Amortization  311,986   206,451 
Provision for excess and obsolete inventories  166,620   150,000 
Deferred income tax provision (benefit)  (4,000)  2,000 
Share based compensation expense  41,884   45,013 
Changes in assets and liabilities:        
 Accounts receivable
  195,077   425,783 
 Income tax receivable\payable
  119,346   (136,490)
Inventories  683,638   475,224 
Prepaid expenses  29,060   26,524 
Other assets  (424)  – 
Accounts payable  179,651   28,320 
Accrued expenses  
(252,515
)  
(323,180
)
Net cash provided by operating activities  1,791,271   1,018,819 
         
Investing Activities        
Acquisition of net operating assets  (6,643,540)  (178,000)
Repayments of loans to equity method investee  970,500   – 
Purchases of property and equipment  
(69,833
)  
(24,475
)
Net cash used in investing activities  (5,742,873)  (202,475)
         
Financing Activities        
Proceeds from notes payable  4,000,000   – 
Debt issuance costs  (15,394)  – 
Payments on notes payable  
(437,793
)  
(215,989
)
Net cash provided by (used in) financing activities  
3,546,813
   
(215,989
)
         
Net increase (decrease) in cash and cash equivalents  (404,789)  600,355 
Cash and cash equivalents at beginning of period  
4,508,126
   
6,110,986
 
Cash and cash equivalents at end of period 
$
4,103,337
  
$
6,711,341
 
         
Supplemental cash flow information:        
Cash paid for interest $63,161  $46,393 
Cash paid for income taxes $–  $142,200 
         
Supplemental noncash investing activities:        
Deferred guaranteed payments for acquisition of business $(1,897,372) $– 
  Nine Months Ended June 30, 
  2016  2015 
Operating Activities      
Net income $485,710  $1,287,312 
Adjustments to reconcile net income to net cash        
provided by operating activities:        
Depreciation  312,403   299,591 
Amortization  619,353   619,354 
Provision for excess and obsolete inventories  450,000   450,000 
Deferred income tax benefit  (20,000)   (180,000)
Share based compensation expense  142,040   184,751 
Loss from equity method investment  77,021   – 
Changes in assets and liabilities:        
    Accounts receivable  (1,444,754)  593,954
    Income tax receivable\payable  (69,597)  212,924 
Inventories  1,499,557   (2,166,895)
Prepaid expenses  (55,183)  17,550
Other assets  (1,310)  – 
Accounts payable  641,268   (125,367) 
Accrued expenses  
19,649
  
(62,003
) 
Net cash provided by operating activities  2,656,157   1,131,171 
         
Investing Activities        
Acquisition of net operating assets  (178,000)  − 
Guaranteed payments for acquisition of business  (1,000,000)  (1,000,000)
Investment in and loans to equity method investment  (1,592,742)  – 
Additions to land and buildings    –    (56,074) 
Additions to machinery and equipment  
(199,715
)  
(90,187
)
Net cash used in investing activities  (2,970,457)  (1,146,261)
         
Financing Activities        
Payments on notes payable  
(652,912
)  
(632,266
)
Net cash used in financing activities  
(652,912
)  
(632,266
)
         
Net decrease in cash and cash equivalents  (967,212)  (647,356)
Cash and cash equivalents at beginning of period  6,110,986   5,286,097 
Cash and cash equivalents at end of period $
5,143,774
  $
4,638,741
 
         
Supplemental cash flow information:        
Cash paid for interest $153,531  $156,098 
Cash paid for income taxes $351,200  $600,000 







See notes to unaudited consolidated condensed financial statements.
5
ADDVANTAGE TECHNOLOGIES GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

Note 1 - Basis of Presentation and Accounting Policies

Basis of presentation

The consolidated condensed financial statements include the accounts of ADDvantage Technologies Group, Inc. and its subsidiaries, all of which are wholly owned (collectively, the “Company”).  Intercompany balances and transactions have been eliminated in consolidation.  The Company’s reportable segments are Cable Television (“Cable TV”) and Telecommunications (“Telco”).

The accompanying unaudited consolidated condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial statements and do not include all the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.  However, the information furnished reflects all adjustments, consisting only of normal recurring items which are, in the opinion of management, necessary in order to make the consolidated condensed financial statements not misleading.  It is suggested that these consolidated condensed financial statements be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2015.2016.

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.

In September 2015, the FASB issued  Based on management’s initial assessment of ASU No. 2015-16: “Business Combinations (Topic 805)”.  This guidance was issued to amend existing guidance related to measurement period adjustments associated with a business combination.  The new standard requires the Company to recognize measurement period adjustments in the reporting period in which the adjustments are determined, including any cumulative charge to earnings in the current period.  The amendment removes the requirement to adjust prior period financial statements for these measurement period adjustments.  The guidance is effective for annual periods beginning after December 15, 2015 and early adoption is permitted.  Management is evaluating the impact2014-09, management does not expect that ASU No. 2015-162014-09 will have on the Company’s consolidated financial statements.

In November 2015, the FASB issued ASU No. 2015-17: “Income Taxes (Topic 740) – Balance Sheet Classification of Deferred Taxes.” This guidance was issued to simplify the presentation of deferred income taxes.  The amendments in this Update require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position.  The effective date of ASU No. 2015-17 is for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods.  Management is evaluating thematerial impact that ASU No. 2015-17 will have 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.  The ASU will require organizations (“lessees”) that lease assets with lease terms of more than twelve months to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases.  Organizations that own the assets leased by lessees (“lessors”) will remain largely unchanged from current GAAP.  In addition, the ASU will require disclosures to help investors and other financial statement users better understand the amount, timing and uncertainty of cash flows arising from leases.  The guidance is effective for annual periods beginning after December 15, 2018 and early adoption is permitted.  Management is evaluating the impact that ASU No. 2016-02 will have on the Company’s consolidated financial statements.

6
In March 2016, the FASB issued ASU No. 2016-09: “Compensation – Stock Compensation (Topic 718)” which is intended to improve employee share-based payment accounting.  This ASU identifies areas for simplification involving several aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, an option to recognize gross stock compensation expense with actual forfeitures recognized as they occur, as well as certain classifications on the statement of cash flows.  The guidance is effective for annual periods beginning after December 15, 2016 and interim periods within those annual periods.  Early adoption is permitted.  Management is evaluating the impact that ASU No. 2016-09 will have on the Company’s consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15: “Statement of Cash Flows (Topic 230) – Classification of Certain Cash Receipts and Cash Payments.”  This update addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice.  The amendments in this Update are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years.  Early adoption is permitted.  Management is evaluating the impact that ASU No. 2016-15 will have on the Company’s consolidated financial statements.
6
In January 2017, the FASB issued ASU 2017-04: “Intangibles – Goodwill and Other (Topic 350) – Simplifying the Test for Goodwill Impairment.”  The standard 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. The standard 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.

Note 2 – Acquisition

On December 31, 2015,As part of the Company’s growth strategy, the Company is 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 operating assets of Advantage Solutions, LLCTriton 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 Kingsport, Tennessee.  This new locationthat it further diversifies the Company into the broader telecommunications industry by reselling refurbished products into the enterprise customer market.
The preliminary estimated purchase price for Triton Miami includes the Cable TV segment will provide cable television equipment repair services in the region as well as expand the Company’s Cable TV equipment sales opportunities.following:
    
Upfront cash payment $6,500,000 
Deferred guaranteed payments (a)  1,897,372 
Working capital purchase adjustment  143,540 
Net purchase price 
$
8,540,912
 

(a)This amount represents the present value of $2.0 million in deferred payments, which will be paid in equal annual installments over the next three years.  These deferred payments 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% of Triton Datacom’s annual EBITDA in excess of $1.2 million per year.  The Company will recognize the payments ratably over the three-year period as compensation expense.

Under the acquisition method of accounting, the total estimated purchase price wasis allocated to the major categories ofTriton Miami’s tangible and intangible assets acquired and liabilities assumed based on their estimated fair values atas of October 14, 2016, the effective date of the acquisition.  Any remaining amount is recorded as goodwill.

The Company has one year from the date of the acquisition date.to finalize the purchase price allocation, and there may be a material change in the purchase price allocation as presented.  The Company is still working with its valuation experts on the valuation of identifiable intangibles and inventories for which any change may impact the goodwill amount recorded.  If information becomes available which would indicate material adjustments are required to the preliminary purchase price allocation, such adjustments will be included in the purchase price allocation retrospectively.

The following table summarizes the preliminary purchase price allocation:allocation of the fair value of the assets acquired and the liabilities assumed at October 14, 2016:

Assets acquired:   
Accounts receivable $107,957 
Refurbished inventory  16,100 
Fixed assets - equipment  111,900 
Liabilities assumed:    
Current liabilities  
(57,957
)
Net assets acquired 
$
178,000
 
7
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  2,121 
Total assets acquired  9,297 
     
Liabilities assumed:    
Accounts payable  584 
Accrued expenses  172 
Total liabilities assumed  756 
Net purchase price 
$
8,541
 

The acquired 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 information in the table below summarizes the combined results of operations of ADDvantage Technologies Group and Triton Miami for the three months ended December 31, 2016 and December 31, 2015, on a pro forma basis, as though the companies had been combined as of October 1, 2015.  The unaudited pro forma earnings for the three months ended December 31, 2016 and December 31, 2015 were adjusted to include intangible amortization expense of $21 thousand and $0.1 million, respectively.  Incremental interest expense of $7 thousand and $44 thousand was included in the three months ended December 31, 2016 and December 31, 2015, as if the $4.0 million term loan used to help fund the acquisition had been entered into on October 1, 2015.  The unaudited pro forma earnings for the three months ended December 31, 2015 were adjusted to include $0.2 million of acquisition-related costs recorded as operating, selling, general and administrative expenses in the Consolidated Condensed Statements of Income.  The unaudited pro forma financial information is provided for informational purposes only and does not purport to be indicative of the Company’s combined results of operations which would actually have been obtained had the acquisition taken place on October 1, 2015 nor should it be taken as indicative of our future consolidated results of operations.

  
Three Months Ended
December 31,
 
  2016  2015 
  
(in thousands, except
per share amounts)
 
Sales $12,534  $11,173 
Income from operations $658  $64 
Net income (loss) $351  $(33)
Earnings (loss) per share:        
Basic $0.03  $(0.00)
Diluted $0.03  $(0.00)

8

Note 3 – Inventories
Inventories at June 30,December 31, 2016 and September 30, 20152016 are as follows:

  
December 31,
2016
  
September 30,
2016
 
New:      
Cable TV $14,541,111  $15,087,495 
Telco  225,177   – 
Refurbished and used:        
Cable TV  3,255,801   3,383,079 
 Allowance for excess and obsolete inventory
  (2,369,586)  (2,219,586)
Telco  6,538,654   5,625,213 
 Allowance for excess and obsolete inventory
  
(367,902
)  
(351,282
)
         
  
$
21,823,255
  
$
21,524,919
 
  
June 30,
2016
  
September 30,
2015
 
New:      
Cable TV $14,916,937  $16,255,487 
Refurbished:        
Cable TV  3,832,035   3,676,132 
Telco  6,125,195   6,426,005 
Allowance for excess and obsolete inventory  
(3,206,628
)  (2,756,628)
         
 $
21,667,539
  $23,600,996 

New inventory includes products purchased from the manufacturers plus “surplus-new”, which are unused products purchased from other distributors or multiple system operators.  Refurbished inventory 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 Telco new and refurbished inventory at December 31, 2016 includes $0.1 million and $1.1 million, respectively from the Triton Miami acquisition.

The Company regularly reviews the Cable TV 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 obsolete inventory, which increased the cost of sales during the ninethree months ended June 30,December 31, 2016 and 2015, by approximately $0.5$0.2 million.

For the Telco segment, any obsolete andor excess telecommunications inventory is generally processed through its recycling program when it is identified.  However, the Telco segment has identified certain inventory that more than likely will not be sold or that the cost will not be recovered when it is sold, and had not yet been processed through its recycling program.  Therefore, the Company has a $0.4 million reserve at December 31, 2016.
7
Note 4 – Investment In and Loans to Equity Method Investee

On March 10, 2016, the Company announced that it entered into aThe Company’s joint venture with YKTG Solutions, LLC (“YKTG Solutions”), which will primary purpose is to support decommission work on cell tower sites across 13 states in the northeast on behalf of a major U.S. wireless provider.  YKTG Solutions is owned 51% by YKTG, LLC and 49% by the Company, and YTKG Solutions is certified as a minority-based enterprise.  The joint venture is governed by an operating agreement for the purpose of completing the decommission project, but the operating agreement can be expanded to include other projects upon agreement by both owners.  The Company will accountaccounts for its investment in YKTG Solutions using the equity-method of accounting.

For its role in the decommission project, the Company will earnearns a management fee from YKTG Solutions based on billings.  The Company is financing the decommission project pursuant to the terms of a loan agreement between the Company and YKTG Solutions by providing a revolving line of credit.  The line of credit is for $4.0 million and is secured by all of the assets of YKTG Solutions, YKTG, LLC and the personal guarantees by the owners of YKTG, LLC.  The line of credit accrues interest at a fixed interest rate of 12% and is paid monthly.  At June 30,December 31, 2016, the amount outstanding under this line of credit was $1.6$2.3 million.  The management fee encompasses any interest earned on outstanding advances under the line of credit.

In the third quarter of 2016, YKTG Solutions completed another project with a major U.S. telecommunications provider, which yielded management fees and equity income of $38 thousand and $0.3 million, respectively.

During the nine months ended June 30, 2016, the Company recognized management fees of $0.2 million as other income and $31 thousand as interest income in the Consolidated Condensed Statements of Income related to the Company’s participation in both projects and the financing provided.

The Company’s carrying value in YKTG Solutions is reflected in investment in and loans to equity method investee in the Consolidated Condensed Balance Sheets.  During the ninethree months ended June 30,December 31, 2016, the Company advanced YKTG Solutions areceived payments, net of $1.6advances, totaling $1.0 million and recorded a net loss from the equity method of investment of $0.1 million, which resulted in the $1.5 million carrying value at June 30, 2016.YKTG Solutions.  At June 30,December 31, 2016, the Company's total estimate of maximum exposure to loss as a result of its relationship with YKTG Solutions was
9
approximately $4.0 million, which represents the Company’s equity investment and available and outstanding line of credit with this entity.  To help mitigate the risks associated with funding of the decommission project, the Company has obtained credit insurance for qualifying YKTG Solutions accounts receivable outstanding arising from the decommission project.  In addition, in July 2016, YKTG Solutions entered into a $2.0 million surety payment bond whereby the Company and YKTG, LLC will beare guarantors under the surety payment bond.

To date, this joint venture has incurred operating losses totaling $0.4 million and, as of December 31, 2016, the total assets of the joint venture are less than the amount it owes to the Company.  The U.S. wireless provider recently changed the process for assigning the various sites within the decommission project, which YKTG Solutions believes would result in a negative cash flow for the joint venture.  Accordingly, YKTG Solutions has 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.  As a result, for the three months ended December 31, 2016, the Company did not record management fees of $0.2 million related to the joint venture billings as the management fees may not be ultimately collectible from YKTG Solutions and adjusted the investment in and loans to equity method investee to the net realizable amount.

Note 5 – Intangible Assets

Intangible assets that have finite useful lives are amortized on a straight-line basis over their estimated useful lives ranging from 3 years to 10 years.  As a result of the Triton Miami acquisition, the Company has recorded additional intangible assets for customer relationships, trade name and non-compete agreements (see Note 2).  The intangible assets with their associated accumulated amortization amounts at June 30,December 31, 2016 and September 30, 20152016 are as follows:

  December 31, 2016 
  
Gross
  
Accumulated
Amortization
  
Net
 
Intangible assets:         
Customer relationships – 10 years $8,152,000  $(1,286,500) $6,865,500 
Technology – 7 years  1,303,000   (527,402)  775,598 
Trade name – 10 years  2,119,000   (383,264)  1,735,736 
Non-compete agreements – 3 years  
374,000
   
(248,151
)  
125,849
 
             
Total intangible assets 
$
11,948,000
  
$
(2,445,317
) 
$
9,502,683
 


  September 30, 2016 
  
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
 
             

  June 30, 2016 
  Gross  
Accumulated
Amortization
  Net 
Intangible assets:         
Customer relationships – 10 years $4,257,000  $(993,296) $3,263,704 
Technology – 7 years  1,303,000   (434,332)  868,668 
Trade name – 10 years  1,293,000   (301,699)  991,301 
Non-compete agreements – 3 years  254,000   
(197,553
)  
56,447
 
             
Total intangible assets $7,107,000  $
(1,926,880
) $
5,180,120
 
810

  September 30, 2015 
  Gross  
Accumulated
Amortization
  Net 
Intangible assets:         
Customer relationships – 10 years $4,257,000  $(674,023) $3,582,977 
Technology – 7 years  1,303,000   (294,725)  1,008,275 
Trade name – 10 years  1,293,000   (204,724)  1,088,276 
Non-compete agreements – 3 years  254,000   (134,055)  119,945 
             
Total intangible assets $7,107,000  $(1,307,527) $5,799,473 
Note 6 – Notes Payable and Line of Credit

Notes Payable

The Company has an Amended and Restated Revolving Credit and Term Loan Agreement (“Credit and Term Loan Agreement”) with its primary financial lender.  At June 30,December 31, 2016, the Company has twothree term loans outstanding under the Credit and Term Loan Agreement.

The first outstanding term loan has an outstanding balance of $1.0$0.9 million at June 30,December 31, 2016 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% (1.87%(2.03% at June 30,December 31, 2016) and is reset monthly.  This term loan is collateralized by inventory, accounts receivable, equipment and fixtures and general intangibles.

The second outstanding term loan has an outstanding balance of $3.5$3.2 million at June 30,December 31, 2016 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%.  This term loan is collateralized by inventory, accounts receivable, equipment and fixtures and general intangibles.

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 $3.8 million at December 31, 2016 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%. This term loan is collateralized by inventory, accounts receivable, equipment and fixtures and general intangibles.

Line of Credit

The Company has a $7.0 million Revolving Line of Credit (“Line of Credit”) under the Credit and Term Loan Agreement.  At June 30,December 31, 2016, the Company had no balance outstanding under the Line of Credit.  The Line of Credit requires quarterly interest payments based on the prevailing 30-day LIBOR rate plus 2.75% (3.24%(3.52% at June 30,December 31, 2016), and the interest rate is reset monthly.  Any future borrowings under the Line of Credit are due on March 31, 2017.  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 at June 30,December 31, 2016.  Among other financial covenants, the Line of Credit agreement provides that the Company maintain a fixed charge ratio of coverage (EBITDA to total fixed charges) of not less than 1.25 to 1.0, determined quarterly.  The Line of Credit is collateralized by inventory, accounts receivable, equipment and fixtures and general intangibles.

Fair Value of Debt

FASB ASC 820, Fair Value Measurements and Disclosures, defines fair value, establishes a consistent framework for measuring fair value 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.

9
·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.

11
The Company has determined the carrying value of its 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 rates at which loans with similar terms and maturities could currently be executed.  The Company then estimated the fair value of the fixed-rate term loanloans using cash flows discounted at the current market interest rate obtained.  The fair value of the Company’s second outstanding fixed rate loan was $3.5$3.2 million as of June 30,December 31, 2016.  The fair value of the Company’s third outstanding fixed rate loan was $3.8 million at December 31, 2016.

Note 7 – Earnings Per Share
Basic earnings per share are based on the sum of the average number of common shares outstanding and issuable, restricted and deferred shares.  Diluted earnings per share include any dilutive effect of stock options and restricted stock.  In computing the diluted weighted average shares, the average share price for the period is used in determining the number of shares assumed to be reacquired under the treasury stock method from the exercise of options.

Basic and diluted earnings per share for the three and nine months ended June 30,December 31, 2016 and 2015 are:
 Three Months Ended June 30,  Nine Months Ended June 30,  
Three Months Ended
December 31,
 
 2016  2015  2016  2015  2016  2015 
Net income attributable to common shareholders $
316,086
  $
637,134
  $
485,710
  $
1,287,312
  
$
217,161
  
$
23,994
 
                        
Basic weighted average shares  10,134,235   10,073,121   10,098,564   10,055,390   10,134,235   10,069,139 
Effect of dilutive securities:                        
Stock options  
1,372
   −   
4,490
   −   324   – 
Diluted weighted average shares  
10,135,607
   
10,073,121
   
10,103,054
   10,055,390   
10,134,559
   
10,069,139
 
        
Earnings per common share:
                        
Basic $0.03  $0.06  $0.05  $0.13  $0.02  $0.00 
Diluted $0.03  $0.06  $0.05  $0.13  $0.02  $0.00 

The table below includes information related to stock options that were outstanding at the end of each respective three and nine month periodsthree-month period ended June 30,December 31, 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 three and nine months ended June 30,December 31, or their effect would be anti-dilutive.

  
Three Months Ended
December 31,
 
  2016  2015 
Stock options excluded  520,000   535,000 
Weighted average exercise price of        
stock options $2.83  $2.88 
Average market price of common stock $1.76  $2.19 
  Three Months Ended June 30,  Nine Months Ended June 30, 
  2016  2015  2016  2015 
Stock options excluded  520,000   545,000   520,000   545,000 
Weighted average exercise price of                
stock options $2.83  $2.91  $2.83  $2.91 
Average market price of common stock $1.80  $2.37  $1.92  $2.41 
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Note 8 – Stock Option PlanStock-Based Compensation

Plan Information

The 2015 Incentive Stock Plan (the “Plan”) provides for awards of stock options and restricted stock to officers, directors, key employees and consultants.  Under the Plan, option prices will be set by the Compensation Committee and may not be less than the fair market value of the stock on the grant date.

12
At June 30,December 31, 2016, 1,100,415 shares of common stock were reserved for stock award grants under the Plan.  Of these reserved shares, 434,211 shares were available for future grants.

Stock Options

All share-based payments to employees, including grants of employee stock options, are recognized in the financial statements based on their grant date fair value over the requisite service period.  Compensation expense for share-based awards is included in the operating, selling, general and administrative expense section of the Company’s consolidated condensed statements of income.

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 grant.

A summary of the status of the Company's stock options at June 30,December 31, 2016 and changes during the ninethree months then ended is presented below:

  
Shares
  
Wtd. Avg.
Ex. Price
 
Outstanding at September 30, 2016  570,000  $2.73 
Granted  –   – 
Exercised  –   – 
Expired  –   – 
Forfeited  
–
   – 
Outstanding at December 31, 2016  
570,000
  $2.73 
         
Exercisable at December 31, 2016  403,334  $2.81 

  Shares  
Wtd. Avg.
Ex. Price
 
Outstanding at September 30, 2015  535,000  $2.88 
Granted  50,000   1.75 
Exercised  –   – 
Expired  (10,000)  5.78 
Forfeited  (5,000)   3.00 
Outstanding at June 30, 2016  570,000  $2.73 
         
Exercisable at June 30, 2016  403,334  $2.81 
The Company grantedNo nonqualified stock options of 50,000 shareswere granted for the ninethree months ended June 30,December 31, 2016.  The Company estimates the fair value of the options granted using the Black-Scholes option valuation model.  The Company estimates the expected term of options granted based on the historical grants and exercises of the Company’s options.  The Company estimates 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 bases the risk-free rate that is 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 term.  The Company has never paid cash dividends on its common stock and does not anticipate paying cash dividends in the foreseeable future.  Consequently, the Company uses 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 uses historical data to estimate the pre-vesting option forfeitures and records share-based expense only for those awards that are expected to vest.

The estimated fair value at date of grant for stock options utilizing the Black-Scholes option valuation model and the assumptions that were used in the Black-Scholes option valuation model for the nine months ended June 30, 2016 are as follows:
11

  
Nine Months Ended
June 30, 2016
 
Estimated fair value of options at grant date $34,350 
Black-Scholes model assumptions:    
Average expected life (years)  6 
Average expected volatility factor  38%
Average risk-free interest rate  1.75%
Average expected dividends yield  – 

Compensation expense related to unvested stock options recorded for the ninethree months ended June 30,December 31, 2016 is as follows:

 Nine Months Ended  Three Months Ended 
 June 30, 2016  December 31, 2016 
Fiscal year 2012 grant $13,062  $2,680 
Fiscal year 2014 grant $35,641  $6,788 
Fiscal year 2016 grant $3,498  $4,055 

The Company records compensation expense over the vesting term of the related options.  At June 30,December 31, 2016, compensation costs related to these unvested stock options not yet recognized in the consolidated condensed statements of income was $66,020.$31,014.

13
Restricted Stock
The Company granted restricted stock in March 2016 to its Board of Directors and a Company officer totaling 62,874 shares, which were valued at market value on the date of grant.  The shares are being held by the Company for 12 months and will be delivered to the directors at the end of the 12 month holding period.  The fair value of these shares at issuance totaled $105,000, which is being 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 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.  The unamortized portion of the restricted stock is included in prepaid expenses on the Company’s consolidated condensed balance sheets.

Note 9 – Segment Reporting

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

Cable Television (“Cable TV”)

The Company’s Cable TV segment sells new, surplus and re-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 also repairs cable television equipment for various cable companies.

12
Telecommunications (“Telco”)

The Company’s Telco segment primarily sells certified used telecommunications networking equipment from a broad range of manufacturers to customers primarily in North America.  In addition, this segment is a reseller of new telecommunications equipment from certain manufacturers.  Also, this segment offers its customers decommissioning services for surplus and obsolete equipment, which it in turn processes through its recycling services.  As a result of the Triton Miami acquisition (see Note 2), this segment also includes the Company’s newly formed Triton Datacom subsidiary, a provider of new and refurbished enterprise networking products, including IP desktop phones, enterprise switches and wireless routers.

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.
  Three Months Ended  Nine Months Ended 
  
June 30,
2016
  
June 30,
2015
  
June 30,
2016
  
June 30,
2015
 
Sales            
Cable TV $5,942,856  $6,752,224  $16,966,744  $19,377,515 
Telco  4,134,665   5,235,317   12,053,568   15,085,388 
Intercompany  
(17,279
)  
(85,150
)  
(123,215
)  
(356,815
)
Total sales $
10,060,242
  $
11,902,391
  $
28,897,097
  $
34,106,088
 
Gross profit                
Cable TV $2,126,744  $2,367,221  $5,612,691  $6,189,705 
Telco  1,339,407   
1,777,386
   
4,203,452
   
6,030,217
 
Total gross profit $
3,466,151
  $
4,144,607
  $
9,816,143
  $
12,219,922
 
                 
Income (loss) from operations                
Cable TV $528,651  $846,372  $981,770  $1,813,022 
Telco  
(124,788
)  
95,833
   
(152,943
)  
325,884
 
Total income from operations $
403,863
  $
942,205
  $
828,827
  $
2,138,906
 
  
June 30,
2016
  
September 30,
2015
 
Segment assets      
Cable TV $25,356,102  $26,494,430 
Telco  16,916,218   17,094,713 
Non-allocated  
9,385,712
   8,383,913 
Total assets $
51,658,032
  $51,973,056 

  Three Months Ended 
  
December 31,
2016
  
December 31,
2015
 
Sales      
Cable TV $6,574,824  $5,004,998 
Telco  5,539,977   3,317,730 
Intersegment  
(18,975
)  
(73,060
)
Total sales 
$
12,095,826
  
$
8,249,668
 
         
Gross profit        
Cable TV $2,400,342  $1,579,272 
Telco  
1,623,287
   
1,186,108
 
Total gross profit 
$
4,023,629
  
$
2,765,380
 
 
        
1314
Operating income (loss)      
Cable TV $908,982  $116,841 
Telco  (482,177)   (20,086) 
Total operating income 
$
426,805
  
$
96,755
 

  
December 31,
2016
  
September 30,
2016
 
Segment assets      
Cable TV $24,645,908  $25,201,697 
Telco  23,686,244   15,122,911 
Non-allocated  
8,294,350
   
9,943,551
 
Total assets 
$
56,626,502
  
$
50,268,159
 







15
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Special Note on Forward-Looking Statements

Certain statements in Management's Discussion and Analysis (“MD&A”), other than purely historical information, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements generally are identified by the words “estimates,” “projects,” “believes,” “plans,” “intends,” “will likely result,” and similar expressions.  Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. These statements are subject to a number of risks, uncertainties and developments beyond our control or foresight, including changes in the trends of the cable television industry, changes in the trends of the telecommunications industry, changes in our supplier agreements, technological developments, changes in the economic environment generally, the growth or formation of competitors, changes in governmental regulation or taxation, changes in our personnel and other such factors.  Our actual results, performance or achievements may differ significantly from the results, performance or achievement expressed or implied in the forward-looking statements.  We do not undertake any obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events.

Overview

The following MD&A is intended to help the reader understand the results of operations, financial condition, and cash flows of the Company.  MD&A is provided as a supplement to, and should be read in conjunction with the information presented elsewhere in this quarterly report on Form 10-Q and with the information presented in our annual report on Form 10-K for the year ended September 30, 2015,2016, which includes our audited consolidated financial statements and the accompanying notes to the consolidated financial statements.

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

Cable Television (“Cable TV”)

The Company’s Cable TV segment sells new, surplus and re-manufactured cable television equipment throughout North America, Central America and South America and, to a substantially lesser extent, other international regions that utilize the same technology.America.  In addition, this segment also repairs cable television equipment for various cable companies.

Telecommunications (“Telco”)

The Company’s Telco segment sells certified used telecommunications networking equipment from a broad range of manufacturers primarily in North America.  In addition, this segment is a reseller of new telecommunications equipment from certain manufacturers.  Also, this segment offers its customers decommissioning services for surplus and obsolete equipment, which it then processes through its recycling program.
Recent Business Developments

Investment in YKTG Solutions, LLC (“YKTG Solutions”)

On March 10, 2016, the Company announced that it entered into  As a joint venture, YKTG Solutions, which will support decommission work on cell tower sites across 13 states in the northeast on behalf of a major U.S. wireless provider.  YKTG Solutions is owned 51% by YKTG, LLC and 49% by ADDvantage Technologies Group, and YTKG Solutions has been certified as a minority-based enterprise.  The joint venture is governed by an operating agreement for the purpose of completing the decommission project, but the operating agreement can be expanded to include other projects upon agreement by both owners.
14

For its role in the decommission project, the Company will earn a management fee from YKTG Solutions based on billings.  The Company is financing the decommission project pursuant to the terms of a loan agreement between the Company and YKTG Solutions by providing a revolving line of credit.  The management fee encompasses any interest earned on outstanding advances under the loan agreement.  The Company anticipates that this project will be completed in our third quarter of 2017, and estimates that this project will generate a total of approximately $1 million in pretax income over the liferesult of the project.

InTriton Miami acquisition (see Note 2), this segment also includes the third quarterCompany’s newly formed Triton Datacom subsidiary, a provider of 2016, YKTG Solutions completed another project with a major U.S. telecommunications provider, which generated management fees to the Company of $38 thousandnew and equity earnings of $0.3 million.

For the nine months ended June 30, 2016, the Company recognized management fees of $0.2 million as other incomerefurbished enterprise networking products, including IP desktop phones, enterprise switches and $31 thousand as interest income from our participation in the projects and financing provided.  In addition, the Company recognized income from the equity method investment of $0.1 million for the three months ended June 30, 2016 and a loss of $0.1 million for the nine months ended June 30, 2016 for its role in YKTG Solutions.wireless routers.

Results of Operations

Comparison of Results of Operations for the Three Months Ended June 30,December 31, 2016 and June 30,December 31, 2015

Consolidated

Consolidated sales decreased $1.8increased $3.9 million before the impact of intercompany sales, or 15%48%, to $10.1$12.1 million for the three months ended June 30,December 31, 2016 from $11.9$8.2 million for the three months ended June 30,December 31, 2015.  The decrease
16
increase in sales was due to a decrease in sales from both the Cable TV and Telco segmentssegment of $0.8$1.6 million and $1.1$2.2 million, respectively.  Consolidated gross profit decreased $0.6increased $1.2 million, or 16%46%, to $3.5$4.0 million for the three months ended June 30,December 31, 2016 from $4.1$2.8 million for the same period last year.  The decreaseincrease in gross profit was due to a decrease in gross profit from both the Cable TV and Telco segmentssegment of $0.2$0.8 million and $0.4 million, respectively.

Consolidated operating, selling, general and administrative expenses include all personnel costs, which include fringe benefits, insurance and business taxes, as well as occupancy, communication and professional services, among other less significant cost categories.  Operating, selling, general and administrative expenses decreased $0.1increased $0.9 million, or 4%35%, to $3.1$3.6 million for the three months ended June 30,December 31, 2016 from $3.2$2.7 million for the same period last year.  This decreaseincrease in expenses was due to a decrease in the Telco segment of $0.2$0.9 million, partially offset by an increase inwhile the Cable TV segment of $0.1 million.remained relatively flat.

Other income (expense) consists of activity related to our investment in YKTG Solutions, including other income, interest income and equity earnings (losses), and interest expense related to our notes payable.  Other income, which is our fee for our role in the YKTG Solutions projects, for the three months ended June 30, 2016 was $0.1 million.  Equity income for the three months ended June 30, 2016 was $0.1 million.  Interest expense remained relatively flat at $0.1 million for both the three months ended June 30,December 31, 2016 compared to the same period last year.and December 31, 2015.

The provision for income taxes was $0.2$0.1 million for the three months ended June 30,December 31, 2016, or an effective rate of 38%34%, compared tofrom a provision for income taxes of $0.2 million$5 thousand for the three months ended June 30,December 31, 2015, or an effective rate of 27%17%.

Segment Results

Cable TV

Sales for the Cable TV segment decreased $0.8increased $1.6 million to $5.9$6.6 million for the three months ended June 30,December 31, 2016 from $6.7 million for the same period last year.  The decrease in sales was due primarily to a decrease in new equipment sales of $0.9 million, partially offset by an increase in repairs revenue of $0.1 million.  Gross margin was 36% for the three months ended June 30, 2016 and 35% for the same period last year.

15
Operating, selling, general and administrative expenses increased $0.1 million to $1.6 million for the three months ended June 30, 2016 from $1.5$5.0 million for the same period last year.  The increase in sales was due primarily to increased personnel costs primarily related to the acquisition of the net operating assets of Advantage Solutions, LLC.

Telco

Sales for the Telco segment decreased $1.1 million to $4.1 million for the three months ended June 30, 2016 from $5.2 million for the same period last year.  The decrease in sales primarily resulted from a decrease in used equipment sales of $1.8 million, partially offset by an increase in new equipment sales and recycling revenuerepair sales of $0.3$1.4 million and $0.4 million, respectively.  Therespectively, partially offset by a decrease in usedrefurbished equipment revenue of $0.2 million.  The increase in the new equipment sales was due primarily to the absence of $0.8 millionan overall increase in equipment sales to an end-user customer in the third quarter of 2015.  Gross margin was 32%demand for the three months ended June 30,December 31, 2016 and 33% for the same periodas compared to last year.

Operating, selling, general and administrative expenses decreased $0.2 million to $1.5 million Gross margin was 37% for the three months ended June 30,December 31, 2016 from $1.7 million for the same period last year.  The decrease in expenses was duecompared to decreased expenses related to the earn-out payments resulting from the Nave Communications acquisition of $0.1 million and decreased personnel costs of $0.1 million.

Comparison of Results of Operations for the Nine Months Ended June 30, 2016 and June 30, 2015

Consolidated

Consolidated sales decreased $5.2 million, or 15%, to $28.9 million for the nine months ended June 30, 2016 from $34.1 million for the nine months ended June 30, 2015.  The decrease in sales was in both the Cable TV and Telco segments of $2.4 million and $3.0 million, respectively.  Consolidated gross profit decreased $2.4 million, or 20%, to $9.8 million for the nine months ended June 30, 2016 from $12.2 million for the same period last year.  The decrease in gross profit was in both the Cable TV and Telco segment of $0.6 million and $1.8 million, respectively.

Consolidated operating, selling, general and administrative expenses include all personnel costs, which include fringe benefits, insurance and business taxes, as well as occupancy, communication and professional services, among other less significant cost categories.  Operating, selling, general and administrative expenses decreased $1.1 million, or 11%, to $9.0 million for the nine months ended June 30, 2016 from $10.1 million for the same period last year.  This decrease in expenses was primarily due to the Telco segment of $1.4 million, partially offset by an increase in expenses of $0.3 million from the Cable TV segment.

Other income and expense consists of activity related to our investment in YKTG Solutions, including other income, interest income and equity earnings (losses), and interest expense related to our notes payable.  Other income, which is our fee for our role in the YKTG Solutions projects, for the nine months ended June 30, 2016 was $0.2 million.  Equity losses for the nine months ended June 30, 2016 were $0.1 million.  Interest expense decreased $52 thousand to $184 thousand for the nine months ended June 30, 2016 from $236 thousand for the same period last year.

The provision for income taxes was $0.3 million for the nine months ended June 30, 2016, or an effective rate of 38%, from a provision for income taxes of $0.6 million for the nine months ended June 30, 2015, or an effective rate of 32%.

Segment Results
Cable TV

Sales for the Cable TV segment decreased $2.4 million to $17.0 million for the nine months ended June 30, 2016 from $19.4 million for the same period last year.  The decrease in sales was due primarily to a decrease in new equipment sales of $3.2 million, partially offset by an increase of $0.4 million in both refurbished equipment sales and repairs revenue.  The decline in equipment sales for the Cable TV segment primarily occurred in the first quarter of fiscal year 2016.  The Cable TV segment has experienced declining equipment sales over the past several years for the products we traditionally carry due to the continued consolidation of the cable television operators and fewer upgrades of the cable television networks and plant expansions.  For the first quarter of fiscal year 2016, our equipment sales
16
decreased to their lowest level during this downturn.  However, we believe some of the decrease in sales was due to uncertainties caused by pending merger activities.  In the second and third quarters of fiscal year 2016, we saw our equipment sales increase back to similar levels we experienced last year.   Gross margin was 33% for the nine months ended June 30, 2016 and 32% for the same period last year.

Operating, selling, general and administrative expenses increased $0.2 million to $4.6remained flat at $1.5 million for both the ninethree months ended June 30,December 31, 2016 from $4.4 million for the same period last year.  The increase was due primarily to increased personnel costs primarily related to the acquisition of the net operating assets of Advantage Solutions, LLC.and December 31, 2015.

Telco

Sales for the Telco segment decreased $3.0increased $2.2 million to $12.1$5.5 million for the ninethree months ended June 30,December 31, 2016 from $15.1$3.3 million for the same period last year.  The decreaseincrease in sales resulted from a decreasefor the Telco segment was due to an increase in used equipment sales of $4.4 million, partially offset by new equipment sales and recycling revenue increases of $0.9$2.0 million and $0.5$0.3 million, respectively.respectively, partially offset by a decrease of new equipment sales of $0.1 million.  The decreaseincrease in Telco equipment sales was primarily due primarily to Triton Datacom, which offset the absencecontinued lower sales from the remaining portion of $2.3 millionthis segment.  The Company is addressing the lower sales in equipmentthis segment by expanding its sales to anforce, targeting a broader end-user customer inbase, expanding the secondcapacity of the recycling program and third quarters of 2015.  In addition, intesting the first quarter of fiscal year 2016, we believe that the decreased sales volume was due largelyused equipment inventory prior to delays in capital expenditures from our major customers duesale to weak economic conditions and budgetary constraints.  Sales for the Telco segment did increase in the second and third quarters of fiscal year 2016 as compared to the first quarter as we saw these conditions improve.  end-user customers.

Gross margin was 35%29% for the ninethree months ended June 30,December 31, 2016 and 40%36% for the same period last year.three months ended December 31, 2015.  The decrease in gross margin was due primarily to decreasedlower gross margins from recycling revenue resultingequipment sales related to Triton Datacom and lower gross margins for refurbished equipment sales from the remaining portion of this segment as a result of an increased percentage of sales to resellers, which traditionally have lower commodity prices.gross margins, as compared to end-user customers.

Operating, selling, general and administrative expenses decreased $1.4increased $0.9 million to $4.3$2.1 million for the ninethree months ended June 30,December 31, 2016 from $5.7$1.2 million for the same period last year.  The decrease in expensesThis increase was due primarily to decreasedoperating expenses of $0.5 million from Triton Datacom and Triton Miami acquisition-related costs of $0.2 million.  In addition, for the three months ended December 31, 2015, the Company recorded a reduction in expense of $0.2 million for the March 2016 earn-out accrual related to the earn-out payments resulting primarily from the Nave Communications acquisition of $0.9 million and decreased personnel costs of $0.3 million.  In March 2016, we made our second annual earn-out payment for $0.2 million, which was equal to 70% of Nave Communications’ annual adjusted EBITDA in excess of $2.0 million per year (“Nave Earn-out”).  We will make the third and final Nave Earn-out payment in March 2017, which we estimate will be between $0.3 million and $1.0 million.Company acquisition.

17
Non-GAAP Financial Measure

EBITDA is a supplemental, non-GAAP financial measure.  EBITDA is defined as earnings before interest expense, income taxes, depreciation and amortization.  In addition, EBITDA as presented excludes other income, interest income and income from equity method investment.  EBITDA is presented below because this metric is used by the financial community as a method of measuring our financial performance and of evaluating the market value of companies considered to be in similar businesses.  Since EBITDA is not a measure of performance calculated in accordance with GAAP, it should not be considered in isolation of, or as a substitute for, net earnings as an indicator of operating performance.  EBITDA, as calculated below, may not be comparable to similarly titled measures employed by other companies.  In addition, EBITDA is not necessarily a measure of our ability to fund our cash needs.

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

 Three Months Ended June 30, 2016  Three Months Ended June 30, 2015 
 Cable TV  Telco  Total  Cable TV  Telco  Total  Three Months Ended December 31, 2016  Three Months Ended December 31, 2015 
                   Cable TV  Telco  Total  Cable TV  Telco  Total 
Income (loss) from
operations
 $528,651  $(124,788) $403,863  $846,372  $95,833  $942,205  $908,982  $(482,177) $426,805  $116,841  $(20,086) $96,755 
Depreciation  84,152   24,902   109,054   72,909   27,795   100,704   73,245   30,542   103,787   72,464   22,716   95,180 
Amortization  −   206,451   206,451   −   206,451   206,451   −   311,986   311,986   −   
206,451
   206,451 
EBITDA (a)
 $
612,803
  $
106,565
  $
719,368
  $
919,281
  $
330,079
  $
1,249,360
  
$
982,227
  
$
(139,649
)
 
$
842,578
  
$
189,305
  
$
209,081
  
$
398,386
 

(a)The Telco segment includes earn-out expenses of zero and $0.1 million for the three months ended June 30,December 31, 2016 and 2015, respectively,includes acquisition-related costs of $0.2 million related to the acquisition of Nave Communications.

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  Nine Months Ended June 30, 2016  Nine Months Ended June 30, 2015 
  Cable TV  Telco  Total  Cable TV  Telco  Total 
                   
Income (loss) from
  operations
 $981,770  $(152,943) $828,827  $1,813,022  $325,884  $2,138,906 
Depreciation  237,418   74,985   312,403   214,622   84,969   299,591 
Amortization  −   
619,353
   
619,353
   −   
619,354
   
619,354
 
EBITDA (a)
 $
1,219,188
  $
541,395
  $
1,760,583
  $
2,027,644
  $
1,030,207
  $
3,057,851
 
(a)The Telco segment includes earn-out expenses of zero and $0.8 million for the nine months ended June 30, 2016 and 2015, respectively, related to the acquisition of Nave Communications.Triton Miami.

Critical Accounting Policies

Note 1 to the Consolidated Financial Statements in Form 10-K for fiscal 20152016 includes a summary of the significant accounting policies or methods used in the preparation of our Consolidated Condensed Financial Statements.  Some of those significant accounting policies or methods require us to make estimates and assumptions that affect the amounts reported by us.  We believe the following items require the most significant judgments and often involve complex estimates.

General

The preparation of financial statements in conformity with United States generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  We base our estimates and judgments on historical experience, current market conditions, and various other factors we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.  Actual results could differ from these estimates under different assumptions or conditions.  The most significant estimates and assumptions relate to the carrying value of our inventory and, to a lesser extent, the adequacy of our allowance for doubtful accounts.are discussed below.

Inventory Valuation

Our position in the industry requires us to carry large inventory quantities relative to annual sales, but it also allows us to realize high overall gross profit margins on our sales.  We market our products primarily to MSOs, telecommunication providers and other users of cable television and telecommunication equipment who are seeking products for which manufacturers have discontinued production or cannot ship new equipment on a same-day basis as well as providing used products as an alternative to new products from the manufacturer.  Carrying these large inventory quantities represents our largest risk.

We are required to make judgments as to future demand requirements from our customers.  We regularly review the value of our inventory in detail with consideration given to rapidly changing technology which can significantly affect future customer demand.  For individual inventory items, we may carry inventory quantities that are excessive relative to market potential, or we may not be able to recover our acquisition costs for sales that we do make.  In order to
18
address the risks associated with our investment in inventory, we review inventory quantities on hand and reduce the carrying value when the loss of usefulness of an item or other factors, such as obsolete and excess inventories, indicate that cost will not be recovered when an item is sold.

Our inventories consist of new and used electronic components for the cable television industry.  Inventory is stated at the lower of cost and net realizable value, with cost determined using the weighted-average method.  Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.  At June 30,December 31, 2016, we had total inventory, before the reserve for excess and obsolete inventory, of $24.9$24.6 million, consisting of $14.9$14.8 million in new products and $10.0$9.8 million in used or refurbished products.

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For the Cable TV segment, our reserve at June 30,December 31, 2016 for excess and obsolete inventory was $3.2$2.4 million, which reflects an increase of approximately $0.5$0.2 million to reflect deterioration in the market demand of that inventory.  If actual market conditions are less favorable than those projected by management, and our estimates prove to be inaccurate, we could be required to increase our inventory reserve and our gross margins could be materially adversely affected.

For the Telco segment, we do not maintain an inventory reserve as we recycle any surplus and obsolete or excess equipment on hand is generally processed through our recycling program when it is identified.  However, the Telco segment has identified certain inventory that more than likely will not be sold or that the cost will not be recovered when it is sold, and had not yet been processed through its recycling program.  Therefore, the Company has a $0.4 million reserve at December 31, 2016.

Inbound freight charges are included in cost of sales.  Purchasing and receiving costs, inspection costs, warehousing costs, internal transfer costs and other inventory expenditures are included in operating expenses, since the amounts involved are not considered material.

Accounts Receivable Valuation

Management judgments and estimates are made in connection with establishing the allowance for doubtful accounts. Specifically, we analyze the aging of accounts receivable balances, historical bad debts, customer concentrations, customer credit-worthiness, current economic trends and changes in our customer payment terms.  Significant changes in customer concentration or payment terms, deterioration of customer credit-worthiness, or weakening in economic trends could have a significant impact on the collectability of receivables and our operating results.  If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, an additional provision to the allowance for doubtful accounts may be required.  The reserve for bad debts was approximately $0.3 million at June 30,December 31, 2016 and September 30, 2015.2016.   At June 30,December 31, 2016, accounts receivable, net of allowance for doubtful accounts, was $5.8$5.2 million.

Note Receivable Valuation

Included in investment in and loans to equity method investee as of December 31, 2016 is a note receivable from the Company's joint venture partner, YKTG Solutions, of $2.3 million.  To date, this joint venture has incurred operating losses totaling $0.4 million and, as of December 31, 2016, the total assets of the joint venture are less than the amount it owes to ADDvantage.  ADDvantage previously estimated that the decommission project with the U.S. wireless provider would generate approximately $1.0 million of pretax income over the life of the project, which was projected to be completed in our third quarter of 2017, based on an anticipated remaining volume of sites to decommission.  However, the U.S. wireless provider recently changed the process for assigning the various sites within the decommission project, which YKTG Solutions believes would result in a negative cash flow for the joint venture.  Accordingly, YKTG Solutions recently elected to suspend the acceptance of any further work under the decommission project unless and until the U.S. wireless provider resumes its previous process of assigning the sites under the decommission project.

Management judgements and estimates are made in connection with collection of the note receivable from the joint venture.  Specifically, since the decommission project on behalf of the U.S. wireless provider has been suspended, we determined the remaining billings and vendor payments to be incurred for this project to determine the ability of the joint venture to satisfy its obligations to the Company.  Based on this analysis, we determined that the remaining net assets of the joint venture will not satisfy the obligation to the Company.  Therefore, the Company did not record
19
management fees of $0.2 million for the three months ended December 31, 2016, as these management fees may not be ultimately collectible from YKTG Solutions.  The Company plans on pursuing collections from the joint venture partners under personal guarantee agreements the Company has with the joint venture partners.  After considering the outstanding accounts receivable from and remaining billings to the U.S. wireless provider, which is secured by a credit insurance policy, the remaining vendor payments to YKTG Solutions’ subcontractors, the personal guarantees the Company has with the joint venture partners and the equity losses already recorded, the Company adjusted the investment in and loans to equity method investee to the net realizable amount.

Goodwill

Goodwill represents the excess of purchase price of acquisitions over the acquisition date fair value of the net assets of businesses acquired.  Goodwill is not amortized and is tested at least annually for impairment.  We perform our annual analysis during the fourth quarter of each fiscal year and in any other period in which indicators of impairment warrant additional analysis.  Goodwill is evaluated for impairment by first comparing our estimate of the fair value of each reporting unit, or operating segment, with the reporting unit’s carrying value, including goodwill.  Our reporting units for purposes of the goodwill impairment calculation are the Cable TV operating segment and the Telco operating segment.

Management utilizes a discounted cash flow analysis to determine the estimated fair value of each reporting unit.  Significant judgments and assumptions including the discount rate and anticipated revenue growth rate, gross margins and operating expenses are inherent in these fair value estimates, which are based on historical operating results.  As a result, actual results may differ from the estimates utilized in our discounted cash flow analysis.  The use of alternate judgments and/or assumptions could result in the recognition of different levels of impairment charges in the financial statements.  If the carrying value of one of the reporting units exceeds its fair value, a computation of the implied fair value of goodwill would then be compared to its related carrying value. If the carrying value of the reporting unit’s goodwill exceeds the implied fair value of goodwill, an impairment loss would be recognized in the amount of the excess.  If an impairment charge is incurred, it would negatively impact our results of operations and financial position.

We performed our annual impairment test for both reporting units in the fourth quarter of 20152016 and determined that the fair value of our reporting units exceeded their carrying values.  Therefore, no impairment existed as of September 30, 2015.
2016.

We did not record a goodwill impairment for either of our two reporting units in the three year period ended September 30, 2015.2016.  Although we do not anticipate a future impairment charge, certain events could occur that might adversely affect the reported value of goodwill.  Such events could include, but are not limited to, economic or competitive conditions, a significant change in technology, the economic condition of the customers and industries we serve, a significant decline in the real estate markets we operate in, and a material negative change in the relationships with one or more of our significant customers or equipment suppliers.  If our judgments and assumptions change as a result
19
of the occurrence of any of these events or other events that we do not currently anticipate, our expectations as to future results and our estimate of the implied value of each reporting unit also may change.

As a result of the Triton Miami acquisition, the Company recorded additional goodwill of $2.1 million as the purchase price exceeded the acquisition date fair value of the net assets based on the preliminary purchase price allocation.  The Company is still working with its valuation experts on the valuation of identifiable intangibles and inventories for which any change may impact the goodwill amount recorded.  If information becomes available which would indicate material adjustments are required to the preliminary purchase price allocation, such adjustments will be included in the purchase price allocation retrospectively.

Intangibles

Intangible assets that have finite useful lives are amortized on a straight-line basis over their estimated useful lives ranging from 3 years to 10 years. 
ImpairmentAs a result of Long-Lived Assetsthe Triton Miami acquisition, the Company has recorded additional intangible assets for customer relationships of $3.9 million, trade name of $0.8 million and non-compete agreements of $0.1 million based on the preliminary purchase price allocation.

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 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.
20

In the third fiscal quarter of 2016, we concluded that there was a triggering event requiring assessment of impairment for certain of our intangible assets in connection with a new operating system implemented in our Telco segment.  The new operating system in our Telco segment enhanced the functionality of the overall software system and decreased reliance upon a former employee maintaining the predecessor system.  We did not record an impairment charge against the technology intangible asset as we determined that the carrying amount of the asset group did not exceed the sum of the undiscounted cash flows for the asset group.
Liquidity and Capital Resources

Cash Flows Provided by Operating Activities

We finance our operations primarily through operations, and have a revolvingbank line of credit of up to $7.0 million.  During the ninethree months ended June 30,December 31, 2016, we generated $2.7$1.8 million of cash flowflows from operations.  The cash flowflows from operations was favorably impacted by $1.5$0.7 million from a net decrease in inventory primarily from the Cable TV segment and by $0.6 million from a net increase in accounts payable due primarily to timing of inventory purchases.  The cash flow from operations was unfavorably impacted by $1.4 million from an increase in accounts receivable.

In March 2016, we paid $0.2 million for the second of three annual earn-out payments.  The earn-out is equal to 70% of Nave Communications adjusted EBITDA earnings in excess of $2.0 million for the twelve month period beginning March 1 each year.  We estimate the final remaining annual payment will be between $0.3 million and $1.0 million.inventory.

Cash Flows Used for Investing Activities

In MarchDuring the three months ended December 31, 2016, we paid $1.0cash used in investing activities was $5.7 million for the secondprimarily related to payments of three annual installment payments$6.6 million related to the Nave Communications owners for deferred consideration resulting from the Nave Communications acquisition.  The deferred consideration, which consistsacquisition of $3.0 million to be paid in equal annual installments over the three years, is recorded at its present value of $1.0 million at June 30, 2016.

On December 31, 2015, we acquired the net operating assets of a business for $0.2 million.  The acquisition isTriton Miami as discussed in Note 2 of the Notes to the Consolidated Condensed Financial Statements included in Item 1 of this Quarterly Report on Form 10-Q.10-Q, partially offset by cash generated from note receivable payments from the YKTG Solutions joint venture of $1.0 million.

20Cash Flows Provided by Financing Activities

During the ninethree months ended June 30,December 31, 2016, we funded YKTG Solutions, pursuantcash provided by financing activities was $3.5 million primarily due to cash borrowings of $4.0 million, partially offset by notes payable payments of $0.4 million.  Cash borrowings were due to a revolving linenew term loan of credit between$4.0 million under our Credit and Term Loan Agreement.  This term loan was used to assist in the Company and YKTG Solutions, for $1.6 million.  We plan to fund future advances to YKTG Solutions utilizing our cash flows from operations or our revolving line of credit.  The investment in YKTG Solutions is discussed in Note 4funding of the Notes to the Consolidated Condensed Financial Statements included in Item 1acquisition of this Quarterly Report on Form 10-Q.Triton Miami.
Cash Flows Used for Financing Activities
During the ninethree months ended June 30,December 31, 2016, we made principal payments of $0.7$0.4 million on our twothree term loans under our Credit and Term Loan Agreement with our primary lender.  The first term loan requires monthly payments of $15,334 plus accrued interest through November 2021.  Our second term loan is a five year term loan with a seven year amortization payment schedule with monthly principal and interest payments of $68,505 through March 2019.  Our third term loan, entered into in connection with the acquisition of Triton Miami, is a three year term loan with monthly principal and interest payments of $118,809 through October 2019.  The interest rate is a fixed rate of 4.40%.

At June 30,December 31, 2016, there was not a balance outstanding under our line of credit.  The lesser of $7.0 million or the total of 80% of the qualified accounts receivable plus 50% of qualified inventory is available to us under the revolving credit facility ($7.0 million at June 30,December 31, 2016).  Any future borrowings under the revolving credit facility are due at maturity.
maturity on March 31, 2017, for which the Company expects to renew the revolving credit facility for at least one year.

We believe that our cash and cash equivalents of $5.1$4.1 million at June 30,December 31, 2016, cash flowflows from operations and our existing line of credit provide sufficient liquidity and capital resources to meet our working capital and debt payment needs.

Item 4.  Controls and Procedures.

We maintain disclosure controls and procedures that are designed to ensure the information we are required to disclose in the reports we file or submit under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission.  Based on their evaluation as of June 30,December 31, 2016, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective to accomplish their objectives and to ensure the information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.


We completed the acquisition of Triton Miami effective October 14, 2016.  We are in the process of assessing and, to the extent necessary, making changes to the internal control over financial reporting of Triton Datacom to conform such internal control to that used in our other operations.  However, we are not yet required to evaluate, and have not yet fully evaluated, changes in Triton Datacom’s internal control over financial reporting.  Subject to the foregoing,
21
during the period covered by this report on Form 10-Q, there have been no changes in our internal control over financial reporting that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.


2122

PART II   OTHER INFORMATION


Item 6.  Exhibits.
  
Exhibit No.Description
  
31.1Certification of Chief Executive Officer under Section 302 of the Sarbanes Oxley Act of 2002.
  
31.2Certification of Chief Financial Officer under Section 302 of the Sarbanes Oxley Act of 2002.
  
32.1Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  
32.2Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  
101.INSXBRL Instance Document.
  
101.SCHXBRL Taxonomy Extension Schema.
  
101.CALXBRL Taxonomy Extension Calculation Linkbase.
  
101.DEFXBRL Taxonomy Extension Definition Linkbase.
  
101.LABXBRL Taxonomy Extension Label Linkbase.
  
101.PREXBRL Taxonomy Extension Presentation Linkbase.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


ADDVANTAGE TECHNOLOGIES GROUP, INC.
(Registrant)


Date:  August 9, 2016February 14, 2017                /s/ David L. Humphrey
David L. Humphrey,
President and Chief Executive Officer
(Principal Executive Officer)


Date:  August 9, 2016February 14, 2017                /s/ Scott A. Francis
Scott A. Francis,
Chief Financial Officer
(Principal Financial Officer)


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Exhibit Index

The following documents are included as exhibits to this Form 10-Q:

Exhibit No.Description
  
31.1Certification of Chief Executive Officer under Section 302 of the Sarbanes Oxley Act of 2002.
  
31.2Certification of Chief Financial Officer under Section 302 of the Sarbanes Oxley Act of 2002.
  
32.1Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  
32.2Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  
101.INSXBRL Instance Document.
  
101.SCHXBRL Taxonomy Extension Schema.
  
101.CALXBRL Taxonomy Extension Calculation Linkbase.
  
101.DEFXBRL Taxonomy Extension Definition Linkbase.
  
101.LABXBRL Taxonomy Extension Label Linkbase.
  
101.PREXBRL Taxonomy Extension Presentation Linkbase.
















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