ADDVANTAGE TECHNOLOGIES GROUP, INC.
See notes to unaudited consolidated condensed financial statements.
ADDVANTAGE TECHNOLOGIES GROUP, INC.
See notes to unaudited consolidated condensed financial statements.
ADDVANTAGE TECHNOLOGIES GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| | Three Months Ended December 31, | |
| | | | | | |
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, | |
| | 2017 | | | 2016 | |
Operating Activities | | | | | | |
Net income | | $ | 160,969 | | | $ | 485,710 | |
Adjustments to reconcile net income to net cash | | | | | | | | |
provided by operating activities: | | | | | | | | |
Depreciation | | | 328,673 | | | | 312,403 | |
Amortization | | | 953,871 | | | | 619,353 | |
Provision for excess and obsolete inventories | | | 433,579 | | | | 450,000 | |
Deferred income tax benefit | | | (157,000 | ) | | | (20,000 | ) |
Share based compensation expense | | | 130,390 | | | | 142,040 | |
Loss from equity method investment | | | – | | | | 77,021 | |
Changes in assets and liabilities: | | | | | | | | |
Accounts receivable | | | (629,035 | ) | | | (1,444,754 | ) |
Income tax receivable/payable | | | 379,083 | | | | (69,597 | ) |
Inventories | | | (420,337 | ) | | | 1,499,557 | |
Prepaid expenses | | | 14,078 | | | | (55,183 | ) |
Other assets | | | (424 | ) | | | (1,310 | ) |
Accounts payable | | | 908,972 | | | | 641,268 | |
Accrued expenses | | | 93,613 | | | | 25,776 | |
Other liabilities | | | 88,312 | | | | (6,127 | ) |
Net cash provided by operating activities | | | 2,284,744 | | | | 2,656,157 | |
| | | | | | | | |
Investing Activities | | | | | | | | |
Acquisition of net operating assets | | | (6,643,540 | ) | | | (178,000 | ) |
Guaranteed payments for acquisition of business | | | (1,000,000 | ) | | | (1,000,000 | ) |
Loan repayments from (investment in and loans to) equity method investee | | | 2,299,921 | | | | (1,592,742 | ) |
Purchases of property and equipment | | | (169,560 | ) | | | (199,715 | ) |
Disposals of property and equipment | | | 1,817 | | | | – | |
Net cash used in investing activities | | | (5,511,362 | ) | | | (2,970,457 | ) |
| | | | | | | | |
Financing Activities | | | | | | | | |
Proceeds from notes payable | | | 4,000,000 | | | | – | |
Debt issuance costs | | | (16,300 | ) | | | – | |
Payments on notes payable | | | (1,520,700 | ) | | | (652,912 | ) |
Net cash provided by (used in) financing activities | | | 2,463,000 | | | | (652,912 | ) |
| | | | | | | | |
Net decrease in cash and cash equivalents | | | (763,618 | ) | | | (967,212 | ) |
Cash and cash equivalents at beginning of period | | | 4,508,126 | | | | 6,110,986 | |
Cash and cash equivalents at end of period | | $ | 3,744,508 | | | $ | 5,143,774 | |
| | | | | | | | |
Supplemental cash flow information: | | | | | | | | |
Cash paid for interest | | $ | 256,882 | | | $ | 153,531 | |
Cash paid for (received from) income taxes | | $ | (200,000 | ) | | $ | 351,200 | |
| | | | | | | | |
Supplemental noncash investing activities: | | | | | | | | |
Deferred guaranteed payments for acquisition of business | | $ | (1,836,105 | ) | | $ | – | |
See notes to unaudited consolidated condensed financial statements.
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, 2016.
Reclassification
Certain prior period amounts have been reclassified to conform to the current period presentation. These reclassifications had no effect on previously reported results of operations or retained earnings.
Recently Issued Accounting Standards
In May 2014, the FASB issued ASU No. 2014-09: “Revenue from Contracts with Customers (Topic 606)”. This guidance was issued to clarify the principles for recognizing revenue and develop a common revenue standard for U.S. GAAP and International Financial Reporting Standards (“IFRS”). In addition, in August 2015, the FASB issued ASU No. 2015-14: “Revenue from Contracts with Customers (Topic 606). This update was issued to defer the effective date of ASU No. 2014-09 by one year. Therefore, the effective date of ASU No. 2014-09 is for annual reporting periods beginning after December 15, 2017. Management is evaluating the impact that ASU No. 2014-09 will have on the Company’s consolidated financial statements. Based on management’s initial assessment of ASU 2014-09, management does not expect that ASU No. 2014-09 will have a material impact on the Company’s consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02: “Leases (Topic 842)” which is intended to improve financial reporting about leasing transactions. The ASU will require organizations (“lessees”) that lease assets with lease terms of more than twelve months to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. Organizations that own the assets leased by lessees (“lessors”) will remain largely unchanged from current GAAP. In addition, the ASU will require disclosures to help investors and other financial statement users better understand the amount, timing and uncertainty of cash flows arising from leases. The guidance is effective for annual periods beginning after December 15, 2018 and early adoption is permitted. Management is evaluating the impact that ASU No. 2016-02 will have on the Company’s consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-09: “Compensation – Stock Compensation (Topic 718)” which is intended to improve employee share-based payment accounting. This ASU identifies areas for simplification involving several aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, an option to recognize gross stock compensation expense with actual forfeitures recognized as they occur, as well as certain classifications on the statement of cash flows. The guidance is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted. Management is evaluating the impact that ASU No. 2016-09 will have on the Company’s consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15: “Statement of Cash Flows (Topic 230) – Classification of Certain Cash Receipts and Cash Payments.” This updateASU addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. The amendments in this UpdateASU 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.
6In January 2017, the FASB issued ASU No. 2017-01: “Business Combinations (Topic 805) – Clarifying the definition of a Business.” This ASU clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The guidance is effective for annual periods beginning after December 15, 2017, including interim periods within those periods. Management is evaluating the impact that ASU 2017-01 will have on the Company’s consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04: “Intangibles – Goodwill and Other (Topic 350) – Simplifying the Test for Goodwill Impairment.” The standardThis ASU eliminates the second step in the goodwill impairment test which requires an entity to determine the implied fair value of the reporting unit’s goodwill. Instead, an entity should recognize an impairment loss if the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, with the impairment loss not to exceed the amount of goodwill allocated to the reporting unit. The standardThis ASU is effective for annual and interim goodwill impairment tests conducted in fiscal years beginning after December 15, 2019, with early adoption permitted. Management is evaluating the impact that ASU No. 2017-04 will have on the Company’s consolidated financial statements.
Note 2 – Acquisition
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 assets of Triton Miami, Inc. (“Triton Miami”). Triton Datacom is a provider of new and refurbished enterprise networking products, including IP desktop phones, enterprise switches and wireless routers. This acquisition, along with its retained management team, is part of the overall growth strategy of the Company in that it further diversifies the Company into the broader telecommunications industry by reselling refurbished products into the enterprise customer market.
The preliminary estimated purchase price for Triton Miami includes the following:
| | | | | | |
Upfront cash payment | | $ | 6,500,000 | | | $ | 6,500,000 | |
Deferred guaranteed payments (a) | | | 1,897,372 | | | | 1,836,105 | |
Working capital purchase adjustment | | | 143,540 | | | | 143,540 | |
Net purchase price | | $ | 8,540,912 | | | $ | 8,479,645 | |
(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. TheseAt June 30, 2017 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
thethese annual payments
ratably over the three-year period as compensation expense.
Under the acquisition method of accounting, the total estimated purchase price is allocated to Triton Miami’s tangible and intangible assets acquired and liabilities assumed based on their estimated fair values as of October 14, 2016, the effective date of the acquisition. Any remaining amount is recorded as goodwill.
The Company has one year from the date of the acquisition 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.7
The following summarizes the preliminaryfinal purchase price allocation of the fair value of the assets acquired and the liabilities assumed at October 14, 2016:
Assets acquired: | | (in thousands) | | | (in thousands) | |
Accounts receivable | | $ | 1,117 | | | $ | 1,117 | |
Inventories | | | 1,149 | | | | 1,149 | |
Property and equipment, net | | | 68 | | | | 68 | |
Other non-current assets | | | 1 | | | | 1 | |
Intangible assets | | | 4,841 | | | | 4,841 | |
Goodwill | | | 2,121 | | | | 2,060 | |
Total assets acquired | | | 9,297 | | | | 9,236 | |
| | | | | | | | |
Liabilities assumed: | | | | | | | | |
Accounts payable | | | 584 | | | | 584 | |
Accrued expenses | | | 172 | | | | 172 | |
Total liabilities assumed | | | 756 | | | | 756 | |
Net purchase price | | $ | 8,541 | | | $ | 8,480 | |
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 and nine months ended December 31,June 30, 2017 and June 30, 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,June 30, 2016 were adjusted to include intangible amortization expense of $0.1 million and December 31, 2015Triton Datacom earn-out expenses of $0.2 million. The pro forma earnings for the nine months ended June 30, 2017 and June 30, 2016 were adjusted to include intangible amortization expense of $21 thousand and $0.4 million, respectively, and Triton Datacom earn-out expenses of $19 thousand and $0.1 million, respectively. Incremental interest expense of $7 thousand and $44 thousand was included in the three months ended December 31,June 30, 2016 and December 31, 2015,$7 thousand and $0.1 million for the nine months ended June 30, 2017 and June 30, 2016, respectively, as if the $4.0 million term loan used to help fund the acquisition had been entered into on October 1, 2015. In addition, $21 thousand and $55 thousand of interest expense was included for the guaranteed payments to the Triton Miami owners for the three months and nine months ended June 30, 2016, respectively. The unaudited pro forma earnings for the three and nine months ended December 31, 2015June 30, 2016 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.Operations. 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, | | | Three Months Ended June 30, | | | Nine Months Ended June 30, | |
| | 2016 | | | 2015 | | | 2017 | | | 2016 | | | 2017 | | | 2016 | |
| | (in thousands, except per share amounts) | | | (in thousands, except per share amounts) | |
Sales | | $ | 12,534 | | | $ | 11,173 | | | $ | 12,990 | (1) | | $ | 13,838 | | | $ | 36,819 | | | $ | 35,220 | |
Income from operations | | $ | 658 | | | $ | 64 | | |
Income (loss) from operations | | | $ | (1 | )(1) | | $ | 477 | | | $ | 744 | | | $ | 1,221 | |
Net income (loss) | | $ | 351 | | | $ | (33 | ) | | $ | (67 | )(1) | | $ | 318 | | | $ | 295 | | | $ | 656 | |
Earnings (loss) per share: | | | | | | | | | | | | | | | | | | | | | | | | |
Basic | | $ | 0.03 | | | $ | (0.00 | ) | | $ | (0.01 | )(1) | | $ | 0.03 | | | $ | 0.03 | | | $ | 0.07 | |
Diluted | | $ | 0.03 | | | $ | (0.00 | ) | | $ | (0.01 | )(1) | | $ | 0.03 | | | $ | 0.03 | | | $ | 0.06 | |
(1) | These amounts are presented in the unaudited Consolidated Condensed Statement of Operations for the quarter ended June 30, 2017. |
Note 3 – Inventories
Inventories at December 31, 2016June 30, 2017 and September 30, 2016 are as follows:
| | | | | | | | June 30, 2017 | | | September 30, 2016 | |
New: | | | | | | | | | | | | |
Cable TV | | $ | 14,541,111 | | | $ | 15,087,495 | | | $ | 14,754,582 | | | $ | 15,087,495 | |
Telco | | | 225,177 | | | | – | | | | 406,404 | | | | – | |
Refurbished and used: | | | | | | | | | | | | | | | | |
Cable TV | | | 3,255,801 | | | | 3,383,079 | | | | 3,146,248 | | | | 3,383,079 | |
Allowance for excess and obsolete inventory | | | (2,369,586 | ) | | | (2,219,586 | ) | |
Telco | | | 6,538,654 | | | | 5,625,213 | | | | 7,337,679 | | | | 5,625,213 | |
Allowance for excess and obsolete inventory | | | (367,902 | ) | | | (351,282 | ) | |
Allowance for excess and obsolete inventory: | | | | | | | | | |
Cable TV | | | | (2,669,586 | ) | | | (2,219,586 | ) |
Telco | | | | (315,056 | ) | | | (351,282 | ) |
| | | | | | | | | | | | | | | | |
| | $ | 21,823,255 | | | $ | 21,524,919 | | |
Total inventories | | | $ | 22,660,271 | | | $ | 21,524,919 | |
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, 2016June 30, 2017 includes $0.1 million and $1.1$1.3 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 threenine months ended December 31, 2016 and 2015,June 30, 2017, by approximately $0.2 million.$0.4 million, to an allowance of $2.7 million at June 30, 2017.
For the Telco segment, any obsolete or 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 CompanyTelco segment has a $0.4$0.3 million reserveallowance at December 31, 2016.June 30, 2017.
Note 4 – Investment In and Loans to Equity Method Investee
The Company’sCompany entered into a joint venture, with YKTG Solutions, LLC (“YKTG Solutions”), in March 2016, whose 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 accounts for its investment in YKTG Solutions using the equity-method of accounting.
For its role inIn 2017, the decommission project, the Company earns 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 December 31, 2016, the amount outstanding under this line of credit was $2.3 million. The management fee encompasses any interest earned on outstanding advances under the line of credit.
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 three months ended December 31, 2016, the Company received payments, net of advances, totaling $1.0 million from YKTG Solutions. At December 31, 2016, the Company's total estimate of maximum exposure to loss as a result of its relationship with YKTG Solutions was
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, YKTG Solutions entered into a $2.0 million surety payment bond whereby the Company and YKTG, LLC are 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
The Company’s carrying value in YKTG Solutions was $0.3 million at June 30, 2017 and is reflected in investment in and loans to equity method investee in the Consolidated Condensed Balance Sheets. During the three and nine months ended June 30, 2017, the Company received payments, net of advances, totaling $0.1 million and $2.3 million, respectively from YKTG Solutions. In addition, YKTG Solutions entered into a $2.0 million surety payment bond
whereby the Company and YKTG, LLC are guarantors under the surety payment bond. Therefore, the Company’s total estimate of maximum exposure to loss as a result of its relationship with YKTG Solutions was the $0.3 million carrying value and the $2.0 million surety payment bond. Therefore, the Company’s total estimate of maximum exposure to loss as a result of its relationship with YKTG Solutions was the $0.3 million carrying value and the $2.0 million surety payment bond.
To date, this joint venture has incurred net operating losses, and, as of June 30, 2017, the total assets of the joint venture are less than the amount it owes to the Company under a line of credit that the Company provided to YKTG Solutions. Since YKTG Solutions has suspended any additional work for the U.S. wireless provider and YKTG Solutions will not have sufficient assets to repay the line of credit owed to the Company, the Company is pursuing collecting the outstanding line of credit from the YKTG, LLC owners under the personal guarantees they each have with the Company. For the three and nine months ended December 31, 2016,June 30, 2017, the Company did not record management fees of $0.2 million related to the joint venture billings or equity income totaling $12 thousand and $0.3 million, respectively, as the management fees maycollectability of the amounts are not be ultimately collectiblereasonably assured. After estimating the outstanding accounts receivable from and remaining billings to the U.S. wireless provider, the remaining vendor payments to YKTG SolutionsSolutions’ subcontractors, the personal guarantees the Company has with the joint venture partners and the equity losses already recorded, the Company has adjusted the investment in and loans to equity method investee to the net realizable amount.amount of $0.3 million.
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 December 31, 2016June 30, 2017 and September 30, 2016 are as follows:
| | December 31, 2016 | | | June 30, 2017 | |
| | Gross | | | Accumulated Amortization | | | Net | | | Gross | | | Accumulated Amortization | | | Net | |
Intangible assets: | | | | | | | | | | | | | | | | | | |
Customer relationships – 10 years | | $ | 8,152,000 | | | $ | (1,286,500 | ) | | $ | 6,865,500 | | | $ | 8,152,000 | | | $ | (1,694,890 | ) | | $ | 6,457,110 | |
Technology – 7 years | | | 1,303,000 | | | | (527,402 | ) | | | 775,598 | | | | 1,303,000 | | | | (620,473 | ) | | | 682,527 | |
Trade name – 10 years | | | 2,119,000 | | | | (383,264 | ) | | | 1,735,736 | | | | 2,119,000 | | | | (489,506 | ) | | | 1,629,494 | |
Non-compete agreements – 3 years | | | 374,000 | | | | (248,151 | ) | | | 125,849 | | | | 374,000 | | | | (282,333 | ) | | | 91,667 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total intangible assets | | $ | 11,948,000 | | | $ | (2,445,317 | ) | | $ | 9,502,683 | | | $ | 11,948,000 | | | $ | (3,087,202 | ) | | $ | 8,860,798 | |
| | 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 | |
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. Revolving credit and term loans created under the Credit and Term Loan Agreement are collateralized by inventory, accounts receivable, equipment and fixtures, general intangibles and a mortgage on certain property. Among other financial covenants, the Credit and Term Loan Agreement provides that the Company maintain a fixed charge coverage ratio (net cash flow to total fixed charges) of not less than 1.25 to 1.0 and a leverage ratio (total funded debt to EBITDA) of not more than 2.50 to 1.0. Both financial covenants are determined quarterly. The Company was not in compliance with the fixed charge ratio at June 30, 2017. The Company notified its primary financial lender of the covenant violation, and on August 8, 2017, the primary financial lender granted a waiver of the covenant violation under the Credit and Term Loan Agreement. Although the covenant violation was waived at June 30, 2017, the Company believes it may again be out of compliance with its debt covenants at September 30, 2017, and therefore has classified the $6.8 million outstanding balance of its term loans under the Credit and Term Loan Agreement, as current liabilities.
At December 31, 2016,June 30, 2017, the Company has three term loans outstanding under the Credit and Term Loan Agreement.
The first outstanding term loan has an outstanding balance of $0.9$0.8 million at December 31, 2016June 30, 2017 and is due on November 30, 2021, with monthly principal payments of $15,334 plus accrued interest. The interest rate is the prevailing 30-day LIBOR rate plus 1.4% (2.03%(2.48% at December 31, 2016)June 30, 2017) 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 $3.2$2.9 million at December 31, 2016June 30, 2017 and is due March 4, 2019, with monthly principal and interest payments of $68,505, with the balance due at maturity. It is a five year term loan with a seven year amortization payment schedule with a fixed interest rate of 4.07%. 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$3.1 million at December 31, 2016June 30, 2017 and is due on October 14, 2019, with monthly principal and interest payments of $118,809. The interest rate on the term loan is a fixed interest rate of 4.40%. 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. On March 31, 2017, the Company executed the Eighth Amendment under the Credit and Term Loan Agreement. This amendment extended the Revolving Line of Credit (“Line of Credit”) maturity to March 30, 2018, while other terms of the Line of Credit remained essentially the same. At December 31, 2016,June 30, 2017, the Company had no balance outstanding under the Line of Credit. The Line of Credit requires quarterly interest payments based on the prevailing 30-day LIBOR rate plus 2.75% (3.52%(3.97% at December 31, 2016)June 30, 2017), and the interest rate is reset monthly. Any future borrowings under the Line of Credit are due on March 31, 2017.30, 2018. Future borrowings under the Line of Credit are limited to the lesser of $7.0 million or the net balance of 80% of qualified accounts receivable plus 50% of qualified inventory. Under these limitations, the Company’s total available Line of Credit borrowing base was $7.0 million at 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.June 30, 2017.
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. |
· | 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. |
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 loanloans 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 loans using cash flows discounted at the current market interest rate obtained. The fair value of the Company’s second outstanding fixed rate loan was $3.2$2.8 million as of December 31, 2016.June 30, 2017. The fair value of the Company’s third outstanding fixed rate loan was $3.8$3.1 million at December 31, 2016.June 30, 2017.
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 December 31,June 30, 2017 and 2016 and 2015 are:
| | Three Months Ended December 31, | | | Three Months Ended June 30, | | | Nine Months Ended June 30, | |
| | 2016 | | | 2015 | | | 2017 | | | 2016 | | | 2017 | | | 2016 | |
Net income attributable to common shareholders | | $ | 217,161 | | | $ | 23,994 | | |
Net income (loss) attributable to common shareholders | | | $ | (66,863 | ) | | $ | 316,086 | | | $ | 160,969 | | | $ | 485,710 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Basic weighted average shares | | | 10,134,235 | | | | 10,069,139 | | | | 10,192,244 | | | | 10,134,235 | | | | 10,160,017 | | | | 10,098,564 | |
Effect of dilutive securities: | | | | | | | | | | | | | | | | | | | | | | | | |
Stock options | | | 324 | | | | – | | | | – | | | | 1,372 | | | | 565 | | | | 4,490 | |
Diluted weighted average shares | | | 10,134,559 | | | | 10,069,139 | | | | 10,192,244 | | | | 10,135,607 | | | | 10,160,582 | | | | 10,103,054 | |
| | | | | | | | | |
Earnings per common share: | | | | | | | | | |
Earnings (loss) per common share: | | | | | | | | | | | | | | | | | |
Basic | | $ | 0.02 | | | $ | 0.00 | | | $ | (0.01 | ) | | $ | 0.03 | | | $ | 0.02 | | | $ | 0.05 | |
Diluted | | $ | 0.02 | | | $ | 0.00 | | | $ | (0.01 | ) | | $ | 0.03 | | | $ | 0.02 | | | $ | 0.05 | |
The table below includes information related to stock options that were outstanding at the end of each respective three-month periodthree and nine month periods ended December 31,June 30, 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 December 31,June 30, or their effect would be anti-dilutive.
| | Three Months Ended December 31, | | | Three Months Ended June 30, | | | Nine Months Ended June 30, | |
| | 2016 | | | 2015 | | | 2017 | | | 2016 | | | 2017 | | | 2016 | |
Stock options excluded | | | 520,000 | | | | 535,000 | | | | 700,000 | | | | 520,000 | | | | 650,000 | | | | 520,000 | |
Weighted average exercise price of | | | | | | | | | | | | | | | | | | | | | | | | |
stock options | | $ | 2.83 | | | $ | 2.88 | | | $ | 2.54 | | | $ | 2.83 | | | $ | 2.60 | | | $ | 2.83 | |
Average market price of common stock | | $ | 1.76 | | | $ | 2.19 | | | $ | 1.72 | | | $ | 1.80 | | | $ | 1.77 | | | $ | 1.92 | |
Note 8 – Stock-Based Compensation
Plan Information
The 2015 Incentive Stock Plan (the “Plan”) provides for awards of stock options and restricted stock to officers, directors, key employees and consultants. Under the Plan, option prices will be set by the Compensation Committee and may not be less than the fair market value of the stock on the grant date.
At December 31, 2016,June 30, 2017, 1,100,415 shares of common stock were reserved for stock award grants under the Plan. Of these reserved shares, 434,211246,202 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.operations.
Stock options are valued at the date of the award, which does not precede the approval date, and compensation cost is recognized on a straight-line basis over the vesting period. Stock options granted to employees generally become exercisable over a three, four or five-year period from the date of grant and generally expire ten years after the date of grant. Stock options granted to the Board of Directors generally become exercisable on the date of grant and generally expire ten years after the grant.
A summary of the status of the Company's stock options at December 31, 2016June 30, 2017 and changes during the threenine months then ended is presented below:
| | Shares | | | Wtd. Avg. Ex. Price | | | Shares | | | Wtd. Avg. Ex. Price | |
Outstanding at September 30, 2016 | | | 570,000 | | | $ | 2.73 | | | | 570,000 | | | $ | 2.73 | |
Granted | | | – | | | | – | | | | 140,000 | | | | 1.80 | |
Exercised | | | – | | | | – | | | | – | | | | – | |
Expired | | | – | | | | – | | | | (10,000 | ) | | | 3.45 | |
Forfeited | | | – | | | | – | | | | – | | | | – | |
Outstanding at December 31, 2016 | | | 570,000 | | | $ | 2.73 | | |
Outstanding at June 30, 2017 | | | | 700,000 | | | $ | 2.54 | |
| | | | | | | | | | | | | | | | |
Exercisable at December 31, 2016 | | | 403,334 | | | $ | 2.81 | | |
Exercisable at June 30, 2017 | | | | 526,667 | | | $ | 2.78 | |
NoThe Company granted nonqualified stock options were grantedof 140,000 shares for the threenine months ended December 31, 2016.June 30, 2017. 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, 2017 are as follows:
| | Nine Months Ended June 30, 2017 | |
Estimated fair value of options at grant date | | $ | 96,690 | |
Black-Scholes model assumptions: | | | | |
Average expected life (years) | | | 6 | |
Average expected volatility factor | | | 35 | % |
Average risk-free interest rate | | | 2.4 | % |
Average expected dividends yield | | | – | |
Compensation expense related to unvested stock options recorded for the threenine months ended December 31, 2016June 30, 2017 is as follows:
| | Three Months Ended | | |
| | December 31, 2016 | | | Nine Months Ended June 30, 2017 | |
Fiscal year 2012 grant | | $ | 2,680 | | | $ | 5,359 | |
Fiscal year 2014 grant | | $ | 6,788 | | | $ | 13,575 | |
Fiscal year 2016 grant | | $ | 4,055 | | | $ | 12,166 | |
Fiscal year 2017 grant | | | $ | 16,320 | |
The Company records compensation expense over the vesting term of the related options. At December 31, 2016,June 30, 2017, compensation costs related to these unvested stock options not yet recognized in the consolidated condensed statements of incomeoperations was $31,014.$93,808.
Restricted Stock
The Company granted restricted stock in March 20162017 to its Board of Directors and a Company officer totaling 62,87458,009 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 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.
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 | |
| | | | | | |
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 | |
| | | | | | | | |
Operating income (loss) | | | | | | |
Cable TV | | $ | 908,982 | | | $ | 116,841 | |
Telco | | | (482,177 | ) | | | (20,086 | ) |
Total operating income | | $ | 426,805 | | | $ | 96,755 | |
| | | | | | |
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 | |
| | Three Months Ended | | | Nine Months Ended | |
| | June 30, 2017 | | | June 30, 2016 | | | June 30, 2017 | | | June 30, 2016 | |
Sales | | | | | | | | | | | | |
Cable TV | | $ | 6,037,503 | | | $ | 5,942,856 | | | $ | 17,609,293 | | | $ | 16,966,744 | |
Telco | | | 6,954,787 | | | | 4,134,665 | | | | 18,858,229 | | | | 12,053,568 | |
Intercompany | | | (2,300 | ) | | | (17,279 | ) | | | (86,950 | ) | | | (123,215 | ) |
Total sales | | $ | 12,989,990 | | | $ | 10,060,242 | | | $ | 36,380,572 | | | $ | 28,897,097 | |
| | | | | | | | | | | | | | | | |
Gross profit | | | | | | | | | | | | | | | | |
Cable TV | | $ | 1,874,513 | | | $ | 2,126,744 | | | $ | 6,029,913 | | | $ | 5,612,691 | |
Telco | | | 1,881,438 | | | | 1,339,407 | | | | 5,514,096 | | | | 4,203,452 | |
Total gross profit | | $ | 3,755,951 | | | $ | 3,466,151 | | | $ | 11,544,009 | | | $ | 9,816,143 | |
| | | | | | | | | | | | | | | | |
Income (loss) from operations | | | | | | | | | | | | | | | | |
Cable TV | | $ | 414,383 | | | $ | 528,651 | | | $ | 1,586,013 | | | $ | 981,770 | |
Telco | | | (415,459 | ) | | | (124,788 | ) | | | (1,073,280 | ) | | | (152,943 | ) |
Total income (loss) from operations | | $ | (1,076 | ) | | $ | 403,863 | | | $ | 512,733 | | | $ | 828,827 | |
| | June 30, 2017 | | | September 30, 2016 | |
Segment assets | | | | | | |
Cable TV | | $ | 25,316,017 | | | $ | 25,201,697 | |
Telco | | | 24,282,315 | | | | 15,122,911 | |
Non-allocated | | | 6,129,555 | | | | 9,943,551 | |
Total assets | | $ | 55,727,887 | | | $ | 50,268,159 | |