WASHINGTON, D.C. 20549
ADDvantage Technologies Group, Inc.
ADDVANTAGE TECHNOLOGIES GROUP, INC.
Item 1. Financial Statements.
See notes to unaudited consolidated condensed financial statements.
ADDVANTAGE TECHNOLOGIES GROUP, INC.
See notes to unaudited consolidated condensed financial statements.
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” or “we”). 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, 2017.2018.
conditions, and reasonable and supportable forecasts. Entities will now use forward-looking information to better form their credit loss estimates. This ASU also requires enhanced disclosures to help financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an entity’s portfolio. ASU 2016-13 is effective for annual periods beginning after December 15, 2019, including interim periods within those fiscal periods. Entities may adopt earlier as of the fiscal year beginning after December 15, 2018, including interim periods within those fiscal years. We are currently in the process of evaluating this new standard update.
In August 2016, the FASB issued ASU 2016-15: “Statement of Cash Flows (Topic 230) – Classification of Certain Cash Receipts and Cash Payments.” This ASU addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. The amendments in this ASU are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. Based on management’s initial assessment of ASU No. 2016-15, the cash flows associated with guaranteed payments for acquisition of businesses will be reported as a financing activity in the Statement of Cash Flows, as opposed to an investing activity where it is currently reported.6
In January 2017, the FASB issued ASU 2017-04: “Intangibles – Goodwill and Other (Topic 350) – Simplifying the Test for Goodwill Impairment.” This ASU eliminates the second step in the goodwill impairment test which requires an entity to determine the implied fair value of the reporting unit’s goodwill. Instead, an entity should recognize an impairment loss if the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, with the impairment loss not to exceed the amount of goodwill allocated to the reporting unit. This ASU is effective for annual and interim goodwill impairment tests conducted in fiscal years beginning after December 15, 2019, with early adoption permitted. The Company is currently evaluating methodology changes that may be required in performing its annual goodwill impairment assessment in connection with this ASU and any impact that these changes may have on the Company’s financial statements.
Reclassification
Certain prior period amounts have been reclassified to conform to the current year presentation. These reclassifications had no effect on previously reported results of operations or retained earnings.
Note 2 – Revenue Recognition
On October 1, 2018, the Company adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606), using the modified retrospective transition method. Management determined that there was no cumulative effect adjustment to the consolidated financial statements and the adoption of the standard did not require any adjustments to the consolidated financial statements for prior periods. Under the guidance of the standard, revenue is recognized at the time a good or service is transferred to a customer and the customer obtains control of that good or receives the service performed. Substantially all of the Company’s sales arrangements with customers are short-term in nature involving single performance obligations related to the delivery of goods or repair of equipment and generally provide for transfer of control at the time of shipment to the customer. The Company generally permits returns of product or repaired equipment due to defects; however, returns are historically insignificant.
The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for its products or repair services. The following steps are applied in determining the amount and timing of revenue recognition:
| 1. | Identification of a contract with a customer is a sales arrangement involving a purchase order issued by the customer stating the goods to be transferred. Payment terms are generally net due in 30 days. Discounts on sales arrangements are generally not provided. Credit worthiness is determined by the Company based on payment experience and financial information available on the customer. |
| 2. | Identification of performance obligations in the sales arrangement which is predominantly the promise to transfer goods, repair services or recycled items to the customer. |
| 3. | Determination of the transaction price which is specified in the purchase order based on product pricing negotiated between the Company and the customer. |
| 4. | Allocate the transaction price to performance obligations. Substantially all the contracts are single performance obligations and the allocated purchase price is the transaction price. |
| 5. | Recognition of revenue which predominantly occurs upon completion of the performance obligation and transfer of control. Transfer of control generally occurs at the point the Company ships the sold or repaired product from its warehouse locations. |
The Company’s principal revenues are from sales of Cable TV and Telco equipment, Cable TV repair services and Telco recycled equipment. Sales are primarily to customers in the United States. International sales are made to customers in Central America, South America and, to a substantially lesser extent, other international regions that utilize the same technology which totaled approximately $0.9 million and $1.2 million in the three months ended December 31, 2018 and 2017, respectively.
The Company’s customers include multiple system operators, resellers and direct sales to end-user customers. Sales to the Company’s largest customer totaled approximately 5% of consolidated revenues.
Our revenues by type were as follows:
| | | Three Months Ended December 31, | |
| | | 2018 | | | 2017 | |
| Equipment sales | | | | | | |
| Cable TV | | $ | 4,052,140 | | | $ | 5,114,291 | |
| Telco | | | 6,609,642 | | | | 5,691,320 | |
Intersegment | | | (40,242 | ) | | | (180 | ) |
| Recycle revenue | | | | | | | | |
| Cable TV | | ‒ | | | ‒ | |
| Telco | | | 240,697 | | | | 767,221 | |
| Repair revenue | | | | | | | | |
| Cable TV | | | 410,049 | | | | 712,113 | |
| Telco | | ‒ | | | ‒ | |
| | | $ | 11,272,286 | | | $ | 12,284,765 | |
Note 3 – Sale and Leaseback of Assets
In October 2018, the Company entered into an agreement with David Chymiak to sell the Broken Arrow, Oklahoma facility. Mr. Chymiak is the Chief Technology Officer, President of Tulsat LLC (“Tulsat”), director, and substantial shareholder of the Company. The sale agreement provided for a purchase price of $5,000,000 payable in cash at closing. The sale closed on November 29, 2018, which generated a pretax gain of approximately $1.4 million.
In connection with the sale of the Broken Arrow, Oklahoma facility, Tulsat, which is one of the subsidiaries contained in the Cable TV segment, entered into a ten-year lease with Mr. Chymiak for a monthly rent of $44,000, or $528,000 per year. Tulsat, as tenant, will be responsible for most ongoing expenses related to the facility, including property tax, insurance and maintenance. As a result of the leaseback, the pretax gain of $1.4 million was deferred over the lease period and is reported in Deferred gain in the Consolidated Condensed Balance Sheet.
Note 4 – Disposition of Assets
In December 2018, the Company entered into an agreement for the sale of our Cable TV segment business to a company controlled by David Chymiak for $10.3 million. This sale is subject to shareholder approval, which the Company anticipates occurring in our third fiscal quarter of 2019. The purchase price will consist of $3.9 million of cash and a $6.4 million promissory note to be paid in semi-annual installments over five years with an interest rate of 6.0%. If the sale receives shareholder approval, the Company estimates that this sale will result in a pretax loss of approximately $2.8 million. In addition, if the sale receives shareholder approval, the Company will accelerate the remaining deferred gain of $1.4 million from the sale of the Broken Arrow, Oklahoma facility (see Note 3 – Sale and Leaseback of Assets).
Note 5 – Inventories
Inventories at December 31, 20172018 and September 30, 20172018 are as follows:
| | | | | | | | | December 31, 2018 | | | September 30, 2018 | |
| New: | | | | | | | | | | | | |
| Cable TV | | $ | 13,667,532 | | | $ | 14,014,188 | | | $ | 12,056,677 | | | $ | 12,594,138 | |
| Telco | | | 1,225,888 | | | | 990,218 | | | | 1,612,763 | | | | 1,371,545 | |
| Refurbished and used: | | | | | | | | | | | | | | | | |
| Cable TV | | | 3,217,494 | | | | 3,197,426 | | | | 2,968,626 | | | | 2,981,413 | |
| Telco | | | 7,396,225 | | | | 7,071,277 | | | | 6,927,427 | | | | 6,905,946 | |
| Allowance for excess and obsolete inventory: | | | | | | | | | | | | | | | | |
| Cable TV | | | (2,450,000 | ) | | | (2,300,000 | ) | | | (4,150,000 | ) | | | (4,150,000 | ) |
| Telco | | | (650,389 | ) | | | (639,289 | ) | | | (843,000 | ) | | | (815,000 | ) |
| | | | | | | | | | | | | | | | | |
| | | $ | 22,406,750 | | | $ | 22,333,820 | | | $ | 18,572,493 | | | $ | 18,888,042 | |
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 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 by zero and $0.2 million during the three months ended December 31, 2018 and 2017, and 2016.respectively, to an allowance of $4.2 million at December 31, 2018.
ForIn the three months ended December 31, 2018 and 2017, 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 Company has a $0.7$0.8 million reserveallowance at December 31, 2017.2018. In the three months ended December 31, 2018, the Company increased the allowance by $30 thousand. The Company We also reviewed the cost of inventories against estimated net realizable value and recorded a lower of cost or net realizable value charge for the three months ended December 31, 20172018 and December 31, 20162017 of $12 thousandzero and $33$12 thousand, respectively, for inventories that have a cost in excess of estimated net realizable value.
Note 36 – Intangible Assets
The intangible assets with their associated accumulated amortization amounts at December 31 2017, 2018 and September 30, 20172018 are as follows:
| | | December 31, 2018
| |
| | | Gross
| | | Accumulated Amortization | | | Net
| |
| Intangible assets: | | | | | | | | | |
| Customer relationships – 10 years | | $ | 8,152,000 | | | $ | (2,917,689 | ) | | $ | 5,234,311 | |
| Trade name – 10 years | | | 2,119,000 | | | | (807,355 | ) | | | 1,311,645 | |
| Non-compete agreements – 3 years | | | 374,000 | | | | (342,333 | ) | | | 31,667 | |
| | | | | | | | | | | | | |
| Total intangible assets | | $ | 10,645,000 | | | $ | (4,067,377 | ) | | $ | 6,577,623 | |
| | | December 31, 2017 | |
| | | Gross | | | Accumulated Amortization | | | Net | |
| Intangible assets: | | | | | | | | | |
| Customer relationships – 10 years | | $ | 8,152,000 | | | $ | (2,102,491 | ) | | $ | 6,049,509 | |
| Technology – 7 years | | | 1,303,000 | | | | (713,545 | ) | | | 589,455 | |
| Trade name – 10 years | | | 2,119,000 | | | | (595,455 | ) | | | 1,523,545 | |
| Non-compete agreements – 3 years | | | 374,000 | | | | (302,333 | ) | | | 71,667 | |
| | | | | | | | | | | | | |
| Total intangible assets | | $ | 11,948,000 | | | $ | (3,713,824 | ) | | $ | 8,234,176 | |
| | | September 30, 2017 | |
| | | Gross | | | Accumulated Amortization | | | Net | |
| Intangible assets: | | | | | | | | | |
| Customer relationships – 10 years | | $ | 8,152,000 | | | $ | (1,898,691 | ) | | $ | 6,253,309 | |
| Technology – 7 years | | | 1,303,000 | | | | (667,009 | ) | | | 635,991 | |
| Trade name – 10 years | | | 2,119,000 | | | | (542,480 | ) | | | 1,576,520 | |
| Non-compete agreements – 3 years | | | 374,000 | | | | (292,333 | ) | | | 81,667 | |
| | | | | | | | | | | | | |
| Total intangible assets | | $ | 11,948,000 | | | $ | (3,400,513 | ) | | $ | 8,547,487 | |
| | | | | | | | | | | | | |
Note 4 – Income Taxes
The Tax Cuts and Jobs Act was enacted on December 22, 2017. One of the provisions of this legislation was that it reduced the corporate income tax rates for the Company from 34% to 21% effective beginning January 1, 2018. Since the Company’s fiscal year begins on October 1, this results in a blended rate for 2018 of 24.3%. Due to this legislation, the Company has remeasured its deferred tax balances at the reduced enacted tax rates as well as utilized the lower anticipated effective income tax rate for first quarter results. The provision recorded related to the remeasurement of the Company’s deferred tax balances was $0.4 million. The accounting for the effects of the rate change on the deferred tax balances is complete and no provisional amounts were recorded for the new legislation.
| | | September 30, 2018 | |
| | | Gross | | | Accumulated Amortization | | | Net
| |
| Intangible assets: | | | | | | | | | |
| Customer relationships – 10 years | | $ | 8,152,000 | | | $ | (2,713,890 | ) | | $ | 5,438,110 | |
| Trade name – 10 years | | | 2,119,000 | | | | (754,380 | ) | | | 1,364,620 | |
| Non-compete agreements – 3 years | | | 374,000 | | | | (332,332 | ) | | | 41,668 | |
| | | | | | | | | | | | | |
| Total intangible assets | | $ | 10,645,000 | | | $ | (3,800,602 | ) | | $ | 6,844,398 | |
| | | | | | | | | | | | | |
Note 57 – Notes Payable and Line of Credit
Notes PayableForbearance Agreement
TheOn May 31, 2018, the Company has anentered into a forbearance agreement with BOKF, NA dba Bank of Oklahoma (“Lender”) relating to the Company’s Amended and Restated Revolving Credit and Term Loan Agreement (“Credit and Term Loan Agreement”) with.
Under the forbearance agreement, which is Amendment Ten to the Credit and Term Loan Agreement, Lender agreed to delete the fixed charge ratio covenant from the Credit and Term Loan Agreement and to forbear from exercising its primary financial lender. rights and remedies under the Credit and Term Loan Agreement through October 31, 2018 subject to, among other things, the following terms:
| · | Reducing the revolving line commitment from $5.0 million to $3.0 million; |
| · | Terminating the Lender’s obligation to lend or make advances under the revolving line of credit; |
| · | Limiting the Company’s capital expenditure to $100,000 during the forbearance period; |
| · | Requiring semi-monthly reporting of its borrowing base calculation; and |
| · | Requiring the Company to remain in compliance with the terms of the amended Credit and Term Loan |
Agreement.
Revolving credit and term loans created under the Credit and Term Loan Agreement arewere 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 provided that the Company maintain a leverage ratio (total funded debt to EBITDA) of not more than 2.50 to 1.0.
The Company had two term loans outstanding under the Credit and Term Loan Agreement. The first outstanding term loan had an outstanding balance of $0.6 million and was due on October 31, 2018, with monthly principal payments of $15,334 plus accrued interest. The interest rate was the prevailing 30-day LIBOR rate plus 1.4% (3.66% at October 31, 2018).
The second outstanding term loan had an outstanding balance of $1.5 million and was due October 31, 2018, with monthly principal and interest payments of $118,809. The interest rate on the term loan was a fixed interest rate of 4.40%.
In November 2018, the Company extinguished its two outstanding term loans under the forbearance agreement by paying the outstanding balances of $2.1 million.
The forbearance agreement reduced its line of credit to $3.0 million from $5.0 million, while other terms of its line of credit remained essentially the same. Any future borrowings under the line of credit were due on October 31, 2018. In October 2018, the Company extinguished its line of credit under the forbearance agreement by paying the outstanding balance of $0.5 million.
Since the Company extinguished all of its outstanding term loans and line of credit outstanding under the forbearance agreement in the first quarter of 2019, the Company is no longer subject to the terms of the forbearance agreement and has been released from the Credit and Term Loan Agreement.
New Credit Agreement
In December 2018, the Company entered into a new credit agreement with a different lender. This credit agreement contains a $2.5 million revolving line of credit and matures on December 17, 2019. The line of credit requires quarterly interest payments based on the prevailing Wall Street Journal Prime Rate plus 0.75% (6.25% at December 31, 2018), and the interest rate is reset monthly. The new credit agreement provides that the Company maintain a fixed charge coverage ratio (net cash flow to total fixed charges) of not less than 1.25 to 1.0 and a leverage ratio (total funded debt to EBITDA) of not more than 2.50 to 1.0. Both financial covenants are determined quarterly. At December 31, 2017, we were in compliance with our financial covenants.
At December 31, 2017, the Company has two term loans outstanding under the Credit and Term Loan Agreement. The first outstanding term loan has an outstanding balance of $0.7 million at December 31, 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% (2.78% at December 31, 2017) and is reset monthly.
The second outstanding term loan has an outstanding balance of $2.4 million at December 31, 2017 and is due 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%.
On December 6, 2017, the Company extinguished one of its previous term loans by paying the outstanding balance of $2.7 million plus a prepayment penalty of $25,000.
Line of Credit
The Company has a $7.0 million Revolving Line of Credit (“Line of Credit”) under the Credit and Term Loan Agreement. On March 31, 2017, the Company executed the Eighth Amendment under the Credit and Term Loan Agreement. This amendment extended the Line of Credit maturity to March 30, 2018, while other terms of the Line of Credit remained essentially the same. At December 31, 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% (4.31% at December 31, 2017), and the interest rate is reset monthly. Any future borrowings under the Line of Credit are due on March 30, 2018. Future borrowings under the Lineline of Creditcredit are limited to the lesser of $7.0$2.5 million or the net balancesum of 80% of qualifiedeligible accounts receivable plus 50%and 25% of qualifiedeligible Telco segment inventory. Under these limitations, the Company’s total available Lineline of Creditcredit borrowing base was $7.0$2.5 million at December 31, 2017.2018.
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 itsthe Company’s variable-rate term loanline of credit 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 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 $2.5 million as of December 31, 2017.
Note 68 – 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 months ended December 31, 20172018 and 20162017 are:
| | | Three Months Ended December 31, | | | Three Months Ended December 31, | |
| | | 2017 | | | 2016 | | | 2018
| | | 2017
| |
Net income (loss) attributable to common shareholders | | $ | (706,762 | ) | | $ | 217,161 | | |
Net loss attributable to common shareholders | | | $ | (1,038,981 | ) | | $ | (706,762 | ) |
| | | | | | | | | | | | | | | | | |
| Basic weighted average shares | | | 10,225,995 | | | | 10,134,235 | | | | 10,361,292 | | | | 10,225,995 | |
| Effect of dilutive securities: | | | | | | | | | | | | | | | | |
| Stock options | | | – | | | | 324 | | | ‒ | | | | – | |
| Diluted weighted average shares | | | 10,225,995 | | | | 10,134,559 | | | | 10,361,292 | | | | 10,225,995 | |
| | | | | | | | | | | | | | | | | |
| Earnings (loss) per common share: | | | | | | | | | |
| Loss per common share: | | | | | | | | | |
| Basic | | $ | (0.07 | ) | | $ | 0.02 | | | $ | (0.10 | ) | | $ | (0.07 | ) |
| Diluted | | $ | (0.07 | ) | | $ | 0.02 | | | $ | (0.10 | ) | | $ | (0.07 | ) |
The table below includes information related to stock options that were outstanding at the end of each respective three-month period ended December 31, but have been excluded from the computation of weighted-average stock options for dilutive securities due tobecause their effect would be anti-dilutive. The stock options were anti-dilutive because the optionCompany had a net loss for the periods presented. Additionally, for certain stock options, the exercise price exceedingexceeded the average market price per share of our common stock for the three months ended December 31, or their effect would be anti-dilutive.2018 and 2017.
| | | Three Months Ended December 31, | | | Three Months Ended December 31, | |
| | | 2017 | | | 2016 | | | 2018 | | | 2017 | |
| Stock options excluded | | | 700,000 | | | | 520,000 | | | | 620,000 | | | | 700,000 | |
| Weighted average exercise price of | | | | | | | | | | | | | | | | |
| stock options | | $ | 2.54 | | | $ | 2.83 | | | $ | 1.83 | | | $ | 2.54 | |
| Average market price of common stock | | $ | 1.46 | | | $ | 1.76 | | | $ | 1.34 | | | $ | 1.46 | |
Note 79 – 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, 2017,2018, 1,100,415 shares of common stock were reserved for stock award grants under the Plan. Of these reserved shares, 212,451157,154 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, 20172018 and changes during the three months then ended is presented below:
| | | Shares | | | Wtd. Avg. Ex. Price | | | Shares | | | Wtd. Avg. Ex. Price | |
| Outstanding at September 30, 2017 | | | 700,000 | | | $ | 2.54 | | |
| Outstanding at September 30, 2018 | | | | 290,000 | | | $ | 2.40 | |
| Granted | | | – | | | | – | | | | 330,000 | | | $ | 1.33 | |
| Exercised | | | – | | | | – | | | | – | | | | – | |
| Expired | | | – | | | | – | | | | – | | | | – | |
| Forfeited | | | – | | | | – | | | ‒ | | | ‒ | |
| Outstanding at December 31, 2017 | | | 700,000 | | | $ | 2.54 | | |
| Outstanding at December 31, 2018 | | | | 620,000 | | | $ | 1.83 | |
| | | | | | | | | | | | | | | | | |
| Exercisable at December 31, 2017 | | | 526,667 | | | $ | 2.78 | | |
| Exercisable at December 31, 2018 | | | | 396,667 | | | $ | 2.02 | |
NoThe Company granted 330,000 nonqualified stock options were granted for the three months ended December 31, 2017.2018. 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 estimaterecognizes forfeitures as they occur.
The estimated fair value at date of grant for stock options utilizing the pre-vestingBlack-Scholes option forfeituresvaluation model and records share-based expense onlythe assumptions that were used in the Black-Scholes option valuation model for those awards thatthe three months ended December 31, 2018 are expected to vest.as follows:
| | | Three Months Ended December 31, 2018 | |
| Estimated fair value of options at grant date | | $ | 132,620 | |
| Black-Scholes model assumptions: | | | | |
| Average expected life (years) | | | 5 | |
| Average expected volatility factor | | | 28 | % |
| Average risk-free interest rate | | | 3.0 | % |
| Average expected dividends yield | | | – | |
Compensation expense related to unvested stock options recorded for the three months ended December 31, 20172018 is as follows:
| | | Three Months Ended | | | Three Months Ended December 31, 2018 | |
| | | December 31, 2017 | | |
| Fiscal year 2016 grant | | $ | 1,789 | | |
| Fiscal year 2017 grant | | $ | 10,539 | | | $ | 4,594 | |
| Fiscal year 2019 grants | | | $ | 23,476 | |
The Company records compensation expense over the vesting term of the related options. At December 31, 2017,2018, compensation costs related to these unvested stock options not yet recognized in the consolidated condensed statements of operations was $62,657.$128,018.
Restricted Stock
The Company granted restricted stock in October 2018 to its Chairman of the Board of Directors totaling 55,147 shares, which were valued at market value on the date of grant. The shares will vest 20% per year with the first installment vesting on the first anniversary of the grant date. The Company granted restricted stock in March 20172018 to its Board of Directors and a Company officer totaling 58,00980,150 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 unamortized portion of the restricted stock is included in prepaid expenses on the Company’s consolidated condensed balance sheets.
Note 810 – 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 repairs cable television equipment for various cable companies.
Telecommunications (“Telco”)
The Company’s Telco segment sells new and used telecommunications networking equipment, including both central office and customer premise equipment, to its customer base of telecommunications providers, enterprise customers and resellers located primarily in North America. In addition, this segment offers its customers decommissioning services for surplus and obsolete equipment, which it in turn processes through its recycling program.
The Company evaluates performance and allocates its resources based on operating income. The accounting policies of its reportable segments are the same as those described in the summary of significant accounting policies.
Segment assets consist primarily of cash and cash equivalents, accounts receivable, inventory, property and equipment, goodwill and intangible assets.
| | | Three Months Ended | | | Three Months Ended | |
| | | December 31, 2017 | | | December 31, 2016 | | | December 31, 2018 | | | December 31, 2017 | |
| Sales | | | | | | | | | | | | |
| Cable TV | | $ | 5,826,405 | | | $ | 6,574,824 | | | $ | 4,462,189 | | | $ | 5,826,405 | |
| Telco | | | 6,458,540 | | | | 5,539,977 | | | | 6,850,339 | | | | 6,458,540 | |
| Intersegment | | | (180 | ) | | | (18,975 | ) | | | (40,242 | ) | | | (180 | ) |
| Total sales | | $ | 12,284,765 | | | $ | 12,095,826 | | | $ | 11,272,286 | | | $ | 12,284,765 | |
| | | | | | | | | | | | | | | | | |
| Gross profit | | | | | | | | | | | | | | | | |
| Cable TV | | $ | 1,201,127 | | | $ | 2,400,342 | | | $ | 1,118,173 | | | $ | 1,201,127 | |
| Telco | | | 2,180,028 | | | | 1,623,287 | | | | 1,723,389 | | | | 2,180,028 | |
| Total gross profit | | $ | 3,381,155 | | | $ | 4,023,629 | | | $ | 2,841,562 | | | $ | 3,381,155 | |
| | | | | | | | | | | | | | | | | |
| Operating income (loss) | | | | | | | | | |
| Operating loss | | | | | | | | | |
| Cable TV | | $ | (188,500 | ) | | $ | 908,982 | | | $ | (320,381 | ) | | $ | (188,500 | ) |
| Telco | | | (77,168 | ) | | | (482,177 | ) | | | (634,737 | ) | | | (77,168 | ) |
| Total operating income (loss) | | $ | (265,668 | ) | | $ | 426,805 | | |
| | | | | | | | | | |
| Total operating loss | | | $ | (955,118 | ) | | $ | (265,668 | ) |
| | | December 31, 2018 | | | September 30, 2018 | |
| Segment assets | | | | | | |
| Cable TV | | $ | 14,293,755 | | | $ | 18,371,530 | |
| Telco | | | 22,520,031 | | | | 22,173,797 | |
| Non-allocated | | | 4,112,855 | | | | 3,849,293 | |
| Total assets | | $ | 40,926,641 | | | $ | 44,394,620 | |
Note 11 – Subsequent Events
Purchase of Net Assets of Fulton Technologies, Inc. and Mill City Communications, Inc.
On December 27, 2018, the Company entered into a purchase agreement to acquire substantially all of the net assets of Fulton Technologies, Inc. (“Fulton”) and Mill City Communications, Inc. (“Mill City”). These companies provide turn-key wireless infrastructure services for wireless carriers, contractors supporting the wireless carriers, and equipment manufacturers. These services primarily consist of installing and decommissioning equipment on cell towers and small cell towers. This agreement closed on January 4, 2019. This acquisition is part of the overall growth strategy that will further diversify the Company into the broader telecommunications industry by providing wireless infrastructure services to the wireless telecommunications market.
The purchase price for the net assets of Fulton Technologies, Inc. and Mill City Communications, Inc. was $1.7 million, subject to a working capital adjustment. A deposit of $500,000 was paid on December 27, 2018 in connection with signing the purchase agreement and is reflected in other non-current assets in the Consolidated Condensed Balance Sheet. The purchase price will be allocated to the major categories of assets and liabilities based on their estimated fair values at the acquisition date. Any remaining amount will be recorded as goodwill. The acquisition occurred on January 4, 2019, and the Company is still determining the initial purchase price allocation.
| | | December 31, 2017 | | | September 30, 2017 | |
| Segment assets | | | | | | |
| Cable TV | | $ | 23,806,802 | | | $ | 24,116,395 | |
| Telco | | | 23,635,818 | | | | 24,135,091 | |
| Non-allocated | | | 2,850,799 | | | | 6,596,119 | |
| Total assets | | $ | 50,293,419 | | | $ | 54,847,605 | |
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 general 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 achievementachievements 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, 2017,2018, 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. In addition, this segment also repairs cable television equipment for various cable companies.
Telecommunications (“Telco”)
The Company’s Telco segment sells new and used telecommunications networking equipment, including both central office and customer premise equipment, to its customer base of telecommunications providers, enterprise customers and resellers located primarily in North America. In addition, this segment offers its customers decommissioning services for surplus and obsolete equipment, which it in turn processes through its recycling program.
Purchase of Net Assets of Fulton Technologies, Inc. and Mill City Communications, Inc.
On December 27, 2018, we entered into a purchase agreement to acquire substantially all of the net assets of Fulton Technologies, Inc. (“Fulton”) and Mill City Communications, Inc. (“Mill City”). We closed on this agreement on January 4, 2019. These companies provide turn-key wireless infrastructure services for the four major U.S. wireless carriers, national integrators, and original equipment manufacturers that support these wireless carriers. These services primarily consist of the installation and upgrade of technology on cell sites and the construction of new small cells for 5G. Pursuing an acquisition strategy rather than organically building this service offering eliminates the need to invest a significant amount of time launching the business and provides the additional benefit of established and experienced operational teams, as well as pre-existing revenue streams from the major customers in the industry. We anticipate that the purchase price plus integration costs of Fulton and Mill City would be similar to those we would
have incurred to launch this services platform organically. This acquisition is part of the overall growth strategy that will further diversify the Company into the broader telecommunications industry by providing wireless infrastructure services to the wireless telecommunications market.
The purchase price for the net assets of Fulton and Mill City was $1.7 million in cash, subject to a working capital adjustment. A deposit of $500,000 was paid on December 27, 2018 in connection with signing the purchase agreement.
Results of Operations
Comparison of Results of Operations for the Three Months Ended December 31, 20172018 and December 31, 20162017
Consolidated
Consolidated sales increased $0.2decreased $1.0 million before the impact of intercompany sales, or 2%8%, to $11.3 million for the three months ended December 31, 2018 from $12.3 million for the three months ended December 31, 2017 from $12.1 million for the three months ended December 31, 2016.2017. The increasedecrease in sales was in the Telco segment of $1.0 million, partially offset by a decrease in the Cable TV segment of $0.8$1.4 million, partially offset by an increase in the Telco segment of $0.4 million. Consolidated gross profit decreased $0.6 million, or 16%, to $3.4$2.8 million for the three months ended
December 31, 20172018 from $4.0$3.4 million for the same period last year. The decrease in gross profit was in the Cable TV segment of $1.1 million, partially offset by an increase in theand Telco segment of $0.1 million and $0.5 million.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 remained flat at $3.6increased $0.2 million, or 4%, to $3.8 million for the three months ended December 31, 2017 compared to2018 from $3.6 million the same period last year. This was due to an increase of $0.2 million in the Telco segment offset by a decrease in the Cable TV segment of $0.1$0.2 million.
Interest expense remained flat atdecreased $80 thousand, to $20 thousand, for the three months ended December 31, 2018 from $0.1 million for the same period last year primarily related to the impact of paying off our two term loans in November 2018.
The provision for income taxes was $0.1 million for the three months ended December 31, 2017 and 2016.
The2018 from a provision for income taxes wasof $0.3 million for the three months ended December 31, 2017 from a provision for income taxes of $0.1 million for the three months ended December 31, 2016.2017. The increasedecrease in the tax provision was due primarily to the Tax Cuts and Jobs Act enacted on December 22, 2017. One ofvaluation allowance netting the provisions of this legislation was to reduce the corporate income tax rates effective beginning January 1, 2018. As a result of the reduced corporate income tax rate, the Company remeasured its deferred tax balances at the reduced corporate income tax rate, which resulted in income tax expense of $0.4 million. The Company estimates that its effective income tax rate for the remaining quarters of fiscal year 2018 will be approximately 27% as a result of the legislation.assets to zero.
Segment Results
Cable TV
Sales for the Cable TV segment decreased $0.8$1.4 million to $5.8$4.4 million for the three months ended December 31, 20172018 from $6.6$5.8 million for the same period last year. The decrease in sales was due to a decrease in refurbished equipment sales and repair service revenue of $0.5$1.1 million each, partially offset by an increase in new equipment revenue of $0.2 million.and $0.3 million, respectively. The decrease in the refurbished equipment sales was due primarily to an overall decrease in demand for the three months ended December 31, 20172018 as compared to last year. The decrease in repair service revenue was due primarily to the lossclosing of a significant repair customerfacility in the quarter. As a result of this loss, the Company has closed two of its repair facilities and laid off personnel at its remaining repair facilities.April 2018.
Gross margin was 21%25% for the three months ended December 31, 20172018 compared to 37%21% for the same period last year. The decreaseincrease in gross margin in 2019 was due primarily to a significant increasedecrease in volume forfrom a new equipment sales customer with low margins.
Operating, selling, general and administrative expenses decreased $0.1 million toremained flat at $1.4 million for the three months ended December 31, 2017 from $1.5 million2018 and for the same period last year.
Telco
Sales for the Telco segment increased $1.0$0.4 million to $6.5$6.9 million for the three months ended December 31, 20172018 from $5.5$6.5 million for the same period last year. The increase in sales for the Telco segment was due to an increase in equipment sales andof $0.9 million, partially offset by a decrease in recycling revenue of $0.7 million and $0.3 million, respectively.$0.5 million. The increase in Telco equipment sales was primarily due to Nave Communications of $0.7 million and Triton Datacom which offsetof $0.2 million. The decrease in recycling revenue was due primarily to higher revenue in the continued lower equipment sales from Nave Communications. The Company is continuing to address the lower equipment sales at Nave Communications by restructuring and expanding its sales force, targeting a broader end-user customer base, increasing its salesprior year due to the reseller market and expanding the capacitytiming of its recycling program.shipments.
Gross margin was 25% for the three months ended December 31, 2018 and 34% for the three months ended December 31, 2017 and 29%2017. The decrease in gross margin was due primarily to lower gross margins from equipment sales primarily resulting from an increase in sales of new equipment which generally yields lower margins than used equipment sales. In addition, our margin was also impacted by lower margins from our recycling program as a result of lower revenues to cover our fixed costs. The lower revenues from the recycling program for the three months ended December 31, 2016. The increase in2018 decreased gross margin was due primarily to higher gross margins from equipment sales to end-user customers and our recycling program.profit by $0.4 million.
Operating, selling, general and administrative expenses increased $0.1$0.2 million to $2.2$2.4 million for the three months ended December 31, 20172018 from $2.1$2.2 million for the same period last year. This increase was due primarily to earn-outprofessional service expenses allocated to this segment related to the Triton Miami, Inc.asset acquisition of $0.1 million.Fulton and Mill City.
Non-GAAP Financial Measure
Adjusted EBITDA is a supplemental, non-GAAP financial measure. EBITDA is defined as earnings before interest expense, income taxes, depreciation and amortization. Adjusted EBITDA as presented excludes other income, interest income and income from equity method investment. Adjusted EBITDA is presented below because this metric is used by the financial community as a method of measuring our financial performance and of evaluating the market value of companies considered to be in similar businesses. Since Adjusted EBITDA is not a measure of performance calculated in accordance with GAAP, it should not be considered in isolation of, or as a substitute for, net earnings as an indicator of operating performance. Adjusted EBITDA, as calculated below, may not be comparable to similarly titled measures employed by other companies. In addition, Adjusted EBITDA is not necessarily a measure of our ability to fund our cash needs.
A reconciliation by segment of operating incomeloss from operations to Adjusted EBITDA follows:
| | | Three Months Ended December 31, 2017 | | | Three Months Ended December 31, 2016 | | | Three Months Ended December 31, 2018 | | | Three Months Ended December 31, 2017 | |
| | | Cable TV | | | Telco | | | Total | | | Cable TV | | | Telco | | | Total | | | Cable TV
| | | Telco
| | | Total | | | Cable TV | | | Telco | | | Total | |
Income (loss) from operations | | $ | (188,500 | ) | | $ | (77,168 | ) | | $ | (265,668 | ) | | $ | 908,982 | | | $ | (482,177 | ) | | $ | 426,805 | | |
| Loss from operations | | | $ | (320,381 | ) | | $ | (634,737 | ) | | $ | (955,118 | ) | | $ | (188,500 | ) | | $ | (77,168 | ) | | $ | (265,668 | ) |
| Depreciation | | | 66,948 | | | | 31,195 | | | | 98,143 | | | | 73,245 | | | | 30,542 | | | | 103,787 | | | | 80,020 | | | | 31,697 | | | | 111,717 | | | | 66,948 | | | | 31,195 | | | | 98,143 | |
| Amortization | | | − | | | | 313,311 | | | | 313,311 | | | | − | | | | 311,986 | | | | 311,986 | | | | − | | | | 266,775 | | | | 266,775 | | | | − | | | | 313,311 | | | | 313,311 | |
Adjusted EBITDA (a) | | $ | (121,552 | ) | | $ | 267,338 | | | $ | 145,786 | | | $ | 982,227 | | | $ | (139,649 | ) | | $ | 842,578 | | | $ | (240,361 | ) | | $ | (336,265 | ) | | $ | (576,626 | ) | | $ | (121,552 | ) | | $ | 267,338 | | | $ | 145,786 | |
(a) | The Telco segment includes earn-out expenses of $0.1 million for the three months ended December 31, 2017 and acquisition-related costs of $0.2 million for the three months ended December 31, 2016 related to the acquisition of Triton Miami, Inc. |
Critical Accounting Policies
Note 1 to the Consolidated Financial Statements in Form 10-K for fiscal 20172018 includes a summary of the significant accounting policies or methods used in the preparation of our Consolidated Financial Statements. Some of those significant accounting policies or methods require us to make estimates and assumptions that affect the amounts reported by us. We believe the following items require the most significant judgments and often involve complex estimates.
General
The preparation of financial statements in conformity with United States generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We base our estimates and judgments on historical experience,
current market conditions, and various other factors we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates under different assumptions or conditions. The most significant estimates and assumptions are discussed below.
Inventory Valuation
Our 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 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 and telecommunications industries. Inventory is stated at the lower of cost or net realizable value, with cost determined using the weighted-average method. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. At December 31, 2017,2018, we had total inventory, before the reserve for excess and obsolete inventories, of $25.5$23.6 million, consisting of $14.8$13.7 million in new products and $10.7$9.9 million in used or refurbished products.
For the Cable TV segment, our reserve at December 31, 20172018 for excess and obsolete inventory was $2.5 million, which reflects an increase of $0.2 million to reflect deterioration in the market demand of that inventory.$4.2 million. If actual market conditions are less favorable than those projected by management, and our estimates prove to be inaccurate, we could be required to increase our inventory reserve and our gross margins could be materially adversely affected.
For the Telco segment, any obsolete and excess telecommunications inventory is generally processed through its recycling program when it is identified. However, theThe Telco segment identified certain inventory that more than likely will not be sold or that the cost will not be recovered when it is sold, and had not yet been processed through its recycling program. Therefore, we have aan obsolete and excess inventory reserve of $0.7$0.8 million at December 31, 2017.2018. In the three months ended December 31, 2017,2018, we increased the reserve by $11$30 thousand.We also reviewed the cost of inventories against estimated market value and recorded a lower of cost or net realizable value write-off of $12 thousand for inventories that have a cost in excess of estimated net realizable value. If actual market conditions differ from those projected by management, this could have a material impact on our gross margin and inventory balances based on additional write-downs to net realizable value or a benefit from inventories previously written down.
Inbound freight charges are included in cost of sales. Purchasing and receiving costs, inspection costs, warehousing costs, internal transfer costs and other inventory expenditures are included in operating expenses, since the amounts involved are not considered material.
Accounts Receivable Valuation
Management judgments and estimates are made in connection with establishing the allowance for doubtful accounts. Specifically, we analyze the aging of accounts receivable balances, historical bad debts, customer concentrations, customer credit-worthiness, current economic trends and changes in our customer payment terms. Significant changes in customer concentration or payment terms, deterioration of customer credit-worthiness, or weakening in economic trends could have a significant impact on the collectability of receivables and our operating results. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, an additional provision to the allowance for doubtful accounts may be required. The reserve for bad debts was $0.2 million at December 31, 20172018 and September 30, 2017.2018. At December 31, 2017,2018, accounts receivable, net of allowance for doubtful accounts, was $5.3$5.0 million.
Goodwill
Goodwill represents the excess of purchase price of acquisitions over the acquisition date fair value of the net identifiable tangible and intangible assets of businesses acquired. Goodwill is not amortized and is tested at least annually for impairment. We perform our annual analysis during the fourth quarter of each fiscal year and in any other period in which indicators of impairment warrant additional analysis. Goodwill is evaluated for impairment by first comparing our estimate of the fair value of each reporting unit, or operating segment, with the reporting unit’s carrying value, including goodwill. Our reporting units for purposes of the goodwill impairment calculation are aggregated into the Cable TV operating segment and the Telco operating segment.
Management utilizes a discounted cash flow analysis to determine the estimated fair value of each reporting unit. Significant judgments and assumptions including the discount rate, anticipated revenue growth rate, gross margins
and operating expenses are inherent in these fair value estimates. As a result, actual results may differ from the estimates utilized in our discounted cash flow analysis. The use of alternate judgments and/or assumptions could result in the recognition of different levels of impairment charges in the financial statements. If the carrying value of one of the reporting units exceeds its fair value, a computation of the implied fair value of goodwill would then be compared to its related carrying value. If the carrying value of the reporting unit’s goodwill exceeds the implied fair value of goodwill, an impairment loss would be recognized in the amount of the excess. If an impairment charge is incurred, it would negatively impact our results of operations and financial position.
We performed our annual impairment test for both reporting unitsThe Cable TV segment does not have a goodwill balance as it was fully impaired in the fourth quarter of 2017 and determined that the fair value of our reporting units exceeded their carrying values. Therefore, no impairment existed as of September 30, 2017.
fiscal year 2018. We did not record a goodwill impairment for either of our two reporting unitsthe Telco segment in the three year period ended September 30, 2017. However,2018. In addition, we are implementing strategic plans as discussed in Recent Business Developments in our fiscal year 2018 Form 10-K to help prevent impairment charges in the future, which include the restructuring and expansion of the sales organization in the Telco segment to increase the volume of sales activity, and reducing inventory levels in both the Cable TV and Telco segments.future. Although we do not anticipate a future impairment charge, certain events could occur that might adversely affect the reported value of goodwill. Such events could include, but are not limited to, economic or competitive conditions, a significant change in technology, the economic condition of the customers and industries we serve, a significant decline in the real estate markets we operate in, a material negative change in the relationships with one or more of our significant customers or equipment suppliers, failure to successfully implement our plan to restructure and expand the Telco sales organization, and failure to reduce inventory levels within the Cable TV or Telco segments.segment. If our judgments and assumptions change as a result of the occurrence of any of these events or other events that we do not currently anticipate, our expectations as to future results and our estimate of the implied fair value of each reporting unitthe Telco segment also may change.
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.
Liquidity and Capital Resources
Cash Flows Provided byUsed in Operating Activities
We finance our operations primarily through cash flows provided by operations, and we have a new bank line of credit of up to $7.0$2.5 million. During the three months ended December 31, 2017,2018, we generated $0.2used $1.6 million of cash flows for operations. The cash flows from operations.operations was negatively impacted by $0.8 million from a net decrease in accounts payable and $0.6 million from a net increase in accounts receivable. The cash flows from operations was favorably impacted by $0.3 million from a net decrease in accounts receivable. The cash flows operations was negatively impacted by $0.2 million from a net increase in inventory and $0.2 million from a net decrease in accrued expenses, which primarily resulted from the first annual payment of the earn-out related to the acquisition of Triton Miami, Inc.inventory.
Cash Flows Used forProvided by Investing Activities
During the three months ended December 31, 2017,2018, cash used inprovided by investing activities was $0.7$4.5 million, which primarily related to guaranteed payments relatedthe sale of our Broken Arrow, Oklahoma facility to a company controlled by David Chymiak for $5.0 million in cash. In addition, in December 2018, we entered into an agreement with a company controlled by David Chymiak to sell our Cable TV Segment. We anticipate that this sale will close in the acquisitionthird fiscal quarter of Triton Miami, Inc.2019 and generate approximately $3.9 million in cash at closing.
In December 2018, we entered into a purchase agreement to acquire substantially all of $0.7 million.the net assets of Fulton and Mill City. A deposit of $500,000 was paid on December 27, 2018 in connection with signing the purchase agreement.
The purchase price for the net assets of Fulton and Mill City was $1.7 million, subject to a working capital adjustment, and closed on January 4, 2019.
Cash Flows Used for Financing Activities
During the three months ended December 31, 2017,In November 2018, we made principal payments of $3.1 million onextinguished our two outstanding term loans under the forbearance agreement by paying the outstanding balances of $2.1 million.
In October 2018, we also extinguished our Credit and Term Loan Agreement with our primary lender. On December 6, 2017, as partline of our overall plan to become compliant with our financial covenants with our primary financial lender, we extinguished one of our term loanscredit under the forbearance agreement by paying the outstanding balance of $2.7$0.5 million.
Since we extinguished all of our outstanding term loans and line of credit outstanding under the forbearance agreement in the first quarter of 2019, we are no longer subject to the terms of the forbearance agreement and have been released from the Credit and Term Loan Agreement.
In December 2018, the Company entered into a new credit agreement with a different lender. This credit agreement contains a $2.5 million revolving line of credit and matures on December 17, 2019. The Line of Credit requires quarterly interest payments based on the prevailing Wall Street Journal Prime Rate plus a prepayment penalty of $25,000. As a result, we were in compliance with our financial covenants0.75% (6.25% at December 31, 2017.
Our first remaining term loan requires monthly payments of $15,334 plus accrued interest through November 2021. Our second remaining term loan is a three year term loan with monthly principal2018), and interest payments of $118,809 through October 2019. Thethe interest rate is reset monthly. The new credit agreement provides that the Company maintain a fixed ratecharge coverage ratio (net cash flow to total fixed charges) of 4.40%.
At December 31, 2017, there was not a balance outstandingless than 1.25 to 1.0. Future borrowings under our linethe Line of credit. TheCredit are limited to the lesser of $7.0$2.5 million or the totalsum of 80% of the qualifiedeligible accounts receivable plus 50%and 25% of qualified inventory iseligible inventory. Under these limitations, the Company’s total available to us under the revolving credit facility ($7.0Line of Credit borrowing base was $2.5 million at September 30, 2017). Any future borrowings under the revolving credit facility are due at maturity on March 30, 2018, for which the Company expects to renew the revolving credit facility for at least one year.December 31, 2018.
We believe that our cash and cash equivalents of $0.4$2.8 million at December 31, 2017, cash flow from operations2018 and our existing line of credit as well as the anticipated third quarter closing of the sale of the Cable TV segment will provide sufficient liquidity and capital resources to meetcover our operating losses, pay the remaining purchase price for the Fulton and Mill City asset purchase and cover our additional 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 December 31, 2017,2018, 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.
PART IIII. OTHER INFORMATION
Item 5. Other Information.
(a) The 2019 annual meeting will be held in September 2019 at a date and time to be set by the Board of Directors. If you want to include a shareholder proposal in the proxy statement for the 2019 annual meeting, it must be delivered to our executive offices, 1221 East Houston, Broken Arrow, Oklahoma, 74012, on or before April 30, 2019. In addition, if you wish to present a proposal at the 2019 annual meeting that will not be included in our proxy statement and you fail to notify us by June 30, 2019, then the proxies solicited by our Board for the 2019 annual meeting will include discretionary authority to vote on your proposal in the event that it is properly brought before the meeting.
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| Exhibit No. | Description |
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| 10.1 | Stock Purchase Agreement by and among Leveling 8, Inc. and ADDvantage Technologies Group, Inc. dated as of December 26, 2018. |
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| 10.2 | Business Bank Loan Agreement dated December 17, 2018. |
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| 31.1 | Certification of Chief Executive Officer under Section 302 of the Sarbanes Oxley Act of 2002. |
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| 31.2 | Certification of Chief Financial Officer under Section 302 of the Sarbanes Oxley Act of 2002. |
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| 32.1 | Certification 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. |
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| 32.2 | Certification 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.INS | XBRL Instance Document. |
| | |
| 101.SCH | XBRL Taxonomy Extension Schema. |
| | |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase. |
| | |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase. |
| | |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase. |
| | |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase. |
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: February 13, 2018 12, 2019/s/ David L. HumphreyJoseph E. Hart
David L. Humphrey,Joseph E. Hart,
President and Chief Executive Officer
(Principal Executive Officer)
Date: February 13, 2018 12, 2019/s/ Scott A. Francis
Scott A. Francis,
Chief Financial Officer
(Principal Financial Officer)
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