WASHINGTON, D.C. 20549
ADDvantage Technologies Group, Inc.
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Shares outstanding of the issuer's $.01 par value common stock as of January 31, 2018 were
10,225,995.
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Our inventories are all carried in the Telco segment and consist of new and used electronic components for the cable television and telecommunications industries.industry. 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, 2017,2020, we had total inventory, before the reserve for excess and obsolete inventories, of $25.5$9.3 million, consisting of $14.8$1.4 million in new products and $10.7$7.9 million in used or refurbished products.
ForWe regularly review the Cable TV segment, our reserve at December 31, 2017 for excess and obsolete inventory was $2.5 million, which reflects an increasevalue of $0.2 million to reflect deterioration in the market demand of that inventory. If actual market conditions are less favorable than those projected by management, and our estimates prove to be inaccurate, we could be required to increase our inventory reservein 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. In order to address the risks associated with our investment in inventory, we review inventory quantities on hand and our gross margins could be materially adversely affected.
Forreduce the Telco segment, anycarrying value for obsolete and excess telecommunications inventoryinventories, when our analysis indicates that cost will not be recovered when an item is generally processed through its recycling program when it is identified. However, the Telco segmentsold.
We 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 itsour recycling program. Therefore, we have aan obsolete and excess inventory reserve of $0.7$3.1 million at December 31, 2017. In the three months ended December 31, 2017, we increased the reserve, by $11 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.2020. 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, 2017 and September 30, 2017. At December 31, 2017, accounts receivable, net of allowance for doubtful accounts, was $5.3 million.
Goodwill
Goodwill represents the excess of purchase price of acquisitions over the acquisition date fair value of the net assets of businesses acquired. Goodwill is not amortized and is tested at least annually for impairment. We perform our annual analysis during the fourth quarter of each fiscal year and in any other period in which indicators of impairment warrant additional analysis. Goodwill is evaluated for impairment by first comparing our estimate of the fair value of each reporting unit, or operating segment, with the reporting unit’s carrying value, including goodwill. Our reporting units for purposes of the goodwill impairment calculation are the Cable TV operating segment and the Telco operating segment.
Management utilizes a discounted cash flow analysis to determine the estimated fair value of each reporting unit. Significant judgments and assumptions including the discount rate, 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 units 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.
We did not record a goodwill impairment for either of our two reporting units in the three year period ended September 30, 2017. However, we are implementing strategic plans 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. 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. 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 unit also may change.
expenses.
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. Intangible assets are also tested for impairment when events and circumstances indicate that the carrying value may not be recoverable. As of December 31, 2020, there were no indicators of impairment present.
Liquidity and Capital Resources
Cash Flows Provided by Operating Activities
We finance our operations primarily through cash flows provided by operations, and we have a bank line of credit of up to $7.0 million. During the three months ended December 31, 2017, we generated $0.2 million of cash flows from operations. 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.
Cash Flows Used for Investingin Operating Activities
During the three months ended December 31, 2017,2020, cash used in investing activitiesoperations was $0.7$3.7 million. Cash flows from operations were negatively impacted by a net loss of $2.0 million and net cash used by working capital of $2.3 million, which primarily related to guaranteed payments related to the acquisitionwas partially offset by non-cash adjustments of Triton Miami, Inc. of $0.7$0.5 million.
Cash Flows Used for FinancingProvided by Investing Activities
During the three months ended December 31, 2017, we made principal2020, cash provided by investing activities was $1.5 million, consisting of $1.5 million of payments received under the promissory note receivable.
Cash Flows Used in Financing Activities
During the three months ended December 31, 2020, cash used in financing activities was $0.5 million, of $3.1which $1.2 million on our term loans under our Credit and Term Loan Agreement with our primary lender. On December 6, 2017, as partrelated to repayment of our overall plan to become compliant withpromissory note payable, partially offset by net proceeds from the sale of our financial covenantscommon stock utilizing our shelf registration of $0.9 million.
In March 2020, we entered into a loan agreement with our primary financial lender we extinguished one of our term loans by paying the outstanding balance of $2.7for $3.5 million, plus a prepayment penalty of $25,000. As a result, we were in compliance with our financial covenantsbearing interest 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 monthly6% per annum. The principal and interest payments correlate to our promissory note receivable with Leveling 8. We monetized $3.5 million of $118,809 through October 2019. the $5.8 million remaining balance of the promissory note receivable. In connection with the $1.5 million in payments received in the first quarter of 2020, we paid down the remaining outstanding principal under this loan.
The Company has a $4.0 million revolving line of credit agreement with its primary financial lender, which matures on December 17, 2021. The line of credit requires quarterly interest payments based on the prevailing Wall Street Journal Prime Rate, floating (3.25% at December 31, 2020), with the addition of a 4% floor rate isand a fixed ratecharge coverage ratio of 4.40%.
1.25 to be tested quarterly beginning June 30, 2021. At December 31, 2017,2020, there was not a balance $2.8 million
outstanding under ourthe line of credit. TheFuture borrowings under the line of credit are limited to the lesser of $7.0$4.0 million or the totalsum of 80% of the qualifiedeligible accounts receivable plus 50%and 60% of qualified inventory is availableeligible Telco segment inventory. Under these limitations, the Company’s total line of credit borrowing capacity was $4.0 million at December 31, 2020.
On April 14, 2020, the Company received a SBA Payroll Protection Program (“PPP”) loan pursuant to usthe Paycheck Protection Program under the revolving credit facility ($7.0 millionCoronavirus Aid, Relief, and Economic Security Act (“CARES Act”), with its primary lender for $2.9 million. The PPP loan bears interest at September 30, 2017). Any future borrowings1% per annum, with monthly payments of principal and interest in the amount of $164,045 commencing on November 10, 2020, and matures on April 10, 2022. However, the Company has applied for forgiveness in accordance with the terms in the CARES Act, and our lender has not required repayments while under consideration for forgiveness. The Paycheck Protection Program provides that the PPP loan may be partially or fully forgiven if the funds are used for certain qualifying expenses as described in the CARES Act. The Company has applied for forgiveness of the PPP loan in accordance with the requirements and limitations under the revolving credit facility are dueCARES Act, the PPP Flexibility Act and SBA regulations and requirements.
In the first quarter of 2021, we utilized our recently filed shelf registration statement to raise additional cash by selling common shares utilizing an at maturity on March 30, 2018,the market offering under our equity distribution agreement with Northland Securities, Inc. (“Northland”). Under this program, we sold 238,194 shares for which the Company expects to renew the revolving credit facility for at least one year.
net proceeds of $0.88 million.
We believe that our cash and cash equivalents and restricted cash of $0.4$5.7 million at December 31, 2017, cash flow from operations2020 and our existing revolving bank line of credit will provide sufficient liquidity and capital resources to meetcover our operating losses and our additional working capital and debt payment needs. However, we will likely need to seek a waiver for our probable covenant violation under our loan agreements with our primary financial lender. In addition, there is still significant uncertainty surrounding the timing of the overall recovery of the economy and the timing of wireless infrastructure service opportunities for the upgrade to 5G. Therefore, depending on the timing of these factors and our primary financial lender granting us a waiver of the probable covenant violation, there is still risk that we may not have sufficient cash and cash equivalents available for us to sustain our operations at our current level. If that were to occur, we would need to seek additional funding and further utilize our shelf registration that we have available to us in order to enhance our cash position and assist in our working capital 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, 2017,2020, 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.
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PART IIII. OTHER INFORMATION
Item 2. Unregistered Sales of Securities and Use of Proceeds.
During the quarter ended December 31, 2020, the Company sold 238,194 shares of common stock under its registration statement on Form S-3 effective as of April 1, 2020 (333-236859). Gross proceeds from such sales during the quarter were $0.9 million and net proceeds were $0.9 million after the payment of $30 thousand in commissions to Northland Securities, Inc., the underwriter of the offering. Total gross proceeds to the Company from sales under such registration statement since its effective date are $3.1 million and total net proceeds to the Company are $3.0 million after the payment of $0.1 million in commissions to Northland. All sales have been made pursuant to the Prospectus Supplement filed with the Commission on April 24, 2020, under which the Company may sell up to $13,850,000 in common stock. All net proceeds to the Company from such sales have been used in accordance with the “Use of Proceeds” section of such Prospectus Supplement.
Item 6. Exhibits. | | | | | | Exhibit No. | Description | Exhibit No. | Description | 10.1 | | 31.1 | | 31.1 | | | | 31.2 | | | | 32.1 | | | | 32.2 | | | | 101.INS | XBRL Instance Document. | | | 101.SCH | XBRL Taxonomy Extension Schema. | | | 101.CAL | XBRL Taxonomy Extension Calculation Linkbase. | | | 101.DEF | XBRL Taxonomy Extension Definition Linkbase. | | | 101.LAB | XBRL Taxonomy Extension Label Linkbase. | | | 101.PRE | XBRL Taxonomy Extension Presentation Linkbase. |
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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 /s/ David L. Humphrey
David L. Humphrey,
President and Chief Executive Officer
(Principal Executive Officer)
Date: February 13, 2018 /s/ Scott A. Francis
Scott A. Francis,
Chief Financial Officer
(Principal Financial Officer)
Exhibit Index
The following documents are included as exhibits to this Form 10-Q:
Exhibit No. | Description | | | | | | ADDVANTAGE TECHNOLOGIES GROUP, INC. (Registrant) | 31.1Date: February 11, 2021 | Certification of | | /s/ Joseph E. Hart | | Joseph E. Hart, | | President and Chief Executive Officer under Section 302 of the Sarbanes Oxley Act of 2002. | | (Principal Executive Officer) | 31.2 | Certification of | Date: February 11, 2021 | | | /s/ Jarrod M. Watson | | Jarrod M. Watson, | | Chief Financial Officer under Section 302 of the Sarbanes Oxley Act of 2002. | | | 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. | | | 32.2 | Certification of Chief(Principal 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.Officer) |
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