NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – Summary of Significant Accounting Policies
Organization and basis of presentation
The consolidated financial statements include the accounts of ADDvantage Technologies Group, Inc. and its subsidiaries, all of which are wholly owned (collectively, the “Company”) as well as an equity-method investment. Intercompany balances and transactions have been eliminated in consolidation. The Company’s reportable segments are Cable Television (“Cable TV”) and Telecommunications (“Telco”).
Cash and cash equivalents
Cash and cash equivalents includes demand and time deposits, money market funds and other marketable securities with maturities of three months or less when acquired.
Accounts receivable
Trade receivables are carried at original invoice amount less an estimate made for doubtful accounts. Management determines the allowance for doubtful accounts by regularly evaluating individual customer receivables and considering a customer’s financial condition, credit history and current economic conditions. Trade receivables are written off against the allowance when deemed uncollectible. Recoveries of trade receivables previously written off are recorded when received. The Company generally does not charge interest on past due accounts.
Inventories
Inventories consist of new and used electronic components for the Cable TV segment and new and used telecommunications networking equipment for the Telco segment. Inventory is stated at the lower of cost and net realizable value. Cost is determined using the weighted-average method. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. For the Cable TV and Telco segment, the Company records an inventory reserve provision to reflect inventory at its estimated net realizable value based on a review of inventory quantities on hand, historical sales volumes and technology changes. These reserves are to provide for items that are potentially slow-moving, excess or obsolete.
Property and equipment
Property and equipment consists of software, office equipment, warehouse and service equipment, and buildings with estimated useful lives generally of 3 years, 5 years, 10 years and 40 years, respectively. Depreciation is provided using the straight-line method over the estimated useful lives of the related assets. Leasehold improvements are amortized over the shorter of the useful lives or the remainder of the lease agreement. Gains or losses from the ordinary sale or retirement of property and equipment are recorded in other income (expense). Repairs and maintenance costs are generally expensed as incurred, whereas major improvements are capitalized. Depreciation expense was $0.4 million for each of the years ended September 30, 2016, 2015 and 2014.
Goodwill
Goodwill represents the excess of the purchase price of acquisitions over the acquisition date fair value of the net identifiable tangible and intangible assets acquired. In accordance with current accounting guidance, goodwill is not amortized and is tested at least annually for impairment at the reporting unit level. The Company performs this annual analysis in the fourth quarter of each fiscal year and in any other period in which indicators of impairment warrant additional analysis.
The goodwill analysis is a two-step process. Goodwill is first evaluated for impairment by comparing management’s estimate of the fair value for each of the reporting units with the reporting unit’s carrying value, including goodwill. If the carrying value of the reporting unit exceeds its fair value, a computation of the implied fair value of goodwill would then be compared to its related carrying value. If the carrying value of the reporting unit’s goodwill exceeds the implied fair value of goodwill, an impairment loss would be recognized in the amount of the excess. Management
utilizes a discounted cash flow analysis, referred to as an income approach, to determine the estimated fair value of its reporting units. Judgments and assumptions are inherent in the estimate of future cash flows used to determine the estimate of the reporting unit’s fair value. The use of alternate judgments and/or assumptions could result in the recognition of different levels of impairment charges in the consolidated financial statements. At September 30, 2016 and 2015, the estimated fair value of our reporting unit exceeded its carrying value, so goodwill was not impaired.
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.
Impairment of long-lived assets
The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the asset’s carrying amount may not be recoverable. The Company conducts its long-lived asset impairment analyses in accordance with Accounting Standards Codification (“ASC”) 360-10-15, “Impairment or Disposal of Long-Lived Assets.” ASC 360-10-15 requires the Company to group assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities and evaluate the asset group against the sum of the undiscounted future cash flows. If the undiscounted cash flows do not indicate the carrying amount of the asset is recoverable, an impairment charge is measured as the amount by which the carrying amount of the asset group exceeds its fair value based on discounted cash flow analysis or appraisals.
Income taxes
The Company provides for income taxes in accordance with the liability method of accounting. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and tax carryforward amounts. Management provides a valuation allowance against deferred tax assets for amounts which are not considered “more likely than not” to be realized.
Revenue recognition
The Company recognizes revenue for product sales when title transfers, the risks and rewards of ownership have been transferred to the customer, the fee is fixed and determinable and the collection of the related receivable is probable, which is generally at the time of shipment. The stated shipping terms are generally FOB shipping point per the Company's sales agreements with its customers. Accruals are established for expected returns based on historical activity. Revenue for repair services is recognized when the repair is completed and the product is shipped back to the customer. Revenue for recycle services is recognized when title transfers, the risks and rewards of ownership have been transferred to the customer, the fee is fixed and determinable and the collection of the related receivable is probable, which is generally upon acceptance of the shipment at the recycler’s location.
Freight
Amounts billed to customers for shipping and handling represent revenues earned and are included in sales income in the accompanying consolidated statements of operations. Actual costs for shipping and handling of these sales are included in cost of sales.
Advertising costs
Advertising costs are expensed as incurred. Advertising expense was $0.2 million, $0.1 million and $0.1 million for the years ended September 30, 2016, 2015 and 2014, respectively.
Management estimates
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 revenue and expenses during the reporting period. Actual results could differ from those estimates.
Any significant, unanticipated changes in product demand, technological developments or continued economic trends affecting the cable or telecommunications industries could have a significant impact on the value of the Company's inventory and operating results.
Concentrations of credit risk
The Company holds cash with one major financial institution, which at times exceeds FDIC insured limits. Historically, the Company has not experienced any losses due to such concentration of credit risk.
Other financial instruments that potentially subject the Company to concentration of credit risk consist principally of trade receivables. Concentrations of credit risk with respect to trade receivables are limited because a large number of geographically diverse customers make up the Company’s customer base, thus spreading the trade credit risk. The Company controls credit risk through credit approvals, credit limits and monitoring procedures. The Company performs in-depth credit evaluations for all new customers but does not require collateral to support customer receivables. The Company had no customer in 2016, 2015 or 2014 that contributed in excess of 10% of the total net sales. The Company’s sales to foreign (non-U.S. based) customers were approximately $3.0 million, $3.7 million and $3.6 million for the years ended September 30, 2016, 2015 and 2014, respectively. In 2016, the Cable TV segment purchased approximately 31% of its inventory from Arris Solutions, Inc. and approximately 19% of its inventory either directly from Cisco or indirectly through their primary stocking distributor. The concentration of suppliers of the Company’s inventory subjects the Company to risk. The Telco segment did not purchase over 10% of its total inventory purchases from any one supplier.
Employee stock-based awards
Share-based payments to employees, including grants of employee stock options, are recognized in the consolidated financial statements based on their grant date fair value over the requisite service period. The Company determines the fair value of the options issued, using the Black-Scholes valuation model, and amortizes the calculated value over the vesting term of the stock options. Compensation expense for stock-based awards is included in the operating, selling, general and administrative expense section of the consolidated statements of operations.
Earnings per share
Basic earnings per share is computed by dividing the earnings available to common shareholders by the weighted average number of common shares outstanding for the year. Dilutive earnings per share include any dilutive effect of stock options and restricted stock.
Fair value of financial instruments
The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and other current liabilities approximate fair value due to their short maturities.
Financial Accounting Standards Board (“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.
|
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 September 2015, the FASB issued ASU No. 2015-16: “Business Combinations (Topic 805)”. This guidance was issued to amend existing guidance related to measurement period adjustments associated with a business combination. The new standard requires the Company to recognize measurement period adjustments in the reporting period in which the adjustments are determined, including any cumulative charge to earnings in the current period. The amendment removes the requirement to adjust prior period financial statements for these measurement period adjustments. The guidance is effective for annual periods beginning after December 15, 2015 and early adoption is permitted. Management has adopted ASU No. 2015-16 and as of September 30, 2016 it has not had an impact on the Company’s consolidated financial statements.
In November 2015, the FASB issued ASU No. 2015-17: “Income Taxes (Topic 740) – Balance Sheet Classification of Deferred Taxes.” This guidance was issued to simplify the presentation of deferred income taxes. The amendments in this Update require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The effective date of ASU No. 2015-17 is for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods with earlier application permitted. Management has decided to early adopt ASU No. 2015-17. Prior periods were retrospectively adjusted (see Note 6).
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 update addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. The amendments in this Update are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. Management is evaluating the impact that ASU No. 2016-15 will have on the Company’s consolidated financial statements.
Reclassification
Certain prior period amounts have been reclassified to conform to the current year presentation. These reclassifications had no effect on previously reported results of operations or retained earnings.
Note 2 – Acquisition
On December 31, 2015, the Company acquired the net operating assets of Advantage Solutions, LLC in Kingsport, Tennessee. This new location for the Cable TV segment will provide cable television equipment repair services in the region as well as expand the Company’s Cable TV equipment sales opportunities.
The purchase price was allocated to the major categories of assets and liabilities based on their estimated fair values at the acquisition date. The following table summarizes the purchase price allocation:
Assets acquired:
|
|
|
|
Accounts receivable
|
|
$
|
107,957
|
|
Refurbished inventory
|
|
|
16,100
|
|
Fixed assets - equipment
|
|
|
111,900
|
|
Liabilities assumed:
|
|
|
|
|
Current liabilities
|
|
|
(57,957
|
)
|
Net assets acquired
|
|
$
|
178,000
|
|
Subsequent to September 30, 2016, the Company acquired substantially all the assets of Triton Miami, Inc. (“Triton Miami”), a provider of new and refurbished enterprise networking products, including desktop phones, enterprise switches and wireless routers. This acquisition is part of our overall growth strategy in that it further diversifies our Company into the broader telecommunications industry. The Company formed a new subsidiary called ADDvantage Triton, LLC (“Triton”). Under the terms
of the asset purchase agreement, the Company purchased Triton Miami’s assets for $6.6 million in cash and $2.0 million of deferred payments over the next three years. In addition, the Company will also make payments to the Triton Miami owners, if they have not resigned from Triton, over the next three years equal to 60% of Triton’s annual EBITDA in excess of $1.2 million per year. The Company will recognize the payments ratably over the three year period as compensation expense. 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 October 14, 2016, and the Company is still determining the initial purchase price allocation.
Note 3 – Inventories
Inventories at September 30, 2016 and 2015 are as follows:
|
|
2016
|
|
|
2015
|
|
New:
|
|
|
|
|
|
|
Cable TV
|
|
$
|
15,087,495
|
|
|
$
|
16,255,487
|
|
Refurbished:
|
|
|
|
|
|
|
|
|
Cable TV
|
|
|
3,383,079
|
|
|
|
3,676,132
|
|
Allowance for excess and obsolete inventory
|
|
|
(2,219,586
|
)
|
|
|
(2,756,628
|
)
|
Telco
|
|
|
5,625,213
|
|
|
|
6,426,005
|
|
Allowance for excess and obsolete inventory
|
|
|
(351,282
|
)
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
21,524,919
|
|
|
$
|
23,600,996
|
|
New inventory includes products purchased from the manufacturers plus “surplus-new”, which are unused products purchased from other distributors or multiple system operators. Refurbished inventory includes factory refurbished, Company refurbished and used products. Generally, the Company does not refurbish its used inventory until there is a sale of that product or to keep a certain quantity on hand.
The Company regularly reviews the Cable TV and Telco segment inventory quantities on hand, and an adjustment to cost is recognized when the loss of usefulness of an item or other factors, such as obsolete and excess inventories, indicate that cost will not be recovered when an item is sold. The Company recorded charges in the Cable TV segment to allow for obsolete inventory, which increased the cost of sales during the fiscal years ended September 30, 2016, 2015 and 2014, by approximately $0.6 million, respectively.
For the Telco segment, any obsolete and excess telecommunications inventory is generally processed through its recycling program when it is identified. However, in fiscal year ended September 30, 2016, the Telco segment identified certain inventory that more than likely will not be sold or that the cost will not be recovered when it is sold, and had not yet been processed through its recycling program. Therefore, the Company recorded a $0.4 million reserve, which increased cost of sales for the fiscal year ended September 30, 2016, to allow for obsolete and excess inventory.
We also reviewed the cost of inventories against estimated market value and recorded a lower of cost or market charge for the fiscal year ended September 30, 2016 of $0.2 million for inventories that have a cost in excess of estimated market value. For fiscal years ended September 30, 2015 and 2014, there was not a reserve recorded for obsolete and excess inventory.
Note 4 – Investment In and Loans to Equity Method Investee
On March 10, 2016, the Company announced that it entered into a joint venture, YKTG Solutions, LLC (“YKTG Solutions”), which will support decommission work on cell tower sites across 13 states in the northeast on behalf of a major U.S. wireless provider. YKTG Solutions is owned 51% by YKTG, LLC and 49% by 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 in 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 September 30, 2016, the amount outstanding under this line of credit was $3.0 million. The management fee encompasses any interest earned on outstanding advances under the line of credit.
During the year ended September 30, 2016, the Company recognized management fees of $0.5 million as other income and $0.1 million as interest income in the Consolidated Statements of Operations related to the Company’s participation in projects and the financing provided.
The Company’s carrying value in YKTG Solutions is reflected in investment in and loans to equity method investee in the Consolidated Balance Sheets. During the year ended September 30, 2016, the Company advanced YKTG Solutions $2.8 million, net of equity distributions of $0.3 million, and recorded a net loss from the equity method of investment of $0.2 million, which resulted in the $2.6 million carrying value at September 30, 2016. At September 30, 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, in July 2016, YKTG Solutions entered into a $2.0 million surety payment bond whereby the Company and YKTG, LLC will be guarantors under the surety payment bond.
Note 5 – Intangible Assets
Intangible assets with finite useful lives and their associated accumulated amortization amounts at September 30, 2016 are as follows:
|
|
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
|
|
In the third fiscal quarter of 2016, we concluded that there was a triggering event requiring assessment of impairment for certain of our intangible assets in connection with a new operating system implemented in our Telco segment. The new operating system in our Telco segment enhanced the functionality of the overall software system and decreased reliance upon a former employee maintaining the predecessor system. We did not record an impairment charge against the technology intangible asset as we determined that the carrying amount of the asset group did not exceed the sum of the undiscounted cash flows for the asset group.
The intangible assets with their associated accumulated amortization amounts at September 30, 2015 are as follows:
|
|
Gross
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
Intangible assets:
|
|
|
|
|
|
|
|
|
|
Customer relationships – 10 years
|
|
$
|
4,257,000
|
|
|
$
|
(674,023
|
)
|
|
$
|
3,582,977
|
|
Technology – 7 years
|
|
|
1,303,000
|
|
|
|
(294,725
|
)
|
|
|
1,008,275
|
|
Trade name – 10 years
|
|
|
1,293,000
|
|
|
|
(204,724
|
)
|
|
|
1,088,276
|
|
Non-compete agreements – 3 years
|
|
|
254,000
|
|
|
|
(134,055
|
)
|
|
|
119,945
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
$
|
7,107,000
|
|
|
$
|
(1,307,527
|
)
|
|
$
|
5,799,473
|
|
Amortization expense was $0.8 million, $0.8 million and $0.5 million for the years ended September 30, 2016, 2015 and 2014, respectively.
The estimated aggregate amortization expense for each of the next five fiscal years is as follows:
2017
|
|
$
|
776,421
|
|
2018
|
|
|
741,143
|
|
2019
|
|
|
741,143
|
|
2020
|
|
|
741,143
|
|
2021
|
|
|
632,561
|
|
Thereafter
|
|
|
1,341,258
|
|
|
|
|
|
|
Total
|
|
$
|
4,973,669
|
|
Note 6 – Income Taxes
The provision (benefit) for income taxes for the years ended September 30, 2016, 2015 and 2014 consists of:
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Continuing operations:
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
22,000
|
|
|
$
|
1,114,000
|
|
|
$
|
496,000
|
|
Deferred
|
|
|
157,000
|
|
|
|
(341,000
|
)
|
|
|
(276,000
|
)
|
|
|
|
179,000
|
|
|
|
773,000
|
|
|
|
220,000
|
|
Discontinued operations – current
|
|
|
−
|
|
|
|
−
|
|
|
|
(385,000
|
)
|
Total provision (benefit) for income taxes
|
|
$
|
179,000
|
|
|
$
|
773,000
|
|
|
$
|
(165,000
|
)
|
The following table summarizes the differences between the U.S. federal statutory rate and the Company’s effective tax rate for continuing operations financial statement purposes for the years ended September 30, 2016, 2015 and 2014:
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Statutory tax rate
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
State income taxes, net of U.S. federal tax benefit
|
|
|
(4.4
|
)%
|
|
|
2.1
|
%
|
|
|
5.7
|
%
|
Net operating loss
|
|
|
−
|
|
|
|
(4.0
|
%)
|
|
|
(10.2
|
%)
|
Return to accrual adjustment
|
|
|
1.5
|
%
|
|
|
(3.0
|
%)
|
|
|
1.0
|
%
|
Additional state tax deduction for federal taxes
|
|
|
−
|
|
|
|
−
|
|
|
|
(5.6
|
%)
|
Charges without tax benefit
|
|
|
6.8
|
%
|
|
|
1.6
|
%
|
|
|
3.9
|
%
|
Tax credits and other exclusions
|
|
|
(0.1
|
%
)
|
|
|
3.3
|
%
|
|
|
(3.8
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company’s effective tax rate
|
|
|
37.8
|
%
|
|
|
34.0
|
%
|
|
|
25.0
|
%
|
The charges without tax benefit rate for fiscal year 2016 includes, among other things, the impact of officer life insurance and nondeductible meals and entertainment. The tax credits and other exclusions rate for fiscal year 2016 includes, among other things, the impact of deferred taxes resulting from intangible and goodwill basis differences.
The tax effects of temporary differences related to deferred taxes at September 30, 2016 and 2015 consist of the following:
|
|
2016
|
|
|
2015
|
|
Deferred tax assets:
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
281,000
|
|
|
$
|
236,000
|
|
Accounts receivable
|
|
|
97,000
|
|
|
|
96,000
|
|
Inventory
|
|
|
1,269,000
|
|
|
|
1,319,000
|
|
Intangibles
|
|
|
351,000
|
|
|
|
215,000
|
|
Accrued expenses
|
|
|
169,000
|
|
|
|
266,000
|
|
Stock options
|
|
|
226,000
|
|
|
|
212,000
|
|
Other
|
|
|
76,000
|
|
|
|
28,000
|
|
|
|
|
2,469,000
|
|
|
|
2,372,000
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Financial basis in excess of tax basis of certain assets
|
|
|
926,000
|
|
|
|
832,000
|
|
Investment in equity method investee
|
|
|
143,000
|
|
|
|
–
|
|
Other
|
|
|
67,000
|
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
1,333,000
|
|
|
$
|
1,490,000
|
|
The Company early adopted ASU 2015-17: “Income Taxes (Topic 740) – Balance Sheet Classification of Deferred Taxes” (see Note 1). Therefore, the above net deferred tax asset is presented in the Company’s consolidated balance sheets at September 30, 2016 and 2015 as a noncurrent deferred tax asset. For the fiscal year ended September 30, 2015, the $286,000 noncurrent deferred tax liability was combined with the $1,776,000 current deferred tax asset which resulted in a noncurrent deferred tax asset of $1,490,000.
Utilization of the Company’s net operating loss carryforward, totaling approximately $0.7 million at September 30, 2016, to reduce future taxable income is limited to an annual deductible amount of approximately $0.3 million. The net operating loss carryforward expires in varying amounts in 2020 and 2036.
The Company records net deferred tax assets to the extent the Company believes these assets will more likely than not be realized. In making such determination, the Company considers all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial performance. The Company has concluded, based on its historical earnings and projected future earnings, that it will be able to realize the full effect of the deferred tax assets and no valuation allowance is needed.
Based upon a review of its income tax positions, the Company believes that its positions would be sustained upon an examination by the Internal Revenue Service and does not anticipate any adjustments that would result in a material change to its financial position. Therefore, no reserves for uncertain income tax positions have been recorded. Generally, the Company is no longer subject to examinations by the U.S. federal, state or local tax authorities for tax years before 2013.
Note 7 – Accrued Expenses
Accrued expenses at September 30, 2016 and 2015 are as follows:
|
|
2016
|
|
|
2015
|
|
Employee costs
|
|
$
|
1,123,940
|
|
|
$
|
856,078
|
|
Nave Communications earn-out
|
|
|
−
|
|
|
|
290,455
|
|
Taxes other than income tax
|
|
|
120,455
|
|
|
|
116,442
|
|
Interest
|
|
|
13,836
|
|
|
|
16,085
|
|
Other, net
|
|
|
66,421
|
|
|
|
79,621
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,324,652
|
|
|
$
|
1,358,681
|
|
Note 8 – Line of Credit and Notes Payable
Notes Payable
The Company has an Amended and Restated Revolving Credit and Term Loan Agreement (“Credit and Term Loan Agreement”). At September 30, 2016, the Company has two term loans outstanding under the Credit and Term Loan Agreement. One outstanding term loan has an outstanding balance of $1.0 million at September 30, 2016 and is due on November 30, 2021, with monthly principal payments of $15,334 plus accrued interest. The interest rate is the prevailing 30-day LIBOR rate plus 1.4% (1.92% at September 30, 2016) and is reset monthly. This term loan is collateralized by inventory, accounts receivable, equipment and fixtures and general intangibles.
The second outstanding term loan was entered into as a result of the acquisition of Nave Communications for $5.0 million. This term loan has an outstanding balance of $3.4 million at September 30, 2016 and is due March 4, 2019, with monthly principal and interest payments of $68,505, with the balance due at maturity. It is a five year term loan with a seven year amortization payment schedule with a fixed interest rate of 4.07%. This term loan is collateralized by inventory, accounts receivable, equipment and fixtures and general intangibles.
Subsequent to September 30, 2016, ADDvantage entered into a third term loan for $4.0 million under the Credit and Term Loan Agreement as a result of the acquisition of Triton Miami on October 14, 2016 (see Note 2).
The $4.0 million term loan 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.
Capital Lease Obligations
The Company has two capital lease obligations related to machinery and equipment totaling $20 thousand at September 30, 2016 with monthly principal and interest payments of $2,069. The capital lease obligations are due on June 20, 2017 and September 20, 2017.
The aggregate minimum maturities of notes payable for each of the next five years are as follows:
2017
|
|
$
|
899,603
|
|
2018
|
|
|
908,859
|
|
2019
|
|
|
2,143,601
|
|
2020
|
|
|
184,008
|
|
2021
|
|
|
184,008
|
|
Thereafter
|
|
|
45,882
|
|
|
|
|
|
|
Total
|
|
$
|
4,365,961
|
|
Line of Credit
The Company has a $7.0 million Revolving Line of Credit (“Line of Credit”) under the Credit and Term Loan Agreement with its primary financial lender. At September 30, 2016, the Company had no amount 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% (3.28% at September 30, 2016), and the interest rate is reset monthly. Any future borrowings under the Line of Credit are due on March 31, 2017. Future borrowings under the Line of Credit are limited to the lesser of $7.0 million or the net balance of 80% of qualified accounts receivable plus 50% of qualified inventory less any outstanding term loans. Under these limitations, the Company’s total Line of Credit borrowing base was $7.0 million at September 30, 2016. Among other financial covenants, the Line of Credit agreement provides that the Company must maintain a fixed charge ratio of coverage (EBITDA to total fixed charges) of not less than 1.25 to 1.0, determined quarterly. The Line of Credit is collateralized by inventory, accounts receivable, equipment and fixtures and general intangibles.
Fair Value of Debt
The carrying value of the Company’s variable-rate term loan approximates its fair value since the interest rate fluctuates periodically based on a floating interest rate.
The Company has determined the fair value of its fixed-rate term loan utilizing the Level 2 hierarchy as the fair value can be estimated from broker quotes corroborated by other market data. These broker quotes are based on observable market interest 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 loan using cash flows discounted at the current market interest rate obtained. The fair value of the Company’s second term loan was approximately $3.4 million as of September 30, 2016.
Note 9 – Stock-Based Compensation and Preferred Stock
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 September 30, 2016, 1,100,415 shares of common stock were reserved for stock award grants under the Plan. Of these reserved shares, 434,211 shares were available for future grants.
Stock Options
All share-based payments to employees, including grants of employee stock options, are recognized in the consolidated financial statements based on their grant date fair value over the requisite service period. Compensation expense for stock-based awards is included in the operating, selling, general and administrative expense section of the consolidated statements of operations.
Stock options are valued at the date of the award, which does not precede the approval date, and compensation cost is recognized on a straight-line basis over the vesting period. Stock options granted to employees generally become
exercisable over a three, four or five-year period from the date of grant and generally expire ten years after the date of grant. Stock options granted to the Board of Directors generally become exercisable on the date of grant and generally expire ten years after the date of grant.
A summary of the status of the Company's stock options at September 30, 2016 and changes during the year then ended is presented below:
|
|
Options
|
|
|
Weighted Average
Exercise
Price
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at September 30, 2015
|
|
|
535,000
|
|
|
$
|
2.88
|
|
|
|
|
Granted
|
|
|
50,000
|
|
|
$
|
1.75
|
|
|
|
|
Exercised
|
|
|
−
|
|
|
$
|
–
|
|
|
$
|
0
|
|
Expired
|
|
|
(10,000
|
)
|
|
$
|
5.78
|
|
|
|
|
|
Forfeited
|
|
|
(5,000
|
)
|
|
$
|
3.00
|
|
|
|
|
|
Outstanding at September 30, 2016
|
|
|
570,000
|
|
|
$
|
2.73
|
|
|
$
|
0
|
|
Exercisable at September 30, 2016
|
|
|
403,334
|
|
|
$
|
2.81
|
|
|
$
|
0
|
|
There were no options exercised for the years ended September 30, 2016, 2015 and 2014.
Information about the Company’s outstanding and exercisable stock options at September 30, 2016 is as follows:
|
|
|
|
|
|
Exercisable
|
|
Remaining
|
|
|
|
Stock Options
|
|
|
Stock Options
|
|
Contractual
|
Exercise Price
|
|
|
Outstanding
|
|
|
Outstanding
|
|
Life
|
|
$1.750
|
|
|
|
50,000
|
|
|
|
0
|
|
9.6 years
|
|
$3.210
|
|
|
|
200,000
|
|
|
|
133,334
|
|
7.5 years
|
|
$2.450
|
|
|
|
250,000
|
|
|
|
200,000
|
|
5.5 years
|
|
$3.001
|
|
|
|
60,000
|
|
|
|
60,000
|
|
1.9 years
|
|
$3.450
|
|
|
|
10,000
|
|
|
|
10,000
|
|
0.4 years
|
|
|
|
|
|
570,000
|
|
|
|
403,334
|
|
|
The Company granted nonqualified stock options of 50,000 shares for the year ended September 30, 2016. No nonqualified stock options were granted in 2015. The Company granted nonqualified stock options totaling 200,000 shares for fiscal year ended September 30, 2014. The Company estimated the fair value of the options granted using the Black-Scholes option valuation model and the assumptions shown in the table below. The Company estimated the expected term of options granted based on the historical grants and exercises of the Company's options. The Company estimated the volatility of its common stock at the date of the grant based on both the historical volatility as well as the implied volatility on its common stock. The Company based the risk-free rate that was used in the Black-Scholes option valuation model on the implied yield in effect at the time of the option grant on U.S. Treasury zero-coupon issues with equivalent expected terms. The Company has never paid cash dividends on its common stock and does not anticipate paying any cash dividends in the foreseeable future. Consequently, the Company used an expected dividend yield of zero in the Black-Scholes option valuation model. The Company amortizes the resulting fair value of the options ratably over the vesting period of the awards. The Company used historical data to estimate the pre-vesting options forfeitures and records share-based expense only for those awards that are expected to vest.
The estimated fair value at date of grant for stock options utilizing the Black-Scholes option valuation model and the assumptions that were used in the Black-Scholes option valuation model for the fiscal years 2016 and 2014 stock option grants are as follows:
|
|
2016
|
|
|
2014
|
|
Estimated fair value of options at grant date
|
|
$
|
34,350
|
|
|
$
|
244,400
|
|
Black-Scholes model assumptions:
|
|
|
|
|
|
|
|
|
Average expected life (years)
|
|
|
6
|
|
|
|
6
|
|
Average expected volatile factor
|
|
|
38
|
%
|
|
|
34
|
%
|
Average risk-free interest rate
|
|
|
1.75
|
%
|
|
|
2.79
|
%
|
Average expected dividends yield
|
|
|
–
|
|
|
|
–
|
|
Compensation expense related to stock options recorded for the years ended September 30, 2016, 2015 and 2014 is as follows:
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Fiscal year 2012 grant
|
|
$
|
17,417
|
|
|
$
|
33,044
|
|
|
$
|
55,369
|
|
Fiscal year 2014 grant
|
|
|
47,522
|
|
|
|
108,624
|
|
|
|
74,678
|
|
Fiscal year 2016 grant
|
|
|
8,745
|
|
|
|
–
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total compensation expense
|
|
$
|
73,684
|
|
|
$
|
141,668
|
|
|
$
|
130,047
|
|
The Company records compensation expense over the vesting term of the related options. At September 30, 2016, compensation costs related to these unvested stock options not yet recognized in the statements of operations was $44,536.
Restricted stock
The Company granted restricted stock in March 2016, 2015 and 2014 to its Board of Directors and a Company officer totaling 62,874, 31,915 shares and 19,050 shares, respectively. The restricted stock grants were valued at market value on the date of grant. The restricted shares are delivered to the directors and employees at the end of the 12 month holding period. For the shares granted in March 2015 and March 2014, a director resigned from the Board of Directors prior to the expiration of the respective holding period, so their individual share grant of 6,383 shares and 3,175 shares for 2015 and 2014, respectively, was forfeited. The fair value of the shares upon issuance totaled $105,000, $60,000 and $60,000 for the 2016, 2015 and 2014 fiscal year grants, respectively. The grants are amortized over the 12 month holding period as compensation expense. The Company granted restricted stock in December 2015 and October 2015 to two new Directors totaling 3,333 and 4,465 shares, respectively which were valued at market value on the date of the grants. The holding restriction on these shares expired the first week of March 2016. The fair value of the shares issued December 2015 and October 2015 totaled $7,500 and $10,000, respectively and was amortized over the holding period as compensation expense.
The Company granted restricted stock in April of 2014 to certain employees totaling 23,676 shares, which were valued at market value on the date of grant. The shares have a holding restriction, which will expire in equal annual installments of 7,892 shares over three years starting in April 2015. The fair value of these shares upon issuance totaled $76,000 and is being amortized over the respective one, two and three year holding periods as compensation expense.
Compensation expense related to restricted stock recorded for the years ended September 30, 2016, 2015 and 2014 is as follows:
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Fiscal year 2013 grant
|
|
$
|
−
|
|
|
$
|
–
|
|
|
$
|
29,167
|
|
Fiscal year 2014 grant
|
|
|
14,779
|
|
|
|
58,778
|
|
|
|
53,222
|
|
Fiscal year 2015 grant
|
|
|
25,000
|
|
|
|
39,167
|
|
|
|
−
|
|
Fiscal year 2016 grant
|
|
|
78,750
|
|
|
|
−
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
118,529
|
|
|
$
|
97,945
|
|
|
$
|
82,389
|
|
Note 10 – Retirement Plan
The Company sponsors a 401(k) plan that allows participation by all employees who are at least 21 years of age and have completed one year of service. The Company's contributions to the plan consist of a matching contribution as determined by the plan document. Costs recognized under the 401(k) plan were $0.3 million, $0.3 million and $0.2 million for the years ended September 30, 2016, 2015 and 2014, respectively.
Note 11 – Earnings per Share
Basic and diluted earnings per share for the years ended September 30, 2016, 2015 and 2014 are:
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Income from continuing operations
|
|
$
|
294,163
|
|
|
$
|
1,497,900
|
|
|
$
|
659,189
|
|
Discontinued operations, net of tax
|
|
|
−
|
|
|
|
−
|
|
|
|
(666,046
|
)
|
Net income (loss) attributable to common shareholders
|
|
$
|
294,163
|
|
|
$
|
1,497,900
|
|
|
$
|
(6,857
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares
|
|
|
10,107,483
|
|
|
|
10,055,052
|
|
|
|
10,021,431
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
4,062
|
|
|
|
−
|
|
|
|
28,009
|
|
Diluted weighted average shares
|
|
|
10,111,545
|
|
|
|
10,055,052
|
|
|
|
10,049,440
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.03
|
|
|
$
|
0.15
|
|
|
$
|
0.07
|
|
Discontinued operations
|
|
|
−
|
|
|
|
−
|
|
|
|
(0.07
|
)
|
Net income (loss)
|
|
$
|
0.03
|
|
|
$
|
0.15
|
|
|
$
|
(0.00
|
)
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.03
|
|
|
$
|
0.15
|
|
|
$
|
0.07
|
|
Discontinued operations
|
|
|
−
|
|
|
|
−
|
|
|
|
(0.07
|
)
|
Net income (loss)
|
|
$
|
0.03
|
|
|
$
|
0.15
|
|
|
$
|
(0.00
|
)
|
The table below includes information related to stock options that were outstanding at the end of each respective year but have been excluded from the computation of weighted-average stock options for dilutive securities due to the option exercise price exceeding the average market price per share of our common stock for the fiscal year, or their effect would be anti-dilutive.
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Stock options excluded
|
|
|
520,000
|
|
|
|
535,000
|
|
|
|
310,000
|
|
Weighted average exercise price of
|
|
|
|
|
|
|
|
|
|
|
|
|
stock options
|
|
$
|
2.83
|
|
|
$
|
2.88
|
|
|
$
|
3.37
|
|
Average market price of common stock
|
|
$
|
1.90
|
|
|
$
|
2.38
|
|
|
$
|
2.76
|
|
Note 12 – Related Parties
David E. Chymiak and Kenneth A. Chymiak beneficially owned 26% and 22%, respectively, of the Company’s outstanding common stock at September 30, 2016.
Note 13 – Commitments and Contingencies
The Company leases and rents various office and warehouse properties in Arizona, Georgia, Maryland, North Carolina, Pennsylvania, and Tennessee. The terms on its operating leases vary and contain renewal options or are rented on a month-to-month basis. Rental payments associated with leased properties totaled $0.7 million, $0.6 million and $0.4 million for the years ended September 30, 2016, 2015 and 2014, respectively. The Company’s minimum annual future obligations under all existing operating leases for each of the next five years are as follows:
2017
|
|
$
|
630,533
|
|
2018
|
|
|
617,892
|
|
2019
|
|
|
552,868
|
|
2020
|
|
|
554,390
|
|
2021
|
|
|
568,250
|
|
Thereafter
|
|
|
1,279,383
|
|
|
|
|
|
|
Total
|
|
$
|
4,203,316
|
|
Note 14 – Segment Reporting
The Company has two reporting segments, Cable Television and Telecommunications, as 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 Telecommunications segment consists of Nave Communications. Nave Communications’ sells new and used telecommunications networking equipment. In addition, Nave Communications offers its customers decommissioning services for surplus and obsolete equipment, which Nave Communications in turn processes through its recycling services.
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.