q22015_10q.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
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x
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QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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FOR THE QUARTERLY PERIOD ENDED March 31, 2015
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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FOR THE TRANSITION PERIOD FROM________________ TO ______________
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Commission File number 1-10799
ADDvantage Technologies Group, Inc.
(Exact name of registrant as specified in its charter)
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OKLAHOMA
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73-1351610
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.)
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1221 E. Houston
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Broken Arrow, Oklahoma 74012
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(Address of principal executive office)
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(918) 251-9121
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(Registrant's telephone number, including area code)
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
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Yes x No o
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Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
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Yes x No o
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule12b-2 of the Exchange Act.
Large accelerated filer o Accelerated filero
Non-accelerated filer o (do not check if a smaller reporting company) Smaller reporting company x
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
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Yes o No x
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Shares outstanding of the issuer's $.01 par value common stock as of April 30, 2015 were
10,073,121.
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ADDVANTAGE TECHNOLOGIES GROUP, INC.
Form 10-Q
For the Period Ended March 31, 2015
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PART I. FINANCIAL INFORMATION
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Page
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Item 1.
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Financial Statements.
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Consolidated Condensed Balance Sheets (unaudited)
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March 31, 2015 and September 30, 2014
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Consolidated Condensed Statements of Operations (unaudited)
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Three and Six Months Ended March 31, 2015 and 2014
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Consolidated Condensed Statements of Cash Flows (unaudited)
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Six Months Ended March 31, 2015 and 2014
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Notes to Unaudited Consolidated Condensed Financial Statements
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Item 2.
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Management's Discussion and Analysis of Financial Condition and Results of Operations.
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Item 4.
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Controls and Procedures.
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PART II. OTHER INFORMATION
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Item 6.
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Exhibits.
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SIGNATURES
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
ADDVANTAGE TECHNOLOGIES GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
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March 31,
2015
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September 30,
2014
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Assets
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Current assets:
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Cash and cash equivalents
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$ |
4,824,227 |
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$ |
5,286,097 |
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Accounts receivable, net of allowance for doubtful accounts of
$200,000
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6,401,011 |
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6,393,580 |
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Income tax refund receivable
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− |
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220,104 |
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Inventories, net of allowance for excess and obsolete
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inventory of $2,456,628 and $2,156,628, respectively
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24,784,340 |
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22,780,523 |
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Prepaid expenses
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255,972 |
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174,873 |
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Deferred income taxes
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1,457,000 |
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1,416,000 |
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Total current assets
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37,722,550 |
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36,271,177 |
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Property and equipment, at cost:
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Land and buildings
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7,222,279 |
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7,208,679 |
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Machinery and equipment
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3,373,232 |
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3,244,153 |
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Leasehold improvements
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141,237 |
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206,393 |
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Total property and equipment, at cost
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10,736,748 |
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10,659,225 |
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Less accumulated depreciation
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(4,390,403 |
) |
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(4,191,516 |
) |
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Net property and equipment
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6,346,345 |
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6,467,709 |
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Intangibles, net of accumulated amortization
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6,212,375 |
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6,625,278 |
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Goodwill
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3,910,089 |
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3,910,089 |
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Other assets
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131,428 |
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131,428 |
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Total assets
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$ |
54,322,787 |
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$ |
53,405,681 |
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See notes to unaudited consolidated condensed financial statements.
ADDVANTAGE TECHNOLOGIES GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
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March 31,
2015
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September 30,
2014
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Liabilities and Shareholders’ Equity
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Current liabilities:
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Accounts payable
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$ |
4,482,776 |
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$ |
2,880,761 |
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Accrued expenses
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1,742,347 |
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1,809,878 |
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Accrued income taxes
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44,190 |
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− |
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Notes payable – current portion
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859,757 |
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845,845 |
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Other current liabilities
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960,607 |
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983,269 |
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Total current liabilities
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8,089,677 |
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6,519,753 |
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Notes payable, less current portion
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4,805,882 |
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5,240,066 |
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Deferred income taxes
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175,000 |
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267,000 |
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Other liabilities
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1,020,243 |
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1,942,889 |
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Shareholders’ equity:
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Common stock, $.01 par value; 30,000,000 shares authorized;
10,573,779 and 10,541,864 shares issued, respectively; and
10,073,121 and 10,041,206 shares outstanding, respectively
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105,738 |
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105,419 |
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Paid in capital
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(5,167,366 |
) |
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(5,312,881 |
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Retained earnings
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46,293,627 |
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45,643,449 |
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Total shareholders’ equity before treasury stock
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41,231,999 |
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40,435,987 |
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Less: Treasury stock, 500,658 shares, at cost
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(1,000,014 |
) |
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(1,000,014 |
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Total shareholders’ equity
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40,231,985 |
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39,435,973 |
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Total liabilities and shareholders’ equity
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$ |
54,322,787 |
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$ |
53,405,681 |
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See notes to unaudited consolidated condensed financial statements.
ADDVANTAGE TECHNOLOGIES GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
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Three Months Ended March 31,
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Six Months Ended March 31,
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2015
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2014
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2015
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2014
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Sales
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$ |
11,366,539 |
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$ |
8,313,815 |
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$ |
22,203,697 |
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$ |
14,433,549 |
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Cost of sales
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7,123,027 |
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6,082,648 |
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14,128,382 |
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10,339,154 |
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Gross profit
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4,243,512 |
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2,231,167 |
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8,075,315 |
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4,094,395 |
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Operating, selling, general and administrative expenses
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3,803,155 |
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2,659,420 |
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6,878,614 |
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4,289,296 |
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Operating income (loss)
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440,357 |
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(428,253 |
) |
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1,196,701 |
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(194,901 |
) |
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Interest expense
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79,102 |
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25,011 |
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164,523 |
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30,994 |
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Income (loss) before provision for income taxes
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361,255 |
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(453,264 |
) |
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1,032,178 |
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(225,895 |
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Provision (benefit) for income taxes
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127,000 |
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(176,000 |
) |
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382,000 |
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(88,000 |
) |
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Income (loss) from continuing operations
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234,255 |
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(277,264 |
) |
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650,178 |
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(137,895 |
) |
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Discontinued operations:
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Loss from discontinued operations, net of tax
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− |
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(60,444 |
) |
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− |
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(34,076 |
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Loss on sale of discontinued operations, net of tax
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− |
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(556,442 |
) |
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− |
|
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(556,442 |
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Discontinued operations, net of tax
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− |
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(616,886 |
) |
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− |
|
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(590,518 |
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Net income (loss)
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$ |
234,255 |
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$ |
(894,150 |
) |
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$ |
650,178 |
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$ |
(728,413 |
) |
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Earnings (loss) per share:
|
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Basic
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|
|
|
|
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Continuing operations
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$ |
0.02 |
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$ |
(0.03 |
) |
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$ |
0.06 |
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$ |
(0.01 |
) |
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Discontinued operations
|
|
|
− |
|
|
|
(0.06 |
) |
|
|
− |
|
|
|
(0.06 |
) |
|
Net income (loss)
|
|
$ |
0.02 |
|
|
$ |
(0.09 |
) |
|
$ |
0.06 |
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|
$ |
(0.07 |
) |
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Diluted
|
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|
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|
|
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Continuing operations
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$ |
0.02 |
|
|
$ |
(0.03 |
) |
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$ |
0.06 |
|
|
$ |
(0.01 |
) |
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Discontinued operations
|
|
|
− |
|
|
|
(0.06 |
) |
|
|
− |
|
|
|
(0.06 |
) |
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Net income (loss)
|
|
$ |
0.02 |
|
|
$ |
(0.09 |
) |
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$ |
0.06 |
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|
$ |
(0.07 |
) |
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Shares used in per share calculation:
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Basic
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|
10,051,844 |
|
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|
10,004,830 |
|
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|
10,046,525 |
|
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|
10,001,655 |
|
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Diluted
|
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|
10,051,844 |
|
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10,004,830 |
|
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10,046,525 |
|
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|
10,001,655 |
|
See notes to unaudited consolidated condensed financial statements.
ADDVANTAGE TECHNOLOGIES GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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Six Months Ended March 31,
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2015
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|
2014
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Operating Activities
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
650,178 |
|
|
$ |
(728,413 |
) |
|
Net loss from discontinued operations
|
|
|
− |
|
|
|
(590,518 |
) |
|
Net income (loss) from continuing operations
|
|
|
650,178 |
|
|
|
(137,895 |
) |
|
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
|
|
|
|
|
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|
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Depreciation
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|
198,887 |
|
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|
160,177 |
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Amortization
|
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|
412,903 |
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|
76,656 |
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Provision for excess and obsolete inventories
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|
300,000 |
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|
300,000 |
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Deferred income tax benefit
|
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|
(133,000 |
) |
|
|
(88,000 |
) |
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Share based compensation expense
|
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|
125,306 |
|
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|
61,851 |
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Changes in assets and liabilities:
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|
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Accounts receivable
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|
(7,431 |
) |
|
|
(376,746 |
) |
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Income tax refund receivable
|
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|
220,104 |
|
|
|
(385,868 |
) |
|
Inventories
|
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|
(2,303,817 |
) |
|
|
(2,264,830 |
) |
|
Prepaid expenses
|
|
|
(60,571 |
) |
|
|
(35,441 |
) |
|
Accounts payable
|
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|
1,602,015 |
|
|
|
1,669,098 |
|
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Accrued expenses
|
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|
31,351 |
|
|
|
13,934 |
|
|
Net cash provided by (used in) operating activities – continuing operations
|
|
|
1,035,925 |
|
|
|
(1,007,064 |
) |
|
Net cash provided by operating activities – discontinued
operations
|
|
|
− |
|
|
|
257,401 |
|
|
Net cash provided by (used in) operating activities
|
|
|
1,035,925 |
|
|
|
(749,663 |
) |
| |
|
|
|
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Investing Activities
|
|
|
|
|
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Acquisition of business, net of cash acquired
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|
− |
|
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(10,011,080 |
) |
|
Guaranteed payments for acquisition of business
|
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|
(1,000,000 |
) |
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|
− |
|
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Additions to machinery and equipment
|
|
|
(77,523 |
) |
|
|
(23,476 |
) |
|
Proceeds from sale of discontinued operations
|
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|
− |
|
|
|
2,000,000 |
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Net cash used in investing activities
|
|
|
(1,077,523 |
) |
|
|
(8,034,556 |
) |
| |
|
|
|
|
|
|
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Financing Activities
|
|
|
|
|
|
|
|
|
|
Proceeds on notes payable
|
|
|
− |
|
|
|
5,000,000 |
|
|
Payments on notes payable
|
|
|
(420,272 |
) |
|
|
(146,912 |
) |
|
Net cash provided by (used in) financing activities
|
|
|
(420,272 |
) |
|
|
4,853,088 |
|
| |
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
(461,870 |
) |
|
|
(3,931,131 |
) |
|
Cash and cash equivalents at beginning of period
|
|
|
5,286,097 |
|
|
|
8,476,725 |
|
|
Cash and cash equivalents at end of period
|
|
$ |
4,824,227 |
|
|
$ |
4,545,594 |
|
| |
|
|
|
|
|
|
|
|
|
Supplemental cash flow information:
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$ |
105,564 |
|
|
$ |
31,004 |
|
|
Cash paid for income taxes
|
|
$ |
264,000 |
|
|
$ |
27,000 |
|
| |
|
|
|
|
|
|
|
|
|
Supplemental noncash investing activities:
|
|
|
|
|
|
|
|
|
|
Deferred guaranteed payments for acquisition of business
|
|
$ |
− |
|
|
$ |
(2,744,338 |
) |
|
Working capital purchase price receivable
|
|
$ |
− |
|
|
$ |
380,433 |
|
See notes to unaudited consolidated condensed financial statements.
ADDVANTAGE TECHNOLOGIES GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note 1 - Basis of Presentation and Accounting Policies
Basis of presentation
The consolidated condensed financial statements include the accounts of ADDvantage Technologies Group, Inc. and its subsidiaries, all of which are wholly owned (collectively, the “Company”). Intercompany balances and transactions have been eliminated in consolidation. The Company’s reportable segments are Cable Television (“Cable TV”) and Telecommunications (“Telco”).
The accompanying unaudited consolidated condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial statements and do not include all the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. However, the information furnished reflects all adjustments, consisting only of normal recurring items which are, in the opinion of management, necessary in order to make the consolidated condensed financial statements not misleading. It is suggested that these consolidated condensed financial statements be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2014.
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”). The guidance is effective for the fiscal year and interim periods beginning October 1, 2017. Management is evaluating the impact that ASU No. 2014-09 will have on the Company’s consolidated financial statements.
Note 2 – Inventories
Inventories at March 31, 2015 and September 30, 2014 are as follows:
| |
|
March 31,
2015
|
|
|
September 30,
2014
|
|
|
New:
|
|
|
|
|
|
|
|
Cable TV
|
|
$ |
17,338,805 |
|
|
$ |
16,949,713 |
|
|
Refurbished:
|
|
|
|
|
|
|
|
|
|
Cable TV
|
|
|
3,726,751 |
|
|
|
3,982,140 |
|
|
Telco
|
|
|
6,175,412 |
|
|
|
4,005,298 |
|
|
Allowance for excess and obsolete inventory
|
|
|
(2,456,628 |
) |
|
|
(2,156,628 |
) |
| |
|
|
|
|
|
|
|
|
| |
|
$ |
24,784,340 |
|
|
$ |
22,780,523 |
|
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 Television 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 Television segment to allow for obsolete inventory, which increased the cost of sales during the six months ended March 31, 2015, and 2014, by approximately $0.3 million. For the Telco segment, any obsolete and excess telecommunications inventory is processed through its recycling program when it is identified.
Note 3 – 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. The intangible assets with their associated accumulated amortization amounts at March 31, 2015 and September 30, 2014 are as follows:
| |
|
March 31, 2015
|
|
| |
|
Gross
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
|
Intangible assets:
|
|
|
|
|
|
|
|
|
|
|
Customer relationships – 10 years
|
|
$ |
4,257,000 |
|
|
$ |
(461,174 |
) |
|
$ |
3,795,826 |
|
|
Technology – 7 years
|
|
|
1,303,000 |
|
|
|
(201,654 |
) |
|
|
1,101,346 |
|
|
Trade name – 10 years
|
|
|
1,293,000 |
|
|
|
(140,075 |
) |
|
|
1,152,925 |
|
|
Non-compete agreements – 3 years
|
|
|
254,000 |
|
|
|
(91,722 |
) |
|
|
162,278 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
$ |
7,107,000 |
|
|
$ |
(894,625 |
) |
|
$ |
6,212,375 |
|
| |
|
September 30, 2014
|
|
| |
|
Gross
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
|
Intangible assets:
|
|
|
|
|
|
|
|
|
|
|
Customer relationships – 10 years
|
|
$ |
4,257,000 |
|
|
$ |
(248,325 |
) |
|
$ |
4,008,675 |
|
|
Technology – 7 years
|
|
|
1,303,000 |
|
|
|
(108,583 |
) |
|
|
1,194,417 |
|
|
Trade name – 10 years
|
|
|
1,293,000 |
|
|
|
(75,425 |
) |
|
|
1,217,575 |
|
|
Non-compete agreements – 3 years
|
|
|
254,000 |
|
|
|
(49,389 |
) |
|
|
204,611 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
$ |
7,107,000 |
|
|
$ |
(481,722 |
) |
|
$ |
6,625,278 |
|
Note 4 – Notes Payable and Line of Credit
Notes Payable
The Company has an Amended and Restated Revolving Credit and Term Loan Agreement (“Credit and Term Loan Agreement”). At March 31, 2015, the Company has two term loans outstanding under the Credit and Term Loan Agreement. The first outstanding term loan has an outstanding balance of $1.2 million at March 31, 2015 and is due on November 20, 2021, with monthly principal payments of $15,334 plus accrued interest. The interest rate is the prevailing 30-day LIBOR rate plus 1.4% (1.57% at March 31, 2015) and is reset monthly. This term loan is collateralized by inventory, accounts receivable, equipment and fixtures and general intangibles.
The second outstanding term loan has an outstanding balance of $4.4 million at March 31, 2015 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.
Capital Lease Obligations
The Company has two capital lease obligations related to machinery and equipment totaling $53 thousand at March 31, 2015 with monthly principal and interest payments of $2,069. The capital lease obligations are due on June 20, 2017 and September 20, 2017.
Line of Credit
The Company has a $7.0 million Revolving Line of Credit (“Line of Credit”) under the Credit and Term Loan Agreement. At March 31, 2015, 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% (2.91% at March 31, 2015), and the interest rate is reset monthly. Any future borrowings under the Line of Credit are due on November 27, 2015. Future borrowings under the Line of Credit are limited to the lesser of $7.0 million or the net balance of 80% of qualified accounts receivable plus 50% of qualified inventory. Under these limitations, the Company’s total available Line of Credit borrowing base was $7.0 million at March 31, 2015. Among other financial covenants, the Line of Credit agreement provides that the Company maintain a fixed charge ratio of coverage (EBITDA to total fixed charges) of not less than 1.25 to 1.0, determined quarterly. The Line of Credit is collateralized by inventory, accounts receivable, equipment and fixtures and general intangibles.
Fair Value of Debt
FASB ASC 820, Fair Value Measurements and Disclosures, defines fair value, establishes a consistent framework for measuring fair value and establishes a fair value hierarchy based on the observability of inputs used to measure fair value. The three levels of the fair value hierarchy are as follows:
|
·
|
Level 1 – Quoted prices for identical assets in active markets or liabilities that we have the ability to access. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.
|
|
·
|
Level 2 – Inputs are other than quoted prices in active markets included in Level 1 that are either directly or indirectly observable. These inputs are either directly observable in the marketplace or indirectly observable through corroboration with market data for substantially the full contractual term of the asset or liability being measured.
|
|
·
|
Level 3 – Inputs that are not observable for which there is little, if any, market activity for the asset or liability being measured. These inputs reflect management’s best estimate of the assumptions market participants would use in determining fair value.
|
The Company has determined the carrying value of its variable-rate term loan approximates its fair value since the interest rate fluctuates periodically based on a floating interest rate.
The Company has determined the fair value of its fixed-rate term 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 fixed rate loan was $4.2 million as of March 31, 2015.
Note 5 – 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 stock price for the period is used in determining the number of shares assumed to be reacquired under the treasury stock method from the exercise of options.
Basic and diluted earnings per share for the three and six months ended March 31, 2015 and 2014 are:
| |
|
Three Months Ended March 31,
|
|
|
Six Months Ended March 31,
|
|
| |
|
2015
|
|
|
2014
|
|
|
2015
|
|
|
2014
|
|
|
Income (loss) from continuing operations
|
|
$ |
234,255 |
|
|
$ |
(277,264 |
) |
|
$ |
650,178 |
|
|
$ |
(137,895 |
) |
|
Discontinued operations, net of tax
|
|
|
− |
|
|
|
(616,886 |
) |
|
|
− |
|
|
|
(590,518 |
) |
|
Net income (loss) attributable to common shareholders
|
|
$ |
234,255 |
|
|
$ |
(894,150 |
) |
|
$ |
650,178 |
|
|
$ |
(728,413 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares
|
|
|
10,051,844 |
|
|
|
10,004,830 |
|
|
|
10,046,525 |
|
|
|
10,001,655 |
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
− |
|
|
|
− |
|
|
|
– |
|
|
|
− |
|
|
Diluted weighted average shares
|
|
|
10,051,844 |
|
|
|
10,004,830 |
|
|
|
10,046,525 |
|
|
|
10,001,655 |
|
|
Earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$ |
0.02 |
|
|
$ |
(0.03 |
) |
|
$ |
0.06 |
|
|
$ |
(0.01 |
) |
|
Discontinued operations
|
|
|
− |
|
|
|
(0.06 |
) |
|
|
− |
|
|
|
(0.06 |
) |
|
Net income (loss)
|
|
$ |
0.02 |
|
|
$ |
(0.09 |
) |
|
$ |
0.06 |
|
|
$ |
(0.07 |
) |
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$ |
0.02 |
|
|
$ |
(0.03 |
) |
|
$ |
0.06 |
|
|
$ |
(0.01 |
) |
|
Discontinued operations
|
|
|
− |
|
|
|
(0.06 |
) |
|
|
− |
|
|
|
(0.06 |
) |
|
Net income (loss)
|
|
$ |
0.02 |
|
|
$ |
(0.09 |
) |
|
$ |
0.06 |
|
|
$ |
(0.07 |
) |
Note 6 – Stock Option Plan
Plan Information
At the annual meeting of shareholders in March 2015, the shareholders approved the 2015 Incentive Stock Plan (the “Plan”). The Plan provides for awards of stock options and restricted stock to officers, directors, key employees and consultants. The Plan provides an additional 500,000 shares of common stock available for issuance in addition to those stock awards that were outstanding under the previous incentive stock plan. 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 March 31, 2015, 1,100,591 shares of common stock were reserved for stock award grants under the Plan. Of these reserved shares, 500,000 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 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 March 31, 2015 and changes during the six months then ended is presented below:
| |
|
Shares
|
|
|
Wtd. Avg.
Ex. Price
|
|
|
Outstanding at September 30, 2014
|
|
|
560,000 |
|
|
$ |
2.96 |
|
|
Granted
|
|
|
– |
|
|
|
– |
|
|
Exercised
|
|
|
– |
|
|
|
– |
|
|
Expired
|
|
|
(15,000 |
) |
|
$ |
4.62 |
|
|
Forfeited
|
|
|
– |
|
|
|
– |
|
|
Outstanding at March 31, 2015
|
|
|
545,000 |
|
|
$ |
2.91 |
|
| |
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2015
|
|
|
195,000 |
|
|
$ |
2.97 |
|
No nonqualified stock options were granted for the six months ended March 31, 2015. The Company estimates the fair value of the options granted using the Black-Scholes option valuation model. The Company estimates the expected term of options granted based on the historical grants and exercises of the Company’s options. The Company estimates the volatility of its common stock at the date of the grant based on both the historical volatility as well as the implied volatility on its common stock. The Company bases the risk-free rate that is used in the Black-Scholes option valuation model on the implied yield in effect at the time of the option grant on U.S. Treasury zero-coupon issues with equivalent expected term. The Company has never paid cash dividends on its common stock and does not anticipate paying cash dividends in the foreseeable future. Consequently, the Company uses an expected dividend yield of zero in the Black-Scholes option valuation model. The Company amortizes the resulting fair value of the options ratably over the vesting period of the awards. The Company uses historical data to estimate the pre-vesting option forfeitures and records share-based expense only for those awards that are expected to vest.
Compensation expense related to unvested stock options recorded for the six months ended March 31, 2015 is as follows:
| |
|
Six Months Ended
|
|
| |
|
March 31, 2015
|
|
|
Fiscal year 2012 grant
|
|
$ |
16,522 |
|
|
Fiscal year 2014 grant
|
|
$ |
54,312 |
|
The Company records compensation expense over the vesting term of the related options. At March 31, 2015, compensation costs related to these unvested stock options not yet recognized in the consolidated condensed statements of operations was $154,706.
Restricted Stock
The Company granted restricted stock in March 2015 to its Board of Directors totaling 31,915 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 upon issuance totaled $75,000 and is being amortized over the 12 month 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. The unamortized portion of the restricted stock is included in prepaid expenses on the Company’s consolidated condensed balance sheets.
Note 7 – Segment Reporting
The Company is reporting its financial performance based on its external reporting segments: Cable Television and Telecommunications. These reportable segments are described below.
Cable Television (“Cable TV”)
The Company’s Cable TV segment sells new, surplus and re-manufactured cable television equipment throughout North America, Central America, South America and, to a substantially lesser extent, other international regions that utilize the same technology. In addition, this segment also repairs cable television equipment for various cable companies.
Telecommunications (“Telco”)
The Company’s Telco segment sells certified used telecommunications networking equipment from a broad range of manufacturers to customers primarily in North America as well as other international regions. In addition, this segment also 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, plant and equipment, goodwill and intangible assets.
| |
|
Three Months Ended
|
|
|
Six Months Ended
|
|
| |
|
March 31,
2015
|
|
|
March 31,
2014
|
|
|
March 31,
2015
|
|
|
March 31,
2014
|
|
|
Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cable TV
|
|
$ |
5,792,272 |
|
|
$ |
7,248,191 |
|
|
$ |
12,625,291 |
|
|
$ |
13,367,925 |
|
|
Telco
|
|
|
5,813,777 |
|
|
|
1,065,624 |
|
|
|
9,850,071 |
|
|
|
1,065,624 |
|
|
Intercompany
|
|
|
(239,510 |
) |
|
|
− |
|
|
|
(271,665 |
) |
|
|
− |
|
|
Total sales
|
|
$ |
11,366,539 |
|
|
$ |
8,313,815 |
|
|
$ |
22,203,697 |
|
|
$ |
14,433,549 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cable TV
|
|
$ |
1,787,639 |
|
|
$ |
1,852,660 |
|
|
$ |
3,822,484 |
|
|
$ |
3,715,888 |
|
|
Telco
|
|
|
2,455,873 |
|
|
|
378,507 |
|
|
|
4,252,831 |
|
|
|
378,507 |
|
|
Total gross profit
|
|
$ |
4,243,512 |
|
|
$ |
2,231,167 |
|
|
$ |
8,075,315 |
|
|
$ |
4,094,395 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cable TV
|
|
$ |
347,839 |
|
|
$ |
264,365 |
|
|
$ |
966,650 |
|
|
$ |
497,717 |
|
|
Telco
|
|
|
92,518 |
|
|
|
(692,618 |
) |
|
|
230,051 |
|
|
|
(692,618 |
) |
|
Total operating income (loss)
|
|
$ |
440,357 |
|
|
$ |
(428,253 |
) |
|
$ |
1,196,701 |
|
|
$ |
(194,901 |
) |
| |
|
March 31,
2015
|
|
|
September 30,
2014
|
|
|
Segment assets
|
|
|
|
|
|
|
|
Cable TV
|
|
$ |
28,085,530 |
|
|
$ |
29,241,335 |
|
|
Telco
|
|
|
19,813,675 |
|
|
|
17,781,114 |
|
|
Non-allocated
|
|
|
6,423,582 |
|
|
|
6,383,232 |
|
|
Total assets
|
|
$ |
54,322,787 |
|
|
$ |
53,405,681 |
|
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Special Note on Forward-Looking Statements
Certain statements in Management's Discussion and Analysis (“MD&A”), other than purely historical information, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements generally are identified by the words “estimates,” “projects,” “believes,” “plans,” “intends,” “will likely result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. These statements are subject to a number of risks, uncertainties and developments beyond our control or foresight, including changes in the trends of the cable television industry, changes in the trends of the telecommunications industry, changes in our supplier agreements, technological developments, changes in the economic environment generally, the growth or formation of competitors, changes in governmental regulation or taxation, changes in our personnel and other such factors. Our actual results, performance or achievements may differ significantly from the results, performance or achievement expressed or implied in the forward-looking statements. We do not undertake any obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events.
Overview
The following MD&A is intended to help the reader understand the results of operations, financial condition, and cash flows of the Company. MD&A is provided as a supplement to, and should be read in conjunction with the information presented elsewhere in this quarterly report on Form 10-Q and with the information presented in our annual report on Form 10-K for the year ended September 30, 2014, 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 certified used telecommunications networking equipment from a broad range of manufacturers primarily in North America. In addition, this segment offers its customers decommissioning services for surplus and obsolete equipment, which it then processes through its recycling program.
Results of Operations
Comparison of Results of Operations for the Three Months Ended March 31, 2015 and March 31, 2014
Consolidated
Consolidated sales increased $3.1 million, or 37%, to $11.4 million for the three months ended March 31, 2015 from $8.3 million for the three months ended March 31, 2014. The increase in sales was primarily in the Telco segment resulting from the Nave Communications Company (“Nave Communications”) acquisition on February 28, 2014, while sales from the Cable TV segment decreased $1.4 million compared to the same period last year. Consolidated gross profit increased $2.0 million, or 90%, to $4.2 million for the three months ended March 31, 2015 from $2.2 million for the same period last year. The increase in gross profit was due primarily to gross profit from the Telco segment as a result of the Nave Communications acquisition, while gross profit from the Cable TV segment decreased $0.1 million compared to the same period last year.
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 increased $1.1 million, or 43%, to $3.8 million for the three months ended March 31, 2015 from $2.7 million for the same period last year. This increase in expenses was primarily due to the Telco segment of $1.3 million as a result of the Nave Communications acquisition, partially offset by a decrease in the Cable TV segment of $0.2 million.
Interest expense increased $54 thousand to $79 thousand for the three months ended March 31, 2015 from $25 thousand for the same period last year. The increase was due primarily to interest expense incurred on the second outstanding term loan entered into in connection with the Nave Communications acquisition.
The provision for income taxes was $0.1 million for the three months ended March 31, 2015, or an effective rate of 35%, from a benefit for income taxes of $0.2 million for the three months ended March 31, 2014, or an effective rate of 39%.
Segment Results
Cable TV
Sales for the Cable TV segment decreased $1.4 million to $5.8 million for the three months ended March 31, 2015 from $7.2 million for the same period last year. The decrease in sales was due primarily to a decrease in new equipment sales and refurbished equipment sales of $1.1 million and $0.2 million, respectively. Gross margin was 31% for the three months ended March 31, 2015 and 26% for the same period last year.
Operating, selling, general and administrative expenses decreased $0.2 million to $1.4 million for the three months ended March 31, 2015 from $1.6 million for the same period last year. The decrease was due primarily to decreased personnel costs.
Telco
Sales for the Telco segment increased $4.7 million to $5.8 million for the three months ended March 31, 2015 from $1.1 million for the same period last year as a result of the acquisition of Nave Communications. The increase in sales primarily resulted from an increase in used equipment sales and recycling revenue of $4.4 million and $0.3 million, respectively. The increase in used equipment sales was benefited by a $1.5 million equipment sale to an end-user customer in the second quarter of 2015. Gross margin was 42% for the three months ended March 31, 2015 and 36% for the same period last year.
Operating, selling, general and administrative expenses increased $1.3 million to $2.4 million for the three months ended March 31, 2015 from $1.1 million for the same period last year as a result of the acquisition of Nave Communications. The increase in expenses included $0.5 million for the three months ended March 31, 2015 and zero for the same period last year for the earn-out payments related to the Nave Communications acquisition. In March 2015, we made our first of three earn-out payments for $0.7 million, which was equal to 70% of Nave Communications’ annual adjusted EBITDA in excess of $2.0 million per year (“Nave Earn-out”). We will make earn-out payments in March 2016 and 2017, which we estimate will be between $1.0 million and $1.5 million each. In addition, for the three months ended March 31, 2014, these expenses included $0.6 million of direct costs in connection with the acquisition of Nave Communications.
Discontinued Operations
Discontinued operations, net of tax, was zero for the three months ended March 31, 2015 and a loss of $60 thousand for the same period last year. This activity included the operations of Adams Global Communications prior to the sale on January 31, 2014.
Loss on sale of discontinued operations, net of tax, was zero for the three months ended March 31, 2015 and $0.6 million for the same period last year, which resulted from the sale of the net assets of Adams Global Communications on January 31, 2014 for $2 million in cash.
Comparison of Results of Operations for the Six Months Ended March 31, 2015 and March 31, 2014
Consolidated
Consolidated sales increased $7.8 million, or 54%, to $22.2 million for the six months ended March 31, 2015 from $14.4 million for the six months ended March 31, 2014. The increase in sales was primarily in the Telco segment resulting from the Nave Communications acquisition, while sales from the Cable TV segment decreased $0.8 million compared to the same period last year. Consolidated gross profit increased $4.0 million, or 97%, to $8.1 million for the six months ended March 31, 2015 from $4.1 million for the same period last year. The increase in gross profit was due to an increase in the Telco segment of $3.9 million as a result of the Nave Communications acquisition and an increase in the Cable TV segment of $0.1 million.
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 increased $2.6 million, or 60%, to $6.9 million for the six months ended March 31, 2015 from $4.3 million for the same period last year. This increase was primarily due to increased expenses of the Telco segment of $2.9 million as a result of the Nave Communications acquisition, partially offset by decreased expenses of the Cable TV segment of $0.3 million.
Interest expense increased $134 thousand to $165 thousand for the six months ended March 31, 2015 from $31 thousand for the same period last year. The increase was due primarily to interest expense incurred on the second outstanding term loan entered into in connection with the Nave Communications acquisition.
The provision for income taxes was $0.4 million for the six months ended March 31, 2015, or an effective rate of 37%, from a benefit for income taxes of $0.1 million for the six months ended March 31, 2014, or an effective rate of 39%.
Segment Results
Cable TV
Sales for the Cable TV segment decreased $0.8 million to $12.6 million for the six months ended March 31, 2015 from $13.4 million for the same period last year. The decrease in sales was due primarily to a decrease in new equipment sales, refurbished equipment sales and service revenue of $0.3 million, $0.2 million and $0.3 million, respectively. Gross margin was 30% for the six months ended March 31, 2015 and 28% for the same period last year.
Operating, selling, general and administrative expenses decreased $0.3 million to $2.9 million for the six months ended March 31, 2015 from $3.2 million for the same period last year. The decrease was due primarily to decreased personnel costs.
Telco
Sales for the Telco segment increased $8.8 million to $9.9 million for the six months ended March 31, 2015 from $1.1 million for the same period last year as a result of the acquisition of Nave Communications. The increase in sales resulted from an increase in used equipment sales of $8.2 million and recycling revenue of $0.6 million. The increase in used equipment sales was benefited by a $1.5 million equipment sale to an end-user customer in the second quarter of 2015. Gross margin was 43% for the six months ended March 31, 2015 and 36% for the same period last year.
Operating, selling, general and administrative expenses increased $2.9 million to $4.0 million for the six months ended March 31, 2015 from $1.1 million for the same period last year as a result of the acquisition of Nave Communications. The increase in expenses included $0.7 million for the six months ended March 31, 2015 and zero for the same period last year for the earn-out payments related to the Nave Communications acquisition. In March 2015, we made our first of three earn-out payments for $0.7 million, which was equal to 70% of Nave Communications’ annual adjusted EBITDA in excess of $2.0 million per year (“Nave Earn-out”). We will make earn-out payments in March 2016 and 2017, which we estimate will be between $1.0 million and $1.5 million each.
In addition, for the six months ended March 31, 2014, these expenses included $0.6 million of direct costs in connection with the acquisition of Nave Communications.
Discontinued Operations
Loss from discontinued operations, net of tax, was zero for the six months ended March 31, 2015 and a loss of $34 thousand for the same period last year. This activity included the operations of Adams Global Communications prior to the sale on January 31, 2014.
Loss on sale of discontinued operations, net of tax, was zero for the six months ended March 31, 2015 and a loss of $0.6 million for the same period last year, which resulted from the sale of the net assets of Adams Global Communications on January 31, 2014 for $2 million in cash.
Non-GAAP Financial Measure
EBITDA is a supplemental, non-GAAP financial measure. EBITDA is defined as earnings before interest expense, income taxes, depreciation and amortization. EBITDA is presented below because this metric is used by the financial community as a method of measuring our financial performance and of evaluating the market value of companies considered to be in similar businesses. Since EBITDA is not a measure of performance calculated in accordance with GAAP, it should not be considered in isolation of, or as a substitute for, net earnings as an indicator of operating performance. EBITDA, as calculated below, may not be comparable to similarly titled measures employed by other companies. In addition, EBITDA is not necessarily a measure of our ability to fund our cash needs.
A reconciliation by segment of operating income (loss) to EBITDA follows:
| |
|
Three Months Ended March 31, 2015
|
|
|
Three Months Ended March 31, 2014
|
|
| |
|
Cable TV
|
|
|
Telco
|
|
|
Total
|
|
|
Cable TV
|
|
|
Telco
|
|
|
Total
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
$ |
347,839 |
|
|
$ |
92,518 |
|
|
$ |
440,357 |
|
|
$ |
264,365 |
|
|
$ |
(692,618 |
) |
|
$ |
(428,253 |
) |
|
Depreciation
|
|
|
70,149 |
|
|
|
29,930 |
|
|
|
100,079 |
|
|
|
76,444 |
|
|
|
14,757 |
|
|
|
91,201 |
|
|
Amortization
|
|
|
− |
|
|
|
206,451 |
|
|
|
206,451 |
|
|
|
− |
|
|
|
76,656 |
|
|
|
76,656 |
|
|
EBITDA (a)
|
|
$ |
417,988 |
|
|
$ |
328,899 |
|
|
$ |
746,887 |
|
|
$ |
340,809 |
|
|
$ |
(601,205 |
) |
|
$ |
(260,396 |
) |
|
(a)
|
The Telco segment includes earn-out expenses of $0.5 million and zero for the three months ended March 31, 2015 and 2014, respectively, related to the acquisition of Nave Communications. In addition, the Telco segment includes acquisition-related costs of $0.6 million for the three months ended March 31, 2014 related to the acquisition of Nave Communications.
|
| |
|
Six Months Ended March 31, 2015
|
|
|
Six Months Ended March 31, 2014
|
|
| |
|
Cable TV
|
|
|
Telco
|
|
|
Total
|
|
|
Cable TV
|
|
|
Telco
|
|
|
Total
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
$ |
966,650 |
|
|
$ |
230,051 |
|
|
$ |
1,196,701 |
|
|
$ |
497,717 |
|
|
$ |
(692,618 |
) |
|
$ |
(194,901 |
) |
|
Depreciation
|
|
|
141,713 |
|
|
|
57,174 |
|
|
|
198,887 |
|
|
|
145,420 |
|
|
|
14,757 |
|
|
|
160,177 |
|
|
Amortization
|
|
|
− |
|
|
|
412,903 |
|
|
|
412,903 |
|
|
|
− |
|
|
|
76,656 |
|
|
|
76,656 |
|
|
EBITDA (a)
|
|
$ |
1,108,363 |
|
|
$ |
700,128 |
|
|
$ |
1,808,491 |
|
|
$ |
643,137 |
|
|
$ |
(601,205 |
) |
|
$ |
41,932 |
|
|
(a)
|
The Telco segment includes earn-out expenses of $0.7 million and zero for the six months ended March 31, 2015 and 2014, respectively, related to the acquisition of Nave Communications. In addition, the Telco segment includes acquisition-related costs of $0.6 million for the six months ended March 31, 2014 related to the acquisition of Nave Communications.
|
Critical Accounting Policies
Note 1 to the Consolidated Financial Statements in Form 10-K for fiscal 2014 includes a summary of the significant accounting policies or methods used in the preparation of our Consolidated Condensed Financial Statements. Some of those significant accounting policies or methods require us to make estimates and assumptions that affect the
amounts reported by us. We believe the following items require the most significant judgments and often involve complex estimates.
General
The preparation of financial statements in conformity with United States generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. 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 may differ from these estimates under different assumptions or conditions. The most significant estimates and assumptions relate to the carrying value of our inventory and, to a lesser extent, the adequacy of our allowance for doubtful accounts.
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 multiple system operators (“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 market, with cost determined using the weighted-average method. At March 31, 2015, we had total inventory, before the reserve for excess and obsolete inventory, of $27.2 million, consisting of $17.3 million in new products and $9.9 million in used or refurbished products.
For the Cable TV segment, our reserve at March 31, 2015 for excess and obsolete inventory was $2.5 million, which reflects an increase of approximately $0.3 million to reflect deterioration in the market demand of that inventory. If actual market conditions are less favorable than those projected by management, and our estimates prove to be inaccurate, we could be required to increase our inventory reserve and our gross margins could be materially adversely affected.
For the Telco segment, we do not maintain an inventory reserve as we recycle any surplus and obsolete equipment on hand through our recycling program when it is identified.
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 March 31, 2015 and September 30, 2014. At March 31, 2015, accounts receivable, net of allowance for doubtful accounts, was $6.4 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 and anticipated revenue growth rate, gross margins and operating expenses are inherent in these fair value estimates, which are based on historical operating results. As a result, actual results may differ from the estimates utilized in our discounted cash flow analysis. The use of alternate judgments and/or assumptions could result in the recognition of different levels of impairment charges in the financial statements. If the carrying value of one of the reporting units exceeds its fair value, a computation of the implied fair value of goodwill would then be compared to its related carrying value. If the carrying value of the reporting unit’s goodwill exceeds the implied fair value of goodwill, an impairment loss would be recognized in the amount of the excess. If an impairment charge is incurred, it would negatively impact our results of operations and financial position.
Although we do not anticipate a future impairment charge, certain events could occur that might adversely affect the reported value of goodwill. Such events could include, but are not limited to, economic or competitive conditions, a significant change in technology, the economic condition of the customers and industries we serve, a significant decline in the real estate markets we operate in, and a material negative change in the relationships with one or more of our significant customers or equipment suppliers. If our judgments and assumptions change as a result of the occurrence of any of these events or other events that we do not currently anticipate, our expectations as to future results and our estimate of the implied value of each reporting unit also may change.
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.
Liquidity and Capital Resources
Cash Flows Provided by Operating Activities
We finance our operations primarily through operations, and we also have available to us a bank line of credit of $7.0 million. During the six months ended March 31, 2015, we generated $1.0 million of cash flow for operations. The cash flow from operations was favorably impacted by $1.6 million from a net increase in accounts payable primarily as a result of inventory purchases. The cash flow from operations was unfavorably impacted by $2.3 million from a net increase in inventory due primarily to purchases of used telecommunications equipment.
During the six months ended March 31, 2015, we increased the Nave Earn-out by $0.7 million, which is recorded in accrued expenses. In March 2015, we paid $0.7 million for the first of three annual Nave Earn-out payments. The Nave Earn-out is equal to 70% of Nave Communications adjusted EBITDA earnings in excess of $2.0 million each year. We estimate the remaining two annual payments will be between $1.0 million and $1.5 million each.
Cash Flows Used for Investing Activities
In March 2015, we paid $1.0 million for the first of three annual installment payments to the Nave Communications owners for deferred consideration resulting from the Nave Communications acquisition. The deferred consideration, which consists of $3.0 million to be paid in equal annual installments over the three years, is recorded at its present value of $1.9 million at March 31, 2015. During the six months ended March 31, 2015, cash used in investing activities was $0.1 million related to capital expenditures.
Cash Flows Used for Financing Activities
During the six months ended March 31, 2015, we made principal payments of $0.4 million on our two term loans under our Credit and Term Loan Agreement with our primary lender. The first term loan requires monthly payments of $15,334 plus accrued interest through November 2021. Our second term loan is a five year term loan with a seven year amortization payment schedule with monthly principal and interest payments of $68,505 through March 2019.
At March 31, 2015, there was not a balance outstanding under our line of credit. The lesser of $7.0 million or the total of 80% of the qualified accounts receivable plus 50% of qualified inventory is available to us under the revolving credit facility ($7.0 million at March 31, 2015). Any future borrowings under the revolving credit facility are due at maturity.
We believe that our cash and cash equivalents of $4.8 million at March 31, 2015, cash flow from operations and our existing line of credit provide sufficient liquidity and capital resources to meet our working capital and debt payment needs.
Item 4. Controls and Procedures.
We maintain disclosure controls and procedures that are designed to ensure the information we are required to disclose in the reports we file or submit under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Based on their evaluation as of March 31, 2015, 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 II OTHER INFORMATION
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Exhibit No.
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Description
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|
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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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|
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31.2
|
Certification of 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 Financial 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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|
|
101.INS
|
XBRL Instance Document.
|
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|
|
101.SCH
|
XBRL Taxonomy Extension Schema.
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101.CAL
|
XBRL Taxonomy Extension Calculation Linkbase.
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|
|
101.DEF
|
XBRL Taxonomy Extension Definition Linkbase.
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101.LAB
|
XBRL Taxonomy Extension Label Linkbase.
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101.PRE
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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: May 12, 2015 /s/ David L. Humphrey
David L. Humphrey,
President and Chief Executive Officer
(Principal Executive Officer)
Date: May 12, 2015 /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:
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Exhibit No.
|
Description
|
| |
|
|
31.1
|
Certification of Chief Executive Officer under Section 302 of the Sarbanes Oxley Act of 2002.
|
| |
|
|
31.2
|
Certification of 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 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.
|
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|
|
101.CAL
|
XBRL Taxonomy Extension Calculation Linkbase.
|
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|
|
101.DEF
|
XBRL Taxonomy Extension Definition Linkbase.
|
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|
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101.LAB
|
XBRL Taxonomy Extension Label Linkbase.
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|
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101.PRE
|
XBRL Taxonomy Extension Presentation Linkbase.
|