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EXCEL - IDEA: XBRL DOCUMENT - ADDVANTAGE TECHNOLOGIES GROUP INCFinancial_Report.xls
EX-23.1 - CONSENT OF HOGANTAYLOR LLP - ADDVANTAGE TECHNOLOGIES GROUP INCexhibit23.htm
EX-32.1 - CERTIFICATION OF CEO PURSUANT TO SEC 906 OF THE SARBANES-OXLEY ACT OF 2002 - ADDVANTAGE TECHNOLOGIES GROUP INCexhibit32_1.htm
EX-10.14 - AMENDMENT FIVE TO AMENDED AND RESTATED REVOLVING CREDIT AND TERM LOAN AGREEMENT - ADDVANTAGE TECHNOLOGIES GROUP INCcredit_agreement.htm
EX-21.1 - LISTING OF COMPANY SUBSIDIARIES - ADDVANTAGE TECHNOLOGIES GROUP INCexhibit21.htm
EX-31.2 - CERTIFICATION OF CFO PURSUANT TO SEC 302 OF THE SARBANES-OXLEY ACT OF 2002 - ADDVANTAGE TECHNOLOGIES GROUP INCexhibit31_2.htm
EX-32.2 - CERTIFICATION OF CFO PURSUANT TO SEC 906 OF THE SARBANES-OXLEY ACT OF 2002 - ADDVANTAGE TECHNOLOGIES GROUP INCexhibit32_2.htm
EX-31.1 - CERTIFICATION OF CEO PURSUANT TO SEC 302 OF THE SARBANES-OXLEY ACT OF 2002 - ADDVANTAGE TECHNOLOGIES GROUP INCexhibit31_1.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K
 
xANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2014
 
oTRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
Commission file number 1-10799
 
ADDVANTAGE TECHNOLOGIES GROUP, INC.
(Exact name of registrant as specified in its charter)

Oklahoma
73-1351610
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
   
1221 E. Houston, Broken Arrow, Oklahoma
74012
(Address of principal executive offices)
(Zip code)
 
 
Registrant’s telephone number:  (918) 251-9121
                                                       Securities registered under Section 12(b) of the Act:

Title of each class
Name of exchange on which registered
Common Stock, $.01 par value
NASDAQ Global Market

                                                     Securities registered under Section 12(g) of the Act:  None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
 Yes o      No  x
   
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.
 Yes o      No  x
   
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.
 
 
Yes x                        No  o
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 during
the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 
 
Yes x                        No  o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
 
 
             x
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 Rule 12b-2 of the Exchange Act.
   Large accelerated filer   o                                                                                     Accelerated filer   o
   Non-accelerated filer   o                                                                                     Smaller reporting company   x
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
 Yes o      No  x
 
The aggregate market value of the outstanding shares of common stock, par value $.01 per share, held by non-affiliates
computed by reference to the closing price of the registrant’s common stock as of March 31, 2014 was $17,110,819.
 
 
The number of shares of the registrant’s outstanding common stock, $.01 par value per share, was 10,041,206 as of
November 30, 2014.
 
 
Documents Incorporated by Reference
 
   
The identified sections of definitive Proxy Statement to be filed as Schedule 14A pursuant to Regulation 14A in connection with the Registrant’s 2015 annual meeting of shareholders are incorporated by reference into Part III of this Form 10-K.  The Proxy Statement will be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Form 10-K.
 


 
 

 

ADDVANTAGE TECHNOLOGIES GROUP, INC.
FORM 10-K
YEAR ENDED SEPTEMBER 30, 2014
INDEX
 
   
Page
 
PART I
 
 
 
   
     
Item 1.
Business.
Item 2.
Properties.
Item 3.
Legal Proceedings.
     
     
 
PART II
 
     
Item 5.
Market for Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities.
 
Item 6.
Selected Financial Data.
Item 7.
Management's Discussion and Analysis of Financial Condition and Results
of Operations.
 
     
Item 8.
Financial Statements and Supplementary Data.
Item 9.
Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
 
Item 9A.
Controls and Procedures.
Item 9B.
Other Information.
 
 
PART III
 
     
Item 10.
Directors, Executive Officers and Corporate Governance.
Item 11.
Executive Compensation.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.
 
Item 13.
Certain Relationships and Related Transactions, and Director Independence.
Item 14.
Principal Accounting Fees and Services.
     
 
PART IV
 
     
Item 15.
Exhibits, Financial Statement Schedules.
     
 
SIGNATURES
 
 
 


 
 
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PART I
 
Item  1.                 Business.

Forward-Looking Statements
 
Certain matters discussed in this report constitute forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, including statements which relate to, among other things, expectations of the business environment in which ADDvantage Technologies Group, Inc. (the “Company”, “We” or “ADDvantage”) operates, projections of future performance, perceived opportunities in the market and statements regarding our goals and objectives and other similar matters.  The words “estimates”, “projects”, “intends”, “expects”, “anticipates”, “believes”, “plans”, “goals”, “strategy”, “likely”, “may”, “should” and similar expressions often identify forward-looking statements.  These forward-looking statements are found at various places throughout this report and the documents incorporated into it by reference.  These and other statements, which are not historical facts, are hereby identified as “forward-looking statements” for purposes of the safe harbor provided by Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended.  These statements are subject to a number of risks, uncertainties and developments beyond our control or foresight, including changes in the cable television industry, changes in customer and supplier relationships, technological developments, changes in the economic environment generally, the growth or formation of competitors, changes in governmental regulation or taxation, changes in our personnel, our ability to identify, complete and integrate acquisitions on favorable terms and other such factors.  Our actual results, performance or achievements may differ significantly from the results, performance or achievements 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.

Background

The Company was incorporated under the laws of Oklahoma in September 1989 as “ADDvantage Media Group, Inc.”.  In December 1999, its name was changed to ADDvantage Technologies Group, Inc.  Our headquarters are located in Broken Arrow, Oklahoma.

We (through our subsidiaries) distribute and service a comprehensive line of electronics and hardware for the cable television (“CATV”) and telecommunications industries.  In addition, we also provide equipment repair services to cable operators. 

Several of our subsidiaries, through their long relationships with the original equipment manufacturers (“OEMs”) and specialty repair facilities, have established themselves as value-added resellers (“VARs”).  ADDvantage has a reseller agreement with Arris Solutions to sell cable television equipment in the United States.  We are also one of only three distributors of Arris broadband products.  We are a distributor of Cisco video products as a Cisco Premier Partner, which allows us to sell Cisco’s IT related products.  In addition, we are designated as an authorized third party Cisco repair center for select video products.  Our subsidiaries also sell products from other OEMs including Alpha, Blonder-Tongue, RL Drake, Corning-Gilbert, Promax, Quintech, Standard and Triveni Digital. 

In addition to offering a broad range of new products, we also sell surplus-new and refurbished equipment that we purchase in the market as a result of cable operator system upgrades or an overstock in their warehouses.  We maintain one of the industry's largest inventories of new and refurbished equipment, which allows us to expedite delivery of products to our customers.  We continue to upgrade our new product offerings to stay in the forefront of the communications broadband technology revolution.

Most of our subsidiaries operate technical service centers that service/repair most brands of CATV equipment.

Website Access to Reports

Our public website is addvantagetechnologies.com.  We make available free of charge through the “Investor Relations” section of our website our annual reports to stockholders, annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after we
 
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electronically file such material with, or furnish it to, the Securities and Exchange Commission (“SEC”).  Any material we file with or furnish to the SEC is also maintained on the SEC website (sec.gov).

The information contained on our website, or available by hyperlink from our website, is not incorporated into this Form 10-K or other documents we file with, or furnish to, the SEC.  We intend to use our website as a means of disclosing material non-public information and for complying with our disclosure obligations under Regulation FD.  Such disclosures will be included on our website in the “Investor Relations” section.  Accordingly, investors should monitor such portions of our website, in addition to following our press releases, SEC filings and public conference calls and webcasts.

Operating Segments

During the second quarter of fiscal year 2014, the Company changed its organizational structure with the acquisition of Nave Communications Company. As a result of this acquisition, information that the Company’s management team regularly reviews for purposes of allocating resources and assessing performance changed.  Therefore, beginning in fiscal year 2014, the Company is reporting its financial performance based on its new reporting segments: Cable Television (“Cable TV”) and Telecommunications (“Telco”).

The Cable TV segment sells new, surplus and re-manufactured cable television equipment to cable operators (called multiple system operators or “MSOs”) or other resellers that sell to these customers 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.

The Telco segment provides quality used telecommunication networking equipment to its world-wide customer base of telecommunications providers and resellers by utilizing its inventory from a broad range of manufacturers as well as other supply channels.  In addition, this segment offers its customers decommissioning services for surplus and obsolete equipment, which it in turn processes through its recycling services.

Purchase of Nave Communications Company

On February 28, 2014, the Company acquired all of the outstanding common stock of Nave Communications Company (“Nave Communications”), a provider of quality used telecommunication networking equipment.  The purchase price for Nave Communications included approximately $9.6 million in cash payments, as well as $3.0 million in deferred payments over the next three years.  In addition, the Company will make future earn-out payments equal to 70% of Nave Communications’ annual EBITDA in excess of an EBITDA target of $2 million per year over the next three years, which is estimated to be between $0.7 million and $1.0 million annually.  The acquisition was funded through a combination of cash on hand and a $5.0 million term loan under our revolving credit and term loan agreement.

Products and Services

Cable TV segment

We offer our customers a wide range of new, surplus-new and refurbished products across the leading OEM suppliers in the industry that are used in connection with video, telephone and internet data signals.

Headend ProductsHeadend products are used by a system operator for signal acquisition, processing and manipulation for further transmission.  Among the products we offer in this category are satellite receivers (digital and analog), integrated receiver/decoders, demodulators, modulators, antennas and antenna mounts, amplifiers, equalizers and processors.  The headend of a television signal distribution system is the “brain” of the system; the central location where the multi-channel signal is initially received, converted and allocated to specific channels for distribution.  In some cases, where the signal is transmitted in encrypted form or digitized and compressed, the receiver will also be required to decode the signal.

Fiber ProductsFiber products are used to transmit the output of cable system headend to multiple locations using fiber-optic cable.  In this category, we currently offer products including optical transmitters, fiber-optic cable, receivers, couplers, splitters and compatible accessories.  These products convert radio frequencies to light
 
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frequencies and launch them on optical fiber.  At each receiver site, an optical receiver is used to convert the signals back to RF VHF frequencies for distribution to subscribers.
 
Access and Transport ProductsAccess and transport products are used to permit signals to travel from the headend to their ultimate destination in a home, apartment, hotel room, office or other terminal location along a distribution network of fiber optic or coaxial cable.  Among the products we offer in this category are transmitters, receivers, line extenders, broadband amplifiers, directional taps and splitters.

Customer Premise Equipment (“CPE”)CPE includes digital converters and modems that are boxes placed inside the home that receive, record and transmit video, data and telephony signals.  They are the primary interface equipment between the cable operator and the consumer.

Test EquipmentTest equipment is used in the set-up, signal testing and maintenance of electronic equipment and the overall support of the cable television plant. Test equipment is vital in maintaining the proper function and efficiency of this electronic equipment, which helps to provide high quality video, telephone and high speed data to the end user.

Hardware EquipmentWe also inventory and sell to our customers other hardware such as connector and cable products.

Telco Segment

We offer our customers a wide range of used telecommunication equipment across most major manufacturers consisting primarily of component parts to expand capacity, provide spares or replace non-working components.

Central Office Equipment – Central office equipment includes optical, switching, and data equipment on a customer’s communication network.  Optical equipment products aggregate and transport internet traffic, switching equipment products originate, terminate and route voice traffic, and data equipment products transport internet and voice over internet protocol (“VOIP”) traffic via routers.

Customer Premise Equipment – CPE includes integrated access devices, channel banks and routers that are placed inside the customer site that will receive the communication signal from the communication services provider.

Revenues by Geographic Area

Our revenues by geographic areas were as follows:

   
2014
   
2013
   
2012
 
United States
                 
Cable TV
  $ 25,738,706     $ 27,541,137     $ 28,244,199  
Telco
    6,533,458              
Canada, Central America, Asia, Europe, Mexico, South America and Other
                       
Cable TV
    1,465,514       1,136,214       1,432,979  
Telco
    2,151,014              
    $ 35,888,692     $ 28,677,351     $ 29,677,178  

Revenues attributed to geographic areas are based on the location of the customer.  All of our long-lived assets are located within the United States.

Sales and Marketing

In 2014, Cable TV segment sales of new products represented 67% of Cable TV segment revenues and refurbished product sales represented 19%.  Repair and other services contributed the remaining 14% of Cable TV segment revenues.  Telco segment sales of refurbished products represented 86% of Telco segment revenues.  Recycle sales and other services contributed the remaining 14% of Telco segment revenues.

 
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We market and sell our products to franchise and private MSOs, telecommunication companies, system contractors and other resellers.  Our sales and marketing are predominantly performed by our experienced internal sales and customer service staff as well as our outside sales representatives located in various geographic areas.  The majority of our sales activity is generated through personal relationships developed by our sales personnel and executives, referrals from manufacturers we represent, trade shows and advertising in trade journals.

We maintain a wide breadth of inventory of new and used products and many times can offer our customers same day shipments.  We carry one of the most diverse inventories of any cable television or telecommunication product reseller in the country, and we also have access to inventory via our various supply channels.  We believe our investment in on-hand inventory, our product supply channels, our network of regional repair centers and our experienced sales and customer service team create a competitive advantage for us.
  
Suppliers

In fiscal year 2014, the Cable TV segment purchased approximately 32% of its total inventory purchases directly from Arris Solutions and approximately 14% of its total inventory purchases either directly from Cisco or indirectly through Cisco’s primary stocking distributor.  In addition to purchasing inventory from OEMs, this segment also purchases used or surplus-new inventory from MSOs who have upgraded or are in the process of upgrading their systems and from other resellers in this business.

In fiscal year 2014, the Telco segment purchased approximately 13% of its total inventory purchases from Windstream.  This segment of our business primarily purchases its used inventory from telecommunication companies that have excess equipment on hand or have upgraded their systems or from other resellers in this segment.

Seasonality

In the Cable TV segment, many of the products that we sell are installed outdoors and can be damaged by storms and power surges.  Consequently, we can experience increased demand on certain product offerings during the months between late spring and early fall when severe weather tends to be more prominent than at other times during the year.

In the Telco segment, we do not anticipate that quarterly operating results will generally be impacted by seasonal fluctuations.

Competition

The overall telecommunications equipment industry is highly competitive.  We compete with numerous resellers in the marketplace and recent declines in the economy have reduced the amount of capital expenditures in our industry, which heightens the competition.  In addition, especially for the Cable TV segment, we sell current production products in competition with the original equipment manufacturers.

Cable TV Segment

We believe we have differentiated ourselves from the OEMs, other resellers and repair operations in the marketplace in the following ways:  1) we sell both new and refurbished CATV equipment as well as repair what we sell, while most of our competition does not offer all of these services; 2) we stock both new and refurbished inventory; 3) we stock a wide breadth of inventory, which many of our competitors do not due to working capital constraints; 4) we can reconfigure new and refurbished equipment to meet the different needs of our customers; 5) we can meet our customers’ timing needs for product due to our inventory on hand; and 6) we have experienced sales support staff that have the technical know-how to assist our customers regarding solutions for various products and configurations.  In terms of sales and inventory on hand or available via our supply channels, we believe we are one of the largest resellers in this industry, providing both sales and service of new and refurbished CATV equipment.

We also compete with our OEM suppliers as they can sell directly to our customers.  Our OEM suppliers have a competitive advantage over us as they can sell products at lower prices than we offer.  As a result, we are often considered a secondary supplier by large MSOs and telephone companies when they are making large equipment
 
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purchases or upgrades.  However, for smaller orders or items that are needed to be delivered quickly, we often hold an advantage over our OEM suppliers as we carry most inventory in stock and can have it delivered in a shorter time frame than the OEM.

Telco Segment

For the Telco segment, we believe our differentiation from other resellers in the marketplace is primarily the following:  1) we stock a broad range of used inventory, which allows us to meet our customers’ timing needs, 2) we have experienced sales support staff that have strong relationships with our customers and technical knowledge of the products we offer, 3) we have the following quality certifications:  TL9000 (telecommunications quality certification), ISO 14001 (environmental management certification and OHSAS18000 (occupational safety and health management certification), and will soon be R2 certified (EPA responsible recycling practices for electronics) as well, and 4) we provide multiple services for our customers including de-installation of products, storage and managing spares inventory, logistics, recycling and e-services.

Working Capital Practices

Working capital practices in the industry center on inventory and accounts receivable.  We choose to carry a relatively large inventory due to our on-hand demand business model.  We have typically utilized excess cash flows to reinvest in inventory to expand our product offerings.  The greatest need for working capital occurs when we make bulk purchases of surplus-new and used inventory, or when our OEM suppliers offer additional discounts on large purchases.  In 2014, we increased our overall inventory level $4.8 million due primarily to taking advantage of Cable TV supplier incentives and the inventory acquired in the Nave Communications acquisition.  In 2013, we reduced our inventory, generating $1.1 million of cash flows due to the continued decrease in plant expansions and bandwidth upgrades in the cable television industry. Our working capital requirements are generally met by cash flow from operations and a bank line of credit, which currently permits borrowings up to $7.0 million.  We expect to have sufficient funds available from our cash on hand, future excess cash flows and the bank line of credit to meet our working capital needs for the foreseeable future.

Significant Customers

We sold our equipment and services to approximately 1,350 accounts in fiscal year 2014.  We are not dependent on one or a few customers to support our business on an on-going basis.   Sales to our largest customer accounted for approximately 6% of our consolidated sales in fiscal year 2014, while our sales to our largest five customers were 21% of our consolidated sales in fiscal year 2014, all of which were in the Cable TV segment.

Personnel

At September 30, 2014, we had 159 employees, including 154 full-time employees.  Management considers its relationships with its employees to be excellent.  Our employees are not unionized, and we are not subject to any collective bargaining agreements.

Item 2.                 Properties.

Each subsidiary owns or leases property for office, warehouse and service center facilities.

Cable TV Segment

·  
Broken Arrow, Oklahoma – We own a facility in a suburb of Tulsa consisting of our headquarters, additional offices, warehouse and service center of approximately 100,000 square feet on ten acres, with an investment of $3.3 million, financed by a loan of $2.8 million, due in monthly payments through 2021 at an interest rate of LIBOR plus 1.4%.   In 2007, we also constructed a 62,500 square foot warehouse facility on the rear of our existing property in Broken Arrow, OK, with an investment of $1.6 million, financed with cash flows from operations.

·  
Deshler, Nebraska – We own a facility near Lincoln consisting of land and an office, warehouse and service center of approximately 8,000 square feet.
 
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·  
Warminster, Pennsylvania – We own a facility in a suburb of Philadelphia consisting of an office, warehouse and service center of approximately 12,000 square feet, with an investment of $0.6 million.  We also lease property of approximately 2,000 square feet, with monthly rental payments of $1,390 through December 31, 2014.  We also rent on a month-to-month basis another property of approximately 2,000 square feet, with monthly rental payments of $1,325.

·  
Sedalia, Missouri – We own a facility near Kansas City consisting of land and an office, warehouse and service center of approximately 24,300 square feet.  In 2007, we also constructed an 18,000 square foot warehouse facility on the back of our existing property in Sedalia, MO, with an investment of $0.4 million.

·  
New Boston, Texas – We own a facility near Texarkana consisting of land and an office, warehouse and service center of approximately 13,000 square feet.

·  
Suwanee, Georgia – We rent on a month-to-month basis a facility in a suburb of Atlanta consisting of an office and service center of approximately 5,000 square feet, with monthly rental payments of $3,360.

Telco Segment

·  
Jessup, Maryland – We lease a facility in a suburb of Baltimore consisting of an office, warehouse, and service center of approximately 88,000 square feet, with monthly rental payments of $40,000 increasing each year by 2.5% through November 30, 2023.

We believe that our current facilities are adequate to meet our needs.

Item 3.                 Legal Proceedings.

From time to time in the ordinary course of business, we have become a party to various types of legal proceedings.  We do not believe that these proceedings, individually or in the aggregate, will have a material adverse effect on our financial position, results of operations or cash flows.
 
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PART II

Item 5.
Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Market Information

The table sets forth the high and low sales prices on the NASDAQ Global Market under the symbol “AEY” for the quarterly periods indicated.

Year Ended September 30, 2014
High
Low
     
First Quarter
$3.28
$2.41
Second Quarter
$3.42
$2.55
Third Quarter
$3.55
$2.55
Fourth Quarter
$2.80
$2.25
     
Year Ended September 30, 2013
High
Low
     
First Quarter
$2.20
$1.87
Second Quarter
$2.40
$2.00
Third Quarter
$2.40
$2.19
Fourth Quarter
$2.92
$2.24
     
 
Holders

At November 30, 2014, we had approximately 70 shareholders of record and, based on information received from brokers, there were approximately 2,200 beneficial owners of our common stock.

Dividend policy

We have never declared or paid a cash dividend on our common stock.  It has been the policy of our Board of Directors to use all available funds to finance the development and growth of our business.  The payment of cash dividends in the future will be dependent upon our earnings and financial requirements and other factors deemed relevant by our Board of Directors.

Securities authorized for issuance under equity compensation plans

The information in the following table is as of September 30, 2014:
 
 
 
 
 
Plan Category
 
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
(a)
 
Weighted-average
exercise price of
outstanding options,
warrants and rights
(b)
Number of securities remaining
available for future issuance
under equity compensation
plans (excluding securities
reflected in column (a))
(c)
Equity compensation plans approved by security holders
560,000
$2.96
40,415
Equity compensation plans not approved by security holders
0
0
0
Total
560,000
$2.96
40,415
 
 
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Item 6.                 Selected Financial Data.

SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

    Fiscal Year Ended September 30,  
   
2014
   
2013
   
2012
   
2011
   
2010
 
                               
Sales
  $ 35,889     $ 28,677     $ 29,677     $ 36,145     $ 47,306  
                                         
Income from operations
  $ 1,097     $ 2,896     $ 2,619     $ 4,754     $ 7,554  
                                         
Income from continuing operations
  $ 659     $ 1,772     $ 939     $ 2,431     $ 4,186  
                                         
Continuing operations earnings per share
                                       
  Basic
  $ 0.07     $ 0.18     $ 0.09     $ 0.24     $ 0.41  
  Diluted
  $ 0.07     $ 0.18     $ 0.09     $ 0.24     $ 0.41  
                                         
Total assets
  $ 53,406     $ 43,116     $ 42,033     $ 52,888     $ 52,260  
                                         
Long-term obligations inclusive
                                       
  of current maturities
  $ 6,086     $ 1,503     $ 1,687     $ 12,058     $ 13,872  

For fiscal years 2011 – 2013, the amounts above have been restated to include the impact of discontinued operations presentation resulting from the sale of Adams Global Communications in January 2014.  There was no impact for fiscal year 2010 as Adams Global Communications was acquired in May 2011.
 
Item 7.                      Management's Discussion and Analysis of Financial Condition and Results of Operations.
 
The following discussion and analysis of financial condition and results of operations should be read in conjunction with our consolidated historical financial statements and the notes to those statements that appear elsewhere in this report.  Certain statements in the discussion contain forward-looking statements based upon current expectations that involve risks and uncertainties, such as plans, objectives, expectations and intentions.  Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors.

General

During fiscal year 2014, the Company changed its organizational structure with the acquisition of Nave Communications. As a result of this acquisition, information that the Company’s management team regularly reviews for purposes of allocating resources and assessing performance changed.  Therefore, beginning in fiscal year 2014, the Company is reporting its financial performance based on its new 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 to cable MSOs throughout North America, Central America and South America.  Our Cable TV segment is a Premier Partner for Cisco’s products, which allows them to sell both video-related and IT-related products in the United States and a leading distributor of Arris broadband products.  The Cable Television segment also distributes products from other OEMs including Alpha, Blonder-Tongue, RL Drake, Corning-Gilbert, Promax, Quintech, Standard and Triveni Digital.  In addition, we also operate technical service centers that offer repair services for our cable MSO customers on most products that we sell.
 
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Telecommunications (“Telco”)

The Company’s Telco segment sells used telecommunications networking equipment from a wide range of manufacturers.  We have an extensive stock on hand in order to serve our telecommunications customers.  We primarily resell our inventory in North America, but we have a worldwide customer base, which we are actively trying to expand, especially in the European market.  In addition, this segment offers its customers decommissioning services for surplus and obsolete equipment, which it then processes through its recycling services.

Recent Business Developments

Acquisition of Nave Communications Company

On February 28, 2014, the Company acquired all of the outstanding common stock of Nave Communications, a provider of quality used telecommunication networking equipment.  The purchase price for Nave Communications included approximately $9.6 million in cash payments, as well as $3.0 million in deferred payments over the next three years.  In addition, the Company will make future earn-out payments equal to 70% of Nave Communications’ annual EBITDA in excess of an EBITDA target of $2 million per year over the next three years, which is estimated to be between $0.7 million and $1.0 million annually.

Sale of Adams Global Communications

On January 31, 2014, the Company executed an agreement to sell the majority of the net assets and operations of Adams Global Communications (“AGC”) to Adams Cable Equipment, a supplier of customer premise equipment (“CPE”) and other products for the cable television industry, for approximately $2 million in cash, which yielded an after tax loss of $0.6 million.  As part of the sales agreement, ADDvantage retained their existing relationship with Arris Solutions, as well as non-CPE inventory consisting primarily of headend and access and transport equipment.  In addition, ADDvantage retained the AGC facility, which was actively marketed for sale.  As part of the agreement, the Company also agreed to not compete in the used CPE market for three years.  AGC’s net assets that were disposed of consisted of approximately $2.5 million of current assets, $0.5 million of noncurrent assets and $0.1 million of current liabilities, which yielded a loss on the sale, net of tax, of approximately $0.6 million.

Assets Held for Sale

As a result of the sale of the net assets of AGC discussed above, the Company retained the AGC facility and engaged a real estate broker to sell the facility. On June 30, 2014, the Company sold the AGC facility for $1.5 million with net settlement proceeds of $1.4 million.  The sale resulted in a pretax loss of $0.1 million.

Business Strategy

In fiscal year 2014, we continued to execute on our growth strategy of organic growth and acquisitions.  Our Cable TV segment has experienced top-line revenue declines since 2008 due to decreased plant expansions and bandwidth equipment upgrades as a result of lower new housing developments and an overall lower cable television subscriber base.  For the Cable TV segment, our growth strategy is primarily focused on organic growth in order to gain market share in a shrinking capital equipment expenditure market.  We believe we can increase this business segment primarily along three major fronts:  1) expand product offerings among existing OEM vendors, 2) add additional vendors to our product offering mix and 3) expand our sales force.  In fiscal year 2014, we did increase our product offerings with our OEM vendors and increased our supply of inventory on hand in order to better serve our customers.  In addition, we continue to expand our sales force in order to gain additional market share in the Cable TV segment.  Also, as discussed above, we divested AGC from this segment as it was not performing to our expectations and it did not fit our core distribution strategy in this segment.

We believe that the current state of the industry may provide opportunities for expansion of our business through acquisitions.  We are seeking acquisition opportunities that will enable us to expand the scope of our business within the broader telecommunications industry.  In fiscal year 2013, we engaged an investment banking firm to help us identify and ultimately close a strategic acquisition.  On February 28, 2014, the Company acquired all of the outstanding common stock of Nave Communications, a telecommunications distributor of used telecommunication networking equipment and a recycler of surplus and obsolete telecommunications equipment.  This acquisition, along with its retained management team, has diversified the Company’s business outside of the cable television
 
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industry and will also allow the Company to capitalize on growth opportunities in both the cable television and telecommunication industries.
 
After completing the integration of Nave Communications into our business, we will continue to evaluate companies in the telecommunications market and are optimistic that we will identify and execute another strategic acquisition.  It should be noted, however, that the identification and completion of acquisitions on terms favorable to the Company and the successful integration of acquired businesses into our existing business are matters posing some risk to any company and about which we can give no assurance.

Results of Operations

Year Ended September 30, 2014, compared to Year Ended September 30, 2013 (all references are to fiscal years)

Consolidated

Consolidated sales increased $7.2 million, or 25%, to $35.9 million for 2014 from $28.7 million for 2013.  The increase in net sales was a result of the addition of the Telco segment of $8.7 million as a result of the Nave Communications acquisition, partially offset by a decrease in the Cable TV segment of $1.5 million.

Consolidated gross profit increased $2.9 million, or 33%, to $11.6 million for 2014 from $8.7 million for 2013.  The increase in gross profit was due primarily to the addition of the Telco segment of $3.8 million as a result of the Nave Communications acquisition, partially offset by a decrease in the Cable TV segment of $0.9 million.

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 $4.7 million, or 81%, to $10.5 million for 2014 compared to $5.8 million for 2013.  This increase was primarily due to increased expenses of the Cable TV segment of $0.5 million and the Telco segment of $4.2 million, which was a result of the Nave Communications acquisition.

Interest expense increased $0.2 million to $0.2 million for 2014 from $26,000 for the same period last year.  The increase was due primarily to interest expense incurred on the $5.0 million term loan entered into in connection with the Nave Communications acquisition.

The provision for income taxes from continuing operations decreased by $0.9 million to $0.2 million, or an effective rate of 25.0%, for 2014 from $1.1 million, or an effective rate of 38.3%, for the same period last year.  The 2014 provision for income taxes includes an adjustment to the federal tax provision for an additional deduction for state income taxes with an impact of approximately $40 thousand.

Segment results

Cable TV

Net sales for the Cable TV segment decreased $1.5 million to $27.2 million for the year ended September 30, 2014 from $28.7 million for the same period last year.  New equipment sales decreased $0.7 million, or 4%, to $18.2 million for 2014 from $18.9 million for 2013.  Net refurbished sales decreased $0.6 million, or 9%, to $5.2 million for 2014 from $5.8 million for the same period last year.  Net repair service revenues decreased $0.2 million, or 6%, to $3.8 million for 2014 from $4.0 million for the same period last year.  The decrease in equipment sales was due primarily to the continued decrease in plant expansions and bandwidth upgrades in the cable television industry and the absence of equipment sales as a result of Hurricane Sandy in fiscal year 2013, partially offset by supplying a major MSO equipment for certain projects.  In addition, repair service revenue decreased $0.2 million.

Gross profit decreased $0.9 million to $7.8 million for the year ended September 30, 2014 from $8.7 million for the same period last year.  The decrease in gross profit was primarily due to lower net sales.  Gross margin was 29% for the year ended September 30, 2014 and 30% for the year ended September 30, 2013.

Operating, selling, general and administrative expenses increased $0.5 million to $6.3 million for the year ended September 30, 2014 from $5.8 million for the same period last year.  The increase was due primarily to increased
 
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personnel costs as a result of expanding our sales force as discussed in our “Business Strategy” section above.

Telco

Net sales for the Telco segment were $8.7 million for the year ended September 30, 2014 and zero for the same period last year as a result of the acquisition of Nave Communications.  Net sales for the Telco segment consisted of $7.5 million of used equipment sales and $1.2 million of recycling revenue.  Gross margin was 42% for the year ended September 30, 2014.

Operating, selling, general and administrative expenses were $4.2 million for the year ended September 30, 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 $36 thousand for the year ended September 30, 2014 compared to $100 thousand for the same period last year.  This activity included the operations of AGC prior to the sale on January 31, 2014.

Loss on sale of discontinued operations, net of tax, was $0.6 million for the year ended September 30, 2014.  This loss consisted of a pretax loss of $0.9 million from the sale of the net assets of AGC on January 31, 2014 for $2 million in cash and a pretax loss of $0.1 million from the sale of the AGC facility on June 30, 2014 for $1.5 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:

   
Year Ended September 30, 2014
   
Year Ended September 30, 2013
 
   
Cable TV
   
Telco
   
Total
   
Cable TV
   
Telco
   
Total
 
                                     
Operating income (loss)
  $ 1,492,100     $ (395,001 )   $ 1,097,099     $ 2,896,254     $     $ 2,896,254  
Depreciation
    306,538       53,741       360,279       276,356             276,356  
Amortization
          481,722       481,722                    
EBITDA (a)
  $ 1,798,638     $ 140,462     $ 1,939,100     $ 3,172,610     $     $ 3,172,610  

(a)
The Telco segment for the year ended September 30, 2014 includes acquisition-related costs of $0.6 million related to the acquisition of Nave Communications.

Year Ended September 30, 2013, compared to Year Ended September 30, 2012

For this discussion, consolidated results and segment results are the same as the Telco segment did not have activity until the Nave Communications acquisition in 2014.

Consolidated

Consolidated sales decreased $1.0 million, or 3%, to $28.7 million for 2013 from $29.7 million for 2012.  New equipment sales decreased $0.7 million, or 4%, to $18.9 million for 2013 from $19.6 million for 2012.  Net refurbished sales increased $0.1 million, or 1%, to $5.8 million for 2013 from $5.7 million for the same period last
 
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year.  The net decrease in equipment sales was primarily due to the continued decrease in plant expansions and bandwidth upgrades in the cable television industry, partially offset by increased equipment sales as a result of Hurricane Sandy.  Net repair service revenues decreased $0.3 million, or 7%, to $4.0 million for 2013 from $4.3 million for the same period last year.

Gross profit increased $0.1 million, or 2%, to $8.7 million for 2013 from $8.6 million for 2012.  The increase in gross profit was primarily due to the mix of equipment sales as refurbished equipment generates a higher profit margin than new equipment, largely offset by lower overall net sales and an increase in the provision for excess of excess and obsolete inventory of $0.6 million.  Gross profit margins were 30% for 2013 and 29% for 2012.

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 decreased $0.1 million to $5.8 million for September 30, 2013 from $5.9 million for the same period last year.

Interest expense decreased $1.1 million to $26,000 for 2013 from $1.1 million for the same period last year.  The decrease was due primarily to lower interest expense as a result of the March 2012 payoff of the outstanding amount of $9.4 million under the second term loan under the Amended and Restated Revolving Credit and Term Loan Agreement and a $0.8 million payment made in order to terminate the associated interest rate swap agreement.  The interest rate swap agreement termination payment was recorded as interest expense in 2012.

The provision for income taxes from continuing operations increased by $0.5 million to $1.1 million, or an effective rate of 38.3%, for 2013 from $0.6 million, or an effective rate of 37.6%, for the same period last year.

Discontinued Operations

Gain (loss) from discontinued operations, net of tax, was a loss of $0.1 million for the year ended September 30, 2013 compared to a gain of $0.3 million for the same period last year.  This activity included the operations of Adams Global Communications prior to the sale on January 31, 2014.

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 to EBITDA follows:

   
Year Ended September 30, 2013
   
Year Ended September 30, 2012
 
   
Cable TV
   
Telco
   
Total
   
Cable TV
   
Telco
   
Total
 
                                     
Operating income
  $ 2,896,254     $     $ 2,896,254     $ 2,619,134     $     $ 2,619,134  
Depreciation
    276,356             276,356       300,961             300,961  
Amortization
                                   
EBITDA
  $ 3,172,610     $     $ 3,172,610     $ 2,920,095     $     $ 2,920,095  


Liquidity and Capital Resources

Cash Flows Used in Operating Activities

We generally finance our operations primarily through operations, and we also have available to us a bank line of credit of $7.0 million.  During 2014, we used $1.7 million of cash flow from operations.  The cash flow from
 
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operations was unfavorably impacted by $2.2 million from a net increase in inventory due primarily to purchases of new inventory with certain manufacturer incentives and purchases of refurbished telecommunications inventory and by $2.4 million from a net increase in accounts receivable due primarily to increased sales in the last month of 2014 compared to 2013.  In addition, the cash flow from operations was favorably impacted by $0.8 million from a net increase in accrued expenses primarily resulting from a $0.4 million accrual related to the first earn-out payment related to the Nave Communications acquisition.  We will make future earn-out payments over the next three years equal to 70% of Nave Communications’ annual EBITDA in excess of $2.0 million per year (“Nave Earn-out”), which we estimate will be between $0.7 million and $1.0 million annually.

Cash Flows Used in Investing Activities
 
During 2014, cash used in investing activities was $6.3 million.  This use of cash was primarily due to the acquisition of Nave Communications in the amount of approximately $9.6 million, net of cash acquired.  We also recorded an accrual at present value for deferred consideration of $2.7 million related to the Nave Communications acquisition, which consists of $3.0 million to be paid in equal annual installments over three years to the Nave Communications owners.  The acquisition is discussed in Note 2 of the Notes to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

During 2014, the sale of the net assets of Adams Global Communications for $2.0 and the sale of the AGC facility for $1.5 with net settlement proceeds of $1.4 million provided cash flows from investing activities for discontinued operations of $3.4 million.  The disposition is discussed in Note 3 of the Notes to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.
 
Cash Flows Provided by Financing Activities

During 2014, cash provided by financing activities was $4.5 million primarily due to cash borrowings of $5.0 million, partially offset by note payable payments of $0.5 million.  Cash borrowings were due to a new term loan of $5.0 million under our Amended and Restated Revolving Credit and Term Loan Agreement (“Credit and Term Loan Agreement”).  This term loan was used to assist in the funding of the acquisition of Nave Communications.

During 2014, we made principal payments totaling $0.5 million on our two term loans under our Credit and Term Loan Agreement.  The first term loan has a balance of $1.3 million at September 30, 2014.  The first term loan requires monthly payments of $15,334 plus accrued interest through November 2021.  Our second term loan, entered into in connection with the acquisition of Nave Communications, 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 September 30, 2014, there was not a balance outstanding under the 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 September 30, 2014).  Any outstanding balance on the revolving credit facility would be due on maturity which is November 28, 2014.

Subsequent to September 30, 2014, the Company signed the Fifth Amendment to the Amended and Restated Revolving Credit and Term Loan Agreement with its primary financial lender dated November 28, 2014.  This amendment extended the Line of Credit maturity to November 27, 2015.  The Line of Credit remains at $7.0 million, and the interest rate remains at the prevailing 30-day LIBOR rate plus 2.75%.

We expect that our cash and cash equivalents of $5.3 million at September 30, 2014, cash flow from operations and our existing line of credit to provide sufficient liquidity and capital resources to meet our working capital and debt payment needs.

Critical Accounting Policies and Estimates

Note 1 to the Consolidated Financial Statements in this Form 10-K for fiscal year 2014 includes a summary of the significant accounting policies or methods used in the preparation of our Consolidated Financial Statements.  Some of those significant accounting policies or methods require us to make estimates and assumptions that affect the amounts reported by us.  We believe the following items require the most significant judgments and often involve complex estimates.
 
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General

The preparation of financial statements in conformity with United States generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  We base our estimates and judgments on historical experience, current market conditions, and various other factors we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.  Actual results could differ from these estimates under different assumptions or conditions.  The most significant estimates and assumptions 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 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 industry.  Inventory is stated at the lower of cost or market, with cost determined using the weighted-average method.  At September 30, 2014, we had total inventory, before the reserve for excess and obsolete inventory, of $24.9 million, consisting of $16.9 million in new products and $8.0 million in used or refurbished products.

For the Cable TV segment, our reserve at September 30, 2014 for excess and obsolete inventory was $2.2 million, which reflects an increase of approximately $0.6 million and a write down of the carrying value of certain inventory items by approximately $0.2 million to reflect deterioration in the market demand of that inventory. If actual market conditions are less favorable than those projected by management, and our estimates prove to be inaccurate, we could be required to increase our inventory 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 September 30, 2014 and $0.3 million at September 30, 2013.   At September 30, 2014, accounts receivable, net of allowance for doubtful accounts, was $6.4 million.
 
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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 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.  If an impairment charge is incurred, it would negatively impact our results of operations and financial position.

We did not record a goodwill impairment for either of our two reporting units in the three year period ended September 30, 2014.  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.

We performed our annual impairment test for both reporting units in the fourth quarter to determine whether an impairment existed and to determine the amount of headroom at September 30, 2014.  Headroom is defined as the percentage difference between the carrying value of the goodwill and its fair value.  At September 30, 2014, headroom for the Cable TV and Telco reporting units were 147% and 199%, respectively.

Intangibles

As a result of the Nave Communications acquisition, we have intangible assets with finite useful lives.  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.

Recently Issued Accounting Standards
 
In April 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-08: “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360)”.  This new guidance defines a discontinued operation as a disposal of a component or a group of components of an entity that represents a strategic shift in operations that has a major effect on the Company’s operations and financial results.  This guidance will require additional disclosures for discontinued operations as well as new disclosures for individually significant disposal transactions that do not qualify for discontinued operations reporting.  The guidance is effective for all disposals (or classifications as held for sale) of components of an entity that occur within annual periods beginning on or after December 15, 2014.  Management does not anticipate that the adoption of ASU No. 2014-08 to have a significant impact on the Company’s consolidated financial statements.
 
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 years
 
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and interim periods within those years beginning after December 15, 2016.  Management is evaluating the impact that ASU No. 2014-09 will have on the Company’s consolidated financial statements.

Off-Balance Sheet Arrangements

None.

 
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Item 8.                      Financial Statements and Supplementary Data.


Index to Financial Statements
Page
   
Report of Independent Registered Public Accounting Firm
   
Consolidated Balance Sheets, September 30, 2014 and 2013
   
Consolidated Statements of Operations and Comprehensive Income (Loss), Years
 
ended September 30, 2014, 2013 and 2012
   
Consolidated Statements of Changes in Shareholders’ Equity, Years ended
 
September 30, 2014, 2013 and 2012
   
Consolidated Statements of Cash Flows, Years ended
 
September 30, 2014, 2013 and 2012
   
Notes to Consolidated Financial Statements





 
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Board of Directors and Stockholders of
ADDvantage Technologies Group, Inc.


We have audited the accompanying consolidated balance sheets of ADDvantage Technologies Group, Inc. and subsidiaries as of September 30, 2014 and 2013, and the related consolidated statements of operations and comprehensive income (loss), shareholders’ equity and cash flows for each of the three years in the period ended September 30, 2014.  Our audits of the consolidated financial statements also included the financial statement schedules of ADDvantage Technologies Group, Inc., listed in Item 15(a).  These financial statements and financial statement schedules are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of ADDvantage Technologies Group, Inc. and subsidiaries as of September 30, 2014 and 2013, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2014, in conformity with U.S. generally accepted accounting principles.  Also, in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.



/s/ HOGANTAYLOR LLP


December 9, 2014
Tulsa, Oklahoma

 
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ADDVANTAGE TECHNOLOGIES GROUP, INC.
CONSOLIDATED BALANCE SHEETS


   
September 30,
 
   
2014
   
2013
 
Assets
           
Current assets:
           
Cash and cash equivalents
  $ 5,286,097     $ 8,476,725  
Accounts receivable, net of allowance for doubtful accounts of
$200,000 and $300,000, respectively
    6,393,580       2,390,979  
Income tax refund receivable
    220,104       258,790  
Inventories, net of allowance for excess and obsolete
               
inventory of $2,156,628 and $1,600,000, respectively
    22,780,523       18,011,706  
Prepaid expenses
    174,873       106,509  
Deferred income taxes
    1,416,000       1,066,000  
Current assets of discontinued operations held for sale
          3,267,917  
Total current assets
    36,271,177       33,578,626  
                 
Property and equipment, at cost:
               
Land and buildings
    7,208,679       7,208,679  
Machinery and equipment
    3,244,153       2,991,412  
Leasehold improvements
    206,393       9,633  
Total property and equipment, at cost
    10,659,225       10,209,724  
Less accumulated depreciation
    (4,191,516 )     (3,831,238 )
Net property and equipment
    6,467,709       6,378,486  
                 
Intangibles, net of accumulated amortization
    6,625,278        
Goodwill
    3,910,089       1,150,060  
Other assets
    131,428       11,428  
Assets of discontinued operations held for sale
          1,997,520  
                 
Total assets
  $ 53,405,681     $ 43,116,120  
                 






















See notes to audited consolidated financial statements.
 
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ADDVANTAGE TECHNOLOGIES GROUP, INC.
CONSOLIDATED BALANCE SHEETS


   
September 30,
 
   
2014
   
2013
 
Liabilities and Shareholders’ Equity
           
Current liabilities:
           
Accounts payable
  $ 2,880,761     $ 1,138,494  
Accrued expenses
    1,809,878       878,474  
Notes payable – current portion
    845,845       184,008  
Other current liabilities
    983,269        
Current liabilities of discontinued operations held for sale
          226,757  
Total current liabilities
    6,519,753       2,427,733  
                 
Notes payable, less current portion
    5,240,066       1,318,604  
Deferred income taxes
    267,000       193,000  
Other liabilities
    1,942,889        
                 
Shareholders’ equity:
               
Common stock, $.01 par value; 30,000,000 shares authorized;
10,541,864 and 10,499,138 shares issued, respectively;
10,041,206 and 9,998,480 shares outstanding, respectively
      105,419         104,991  
Paid in capital
    (5,312,881 )     (5,578,500 )
Retained earnings
    45,643,449       45,650,306  
Total shareholders’ equity before treasury stock
    40,435,987       40,176,797  
                 
Less: Treasury stock, 500,658 shares, at cost
    (1,000,014 )     (1,000,014 )
Total shareholders’ equity
    39,435,973       39,176,783  
                 
Total liabilities and shareholders’ equity
  $ 53,405,681     $ 43,116,120  


























See notes to audited consolidated financial statements.
 
22

 

ADDVANTAGE TECHNOLOGIES GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)


   
Years ended September 30,
 
   
2014
   
2013
   
2012
 
Sales
    35,888,692       28,677,351       29,677,178  
Cost of sales
    24,283,236       19,968,034       21,119,250  
Gross profit
    11,605,456       8,709,317       8,557,928  
Operating, selling, general and administrative expenses
    10,508,357       5,813,063       5,938,794  
Income from operations
    1,097,099       2,896,254       2,619,134  
Interest expense
    217,910       25,980       1,113,854  
Income before income taxes
    879,189       2,870,274       1,505,280  
Provision for income taxes
    220,000       1,098,351       566,000  
Income from continuing operations
    659,189       1,771,923       939,280  
                         
Discontinued operations:
                       
Income (loss) from discontinued operations, net of tax
    (36,211 )     (102,207 )     311,212  
Loss on sale of discontinued operations, net of tax
    (629,835 )            
Discontinued operations, net of tax
    (666,046 )     (102,207 )     311,212  
                         
Net income (loss) attributable to common shareholders
    (6,857 )     1,669,716       1,250,492  
                         
Other comprehensive gain:
                       
Unrealized gain on interest rate swap, net of $0, $0 and $370,000 tax provision, respectively
                587,258  
                         
Comprehensive income (loss)
  $ (6,857 )   $ 1,669,716     $ 1,837,750  
                         
Earnings (loss) per share:
                       
Basic
                       
Continuing operations
  $ 0.07     $ 0.18     $ 0.09  
Discontinued operations
    (0.07 )      (0.01 )      0.03  
Net income (loss)
  $ (0.00 )   $ 0.17     $ 0.12  
Diluted
                       
Continuing operations
  $ 0.07     $ 0.18     $ 0.09  
Discontinued operations
    (0.07 )      (0.01 )      0.03  
Net income (loss)
  $ (0.00 )   $ 0.17     $ 0.12  
Shares used in per share calculation:
                       
Basic
    10,021,431       10,052,359       10,196,241  
Diluted
    10,049,440       10,052,359       10,197,496  















See notes to audited consolidated financial statements.

 
23

 

ADDVANTAGE TECHNOLOGIES GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended September 30, 2014, 2013 and 2012

                           
Accumulated
             
                           
Other
             
   
Common Stock
   
Paid-in
   
Retained
   
Comprehensive
   
Treasury
       
   
Shares
   
Amount
   
Capital
   
Earnings
   
Income (Loss)
   
Stock
   
Total
 
Balance, September 30, 2011
    10,431,354     $ 104,314     $ (5,884,521 )   $ 42,730,098     $ (587,258 )   $ (406,279 )   $ 35,956,354  
                                                         
Net income
                      1,250,492                   1,250,492  
Restricted stock issuance
    31,969       320       69,680                         70,000  
Stock options exercised
    2,000       20       1,600                         1,620  
Net unrealized gain on interest swap
                            587,258             587,258  
Share based compensation expense
                64,738                         64,738  
Purchase of common stock
                                  (113,821 )     (113,821 )
                                                         
Balance, September 30, 2012
    10,465,323     $ 104,653     $ (5,748,503 )   $ 43,980,590     $     $ (520,100 )   $ 37,816,640  
                                                         
Net income
                      1,669,716                   1,669,716  
Restricted stock issuance
    31,815       318       69,682                         70,000  
Stock options exercised
    2,000       20       3,280                         3,300  
Share based compensation expense
                97,041                         97,041  
Purchase of common stock
                                  (479,914 )     (479,914 )
                                                         
Balance, September 30, 2013
    10,499,138     $ 104,991     $ (5,578,500 )   $ 45,650,306     $     $ (1,000,014 )   $ 39,176,783  
                                                         
Net loss
                      (6,857 )                 (6,857 )
Restricted stock issuance
    42,726       428       135,572                         136,000  
Share based compensation expense
                130,047                         130,047  
                                                         
Balance, September 30, 2014
    10,541,864     $ 105,419     $ (5,312,881 )   $ 45,643,449     $     $ (1,000,014 )   $ 39,435,973  






See notes to audited consolidated financial statements.

 
24

 
 
CONSOLIDATED STATEMENTS OF CASH FLOWS

    Years ended September 30,  
   
2014
   
2013
   
2012
 
Operating Activities
                 
Net income (loss)
  $ (6,857 )   $ 1,669,716     $ 1,250,492  
Net income (loss) from discontinued operations
    (666,046 )     (102,207 )     311,212  
Net income from continuing operations
    659,189       1,771,923       939,280  
Adjustments to reconcile net income to net cash
                       
provided by (used in) operating activities:
                       
Depreciation
    360,279       276,356       300,961  
Amortization
    481,722              
Provision for excess and obsolete inventories
    601,351       600,000       580,587  
(Gain) loss on disposal of property and equipment
          (5,950 )     114,071  
Deferred income tax provision (benefit)
    (276,000 )     (15,000 )     234,000  
Share based compensation expense
    212,436       167,041       201,404  
Cash provided (used) by changes in operating assets
and liabilities:
                       
Accounts receivable
    (2,351,459 )     195,733       1,199,368  
Income tax refund receivable
    38,686       137,547       (46,592 )
Inventories
    (2,188,205 )     1,066,800       3,280,568  
Prepaid expenses
    (14,753 )     2,045       (76,300 )
Other assets
          2,350       123  
Accounts payable
    (78,670 )     8,844       (815,732 )
Accrued expenses
    838,479       (84,847 )     (218,649 )
Net cash provided by (used in) operating activities −
continuing operations
    (1,716,945 )     4,122,842       5,693,089  
Net cash provided by (used in) operating activities −
discontinued operations
    280,462       (16,365 )     (709,949 )
Net cash provided by (used in) operating activities
    (1,436,483 )     4,106,477       4,983,140  
                         
Investing Activities
                       
Acquisition of net operating assets, net of cash acquired
    (9,630,647 )            
Purchases of property and equipment
    (43,977 )     (211,223 )     (10,069 )
Proceeds from disposal of property and equipment
          12,350        
Net cash used in investing activities – continuing operations
    (9,674,624 )     (198,873 )     (10,069 )
Net cash provided by (used in) investing activities −
discontinued operations
    3,413,001             (197,858 )
Net cash used in investing activities
    (6,261,623 )     (198,873 )     (207,927 )
                         
Financing Activities
                       
Proceeds on notes payable
    5,000,000              
Payments on notes payable
    (492,522 )     (184,008 )     (10,371,508 )
Purchase of treasury stock
          (479,914 )     (113,821 )
Proceeds from stock options exercised
          3,300       1,620  
Net cash provided by (used in) financing activities
    4,507,478       (660,622 )     (10,483,709 )
                         
Net increase (decrease) in cash and cash equivalents
    (3,190,628 )     3,246,982       (5,708,496 )
Cash and cash equivalents at beginning of year
    8,476,725       5,229,743       10,938,239  
Cash and cash equivalents at end of year
  $ 5,286,097     $ 8,476,725     $ 5,229,743  
                         
Supplemental cash flow information:
                       
Cash paid for interest
  $ 126,659     $ 26,137     $ 1,164,522  
Cash paid for income taxes
  $ 62,000     $ 971,000     $ 622,210  
                         
Supplemental noncash investing activities:
                       
Deferred guaranteed payments for acquisition of business
  $ (2,744,338 )   $     $  


See notes to audited consolidated financial statements.

 
25

 

ADDVANTAGE TECHNOLOGIES GROUP, INC.
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”).  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 Television segment and used telecommunications networking equipment for the Telco segment.  Inventory is stated at the lower of cost or market with market defined principally as net realizable value.  Cost is determined using the weighted-average method.  For the Cable Television segment, the Company records an inventory reserve provision to reflect inventory at its estimated 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.  For the Telco segment, the Company does not maintain an inventory reserve as this segment will recycle any surplus and obsolete equipment on hand through its recycling program when it is identified.

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 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, $0.3 million and $0.3 million for the years ended September 30, 2014, 2013 and 2012, respectively.
 
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 of the reporting unit 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
 
26

 
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 our 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, 2014 and 2013, the 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.

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 bases 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 and comprehensive income (loss).  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 $0.1 million for the year ended September 30, 2014 and $0.2 million for each of the years ended September 30, 2013 and 2012.

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.
 
27

 

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 2014, 2013 or 2012 that contributed in excess of 10% of the total net sales.  The Company’s sales to foreign (non-U.S. based customers) were approximately $3.6 million, $1.1 million and $1.4 million for the years ended September 30, 2014, 2013 and 2012, respectively.  In 2014, the Cable TV segment purchased approximately 14% of its inventory either directly from Cisco or indirectly through their primary stocking distributor and approximately 32% of its inventory from Arris Solutions, Inc.  The concentration of suppliers of the Company’s inventory subjects the Company to risk.  The Telco segment purchased approximately 13% of its total inventory purchases from Windstream.

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 and comprehensive income (loss).

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 and accounts payable approximate fair value due to their short maturities.

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 April 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-08: “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360)”.  This new guidance defines a discontinued operation as a disposal of a component or a group of components of an entity that represents a strategic shift in operations that has a major effect on the Company’s operations and financial results.  This guidance will require additional disclosures for discontinued operations as well as new disclosures for individually significant disposal transactions that do not qualify for discontinued operations reporting.  The guidance
 
28

 
is effective for all disposals (or classifications as held for sale) of components of an entity that occur within annual periods beginning on or after December 15, 2014.  Management does not anticipate that the adoption of ASU No. 2014-08 to have a significant impact on the Company’s consolidated financial statements.
 
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 years and interim periods within those years beginning after December 15, 2016. Management is evaluating the impact that ASU No. 2014-09 will have on the Company’s consolidated financial statements.

Note 2 – Acquisition
 
As part of the Company’s growth strategy, the Company is pursuing an acquisition strategy to expand into the broader telecommunications industry.  On February 28, 2014, the Company acquired all of the outstanding common stock of Nave Communications, a telecommunications distributor of used telecommunication networking equipment and a recycler of surplus and obsolete telecommunications equipment.  This acquisition, along with its retained management team, will diversify the Company’s business outside of the cable television industry and will also allow the Company to capitalize on growth opportunities in both the cable television and telecommunication industries.

The purchase price for Nave Communications includes the following:
       
Cash payments, net of cash received
  $ 9,630,647  
Deferred guaranteed payments (a)
    2,744,338  
Net purchase price
  $ 12,374,985  

(a)  
This amount represents the present value of $3.0 million in deferred payments, which will be paid in equal annual installments over the next three years.  Over the three year period, the Company will ratably record interest expense with the offset being the deferred payment liability.  As of September 30, 2014, the deferred guaranteed payments balance is $1.0 million in other current liabilities and $1.8 million in other long-term liabilities.

Under the acquisition method of accounting, the total purchase price is allocated to Nave Communications’ net tangible and intangible assets acquired and liabilities assumed based on their fair values as of February 28, 2014, the effective date of the acquisition.  Any remaining amount is recorded as goodwill.
 
 
29

 
The following summarizes the final purchase price allocation of the fair value of the assets acquired and the liabilities assumed at February 28, 2014:
 
Assets acquired:
 
(in thousands)
 
Cash and cash equivalents
  $ 113  
Accounts receivable
    1,651  
Inventories
    2,503  
Property and equipment
    406  
Other non-current assets
    120  
Intangible assets
    7,107  
Goodwill
    2,760  
Total assets acquired
    14,660  
         
Liabilities assumed:
       
Accounts payable
    1,821  
Accrued expenses
    275  
Capital lease obligation – current portion
    21  
Capital lease obligation
    55  
Total liabilities assumed
    2,172  
Net assets acquired
    12,488  
Less cash acquired
    113  
Net purchase price
  $ 12,375  
 
The acquired intangible assets of approximately $7.1 million consist primarily of customer relationships, technology, trade name, and non-compete agreements with the former owners.

The Company will also make payments over the next three years equal to 70% of Nave Communications’ annual EBITDA in excess of $2.0 million per year (“Nave Earn-out”).  The Company will recognize the expense ratably over the three year period as compensation expense.

The unaudited financial information in the table below summarizes the combined results of operations of ADDvantage Technologies Group and Nave Communications for the year ended September 30, 2014 and September 30, 2013, on a pro forma basis, as though the companies had been combined as of October 1, 2012.  The pro forma earnings for the year ended September 30, 2014 and September 30, 2013 were adjusted to include intangible amortization expense of $0.8 million.  Incremental interest expense of $0.2 million was included in the year ended September 30, 2014 and September 30, 2013, as if the $5.0 million term loan used to help fund the acquisition had been entered into on October 1, 2012.  The $0.6 million of acquisition-related expenses were excluded from the year ended September 30, 2014 and included in the year ended September 30, 2013 as if the acquisition occurred at October 1, 2012.  The unaudited pro forma financial information is provided for informational purposes only and does not purport to be indicative of the Company’s combined results of operations which would actually have been obtained had the acquisition taken place on October 1, 2012 nor should it be taken as indicative of our future consolidated results of operations.

   
Years Ended September 30,
 
   
2014
   
2013
 
   
(in thousands, except
per share amounts) 
 
Sales
  $ 41,983     $ 41,701  
Income from continuing operations
  $ 1,275     $ 1,881  
Net income
  $ 609     $ 1,779  
Earnings per share:
               
Basic:
               
Continuing operations
  $ 0.13     $ 0.19  
Net income
  $ 0.06     $ 0.18  
Diluted:
               
Continuing operations
  $ 0.13     $ 0.19  
Net income
  $ 0.06     $ 0.18  

 
30

 
Note 3 – Discontinued Operations and Assets Held for Sale
 
On January 31, 2014, the Company entered into an agreement to sell the majority of the net assets and operations of Adams Global Communications, LLC (“AGC”) to Adams Cable Equipment, a supplier of customer premise equipment (“CPE”) and other products for the cable television industry, for $2 million in cash, which yielded  an after tax loss of $0.6 million.  As part of the sales agreement, ADDvantage retained their existing relationship with Arris Solutions, as well as non-CPE inventory consisting primarily of headend and access and transport equipment.  In addition, ADDvantage retained the AGC facility.  As part of the agreement, the Company also agreed to not compete in the used CPE market for three years.  The Company elected to pursue this opportunity to sell AGC as management determined that AGC did not fit within the Company’s primary cable television equipment distribution business of selling new and used headend and access and transport equipment, and AGC was not performing to the Company’s expectations.

The calculation of the pretax loss on the sale of AGC is as follows:

Cash proceeds
  $ 2,000,000  
         
Assets sold:
       
Accounts receivable
    454,269  
Inventories
    2,044,135  
Prepaid expenses
    12,054  
Property and equipment
    60,586  
Goodwill
    410,123  
Other
    10,805  
      2,991,972  
Liabilities transferred:
       
Accounts payable
    77,675  
Accrued expenses
    6,075  
      83,750  
Net assets sold
    2,908,222  
         
Pretax loss on the sale of AGC
  $ 908,222  

 
31

 
Assets and liabilities included within discontinued operations held for sale in the Company’s Consolidated Balance Sheet at September 30, 2013, are as follows:

   
 September 30,
2013
 
Assets:
     
Cash and cash equivalents
  $ (110,068 )
Accounts receivable, net
    629,874  
Income tax receivable
    13,590  
Inventories
    2,718,747  
Prepaid expenses
    15,774  
Current assets of discontinued operations held for sale
  $ 3,267,917  
         
Property and equipment, at cost:
       
Land and building
  $ 1,585,594  
Machinery and equipment
    134,010  
Less accumulated depreciation
    (132,207 )
Net property and equipment
    1,587,397  
Goodwill
    410,123  
Non-current assets of discontinued operations held for sale
  $ 1,997,520  
         
Liabilities:
       
Accounts payable
  $ 170,375  
Accrued expenses
    56,382  
Current liabilities of discontinued operations held for sale
  $ 226,757  

The Company retained the AGC facility following the disposition and actively marketed the facility with a real estate broker. Therefore, the Company had classified this facility as “Assets held for sale” on the Consolidated Balance Sheets, net of accumulated depreciation.  On June 30, 2014, the Company sold the AGC facility for $1.5 million with net settlement proceeds of $1.4 million.  The sale resulted in a pretax loss of $0.1 million.

Income (loss) from discontinued operations, net of tax and the loss on sale of discontinued operations, net of tax, of AGC which are presented in total as discontinued operations, net of tax in the Company’s Consolidated Statements of Operations and Comprehensive Income (Loss) for the years ended September 30, 2014, 2013 and 2012 are as follows:

   
2014
   
2013
   
2012
 
Sales
  $ 972,935     $ 4,680,241     $ 5,539,225  
                         
Income (loss) before provision (benefit) for income taxes
    (57,211 )     (164,207 )      511,212  
Income tax provision (benefit)
    (21,000 )     (62,000 )     200,000  
Income (loss) from discontinued operations, net of tax
    (36,211 )     (102,207 )      311,212  
                         
Loss on sale of discontinued operations
    (993,835 )            
Income tax benefit
    (364,000 )            
Loss on sale of discontinued operations,
net of tax
    (629,835 )            
Discontinued operations, net of tax
  $ (666,046 )   $ (102,207 )   $ 311,212  

 
32

 
Note 4 – Inventories

Inventories at September 30, 2014 and 2013 are as follows:

   
2014
   
2013
 
New:
           
Cable TV
  $ 16,949,713     $ 15,679,789  
Refurbished:
               
Cable TV
    3,982,140       3,931,917  
Telco
    4,005,298        
Allowance for excess and obsolete inventory
    (2,156,628 )     (1,600,000 )
                 
    $ 22,780,523     $ 18,011,706  

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 fiscal years ended September 30, 2014, 2013 and 2012, by approximately $0.6 million, respectively.  For the Telco segment, any obsolete and excess telecommunications inventory is processed through its recycling program when it is identified.

Note 5 – Intangible Assets

As a result of the Nave Communications acquisition, the Company now has intangible assets with finite useful lives based on the purchase price allocation (see Note 2).  The intangible assets with their associated accumulated amortization amounts at September 30, 2014 are as follows:

   
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