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EX-32.2 - CERTIFICATION OF CFO PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 - ADDVANTAGE TECHNOLOGIES GROUP INCexhibit32_2.htm
EX-32.1 - CERTIFICATION OF CEO PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 - ADDVANTAGE TECHNOLOGIES GROUP INCexhibit32_1.htm
EX-31.2 - CERTIFICATION OF CFO PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 - ADDVANTAGE TECHNOLOGIES GROUP INCexhibit31_2.htm
EX-31.1 - CERTIFICATION OF CEO PURSUANT TO SECTION 302 OF THE SARBANES- OXLEY ACT OF 2002 - ADDVANTAGE TECHNOLOGIES GROUP INCexhibit31_1.htm
EX-23.1 - CONSENT OF HOGANTAYLOR LLP - ADDVANTAGE TECHNOLOGIES GROUP INCexhibit23_1.htm
EX-21.1 - LISTING OF COMPANY SUBSIDIARIES - ADDVANTAGE TECHNOLOGIES GROUP INCexhibit21_1.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K
 
⌧ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended September 30, 2019
 
□TRANSITION 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.)
   
13757 N. Stemmons Freeway, Farmers Branch, Texas
75234
(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 □      No  ⌧
   
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.
 Yes □      No  ⌧
   
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 ⌧   No  □
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 ⌧   No  □
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.
 
 
             ⌧
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer,
smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer”,
“accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
   Large accelerated filer   □            Accelerated filer   □
   Non-accelerated filer   ⌧             Smaller reporting company   ⌧                Emerging growth company □
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition
period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the
Exchange Act.
 
 
             □
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
 Yes □      No  ⌧
 
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, 2019 was $7,825,604.
 
 
The number of shares of the registrant’s outstanding common stock, $.01 par value per share, was 10,361,292 as of
November 30, 2019.
 


ADDVANTAGE TECHNOLOGIES GROUP, INC.
FORM 10-K
YEAR ENDED SEPTEMBER 30, 2019
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
 
 
 

2

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”, “Our” 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 and telecommunications industries, 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.  In 2019, the Company moved its headquarters from Broken Arrow, Oklahoma to the Dallas, Texas area.

The Company (through its subsidiaries) i) provides turn-key wireless infrastructure services for wireless carriers, tower companies and equipment manufacturers, and ii) distributes and services a comprehensive line of electronics and hardware for the telecommunications industry.  In addition, we offer our customers decommissioning services for surplus and obsolete equipment, which we in turn process through our recycling program.

Fulton Technologies, Inc. (“Fulton”) was purchased on January 4, 2019, which established the Company’s Wireless Infrastructure Services segment.

The Company’s Telecommunications segment operates through our subsidiaries, Nave Communications Company (“Nave”) and ADDvantage Triton, LLC (“Triton”).

For our telecommunications subsidiaries, we sell new, surplus-new and refurbished equipment that we purchase in the market as a result of telecommunications system upgrades or overstock supplies.  We maintain one of the industry's largest inventories of new and used equipment, which allows us to expedite delivery of mission-critical products to our customers.  We continually evaluate new product offerings in the broader telecommunications industry as technology evolves and upgrade our product offerings to stay current with our customer’s technology platforms.

Website Access to Reports
Our public website is www.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 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 (www.sec.gov).
3


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

In the second and third quarters of fiscal year 2019, the Company changed its organizational structure with the acquisition of Fulton and the sale of the Cable TV segment.  As a result of these changes, information that the Company’s management team regularly reviews for purposes of allocating resources and assessing performance changed.  The Company’s current reportable segments are Wireless Infrastructure Services (“Wireless”) and Telecommunications (“Telco”).  The Cable Television (“Cable TV”) segment was sold on June 30, 2019.  Therefore, the Company has classified the Cable TV segment as discontinued operations (see Note 4 – Discontinued Operations).

Products and Services

Wireless Segment

We provide turn-key wireless infrastructure services for the four major U.S. wireless carriers, communication tower companies, national integrators, and original equipment manufacturers that support these wireless carriers.  These services primarily consist of the installation and upgrade of technology on cell sites and the construction of new small cells for 5G.

As part of the Fulton acquisition, we were able to hire and retain the majority of Fulton’s existing employee base.  Fulton now has approximately 100 employees.  Fulton performs equipment installations, upgrades and maintenance services for its customers primarily on communication towers.  Having the proper safety record, training capability and quality oversight is paramount in the industry.  Fulton has prided itself in performing safe, timely and high-quality services.  Demand for tower equipment installation and upgrading services is at an all-time high, and we expect this trend to continue for the foreseeable future as wireless carriers continue to add capacity, expand their networks and upgrade their current technology for high speed connectivity, including 5G.

Fulton also supports the installation and support of temporary tower locations.  This niche and growing business includes the erection of temporary towers to allow for the maintenance of permanent locations without causing a degradation of wireless in the area.  In addition, Fulton provides temporary tower solutions for special events that require an increase of coverage and capacity for festivals, concerts and sporting events.  Fulton has an inventory of temporary poles of different sizes and uses a unique installation process for the quick deployment of a tower location with little to no environmental impact.

Telco Segment

The Telco segment provides quality new and used telecommunication networking equipment, including both central office and customer premise equipment, to its customer base of telecommunications providers, enterprise customers and resellers by utilizing its inventory from a broad range of manufacturers as well as other supply channels.  This segment also offers its customers repair and testing services for telecommunications networking equipment.  In addition, this segment offers its customers decommissioning services for surplus and obsolete equipment, which it in turn processes through its recycling program.

Central Office Equipment – Central office equipment includes optical transport, switching, and data center 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”) – CPE includes integrated access devices, channel banks, internet protocol private branch exchange (“IP PBX”) phones, and routers that are placed inside the customer site that will receive the communication signal from the communication services provider.
4


In addition, we offer our customers decommissioning services for surplus and obsolete telecom equipment, which we then process through our Responsible Recycling (“R2”) -certified recycling program.

Revenues by Geographic Area

Our revenues by geographic areas were as follows:

   
2019
   
 2018 
   
2017 
 
United States
                 
Wireless
 
$
22,918,535
   
$
   
$
 
Telco
   
29,789,593
     
24,606,027
     
22,822,538
 
Canada, Central America, Asia, Europe, Mexico, South America and Other
                       
Telco
   
2,410,169
     
2,867,255
     
3,085,033
 
   
$
55,118,297
   
$
27,473,282
   
$
25,907,571
 

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

Wireless Segment

In 2019, wireless tower and small cell services, including the procurement of the requisite materials, represented substantially all of the Wireless segment’s revenues.  In this segment, we market and sell our products to wireless carriers, wireless equipment providers and tower companies.

Telco Segment

Sales of new products represented 30% of revenues and refurbished products represented 61%.  Repair services represented less than 1% of Telco sales.  Recycle sales and other services contributed the remaining 9% of Telco segment revenues.  In this segment, we market and sell our products to franchise and private MSOs, telecommunication companies, system contractors, other industry resellers, enterprise customers and directly to consumers via on-line sales.  Our sales and marketing are predominantly performed by our experienced internal sales and customer service staff, outside sales representatives located in various geographic and strategic areas of the country, and many on-line sales channel platforms such as our own website, Amazon and Newegg.  The majority of our sales activity is generated through customer relationships developed by our sales personnel and executives, referrals from manufacturers we represent, and on-line advertising.

We maintain a wide breadth 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 telecommunication product reseller in the country, and we have access to additional inventory via our various supply channels.  We believe our investment in on-hand inventory, our product supply channels, and our experienced sales and customer service team create a competitive advantage for us.

Suppliers

In fiscal year 2019, the Telco segment did not purchase over 10% of its total inventory purchases from any one supplier.  This segment of our business primarily purchases its used inventory from telecommunication companies and wholesale suppliers that have excess equipment on hand or have upgraded their systems or from other resellers in this industry.

Seasonality

In the Wireless segment, the services that we provide on our customers’ wireless towers are 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 or consistent rain tends to be more
5

prominent than at other times during the year.  Winter months are generally slower due to the cold weather conditions, and the inability to access wireless towers during periods of heavy snow and ice.

In the Telco segment, we do not anticipate that quarterly operating results will generally be impacted by seasonal fluctuations, other than normal business fluctuations during the winter holiday season.

Competition

Wireless Segment

The wireless infrastructure services business competes with other wireless service companies that compete on a local, regional or national basis.  Sometimes, Fulton finds itself providing services in the same markets that its customers can also provide similar services utilizing their in-house personnel.  Most of the direct competition in the Wireless segment comes from regionally based competition of similarly sized companies.  In niche areas of service and in certain markets, the Wireless segment has few competitors due to their expertise and the required investment in equipment and assets.  The level of competition can vary drastically based on demand characteristics in certain markets.

For the Wireless segment, we believe our differentiation from other service providers in the marketplace is primarily the following:

Past performance and experience;
Robust safety organization;
Ability to recruit and retain personnel;
Properly capitalized for equipment and working capital;
Broad range of master service agreements in place;
Industry relationships; and
Having a diversified offering of services based on know-how and equipment.

Telco Segment

The overall telecommunications equipment industry is highly competitive.  We compete with numerous resellers in the marketplace that sell both direct and on-line.

For the Telco segment, we believe our differentiation from other resellers in the marketplace is primarily the following:

Broad range of new, refurbished and used inventory, which allows us to meet our customers’ timing needs;
Ability to source unique and sometimes rare, high demand inventory;
Offer a range of repair and testing capabilities to help improve the quality of our inventory as well as offering repair and testing of equipment as a service to our customers and vendors;
Experienced sales support staff that maintain strong and longstanding relationships with our customers;
Sales force that has a strong technical knowledge of the products we offer;
Quality certifications:  TL9000 (telecommunications quality certification), ISO 14001 (environmental management certification), OHSAS18000 (occupational safety and health management certification), and R2 (EPA responsible recycling practices for electronics); and
Provide multiple services for our customers including deinstallation and decommission of products, storage and management of spares inventory and recycling.

Working Capital Practices

Working capital practices in our business differ by segment.  In the Wireless segment, we utilize quick payment accounts receivable programs with our major customers and our bank to decrease the amount of time between project completion and payment.  The majority of working capital needs result from the payment of project related costs before invoicing the customer.  This includes personnel, subcontractors, equipment rentals and materials.  Although the quick payment programs are in place to accelerate receivable payments, working capital is necessary to complete the jobs and provide the necessary closeout packages required for customer approval.  In addition, we also have access to our revolving bank line of credit to meet our working capital needs.
6


In the Telco segment, working capital centers on inventory and accounts receivable.  We choose to carry a relatively large volume of inventory due to our on-hand, on-demand business model.  We typically utilize excess cash flows to reinvest in inventory to maintain or 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.  Our working capital requirements are generally met by cash flows from operations and our revolving bank line of credit.

In the first fiscal quarter of 2019, the Company entered into a new credit agreement with a new financial lender.  This credit agreement contains a $2.5 million revolving line of credit and matures on December 17, 2019.  Future borrowings under the line of credit are limited to the lesser of $2.5 million or the sum of 80% of eligible accounts receivable and 25% of eligible inventory.  Subsequent to September 30, 2019, the Company renewed its revolving bank line of credit for one more year to a maturity date of December 17, 2020.  As part of this renewal, the revolving bank line of credit increased from $2.5 million to $4.0 million.  The other terms of the renewal were essentially the same.  We expect to have sufficient funds available from our cash on hand, future cash flows, quick payment accounts receivable programs and the bank revolving line of credit to meet our working capital needs for the foreseeable future.

Significant Customers

We are not dependent on a single or few customers to support our business on an on-going basis company-wide.  Sales to our largest customer accounted for approximately 12% of our consolidated sales in fiscal year 2019, while our sales to our largest five customers were 37% of our consolidated sales in fiscal year 2019, four of which were in the Wireless segment and one was in the Telco segment.

Personnel

At September 30, 2019, we had 188 employees, including 185 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 leases property for office, warehouse and service center facilities.

Wireless Segment

Dallas, Texas – We lease, on a month-to-month basis, a facility in a suburb of Dallas consisting of our headquarters, an office and warehouse with monthly rental payments of $23,920.  We will be relocating to a different facility in the Dallas area in the second quarter of fiscal year 2020.
Tulsa, Oklahoma – We lease a facility in a suburb of Tulsa consisting of offices with monthly rental payments of $2,500 through December 2019, to a company controlled by David Chymiak, a director and substantial shareholder.
Chicago, Illinois – We lease a facility in a suburb of Chicago consisting of an office, warehouse and service center of approximately 40,000 square feet, with monthly rental payments of $21,427 through July 31, 2024.
Minneapolis, Minnesota – We lease a facility in Minneapolis consisting of an office and service center of approximately 22,000 square feet, with monthly rental payments of $14,085 through December 31, 2022.  This facility has been fully subleased through November 30, 2020.

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 $45,256 increasing each year by 2.5% through November 30, 2023.  The rental payment does not include taxes and common area maintenance fees.  We sublease, on a month-to-month basis, approximately 67,000 square feet for $33,433 a month.  We plan to exit this facility and move our office staff to another location in the Baltimore area in 2020.
7

Miami, Florida – We lease a facility in a suburb of Miami consisting of an office, warehouse and service center totaling approximately 31,000 square feet with monthly rental payments of $16,993 increasing each year by 3% through October 31, 2024. The rental payment does not include taxes and common area maintenance fees.

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 are 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.
8


PART II

Item 5.
Market for Registrant’s 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, 2019
High
Low
     
First Quarter
$1.60
$1.25
Second Quarter
$1.50
$1.32
Third Quarter
$1.98
$1.23
Fourth Quarter
$2.20
$1.57
     
Year Ended September 30, 2018
High
Low
     
First Quarter
$2.33
$1.38
Second Quarter
$1.57
$1.28
Third Quarter
$1.50
$1.21
Fourth Quarter
$1.83
$1.29
     
Holders

At November 30, 2019, we had approximately 50 shareholders of record and, based on information received from brokers, there were approximately 1,300 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, 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, 2019:
 
 
 
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
770,000
$1.73
7,154
Equity compensation plans not approved by security holders
0
0
0
Total
770,000
$1.73
7,154

9


Item 6. Selected Financial Data.

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

Fiscal Year Ended September 30,
   
2019
   
2018
   
2017
   
2016
   
2015
 
                               
Sales
 
$
55,118
   
$
27,473
   
$
25,908
   
$
15,666
   
$
18,337
 
                                         
Income (loss) from operations
 
$
(3,976
)
 
$
(3,798
)
 
$
(2,916
)
 
$
(2,092
)
 
$
722
 
                                         
Loss from continuing operations
 
$
(4,035
)
 
$
(5,784
)
 
$
(2,456
)
 
$
(2,447
)
 
$
(1,010
)
                                         
Continuing operations loss per share
                                       
Basic
 
$
(0.39
)
 
$
(0.56
)
 
$
(0.24
)
 
$
(0.24
)
 
$
(0.10
)
Diluted
 
$
(0.39
)
 
$
(0.56
)
 
$
(0.24
)
 
$
(0.24
)
 
$
(0.10
)
                                         
Total assets
 
$
36,828
   
$
25,944
   
$
30,689
   
$
24,895
   
$
25,142
 
                                         
Long-term obligations inclusive
of current maturities
  $
 ‒     $
 1,996     $
 5,502     $
 3,400     $
 4,090  


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

The Company reports its financial performance based on two external reporting segments: Wireless and Telecommunications.  These reportable segments are described below.

Wireless Infrastructure Services (“Wireless”)

On January 4, 2019, the Company purchased substantially all of the net assets of Fulton, which comprises the Wireless segment.  Fulton provides turn-key wireless infrastructure services for the four major U.S. wireless carriers, communication tower companies, national integrators, and original equipment manufacturers that support these wireless carriers.  These services primarily consist of the installation and upgrade of technology on cell sites and the construction of new small cells for 5G.

Telecommunications (“Telco”)

The Company’s Telco segment sells new and refurbished telecommunications networking equipment, including both central office and customer premise equipment, to its customer base of telecommunications providers, enterprise customers and resellers located primarily in North America.  This segment also offers its customers repair and testing services for telecommunications networking equipment.  In addition, this segment offers its customers decommissioning services for surplus and obsolete equipment, which it in turn processes through its recycling program.
10

Recent Business Developments

Purchase of Net Assets of Fulton Technologies, Inc. and Mill City Communications, Inc.

On December 27, 2018, we entered into a purchase agreement to acquire substantially all of the net assets of Fulton Technologies and Mill City.  We closed this transaction on January 4, 2019 for $1.3 million in cash.  The purchase allows us to enter into the wireless communication services business, which is poised for significant growth with the advent of 5G technology.  This acquisition is part of the overall growth strategy that will further grow and diversify the Company into the broader telecommunications industry by providing wireless infrastructure services, which will continue to experience significant growth.

Fulton operates out of two primary locations.  Fulton North, which is based just outside of Chicago in Roselle, Illinois, operates across the northern states including Illinois, Iowa and Minnesota.  Fulton Southwest, which is based in Dallas, Texas, operates throughout Texas and neighboring states.  As part of the asset purchase, we also acquired Mill City, which is based in Fridley, Minnesota.  In April 2019, we decided to market and sell the assets of the Mill City operation and focus the company’s operations on its two large metropolitan locations.  Fulton’s coverage of Chicago, Dallas, Houston, San Antonio and Austin allows it to participate in a collection of top wireless markets in the nation.

One of the key attractions of acquiring Fulton is that it had existing contracts and customer relationships.  Fulton is an approved vendor with the four major U.S. wireless carriers, leading communication tower companies, national integrators, and major equipment manufacturers.  The acquisition allowed us to enter the wireless communication space quickly and cost effectively.  The customer contracts that Fulton had in place eliminated a key barrier for us to enter this industry due to the required experience and safety qualifications necessary to obtain the contracts.

In one of its business lines, Fulton performs equipment installations, upgrades and maintenance services for its customers primarily on communication towers.  Having the proper safety record, training capability and quality oversight is paramount in the industry.  Fulton has prided itself in performing safe, timely and high-quality services.  Demand for tower equipment installation and upgrading services is at an all-time high, and we expect this trend to continue for the foreseeable future as wireless carriers continue to add capacity, expand their networks and upgrade their current technology for high speed connectivity, including 5G technology.

Fulton’s other primary business line involves the installation and support of temporary tower locations.  This niche and growing business includes the erection of temporary towers to allow for the maintenance of permanent locations without causing a degradation of wireless service coverage in the area.  In addition, Fulton provides temporary tower solutions for special events that require an increase of coverage and capacity for festivals, concerts and sporting events.  Fulton has an inventory of temporary poles of different sizes and uses a unique installation process for the quick deployment of a tower location with little to no environmental impact.

Wireless Segment Operating Results Improvements

We are excited about the fiscal third and fourth quarter results of our Wireless segment.  We planned that Fulton would incur operating losses in the first few months after the acquisition as we integrated and began ramping up the operation.  In just our first nine months of operating this segment, Fulton was able to achieve revenue of $22.9 million with continually improving operating results as we continue to integrate the operation, which demonstrates Fulton’s growth potential.  As part of the acquisition, we were able to hire and retain the majority of Fulton’s existing employee base, and we continue to successfully recruit strong industry talent throughout the business to help us implement operational improvements with a focus on improving our quality and project margins.  We are seeing increased opportunities in the industry as wireless carriers prepare for the roll out of 5G and the required densification of their networks.  We also believe that the recent merger news in the industry will present additional opportunities as networks are rationalized and a new carrier potentially expands their network to gain market share.  Our continued goal is to solidify our processes and project oversight to successfully and profitably take advantage of new growth opportunities as they present themselves.  Although there is still much work to do at Fulton over the next several quarters, we believe that Fulton will continue to provide strong revenue growth and gradually improving margins.

Telco Segment

We continue to see efficiencies from the operational restructuring put in place earlier this fiscal year, which has enabled us to focus our core team on sales, procurement and recycling opportunities.  We are also ramping up our
11

repair activities to take advantage of our new capabilities as we further expand our business lines.  We have recently added new employees to our team across both Nave and Triton Datacom with strong experience in online marketing and sales across both Nave and Triton.

At Triton Datacom, we are excited about our new facility that we moved into in October 2019.  The facility has been designed to streamline and improve our processes including inventory management, shipping and receiving and the refurbishment operations.  The added space will allow us to develop the internal systems necessary to expand our refurbishment capabilities and new equipment sales by adding additional product lines and manufacturers.  We have also increased our focus on the brokerage business and internet sales by expanding our sales channels.  We believe that Triton is poised to expand, capture additional market share and develop new customers.  While Triton’s revenues are ahead of last year, we look forward to seeing Triton’s operating results improve as a result of these changes.

Discontinued Operations

In December 2018, the Company entered into an agreement for the sale of our Cable TV segment business to Leveling 8, Inc., a company controlled by David Chymiak, for $10.3 million. David Chymiak is a member of the Company’s Board of Directors and a substantial shareholder of the Company, and he was the Chief Technology Officer and President of Tulsat LLC until the closing of the sale.  This agreement was approved by the Company’s Strategic Direction Committee and Board of Directors.  The sale was subject to shareholder approval, and in April 2019, the Company distributed a proxy statement to its shareholders for a special meeting of shareholders on May 29, 2019.  The shareholders approved the sale at the special meeting, and the Company then closed the transaction effective as of June 30, 2019.

The $10.3 million purchase price consisted of $3.9 million of cash at closing (subject to a working capital adjustment of $1.1 million), less $2.1 million of cash proceeds received from the sale of the Sedalia, Missouri and Warminster, Pennsylvania facilities and a $6.4 million promissory note to be paid in semi-annual installments over five years with an interest rate of 6.0%.  The sale of the facility in Broken Arrow, Oklahoma for $5.0 million was completed prior to entering into the sale agreement, and therefore was not an adjustment to the overall purchase price.

In March and June 2019, we sold the Sedalia, Missouri and Warminster, Pennsylvania buildings to David Chymiak LLC for a cash purchase price of $1.4 million and $0.7 million, respectively.  The proceeds from these sales were a credit to the purchase price and down payment to the proposed Cable TV sale as discussed above.

Therefore, as a result of the sale of the Cable TV business to Leveling 8 and the three facility sales to David Chymiak, we will receive total proceeds of $14.2 million.  These proceeds consist of $7.1 million in cash received from the facility sales, $0.7 million received in the fourth quarter of 2019, and a promissory note of $6.4 million to be paid over five years, which is personally guaranteed by David Chymiak.  Taken as a whole, these transactions resulted in a net pretax loss of $1.5 million for the year ended September 30, 2019.

The proceeds from these sale transactions were used to pay existing debt as well as to support the Company’s strategic growth plans and working capital needs.

Additional Board Member

In July, we appointed a new independent director, John Shelnutt, to our Board of Directors.  Mr. Shelnutt was appointed due to his extensive experience and contacts in the telecommunications industry as well as his background in business leadership and corporate strategy.  Mr. Shelnutt is currently a Vice President of Blue Danube Systems, and previously served in various executive capacities at Cisco, including leading their mobility division with global responsibility for mobile product offerings.  Mr. Shelnutt also spent 12 years in various executive leadership roles at Alcatel, including the startup of their global DSL division and managing their United States mobility division.  Mr. Shelnutt has served on various boards within the telecommunications industry including the QuEST Forum, ATIS, Broadband Forum and was an advisor to Tech Titans of Dallas, Texas and the City of New York Public Schools Technology group.  We are excited about John joining the Board and sharing his experience and talent with us as we continue to grow.

Banking Arrangements

In the first fiscal quarter of 2019, we used internal funds and cash provided by the sale of the Broken Arrow, Oklahoma
12

facility to pay off our outstanding term loans and line of credit under a forbearance agreement with a financial lender totaling $2.6 million.  As a result of paying off the outstanding debt under the forbearance agreement, we were no longer under the forbearance agreement.

In December 2018, we entered into another credit agreement with a different financial lender.  This credit agreement contains a $2.5 million revolving line of credit and matures on December 17, 2019.

Subsequent to September 30, 2019, the Company renewed its revolving bank line of credit for one more year to a maturity date of December 17, 2020.  As part of this renewal, the revolving bank line of credit increased from $2.5 million to $4.0 million.  The other terms of the renewal were essentially the same.

Results of Operations

Year Ended September 30, 2019, compared to Year Ended September 30, 2018 (all references are to fiscal years)

Consolidated

Consolidated sales increased $27.6 million before the impact of intersegment sales, or 101%, to $55.1 million for 2019 from $27.5 million for 2018.  The increase in sales was due to the acquisition of the Wireless segment resulting in sales of $22.9 million and an increase in the Telco segment of $4.7 million.

Consolidated gross profit increased $1.7 million, or 23%, to $9.1 million for 2019 from $7.4 million for 2018.  The increase in gross profit was due to an increase in the Wireless segment of $2.0 million, partially offset by a decrease in the Telco segment of $0.3 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 $2.8 million, or 27%, to $13.1 million for 2019 compared to $10.3 million for 2018.  This increase was primarily due to increased expenses in the Wireless segment of $3.5 million, partially offset by a decrease in Telco segment expenses of $0.7 million.

The Company recorded a $0.9 million restructuring charge for the Telco Segment for the year ended September 30, 2018 resulting from management’s decision to move Nave’s inventory management and order fulfillment operations from its facility in Jessup, Maryland to Palco Telecom (“Palco”), a third-party reverse logistics provider in Huntsville, Alabama.  As a result, Nave incurred the following restructuring charges:  1) intangible impairment charge of $0.4 million related to inventory tracking software that will no longer be utilized; 2) moving expenses of $0.4 million to transfer Nave’s inventory from its facility in Jessup, Maryland to Palco; and 3) severance expenses of $0.1 million for Nave operations employees.

Other income and expense primarily consists of activity related to our investment in YKTG Solutions, including equity earnings (losses).  Equity earnings for the year ended September 30, 2019 were $0.1 million and equity losses were $0.3 million for the year ended September 30, 2018.  The equity earnings for the year ended September 30, 2019 consisted primarily of payments received under a loan to the former YKTG Solutions partners.  The equity losses for the year ended September, 2018 consisted primarily of a legal settlement with a subcontractor on the YKTG Solutions wireless cell tower decommissioning project and the associated legal expenses.

Interest expense decreased $0.1 million to $0.1 million for 2019 from $0.2 million for the same period last year primarily related to the impact of extinguishing one of our term loans in November 2018.

The benefit for income taxes from continuing operations was $13 thousand for 2019, or an effective rate of 0.3%, from a provision of $1.5 million for the same period last year.  The tax provision in 2018 was due primarily to the establishment of a valuation allowance.

13

Segment results
Wireless

Revenues for the Wireless segment were $22.9 million for the year ended September 30, 2019 and zero for the same period last year as a result of the acquisition of Fulton.  Substantially all of the revenue for the year was derived from wireless infrastructure services.  Gross margin was 9% for the year ended September 30, 2019.

Operating, selling, general and administrative expenses were $3.5 million for the year ended September 30, 2019.  These expenses included $0.2 million of acquisition costs in connection with the acquisition of Fulton as well as integration expenses of $0.3 million.

Telco

Sales for the Telco segment increased $4.7 million, or 17%, to $32.2 million for the year ended September 30, 2019 from $27.5 million for the same period last year.  The increase in sales resulted from an increase in equipment sales and recycling revenue of $3.8 million and $0.9 million, respectively.  The increase in Telco equipment sales was due to increased sales at Nave Communications and Triton Datacom of $1.9 million each.  The increase in recycling revenue was due primarily to increased volume of recycling shipments.

Gross profit decreased $0.3 million, or 5%, to $7.1 million for the year ended September 30, 2019 compared to $7.4 million for the same period last year.  Gross margin was 22% for 2019 and 27% for 2018.  Gross margin decreased primarily due to an increase in obsolescence expense of $0.5 million and an increase in lower of cost or net realizable value expense of $0.5 million.

Operating, selling, general and administrative expenses decreased $0.7 million, or 9%, to $9.6 million for the year ended September 30, 2019 from $10.3 million for the same period last year.  This decrease was due primarily to decreased personnel costs.

The Telco segment incurred a $0.9 million restructuring charge for the Telco Segment for the year ended September 30, 2018 resulting from management’s decision to move Nave’s inventory management and order fulfillment operations from its facility in Jessup, Maryland to Palco Telecom (“Palco”), a third-party reverse logistics provider in Huntsville, Alabama.  As a result, Nave incurred the following restructuring charges:  1) intangible impairment charge of $0.4 million related to inventory tracking software that will no longer be utilized; 2) moving expenses of $0.4 million to transfer Nave’s inventory from its facility in Jessup, Maryland to Palco; and 3) severance expenses of $0.1 million for Nave operations employees.

Discontinued Operations

Loss from discontinued operations, net of tax, was $1.3 million for the year ended September 30, 2019 compared to a loss of $1.5 million last year.  This activity included the operations of the Cable TV segment prior to the sale on June 30, 2019.  We recognized a loss on the sale of the Cable TV segment of $1.5 million for the year ended September 30, 2019.  The Cable TV segment recognized a goodwill impairment charge of $1.2 million for the year ended September 30, 2018.

Non-GAAP Financial Measure

Adjusted EBITDA is a supplemental, non-GAAP financial measure.  EBITDA is defined as earnings before interest expense, income taxes, depreciation and amortization.  Adjusted EBITDA as presented also excludes restructuring charge, stock compensation expense, other income, other expense, interest income and income from equity method investment.  Adjusted EBITDA is presented below because this metric is used by the financial community as a method of measuring our financial performance and of evaluating the market value of companies considered to be in similar businesses.  Since Adjusted EBITDA is not a measure of performance calculated in accordance with GAAP, it should not be considered in isolation of, or as a substitute for, net earnings as an indicator of operating performance.  Adjusted EBITDA may not be comparable to similarly titled measures employed by other companies.  In addition, Adjusted EBITDA is not necessarily a measure of our ability to fund our cash needs.
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A reconciliation by segment of loss from operations to Adjusted EBITDA follows:

   
Year Ended September 30, 2019
   
Year Ended September 30, 2018
 
   
Wireless
   
Telco
   
Total
   
Wireless
   
Telco
   
Total
 
                                     
Loss from operations
  $
(1,513,280
)
  $
(2,462,834
)
  $
(3,976,114
)
  $
 
    $
(3,797,957
)
  $
(3,797,957
)
Depreciation
     237,333        130,159       367,492
     
      136,761
      136,761
 
Amortization
   
18,300
     
1,067,100
     
1,085,400
     
     
1,253,244
     
1,253,244
 
Restructuring charge
 
   
   
   
 ‒
     
941,059
     
941,059
 
Stock compensation expense
   
62,190
     
137,102
     
199,292
     
     
155,174
     
155,174
 
Adjusted EBITDA (a)(b)
  $
 (1,195,457 )
  $  (1,128,473 )
  $
(2,323,930
)
  $

    $
(1,311,719
)
  $
 (1,311,719 )

(a)
The Wireless segment includes acquisition expenses of $0.2 million and integration expenses of $0.3 million for the year ended September 30, 2019, related to the acquisition of Fulton (See Note 3 – Acquisition).
(b)
The Telco segment includes an inventory obsolescence charge of $0.7 million and $0.2 million for the years ended September 30, 2019 and 2018, respectively.  In addition, the Telco segment includes a lower of cost or net realizable value charge of $0.7 million and $0.2 million for the years ended September 30, 2019 and 2018, respectively.

Year Ended September 30, 2018, compared to Year Ended September 30, 2017(all references are to fiscal years)

For this discussion, consolidated results and segment results are the same as the Wireless segment did not have activity until the Fulton acquisition in 2019.

Consolidated

Consolidated sales increased $1.6 million before the impact of intersegment sales, or 6%, to $27.5 million for 2018 from $25.9 million for 2017.  The increase in sales was due to an increase in the Telco equipment sales of $1.6 million. The increase in Telco equipment sales was due to increased sales at Nave Communications and Triton Datacom of $1.3 million and $0.3 million, respectively.  The increase in equipment sales at Nave Communications can be attributed in part to the Company addressing the lower equipment sales it had been experiencing over the past several quarters at Nave Communications by restructuring its sales force and implementing a new sales strategy.

Gross profit increased $0.3 million, or 5%, to $7.4 million for the year ended September 30, 2018 compared to $7.1 million for the same period last year.  Gross margin was 27% for both 2018 and 2017.

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 $0.3 million, or 3%, to $10.3 million for 2018 compared to $10.0 million for 2017.  This increase was due primarily to increased personnel costs.

The Telco segment incurred a $0.9 million restructuring charge for the Telco Segment for the year ended September 30, 2018 resulting from management’s decision to move Nave’s inventory management and order fulfillment operations from its facility in Jessup, Maryland to Palco, a third-party reverse logistics provider in Huntsville, Alabama.  As a result, Nave incurred the following restructuring charges:  1) intangible impairment charge of $0.4 million related to inventory tracking software that will no longer be utilized; 2) moving expenses of $0.4 million to transfer Nave’s inventory from its facility in Jessup, Maryland to Palco; and 3) severance expenses of $0.1 million for Nave operations employees.

Other income and expense primarily consists of activity related to our investment in YKTG Solutions, including equity earnings (losses).  Equity losses for the year ended September 30, 2018 were $0.3 million and zero for the year ended September 30, 2017.  The equity losses for year ended September 30, 2018 consisted primarily of a legal settlement with a subcontractor on the YKTG Solutions wireless cell tower decommissioning project and the associated legal expenses.

Interest expense decreased $0.2 million to $0.2 million for 2018 from $0.4 million for the same period last year
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primarily related to the impact of paying off one of our term loans in December 2017.

The provision for income taxes from continuing operations was $1.5 million, or an effective rate of 36% for 2018 from a benefit of $0.8 million for the same period last year.  The effective rate for the year ended September 30, 2018 was higher due primarily to establishing a valuation allowance for deferred taxes.  The effective tax rate for the year ended September 30, 2018 was also increased by net operating losses in states with higher tax rates due primarily to the loss from YKTG Solutions.

Discontinued Operations

Loss from discontinued operations, net of tax, was $1.5 million for the year ended September 30, 2018 compared to income of $2.4 million in 2017.  This activity included the operations of the Cable TV segment prior to the sale on June 30, 2019.  The Cable TV segment recognized a goodwill impairment charge of $1.2 million for the year ended September 30, 2018.

Non-GAAP Financial Measure

Adjusted EBITDA is a supplemental, non-GAAP financial measure.  EBITDA is defined as earnings before interest expense, income taxes, depreciation and amortization.  Adjusted EBITDA as presented also excludes restructuring charge, stock compensation expense, other income, other expense, interest income and income from equity method investment.  Adjusted EBITDA is presented below because this metric is used by the financial community as a method of measuring our financial performance and of evaluating the market value of companies considered to be in similar businesses.  Since Adjusted EBITDA is not a measure of performance calculated in accordance with GAAP, it should not be considered in isolation of, or as a substitute for, net earnings as an indicator of operating performance.  Adjusted EBITDA may not be comparable to similarly titled measures employed by other companies.  In addition, Adjusted EBITDA is not necessarily a measure of our ability to fund our cash needs.

A reconciliation by segment of loss from operations to Adjusted EBITDA follows:

   
Year Ended September 30, 2018
   
Year Ended September 30, 2017
 
   
Wireless 
   
Telco 
   
Total 
   
Wireless 
   
Telco 
   
Total 
 
                                     
Loss from operations
  $

 
  $
(3,797,957
)
  $
(3,797,957
)
  $
 
    $
(2,916,351
)
  $
(2,916,351
)
Depreciation
     ‒        136,761       136,761
     
      151,235
      151,235
 
Amortization
   
     
1,253,244
     
1,253,244
     
     
1,267,182
     
1,267,182
 
Restructuring charge
 
   
941,059
   
941,059
   
 ‒
     
     
 
Stock compensation expense
   
     
155,174
     
155,174
     
     
175,465
     
175,465
 
Adjusted EBITDA (a)
  $
 ‒  
  $  (1,311,719 )
  $
(1,311,719
)
  $

    $
(1,322,469
)
  $
 (1,322,469 )

(a)
The Telco segment includes earn-out expenses of $0.2 million for the year ended September 30, 2017, related to the acquisition of Triton Miami, Inc.  The Telco segment includes an inventory obsolescence charge of $0.2 million and $0.3 million for the years ended September 30, 2018 and 2017, respectively.  In addition, the Telco segment includes a lower of cost or net realizable value charge of $0.2 million and $0.1 million for the years ended September 30, 2018 and 2017, respectively.

Liquidity and Capital Resources

Cash Flows Used in Operating Activities

We generally finance our operations primarily through cash flows provided by operations, our quick payment accounts receivable programs in our Wireless segment and our line of credit of up to $2.5 million.  During 2019, we used $6.0 million of cash flows for continuing operations.  The cash flows from operations was negatively impacted by a $1.4 million net increase in accounts receivable, a $2.3 million net increase in unbilled revenue and a $1.6 million net increase of inventories.  In addition, the cash flows from operations was favorably impacted by $0.5 million from a net increase in accrued expenses.  Net cash provided by operating activities from discontinued operations was $1.2 million.
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Cash Flows Provided by Investing Activities

During 2019, cash used by investing activities for continuing operations was $0.5 million, which primarily related to the purchase of substantially all of the net assets of Fulton Technologies.  The net purchase price was $1.3 million.  Cash received from the sale of the Cable TV segment was $0.8 million.
                                                                                                                                                                                
During 2019, cash provided by investing activities for discontinued operations of $7.1 million was related to the sales of three facilities within the Cable TV segment to a company controlled by David Chymiak.  The sales were our Broken Arrow, Oklahoma facility for $5.0 million, our Sedalia, Missouri facility for $1.4 million and our Warminster, Pennsylvania facility for $0.7 million.  In addition, we also have a promissory note of $6.4 million resulting from the sale of the Cable TV segment to Leveling 8.  These sales are discussed in Note 4 of the Notes to the Consolidated Financial Statements.  Subsequent to September 30, 2019, the first installment of the promissory note of $0.7 million for principal and interest was paid by Leveling 8 to the Company.

Cash Flows Used in Financing Activities

In November 2018, we extinguished one of our two outstanding term loans under the forbearance agreement by paying the outstanding balance of $1.5 million.  In October 2018, we also extinguished our line of credit under the forbearance agreement by paying the outstanding balance of $0.5 million.  As a result of these payments, we were no longer under the forbearance agreement.

In December 2018, the Company entered into a credit agreement with a different lender.  This credit agreement contains a $2.5 million revolving bank line of credit and matures on December 17, 2019.  The revolving bank line of credit requires quarterly interest payments based on the prevailing Wall Street Journal Prime Rate (5.0% at September 30, 2019), and the interest rate is reset monthly.  Future borrowings under the Line of Credit are limited to the lesser of $2.5 million or the sum of 80% of eligible accounts receivable and 25% of eligible inventory.  Under these limitations, the Company’s total line of credit borrowing capacity was $2.5 million at September 30, 2019.  At September 30, 2019, the amount outstanding under the revolving bank line of credit was zero.

Subsequent to September 30, 2019, the Company renewed its revolving bank line of credit for one more year to a maturity date of December 17, 2020.  As part of this renewal, the revolving bank line of credit increased from $2.5 million to $4.0 million.  The other terms of the renewal were essentially the same.

During the year ended September 30, 2019, cash used by financing activities for discontinued operations of $0.6 million related to extinguishing one of the two outstanding term loans under the forbearance agreement by paying the outstanding balance of $0.6 million in November 2018.

We believe that our cash and cash equivalents and restricted cash of $1.6 million at September 30, 2019, our existing revolving bank line of credit, our accounts receivable programs for our Wireless segment and future payments from our promissory note resulting from the Cable TV segment sale will provide sufficient liquidity and capital resources to cover our operating losses and our additional working capital and debt payment needs.  As discussed in the Recent Business Developments section, our Wireless segment is seeing increased opportunities in the industry as wireless carriers prepare for the roll out of 5G and the required densification of their networks, and we also believe that the recent merger news in the industry will present additional opportunities as networks are rationalized and a new carrier potentially expands their network to gain market share.  Depending on the timing and scope of these opportunities, we may need to seek additional funding to finance the necessary working capital for such opportunities.

Critical Accounting Policies and Estimates

Note 1 to the Consolidated Financial Statements in this Form 10-K for fiscal year 2019 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.

17

General

The preparation of financial statements in conformity with United States generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  We base our estimates and judgments on historical experience, current market conditions, and various other factors we believe to be reasonable under the circumstances, the results
of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.  Actual results could differ from these estimates under different assumptions or conditions.  The most significant estimates and assumptions are discussed below.

Inventory Valuation

For our Telco segment, our position in the telecommunications industry requires us to carry relatively 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 telecommunication providers, telecommunication resellers, and other users of 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 are all carried in the Telco segment and consist of new and used electronic components for the telecommunications industry.  Inventory is stated at the lower of cost or net realizable value, with cost determined using the weighted-average method.  Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.  At September 30, 2019, we had total inventory, before the reserve for excess and obsolete inventories, of $8.9 million, consisting of $1.5 million in new products and $7.4 million in used or refurbished products.

We identified certain inventory that more than likely will not be sold or that the cost will not be recovered when it is processed through our recycling program.  Therefore, we have an obsolete and excess inventory reserve of $1.3 million at September 30, 2019.  In 2019, we increased the reserve by $0.5 million.  We also reviewed the cost of inventories against estimated market value and recorded a lower of cost or net realizable value write-off of $0.7 million for inventories that have a cost in excess of estimated net realizable value.  If actual market conditions differ from those projected by management, this could have a material impact on our gross margin and inventory balances based on additional write-downs to net realizable value or a benefit from inventories previously written down.

Inbound freight charges are included in cost of sales.  Purchasing and receiving costs, inspection costs, warehousing costs, internal transfer costs and other inventory expenditures are included in operating expenses, since the amounts involved are not considered a material component of cost of sales.

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, 2019 and September 30, 2018.   At September 30, 2019, accounts receivable, net of allowance for doubtful accounts, was $4.8 million.

18

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 comparing our estimate of the fair value of each
reporting unit, or operating segment, with the reporting unit’s carrying value, including goodwill.  Our reporting units for purposes of the goodwill impairment calculation are aggregated into the Wireless operating segment and the Telco operating segment.

Management utilizes a discounted cash flow analysis to determine the estimated fair value of each reporting unit.  Significant judgments and assumptions including the discount rate, anticipated revenue growth rate, gross margins and operating expenses are inherent in these fair value estimates.  As a result, actual results may differ from the estimates utilized in our discounted cash flow analysis.  The use of alternate judgments and/or assumptions could result in the recognition of different levels of impairment charges in the financial statements.

We did not record a goodwill impairment for the Wireless or Telco segments in the three year period ended September 30, 2019.  In addition, we are implementing strategic plans as discussed in Recent Business Developments to help prevent impairment charges in the future.  Although we do not anticipate a future impairment charge, certain events could occur that might adversely affect the reported value of goodwill.  Such events could include, but are not limited to, economic or competitive conditions, a significant change in technology, the economic condition of the customers and industries we serve, a material negative change in the relationships with one or more of our significant customers or equipment suppliers, failure to successfully implement our plan to restructure and expand the Telco sales organization, and failure to reduce inventory levels within the Telco segment.  If our judgments and assumptions change as a result of the occurrence of any of these events or other events that we do not currently anticipate, our expectations as to future results and our estimate of the implied fair value of the Wireless segment and Telco segment also may change.

As a result of the Fulton Technologies acquisition, the Company recorded additional goodwill of $57 thousand as the purchase price exceeded the acquisition date fair value of the net assets based on the final purchase price allocation.

Intangibles

Intangible assets that have finite useful lives are amortized on a straight-line basis over their estimated useful lives ranging from 3 years to 10 years.  As a result of the Fulton Technologies acquisition, the Company has recorded an additional intangible asset for customer relationships of $0.2 million based on the final purchase price allocation.

Impairment of Long-Lived Assets

The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the asset’s carrying amount may not be recoverable.  The Company conducts its long-lived asset impairment analyses in accordance with Accounting Standards Codification (“ASC”) 360-10-15, “Impairment or Disposal of Long-Lived Assets.”  ASC 360-10-15 requires the Company to group assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities and evaluate the asset group against the sum of the undiscounted future cash flows.  If the undiscounted cash flows do not indicate the carrying amount of the asset is recoverable, an impairment charge is measured as the amount by which the carrying amount of the asset group exceeds its fair value based on discounted cash flow analysis or appraisals.

Recently Issued Accounting Standards

In February 2016, the FASB issued ASU 2016-02: “Leases (Topic 842)” which is intended to improve financial reporting about leasing transactions.  This ASU will require organizations (“lessees”) that lease assets with lease terms of more than twelve months to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases.  Organizations that own the assets leased by lessees (“lessors”) will remain largely unchanged from current GAAP.  In addition, this ASU will require disclosures to help investors and other financial statement users better understand the amount, timing and uncertainty of cash flows arising from leases.  The guidance is effective for annual periods beginning after December 15, 2018 and early adoption is permitted.  Based on management’s initial
19

assessment, ASU 2016-02 will have a material impact on the Company’s consolidated financial statements.  Management reviewed its lease obligations and determined that the Company generally does not enter into long-term lease obligations with the exception of its real estate leases for its facilities and its fleet leases for the Wireless segment.  The Company is a lessee on certain real estate leases and vehicle leases that will be reported as right of use assets and liabilities at an amount of $5.4 million on the Company’s consolidated financial statements on the date of adoption, which is October 1, 2019.

In June 2016, the FASB issued ASU 2016-13: “Financial Instruments – Credit Losses (Topic 326) – Measurement of Credit Losses on Financial Instruments.”  This ASU requires entities to measure all expected credit losses for most financial assets held at the reporting date based on an expected loss model which includes historical experience, current conditions, and reasonable and supportable forecasts.  Entities will now use forward-looking information to better form their credit loss estimates.  This ASU also requires enhanced disclosures to help financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an entity’s portfolio.  ASU 2016-13 is effective for annual periods beginning after December 15, 2019, including interim periods within those fiscal periods.  Entities may adopt earlier as of the fiscal year beginning after December 15, 2018, including interim periods within those fiscal years.  We are currently in the process of evaluating this new standard update.

Off-Balance Sheet Arrangements

None.










20

Item 8. Financial Statements and Supplementary Data.


Index to Financial Statements
Page
   
Report of Independent Registered Public Accounting Firm
   
Consolidated Balance Sheets, September 30, 2019 and 2018
   
Consolidated Statements of Operations, Years ended
 
September 30, 2019, 2018 and 2017
   
Consolidated Statements of Changes in Shareholders’ Equity, Years ended
 
September 30, 2019, 2018 and 2017
   
Consolidated Statements of Cash Flows, Years ended
 
September 30, 2019, 2018 and 2017
   
Notes to Consolidated Financial Statements




21



 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


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

Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of ADDvantage Technologies, Inc. and its subsidiaries (the Company) as of September 30, 2019 and 2018, and the related consolidated statements of operations, changes in shareholders' equity, and cash flows for each of the three years in the period ended September 30, 2019, and the related notes to the consolidated financial statements (collectively, the financial statements).  In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 2019, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion
These financial statements are the responsibility of the Company's management.  Our responsibility is to express an opinion on these financial statements based on our audits.  We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB.  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purposes of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.  Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.  We believe that our audits provide a reasonable basis for our opinion.



/s/ HOGANTAYLOR LLP

We have served as the Company’s auditor since 2006.

Tulsa, Oklahoma
December 17, 2019
22


ADDVANTAGE TECHNOLOGIES GROUP, INC.
CONSOLIDATED BALANCE SHEETS


   
September 30,
 
   
2019
   
2018
 
Assets
           
Current assets:
           
Cash and cash equivalents
 
$
1,242,143
   
$
3,129,280
 
Restricted cash
   
351,909
   
 
Accounts receivable, net of allowance for doubtful accounts of
$150,000
   
4,826,716
     
2,578,998
 
Unbilled revenue
   
2,691,232
   
 
Promissory note – current
   
1,400,000
   
 
Income tax receivable
   
21,350
     
178,766
 
Inventories, net of allowance for excess and obsolete
inventory of $1,275,000 and $815,000, respectively
   
7,625,573
     
7,462,491
 
Prepaid expenses
   
543,762
     
253,405
 
Other current assets
   
262,462
   
 
Current assets of discontinued operations
 
     
16,925,526
 
Total current assets
   
18,965,147
     
30,528,466
 
                 
Property and equipment, at cost:
               
Machinery and equipment
   
2,475,545
     
1,084,024
 
Leasehold improvements
   
190,984
     
190,984
 
Total property and equipment, at cost
   
2,666,529
     
1,275,008
 
Less: Accumulated depreciation
   
(835,424
)
   
(773,312
)
Net property and equipment
   
1,831,105
     
501,696
 
                 
Promissory note – noncurrent
   
4,975,000
   
 
Investment in and loans to equity method investee
 
     
49,000
 
Intangibles, net of accumulated amortization
   
6,002,998
     
6,844,398
 
Goodwill
   
4,877,739
     
4,820,185
 
Other assets
   
176,355
     
125,903
 
Assets of discontinued operations
 
     
1,524,972
 
                 
Total assets
 
$
36,828,344
   
$
44,394,620
 
                 


















See notes to consolidated financial statements.
23

ADDVANTAGE TECHNOLOGIES GROUP, INC.
CONSOLIDATED BALANCE SHEETS


   
September 30,
 
   
2019
   
2018
 
Liabilities and Shareholders’ Equity
           
Current liabilities:
           
Accounts payable
 
$
4,730,537
   
$
3,300,388
 
Accrued expenses
   
1,617,911
     
711,936
 
Deferred revenue
   
97,478
   
 
Notes payable – current portion
 
     
1,996,279
 
Other current liabilities
   
757,867
     
664,374
 
Current liabilities of discontinued operations
 
     
2,392,780
 
Total current liabilities
   
7,203,793
     
9,065,757
 
                 
Other liabilities
   
177,951
     
801,612
 
Total liabilities
   
7,381,744
     
9,867,369
 
                 
Shareholders’ equity:
               
Common stock, $.01 par value; 30,000,000 shares authorized;
10,861,950 and 10,806,803 shares issued, respectively;
10,361,292 and 10,306,145 shares outstanding, respectively
   
108,620
     
108,068
 
Paid in capital
   
(4,377,103
)
   
(4,598,343
)
Retained earnings
   
34,715,097
     
40,017,540
 
Total shareholders’ equity before treasury stock
   
30,446,614
     
35,527,265
 
                 
Less: Treasury stock, 500,658 shares, at cost
   
(1,000,014
)
   
(1,000,014
)
Total shareholders’ equity
   
29,446,600
     
34,527,251
 
                 
Total liabilities and shareholders’ equity
 
$
36,828,344
   
$
44,394,620
 

























See notes to consolidated financial statements.
24

ADDVANTAGE TECHNOLOGIES GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS


   
Years ended September 30,
 
   
2019
   
2018
   
2017
 
Sales
 
$
55,118,297
   
$
27,473,282
   
$
25,907,571
 
Cost of sales
   
46,025,775
     
20,056,067
     
18,835,333
 
Gross profit
   
9,092,522
     
7,417,215
     
7,072,238
 
Operating, selling, general and administrative expenses
   
13,068,636
     
10,274,113
     
9,988,589
 
Restructuring charge
 
     
941,059
     
 
Loss from operations
   
(3,976,114
)
   
(3,797,957
)
   
(2,916,351
)
Other income (expense):
                       
Interest income
   
96,411
   
   
 
Income (loss) from equity method investment
   
135,505
     
(258,558
)
 
 
Other expense
   
(223,999
)
 
   
 
Interest expense
   
(79,902
)
   
(210,182
)
   
(369,394
)
Total other expense, net
   
(71,985
)
   
(468,740
)
   
(369,394
)
                         
Loss before income taxes
   
(4,048,099
)
   
(4,266,697
)
   
(3,285,745
)
Provision (benefit) for income taxes
   
(13,000
)
   
1,517,000
     
(830,000
)
Loss from continuing operations
   
(4,035,099
)
   
(5,783,697
)
   
(2,455,745
)
                         
Income (loss) from discontinued operations, net of tax
   
(1,267,344
)
   
(1,536,159
)
   
2,357,629
 
                         
Net loss
 
$
(5,302,443
)
 
$
(7,319,856
)
 
$
(98,116
)
                         
Income (loss) per share:
                       
Basic
                       
  Continuing operations
 
$
(0.39
)
 
$
(0.56
)
 
$
(0.24
)
      Discontinued operations
   
(0.12
)
   
(0.15
)
   
0.23
 
    Net loss
 
$
(0.51
)
 
$
(0.71
)
 
$
(0.01
)
    Diluted
                       
  Continuing operations
 
$
(0.39
)
 
$
(0.56
)
 
$
(0.24
)
      Discontinued operations
   
(0.12
)
   
(0.15
)
   
0.23
 
    Net loss
 
$
(0.51
)
 
$
(0.71
)
 
$
(0.01
)
Shares used in per share calculation:
                       
Basic
   
10,361,292
     
10,272,749
     
10,201,825
 
Diluted
   
10,361,292
     
10,272,749
     
10,201,825
 

















See notes to consolidated financial statements.
25

ADDVANTAGE TECHNOLOGIES GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended September 30, 2019, 2018 and 2017

                                     
                                     
   
Common Stock
   
Paid-in
   
Retained
   
Treasury
       
   
Shares
   
Amount
   
Capital
   
Earnings
   
Stock
   
Total
 
Balance, September 30, 2016
   
10,634,893
   
$
106,349
   
$
(4,916,791
)
 
$
47,435,512
   
$
(1,000,014
)
 
$
41,625,056
 
                                                 
Net loss
   
     
     
     
(98,116
)
   
     
(98,116
)
Stock options exercised
   
33,751
     
338
     
(338
)
   
     
     
 
Restricted stock issuance
   
58,009
     
580
     
104,420
     
     
     
105,000
 
Share based compensation expense
   
     
     
66,243
     
     
     
66,243
 
                                                 
Balance, September 30, 2017
   
10,726,653
   
$
107,267
   
$
(4,746,466
)
 
$
47,337,396
   
$
(1,000,014
)
 
$
41,698,183
 
                                                 
Net loss
   
     
     
     
(7,319,856
)
   
     
(7,319,856
)
Restricted stock issuance
   
80,150
     
801
     
104,199
     
     
     
105,000
 
Share based compensation expense
   
     
     
43,924
     
     
     
43,924
 
                                                 
Balance, September 30, 2018
   
10,806,803
   
$
108,068
   
$
(4,598,343
)
 
$
40,017,540
   
$
(1,000,014
)
 
$
34,527,251
 
                                                 
Net loss
   
     
     
     
(5,302,443
)
   
     
(5,302,443
)
Restricted stock issuance
   
55,147
     
552
     
74,448
     
     
     
75,000
 
Share based compensation expense
   
     
     
146,792
     
     
     
146,792
 
                                                 
Balance, September 30, 2019
   
10,861,950
   
$
108,620
   
$
(4,377,103
)
 
$
34,715,097
   
$
(1,000,014
)
 
$
29,446,600
 










See notes to consolidated financial statements.
26

ADDVANTAGE TECHNOLOGIES GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

   
Years ended September 30,
 
   
2019
   
2018
   
2017
 
Operating Activities
                 
Net loss
 
$
(5,302,443
)
 
$
(7,319,856
)
 
$
(98,116
)
Net income (loss) from discontinued operations
   
(1,267,344
)
   
(1,536,159
)
   
2,357,629
 
Net loss from continuing operations
   
(4,035,099
)
   
(5,783,697
)
   
(2,455,745
)
Adjustments to reconcile net loss from continuing operations to net cash provided by (used in) operating activities:
                       
Depreciation
   
367,492
     
136,761
     
151,235
 
Amortization
   
1,085,400
     
1,253,244
     
1,267,182
 
Provision for excess and obsolete inventories
   
681,925
     
175,712
     
307,811
 
Charge for lower of cost or net realizable value for
inventories
   
656,323
     
246,053
     
126,822
 
Gain on disposal of property and equipment
   
(251,214
)
   
(1,980
)
   
 
Deferred income tax provision (benefit)
 
     
1,328,000
     
(463,000
)
Share based compensation expense
   
199,292
     
155,174
     
175,465
 
Restructuring charge
 
     
449,845
   
 
(Gain) loss from equity method investment
   
(135,505
)
   
258,558
   
 
Changes in operating assets and liabilities:
                       
Accounts receivable
   
(1,419,580
)
   
609,223
     
300,933
 
Unbilled revenue
   
(2,253,183
)
 
   
 
Income tax receivable\payable
   
157,416
     
37,648
     
226,377
 
Inventories
   
(1,590,972
)
   
(462,051
)
   
(1,434,314
)
Prepaid expenses and other assets
   
(205,516
)
   
25,147
     
19,163
 
Accounts payable
   
180,256
     
868,779
     
760,908
 
Accrued expenses and other liabilities
   
477,042
     
36,909
     
132,166
 
Deferred revenue
   
97,478
   
   
 
Net cash used in operating activities – continuing operations
   
(5,988,445
)
   
(666,675
)
   
(884,997
)
Net cash provided by operating activities – discontinued operations
   
1,179,876
     
4,492,109
     
3,873,810
 
Net cash provided by (used in) operating activities
   
(4,808,569
)
   
3,825,434
     
2,988,813
 
                         
Investing Activities
                       
Acquisition of net operating assets
   
(1,264,058
)
 
     
(6,643,540
)
Proceeds from sale of business
   
753,199
   
   
 
Loan repayments from (investment in and loans to) equity method investee
   
184,505
     
(208,854
)
   
2,389,920
 
Purchases of property and equipment
   
(601,612
)
   
(127,257
)
   
(140,680
)
Disposals of property and equipment
   
452,245
     
13,500
   
 
Net cash used in investing activities – continuing operations
   
(475,721
)
   
(322,611
)
   
(4,394,300
)
Net cash provided by (used in) investing activities – discontinued operations
   
7,075,000
     
10,400
     
(47,806
)
Net cash provided by (used in) investing activities
   
6,599,279
     
(312,211
)
   
(4,442,106
)
                         
Financing Activities
                       
Change in bank revolving line of credit
   
(500,000
)
   
500,000
     
 
Guaranteed payments for acquisition of business
   
(667,000
)
   
(667,000
)
   
(1,000,000
)
Proceeds on notes payable
   
   
     
4,000,000
 
Debt issuance costs
   
   
     
(16,300
)
Payments on notes payable
   
(1,496,279
)
   
(4,005,658
)
   
(1,881,802
)
Principal payments on capital lease obligations
   
(64,753
)
 
   
 
Net cash provided by (used in) financing activities – continuing operations
   
(2,728,032
)
   
(4,172,658
)
   
1,101,898
 
Net cash used in financing activities – discontinued operations
   
(597,906
)
   
(184,008
)
   
(184,008
)
Net cash provided by (used in) financing activities
   
(3,325,938
)
   
(4,356,666
)
   
917,890
 
                         
Net decrease in cash and cash equivalents and restricted cash
   
(1,535,228
)
   
(843,443
)
   
(535,403
)
Cash and cash equivalents and restricted cash at beginning of year
   
3,129,280
     
3,972,723
     
4,508,126
 
Cash and cash equivalents and restricted cash at end of year
 
$
1,594,052
   
$
3,129,280
   
$
3,972,723
 

27



Supplemental cash flow information:
                       
Cash paid for interest
 
$
126,059
   
$
220,117
   
$
360,805
 
Cash received from income taxes
 
$
(172,343
)
 
$
(59,674
)
 
$
(61,000
)
                         
Supplemental noncash investing activities:
                       
   Deferred guaranteed payments for acquisition of business   $

    $

    $
(1,836,105
)
Promissory note from disposition of business
 
$
6,375,000
   
$
   
$
 






























See notes to consolidated financial statements.
28

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 Wireless Infrastructure Services (“Wireless”) and Telecommunications (“Telco”).  The Cable Television (“Cable TV”) segment was sold on June 30, 2019, so the Company has classified the Cable TV segment as discontinued operations (see Note 4 – Discontinued Operations).

Cash, cash equivalents and restricted cash

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.  Restricted cash consists of cash held by a third-party financial institution as a reserve in connection with an agreement to sell certain receivables with recourse in the Wireless segment.

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.

For the Company’s Wireless segment, the Company has entered into various agreements, one with recourse, to sell certain receivables to unrelated third-party financial institutions.  For the agreement with recourse, the Company is responsible for collecting payments on the sold receivables from its customers. Under this agreement, the third-party financial institution advances the Company 90% of the sold receivables and establishes a reserve of 10% of the sold receivables until the Company collects the sold receivables. As the Company collects the sold receivables, the third-party financial institution will remit the remaining 10% to the Company.  The other agreements without recourse are under programs offered by certain customers of the Wireless segment.  The Company accounts for these transactions in accordance with Accounting Standards Codification (“ASC”) 860, “Transfers and Servicing” (“ASC 860”).  ASC 860 allows for the ownership transfer of accounts receivable to qualify for sale treatment when the appropriate criteria is met, which permits the Company to present the balances sold under the program to be excluded from accounts receivable, net on the consolidated balance sheet. Receivables are considered sold when they are transferred beyond the reach of the Company and its creditors, the purchaser has the right to pledge or exchange the receivables and the Company has surrendered control over the transferred receivables.

Inventories

For the Telco segment, inventories consist of new, refurbished and used telecommunications equipment.  Inventory is stated at the lower of cost or net realizable value.  Cost is determined using the weighted-average method.  Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.  For the Telco segment, the Company records an inventory reserve provision to reflect inventory at its estimated net realizable value based on a review of inventory quantities on hand, historical sales volumes and technology changes. These reserves are to provide for items that are potentially slow-moving, excess or obsolete.

Property and equipment

Property and equipment consists of software, office equipment, wireless services equipment and warehouse and service equipment with estimated useful lives generally of 3 years, 5 years, 7 years, and 10 years, respectively.  The wireless services equipment includes mobile wireless temporary towers, equipment trailers and construction
29

equipment.  Depreciation is provided using the straight-line method over the estimated useful lives of the related assets.  Leasehold improvements are amortized over the shorter of the useful lives or the remainder of the lease agreement.  Gains or losses from the ordinary sale or retirement of property and equipment are recorded in other income (expense).  Repairs and maintenance costs are generally expensed as incurred, whereas major improvements are capitalized.  Depreciation expense was $0.4 million, $0.1 million and $0.2 million for the years ended September 30, 2019, 2018 and 2017, respectively.
 
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.  The Company performs its 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 comparing the estimate of the fair value of each reporting unit, or operating segment, with the reporting unit’s carrying value, including goodwill.  The reporting units for purposes of the goodwill impairment calculation are aggregated into the Wireless operating segment and the Telco operating segment.

Management utilizes a discounted cash flow analysis to determine the estimated fair value of each reporting unit.  Significant judgments and assumptions including the discount rate, anticipated revenue growth rate, gross margins and operating expenses are inherent in these fair value estimates.  As a result, actual results may differ from the estimates utilized in the 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.  At September 30, 2019 and 2018, the estimated fair value of each of the reporting units exceeded their individual carrying values, so goodwill was not impaired at either of the reporting units.

As a result of the Fulton Technologies acquisition, the Company recorded additional goodwill of $57 thousand as the purchase price exceeded the acquisition date fair value of the net assets based on the final purchase price allocation.

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.  As a result of the Fulton acquisition, the Company has recorded an additional intangible asset for customer relationships of $0.2 million based on the purchase price allocation.

Impairment of long-lived assets

The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the asset’s carrying amount may not be recoverable.  The Company conducts its long-lived asset impairment analyses in accordance with ASC 360-10-15, “Impairment or Disposal of Long-Lived Assets.”  ASC 360-10-15 requires the Company to group assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities and evaluate the asset group against the sum of the undiscounted future cash flows.  If the undiscounted cash flows do not indicate the carrying amount of the asset is recoverable, an impairment charge is measured as the amount by which the carrying amount of the asset group exceeds its fair value based on discounted cash flow analysis or appraisals.

Income taxes

The Company provides for income taxes in accordance with the liability method of accounting.  Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and tax carryforward amounts.  Management provides a valuation allowance against deferred tax assets for amounts which are not considered “more likely than not” to be realized.

Advertising costs

Advertising costs are expensed as incurred.  Advertising expense was $0.6 million, $0.5 million and $0.4 million for the years ended September 30, 2019, 2018 and 2017, respectively.

30

Management estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP) 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 wireless infrastructure or telecommunications industries could have a significant impact on the value of the Company's inventory and operating results.

Concentrations of risk
The Company holds cash with one major financial institution, which at times exceeds FDIC insured limits.  Historically, the Company has not experienced any losses due to such concentration of credit risk.

Other financial instruments that potentially subject the Company to concentration of credit risk consist principally of trade receivables.  Concentrations of credit risk with respect to trade receivables are limited because a large number of geographically diverse customers make up the Company’s customer base, thus spreading the trade credit risk.  The Company controls credit risk through credit approvals, credit limits and monitoring procedures.  The Company performs credit evaluations for all new customers but does not require collateral to support customer receivables.  

The Company had one customer in 2019 in the Wireless segment that represented 12% of the total sales.  The Company had no customer in 2018 or 2017 that represented in excess of 10% of the total sales.  The Company’s sales to foreign (non-U.S. based) customers were $2.4 million, $2.9 million and $3.1 million for the years ended September 30, 2019, 2018 and 2017, respectively.  The Telco segment did not purchase over 10% of its total inventory purchases from any one supplier.

Employee stock-based awards

Share-based payments to employees, including grants of employee stock options, are recognized in the consolidated financial statements based on their grant date fair value over the requisite service period.  The Company determines the fair value of the options issued, using the Black-Scholes valuation model, and amortizes the calculated value over the vesting term of the stock options.  Compensation expense for stock-based awards is included in the operating, selling, general and administrative expense section of the consolidated statements of operations.

Earnings per share

Basic earnings per share is computed by dividing the earnings available to common shareholders by the weighted average number of common shares outstanding for the year.  Dilutive earnings per share include any dilutive effect of stock options and restricted stock.

Fair value of financial instruments

The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and other current liabilities approximate fair value due to their short maturities.

The carrying value of the Company’s variable-rate line of credit approximates its fair value since the interest rate fluctuates periodically based on a floating interest rate.

Recently issued accounting standards

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02: “Leases (Topic 842)” which is intended to improve financial reporting about leasing transactions.  This ASU will require organizations (“lessees”) that lease assets with lease terms of more than twelve months to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases.  Organizations that own the assets leased by lessees (“lessors”) will remain largely unchanged from current GAAP.  In addition, this ASU
31

will require disclosures to help investors and other financial statement users better understand the amount, timing and uncertainty of cash flows arising from leases.  The guidance is effective for annual periods beginning after December 15, 2018 and early adoption is permitted.  Based on management’s assessment, ASU 2016-02 will have a material impact on the Company’s consolidated financial statements.  Management reviewed its lease obligations and determined that the Company generally does not enter into long-term lease obligations with the exception of its real estate leases for its facilities and its fleet leases for the Wireless segment.  The Company is a lessee on certain real estate leases and vehicle leases that will be reported as right of use assets and liabilities at an amount of $5.4 million on the Company’s consolidated balance sheets on the date of adoption, which is October 1, 2019.

In June 2016, the FASB issued ASU 2016-13: “Financial Instruments – Credit Losses (Topic 326) – Measurement of Credit Losses on Financial Instruments.”  This ASU requires entities to measure all expected credit losses for most financial assets held at the reporting date based on an expected loss model which includes historical experience, current conditions, and reasonable and supportable forecasts.  Entities will now use forward-looking information to better form their credit loss estimates.  This ASU also requires enhanced disclosures to help financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an entity’s portfolio.  ASU 2016-13 is effective for annual periods beginning after December 15, 2019, including interim periods within those fiscal periods.  Entities may adopt earlier as of the fiscal year beginning after December 15, 2018, including interim periods within those fiscal years.  Management is currently in the process of evaluating this new standard update.

Reclassification

The Company adopted ASU 2016-15: “Statement of Cash Flows (Topic 230) – Classification of Certain Cash Receipts and Cash Payments.” on October 1, 2018.  The $667,000 and $1,000,000 of guaranteed payments for acquisition of businesses for the years ended September 30, 2018 and September 30, 2017, respectively, have been reclassified from investing activities and are reported as a financing activity in the Consolidated Statement of Cash Flows.  Certain prior period amounts have been reclassified to conform to the current year presentation.  This reclassification had no effect on previously reported results of operations or retained earnings.

Note 2 – Revenue Recognition

On October 1, 2018, the Company adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606), using the modified retrospective transition method.  Management determined that there was no cumulative effect adjustment to the consolidated financial statements and the adoption of the standard did not require any adjustments to the consolidated financial statements for prior periods.  Under the guidance of the standard, revenue is recognized at the time a good or service is transferred to a customer and the customer obtains control of that good or receives the service performed.  Most of the Company’s sales arrangements with customers are short-term in nature involving single performance obligations related to the delivery of goods or repair of equipment and generally provide for transfer of control at the time of shipment to the customer.  The Company generally permits returns of product or repaired equipment due to defects; however, returns are historically insignificant.

Additionally, the Company provides services related to the installation and upgrade of technology on cell sites and the construction of new small cells for 5G technology.  The work under the purchase orders for wireless infrastructure services are generally completed in less than a month.  These services generally consist of a single performance obligation which the Company recognizes as revenue over time.

The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for its products, repair services or wireless infrastructure services.  The following steps are applied in determining the amount and timing of revenue recognition:

1.
Identification of a contract with a customer is a sales arrangement involving a purchase order issued by the customer stating the goods or services to be transferred.  Payment terms are generally due in net 30 to 90 days.  Discounts on sales arrangements are generally not provided.  Credit worthiness is determined by the Company based on payment experience and financial information available on the customer.

2.
Identification of performance obligations in the sales arrangement which is predominantly the promise to transfer goods, repair services, recycle items or wireless infrastructure services provided to the customer.
 
32


3.
Determination of the transaction price is specified in the purchase order based on the product or services to be transferred or provided to the customer.  Wireless infrastructure services transaction prices are based on the Master Service Agreement contracts between the Company and the wireless customers.

4.
Allocation of the transaction price to performance obligations.  Substantially all the contracts are single performance obligations and the allocated purchase price is the transaction price.

5.
Recognition of revenue occurs upon the satisfaction of the performance obligation and transfer of control.  Transfer of control by the Telco segment generally occurs at the point the Company ships the product from its warehouse locations.  Transfer of control for the Wireless segment generally occurs over time as the Company performs services.  To measure progress towards completion on performance obligations for which revenue is recognized over time the Company utilizes an input method based upon a ratio of direct costs incurred to date to management’s estimate of the total direct costs to be incurred on each contract.  The Company has established the systems and procedures to develop the estimates required to account for performance obligations over time.  These procedures include monthly review by management of costs incurred, progress towards completion, changes in estimates of costs yet to be incurred and execution by subcontractors.

The Company’s principal sales are from Wireless services, sales of Telco equipment and Telco recycled equipment.  Sales are primarily to customers in the United States.  International sales are made by the Telco segment to customers in Central America, South America and, to a substantially lesser extent, other international regions that utilize the same technology which totaled approximately $2.4 million, $2.9 million and $3.1 million in the years ended September 30, 2019, 2018 and 2017, respectively.

The Company’s customers include wireless carriers, wireless equipment providers, multiple system operators, resellers and direct sales to end-user customers.  Sales to the Company’s largest customer totaled approximately 12% of consolidated sales.

Sales by type were as follows:

   
Years Ended September 30,
 
   
2019
   
2018
   
2017
 
                   
Wireless services sales
  $
22,918,535
    $

    $
 ‒  
Equipment sales:                        
Telco
   
29,391,223
     
25,609,108
     
23,991,879
 
Intersegment
   
(54,541
)
   
(49,414
)
   
(86,950
)
Telco repair sales
   
43,442
   
   
 
Telco recycle sales
   
2,819,638
     
1,913,588
     
2,002,642
 
Total sales
 
$
55,118,297
   
$
27,473,282
   
$
25,907,571
 

The timing of revenue recognition from the wireless segment results in contract assets and contract liabilities.  Generally, billing occurs subsequent to revenue recognition, resulting in contract assets.  However, the Company sometimes receives advances or deposits from customers before revenue is recognized, resulting in contract liabilities.  Contract assets and contract liabilities are included in Unbilled revenue and Deferred revenue, respectively, in the consolidated balance sheets.  At September 30, 2019 contract assets were $2.7 million and contract liabilities were $0.1 million.  There were no contract assets at September 30, 2018 and 2017, and no contract liabilities at September 30, 2018 and 2017.

Note 3 – Acquisition

Purchase of Net Assets of Fulton Technologies, Inc. and Mill City Communications, Inc.

On December 27, 2018, the Company entered into a purchase agreement to acquire substantially all of the net assets of Fulton Technologies, Inc. and Mill City Communications, Ins. (collectively “Fulton”).  Fulton provides turn-key wireless infrastructure services for the four major U.S. wireless carriers, communication tower companies, national
33

integrators, and original equipment manufacturers.  These services primarily consist of the installation and upgrade of technology on cell sites and the construction of new small cells for 5G.  This agreement closed on January 4, 2019.  This acquisition is part of the overall growth strategy that will further diversify the Company into the broader telecommunications industry by providing wireless infrastructure services to the wireless telecommunications market.

The purchase price for the net assets of Fulton was $1.3 million.  The purchase price was allocated to the major categories of assets and liabilities based on their estimated fair values as of January 4, 2019, the effective date of the acquisition.  Any remaining amount was recorded as goodwill.

The following summarizes the final purchase price allocation of the fair value of the assets acquired and the liabilities assumed at January 4, 2019:

Assets acquired:
 
(in thousands)
 
Accounts receivable
 
$
828
 
Unbilled revenue
   
438
 
Prepaid expenses
   
341
 
Property and equipment
   
1,201
 
Intangible assets
   
244
 
Other assets
   
35
 
Goodwill
   
57
 
Total assets acquired
   
3,144
 
         
Liabilities assumed:
       
Accounts payable
   
1,250
 
Accrued expenses
   
455
 
Capital lease obligation
   
175
 
Total liabilities assumed
   
1,880
 
Net purchase price
 
$
1,264
 

The acquired intangible asset of approximately $0.2 million consists of customer relationships.

The unaudited financial information in the table below summarizes the combined results of operations of ADDvantage Technologies Group and Fulton for the years ended September 30, 2019 and September 30, 2018, on a pro forma basis, as though the companies had been combined as of October 1, 2017.  The pro forma earnings for the years ended September 30, 2019 and September 30, 2018 were adjusted to include intangible amortization expense of $6 thousand and $24 thousand, respectively.  The $0.2 million of acquisition-related expenses were excluded from the year ended September 30, 2019 and included in the year ending September 30, 2018 as if the acquisition occurred at October 1, 2017.  The pro forma net loss amounts exclude gains from the disposal of assets as well as interest expense and extinguishment of debt related to assets and debt not acquired or assumed from Fulton.  The unaudited pro forma financial information 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, 2017 nor should it be taken as indicative of future consolidated results of operations.

   
(Unaudited)
 
   
Years Ended September 30,
 
   
2019
   
2018
 
   
(in thousands)
 
Total net sales
 
$
58,955
   
$
41,809
 
Loss from continuing operations
 
$
(4,461
)
 
$
(5,997
)
Net loss
 
$
(5,728
)
 
$
(6,474
)

Note 4 – Discontinued Operations

In fiscal year 2018, the Board of Directors formed a committee of independent directors, referred to as the strategic direction committee, to consider, negotiate and approve or disapprove a sale transaction of the Cable TV segment to Leveling 8, Inc. (“Leveling 8”), a company controlled by David Chymiak.  David Chymiak is a director and substantial shareholder of the Company, and he was the Chief Technology Officer and President of Tulsat LLC until the closing of the sale.  The strategic direction committee consulted with senior management of the Company (excluding David
34

Chymiak) as well as the Company’s outside legal counsel, retained appraisal firms to evaluate the Company’s real estate and a business valuation firm to evaluate the fairness to the Company of the purchase price under the purchase agreement and considered many factors, including the decline over time of the Cable TV segment and of the cable TV industry in general, the large working capital requirement of the cable business relative to the return generated and the limited market for the cable business.  The strategic direction committee also reviewed a significant amount of information and considered numerous factors, including the price to be paid by Leveling 8 in the sale transaction, the strategic and financial benefits of the sale transaction, the extensive review process that led to the sale transaction, and the need for additional capital to grow the Company’s non-cable businesses.  In December 2018, the strategic direction committee approved and executed a stock purchase agreement of the Cable TV segment to Leveling 8, which required stockholder approval.

On May 29, 2019, at a special meeting, the Company’s stockholders voted in favor of selling the Company’s Cable TV segment to Leveling 8 for $10.3 million.  The Cable TV segment sale was completed on June 30, 2019.  The purchase price consisted of $3.9 million of cash at closing (subject to working capital adjustment estimated at $1.1 million), less the $2.1 million of cash proceeds from the sale of the Sedalia, Missouri and Warminster, Pennsylvania facilities already received (see discussion below) and a $6.4 million promissory note to be paid in semi-annual installments over five years with an interest rate of 6.0%.  The calculation of the pretax loss of the sale of the Cable TV segment was as follows:

Contract price
 
$
10,314,141
 
Less: Real estate sales
   
2,075,000
 
Less: Working capital adjustment
   
1,110,942
 
Net purchase price
   
7,128,199
 
         
Assets sold:
       
Accounts receivable
   
2,038,305
 
Inventories
   
10,258,487
 
Prepaids and other assets
   
73,073
 
Property and equipment, net
   
335,980
 
     
12,705,845
 
Liabilities transferred:
       
Accounts payable
   
1,306,294
 
Accrued expenses
   
466,759
 
     
1,773,053
 
Net assets sold
   
10,932,792
 
         
Pretax loss on sale of net assets of Cable TV segment
 
$
(3,804,593
)

While the Company was in the process of selling the Cable TV segment to Leveling 8, the Company sold three of its Cable TV real estate facilities to David Chymiak, two of which were originally included in the $10.3 million contract price for the sale of the Cable TV segment.  In October 2018, the Company entered into an agreement with David Chymiak to sell the Broken Arrow, Oklahoma facility.  The sale agreement provided for a purchase price of $5.0 million payable in cash at closing.  The sale closed on November 29, 2018, which generated a pretax gain of approximately $1.4 million.

In March 2019, the Company sold its Sedalia, Missouri building to David Chymiak LLC for a cash purchase price of $1.35 million and generated a pretax gain of $0.5 million.  In June 2019, the Company sold its Warminster, Pennsylvania building to David Chymiak LLC for a cash purchase price of $0.7 million and generated a pretax gain of $0.4 million.

Following is the calculation of the total pretax gain of the sale of the three facilities:

Aggregate purchase price
 
$
7,075,000
 
Less: Book value of real estate facilities
   
4,762,782
 
         
Pretax gain
 
$
2,312,218
 

35


Therefore, as a result of the sale of the Cable TV segment to Leveling 8 and the three real estate facility sales to David Chymiak, the Company will receive total proceeds of $14.2 million and have recorded a pretax loss on the sales of $1.5 million for the year ended September 30, 2019 as follows:

Proceeds:
     
Cash received from real estate facility sales
 
$
7,075,000
 
Cash received from sale of Cable TV segment
   
753,199
 
Promissory note from sale of Cable TV segment
   
6,375,000
 
         
Total proceeds
   
14,203,199
 
         
Book value of assets sold:
       
Cable TV segment
   
10,932,792
 
Real estate facilities
   
4,762,782
 
         
Total book value of assets sold
   
15,695,574
 
         
Pretax loss on sale of discontinued operations
 
$
(1,492,375
)

The cash received from the sale of the Cable TV segment of $0.7 million resulted from the down payment of $1.8 million due at the closing less the working capital adjustment of $1.1 million.  The promissory note from the sale of the Cable TV segment will be paid in semi-annual installments over five years including interest of 6% as follows:

Fiscal year 2020
 
$
1,400,000
 
Fiscal year 2021
   
1,400,000
 
Fiscal year 2022
   
940,000
 
Fiscal year 2023
   
940,000
 
Fiscal year 2024
   
2,970,000
 
Total proceeds
 
$
7,650,000
 

Subsequent to September 30, 2019, Leveling 8 paid the Company the first installment of $0.7 million under this promissory note.  As part of the sale of the Cable TV segment to Leveling 8, David Chymiak personally guaranteed the promissory note due to the Company and pledged certain assets (directly and indirectly owned) to secure the payment of the promissory note, including substantially all of David Chymiak’s Company common stock.  David Chymiak also entered into a standstill agreement with the Company under which he is limited in taking action with respect to the Company or its management for a period of three years after the closing of the Cable TV segment sale.

36

Assets and liabilities included within discontinued operations in the Company’s Consolidated Balance Sheets at September 30, 2019 and September 30, 2018, are as follows:
  
 
September 30,
2019
 
September 30,
2018
 
Assets:
           
Accounts receivable, net

$
 ‒  
$
1,821,870
 
Inventories

   ‒    
11,425,551
 
Prepaid expenses

   ‒    
11,352
 
Assets held for sale
 
   ‒    
3,666,753
 
Current assets of discontinued operations

$
 ‒  
$
16,925,526
 
               
Property and equipment, at cost:
             
Land and building
 
$
 ‒  
$
2,208,676
 
Machinery and equipment

   ‒    
2,800,835
 
Leasehold improvements

   ‒    
9,633
 
Less accumulated depreciation
 
   ‒    
(3,502,712
)
Net property and equipment

   ‒    
1,516,432
 
Deposits and other assets
 
   ‒    
8,540
 
Non-current assets of discontinued operations

$
 ‒  
$
1,524,972
 
               
Liabilities:
             
Accounts payable

$
 ‒  
$
1,356,800
 
Accrued expenses

   ‒    
438,074
 
Notes payable – current portion
 
   ‒    
597,906
 
Current liabilities of discontinued operations

$
 ‒  
$
2,392,780
 
Income (loss) from discontinued operations, net of tax and the loss on sale of discontinued operations, net of tax, of the Cable TV segment business which are presented in total as discontinued operations, net of tax in the Company’s Consolidated Statements of Operations for the years ended September 30, are as follows:

   
Years Ended September 30,
 
   
2019
   
2018
   
2017
 
                   
Total net sales
 
$
13,743,339
   
$
19,940,705
   
$
22,806,175
 
                         
Cost of sales
   
10,096,553
     
16,134,944
     
15,067,820
 
Operating, selling, general and administrative expenses
   
3,411,869
     
5,201,214
     
4,676,398
 
Other expenses
   
1,886
     
21,706
     
20,328
 
                         
Income (loss) from discontinued operations
   
233,031
     
(1,417,159
)
   
3,041,629
 
Loss on sale of discontinued operations
   
(1,492,375
)
 
   
 
Income tax provision
   
8,000
     
119,000
     
684,000
 
Discontinued operations, net of tax
 
$
(1,267,344
)
 
$
(1,536,159
)
 
$
2,357,629
 

Note 5 – Accounts Receivable Agreements
The Company’s Wireless segment has entered into various agreements, one agreement with recourse, to sell certain receivables to unrelated third-party financial institutions.  For the agreement with recourse, the Company is responsible for collecting payments on the sold receivables from its customers.  Under this agreement, the third-party financial institution advances the Company 90% of the sold receivables and establishes a reserve of 10% of the sold receivables until the Company collects the sold receivables.  As the Company collects the sold receivables, the third-party financial institution will remit the remaining 10% to the Company.  At September 30, 2019, the third-party financial institution has a reserve against the sold receivables of $0.4 million, which is reflected as restricted cash.  For the receivables
37

sold under the agreement with recourse, the agreement addresses events and conditions which may obligate the Company to immediately repay the institution the outstanding purchase price of the receivables sold.  The total amount of receivables uncollected by the institution was $3.2 million at September 30, 2019 for which there is a limit of $3.5 million.  Although the sale of receivables is with recourse, the Company did not record a recourse obligation at September 30, 2019 as the Company determined the sold receivables are collectible.  The other agreements without recourse are under programs offered by certain customers of Fulton.

For the year ended September 30, 2019, the Company received proceeds from the sold receivables under all of their various agreements of $19.6 million and included the proceeds in net cash provided by operating activities in the Consolidated Statements of Cash Flows.  The cost of selling these receivables ranges from 1.0% to 1.8%.  The Company recorded costs of $0.3 million for the year ended September 30, 2019, in other expense in the Consolidated Statements of Operations.

The Company accounts for these transactions in accordance with ASC 860, “Transfers and Servicing” (“ASC 860”).  ASC 860 allows for the ownership transfer of accounts receivable to qualify for sale treatment when the appropriate criteria is met, which permits the Company to present the balances sold under the program to be excluded from accounts receivable, net on the consolidated balance sheets.  Receivables are considered sold when they are transferred beyond the reach of the Company and its creditors, the purchaser has the right to pledge or exchange the receivables and the Company has surrendered control over the transferred receivables.

Note 6 – Inventories

Inventories, which are all within the Telco segment, at September 30, 2019 and September 30, 2018 are as follows:

   
September 30,
2019
   
September 30,
2018
 
             
New equipment
 
$
1,496,145
   
$
1,371,545
 
Refurbished and used equipment
   
7,404,428
     
6,905,946
 
Allowance for excess and obsolete inventory:
   
(1,275,000
)
   
(815,000
)
                 
Total inventories, net
 
$
7,625,573
   
$
7,462,491
 

New equipment includes products purchased from manufacturers plus “surplus-new”, which are unused products purchased from other distributors or multiple system operators.  Refurbished and used equipment 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.

In the years ended September 30, 2019 and 2018, the Telco segment identified certain inventory that more than likely will not be sold or that the cost will not be recovered when it is processed through its recycling program.  Therefore, the Company has a $1.3 million allowance at September 30, 2019.  The Company also reviewed the cost of inventories against estimated net realizable value and recorded a lower of cost or net realizable value charge of $0.7 million, $0.2 million and $0.1 million for the years ended September 30, 2019, 2018 and 2017, respectively, for inventories that have a cost in excess of estimated net realizable value.

Note 7 – Intangible Assets

As a result of the Fulton acquisition, the Company has recorded an additional intangible asset for customer relationships of $0.2 million (see Note 3 ‒ Acquisition).  The intangible assets with their associated accumulated amortization amounts at September 30, 2019 and September 30, 2018 are as follows:
38

   
September 30, 2019
 
   
Gross
   
Accumulated
Amortization
   
Net
 
Intangible assets:
                 
Customer relationships – 10 years
 
$
8,396,000
   
$
(3,547,389
)
 
$
4,848,611
 
Trade name – 10 years
   
2,119,000
     
(966,280
)
   
1,152,720
 
Non-compete agreements – 3 years
   
374,000
     
(372,333
)
   
1,667
 
                         
Total intangible assets
 
$
10,889,000
   
$
(4,886,002
)
 
$
6,002,998
 

   
September 30, 2018
 
   
Gross
   
Accumulated
Amortization
   
Net
 
Intangible assets:
                 
Customer relationships – 10 years
 
$
8,152,000
   
$
(2,713,890
)
 
$
5,438,110
 
Trade name – 10 years
   
2,119,000
     
(754,380
)
   
1,364,620
 
Non-compete agreements – 3 years
   
374,000
     
(332,332
)
   
41,668
 
                         
Total intangible assets
 
$
10,645,000
   
$
(3,800,602
)
 
$
6,844,398
 

Amortization expense was $1.1 million, $1.3 million and $1.3 million for the years ended September 30, 2019, 2018 and 2017, respectively.

The estimated aggregate amortization expense for each of the next five fiscal years is as follows:

2020
 
$
1,053,167
 
2021
   
1,051,500
 
2022
   
1,051,500
 
2023
   
1,051,500
 
2024
   
727,757
 
Thereafter
   
1,067,574
 
         
Total
 
$
6,002,998
 

Note 8 – Income Taxes
The provision (benefit) for income taxes for the years ended September 30, 2019, 2018 and 2017 consists of:

   
2019
   
2018
   
2017
 
Continuing operations:
                 
Current
 
$
(13,000
)
 
$
(17,000
)
 
$
174,000
 
Deferred
 
     
1,534,000
     
(1,004,000
)
     
(13,000
)
   
1,517,000
     
(830,000
)
Discontinued operations – current
   
8,000
     
119,000
     
684,000
 
Total provision (benefit) for income taxes
 
$
(5,000
)
 
$
1,636,000
   
$
(146,000
)

The following table summarizes the differences between the U.S. federal statutory rate and the Company’s effective tax rate for continuing operations financial statement purposes for the years ended September 30, 2019, 2018 and 2017:
39



   
2019
   
2018
   
2017
 
Statutory tax rate
   
21.0
%
   
21.0
%
   
34.0
%
State income taxes, net of U.S. federal tax benefit
   
6.6
%
   
8.1
%
   
3.3
%
Return to accrual adjustment
   
(0.6
%)
   
(0.1
%)
   
(0.7
%)
Tax credits
 
     
0.5
%
   
0.6
%
Charges without tax benefit
   
(5.3
%)
   
(4.3
%)
   
(11.8
%)
Change in statutory rate
 
     
(10.3
%)
 
 
Valuation allowance
   
(22.1
%)
   
(50.4
%)
 
 
Other exclusions
   
0.7
%
   
(0.1
%)
   
(0.1
%)
                         
Company’s effective tax rate
   
0.3
%
   
(35.6
%)
   
25.3
%

The charges without tax benefit rate includes, among other things, the impact of officer life insurance, nondeductible meals and entertainment and permanent basis differences in goodwill.

The tax effects of temporary differences related to deferred taxes at September 30, 2019 and 2018 consist of the following:
   
2019
   
2018
 
Deferred tax assets:
           
Net operating loss carryforwards
 
$
2,632,000
   
$
804,000
 
Accounts receivable
   
41,000
     
40,000
 
Inventory
   
393,000
     
1,453,000
 
Intangibles
   
707,000
     
614,000
 
Accrued expenses
   
53,000
     
76,000
 
Stock options
   
109,000
     
66,000
 
Investment in equity method investee
   
112,000
     
162,000
 
Other
 
     
102,000
 
     
4,047,000
     
3,317,000
 
                 
Deferred tax liabilities:
               
Financial basis in excess of tax basis of certain assets
   
705,000
     
726,000
 
Other
   
95,000
     
27,000
 
                 
Less valuation allowance
   
3,247,000
     
2,564,000
 
                 
Net deferred tax asset
  $

    $

 

The Company’s U.S. Federal net operating loss (“NOL”) carryforwards consist of the following:

   
NOL carryforward
   
Year Expires
 
Year ended September 30, 2019
 
$
6,100,000
   
No expiry
 
Year ended September 30, 2018
 
$
2,431,004
   
No expiry
 
Year ended September 30, 2016
 
$
82,820
     
2036
 

The Company records net deferred tax assets to the extent the Company believes these assets will more likely than not be realized.  In making such determination, the Company considers all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial performance.  The Company has concluded, based on its recent cumulative losses, that it is more likely than not that the Company will not be able to realize the full effect of the deferred tax assets and a valuation allowance of $3.2 million is needed.

Based upon a review of its income tax positions, the Company believes that its positions would be sustained upon an examination by the Internal Revenue Service and does not anticipate any adjustments that would result in a material
40

change to its financial position. Therefore, no reserves for uncertain income tax positions have been recorded. Generally, the Company is no longer subject to examinations by the U.S. federal, state or local tax authorities for tax years before 2016.

Note 9 – Accrued Expenses
Accrued expenses at September 30, 2019 and 2018 are as follows:

   
2019
   
2018
 
Employee costs
 
$
1,191,918
   
$
389,401
 
Taxes other than income tax
   
69,080
     
176,464
 
Interest
 
     
7,519
 
Other, net
   
356,913
     
138,552
 
                 
   
$
1,617,911
   
$
711,936
 

Note 10 – Line of Credit and Notes Payable

Credit Agreement

In December 2018, the Company entered into a credit agreement with a new lender.  This credit agreement contains a $2.5 million revolving line of credit and matures on December 17, 2019.  The line of credit requires quarterly interest payments based on the prevailing Wall Street Journal Prime Rate (5.0% at September 30, 2019), and the interest rate is reset monthly.  The credit agreement provides that the Company maintain a fixed charge coverage ratio (net cash flow to total fixed charges) of not less than 1.25 to 1.0 measured annually.  At September 30, 2019, there was no amount outstanding under the line of credit.  Future borrowings under the line of credit are limited to the lesser of $2.5 million or the sum of 80% of eligible accounts receivable and 25% of eligible Telco segment inventory.  Under these limitations, the Company’s total line of credit borrowing capacity was $2.5 million at September 30, 2019.

Subsequent to September 30, 2019, the Company renewed its revolving bank line of credit for one more year to a maturity date of December 17, 2020.  As part of this renewal, the revolving bank line of credit increased from $2.5 million to $4.0 million.  The other terms of the renewal were essentially the same.

Forbearance Agreement

On May 31, 2018, the Company entered into a forbearance agreement with BOKF, NA dba Bank of Oklahoma (“Lender”) relating to the Company’s Amended and Restated Credit and Term Loan Agreement (“Credit and Term Loan Agreement”).

Under the forbearance agreement, which was Amendment Ten to the Credit and Term Loan Agreement, Lender agreed to delete the fixed charge ratio covenant from the Credit and Term Loan Agreement and to forbear from exercising its rights and remedies under the Credit and Term Loan Agreement through October 31, 2018 subject to certain requirements and commitments from the Company.

The Company had two term loans outstanding under the Credit and Term Loan Agreement.  The first outstanding term loan had an outstanding balance of $0.6 million and was due on October 31, 2018, with monthly principal payments of $15,334 plus accrued interest.  The interest rate was the prevailing 30-day LIBOR rate plus 1.4% (3.66% at October 31, 2018).

The second outstanding term loan had an outstanding balance of $1.5 million and was due October 31, 2018, with monthly principal and interest payments of $118,809.  The interest rate on the term loan was a fixed interest rate of 4.40%.

During the first quarter of 2019, the Company extinguished its two outstanding term loans under the forbearance agreement by paying the outstanding balances of $2.1 million, and extinguished its line of credit under the forbearance agreement by paying the outstanding balance of $0.5 million.

Since the Company extinguished all of its outstanding term loans and line of credit outstanding under the forbearance agreement in the first quarter of 2019, the Company is no longer subject to the terms of the forbearance agreement
41

and was released from the Credit and Term Loan Agreement.

Fair Value of Debt

The carrying value of the Company’s variable-rate line of credit approximates its fair value since the interest rate fluctuates periodically based on a floating interest rate.

Note 11 – Stock-Based Compensation
Plan Information

The 2015 Incentive Stock Plan (the “Plan”) provides for awards of stock options and restricted stock to officers, directors, key employees and consultants.  Under the Plan, option prices will be set by the Compensation Committee and may not be less than the fair market value of the stock on the grant date.

At September 30, 2019, 1,100,415 shares of common stock were reserved for stock award grants under the Plan.  Of these reserved shares, 7,154 shares were available for future grants.

Stock Options

All share-based payments to employees, including grants of employee stock options, are recognized in the consolidated financial statements based on their grant date fair value over the requisite service period.  Compensation expense for stock-based awards is included in the operating, selling, general and administrative expense section of the Consolidated Statements of Operations.

Stock options are valued at the date of the award, which does not precede the approval date, and compensation cost is recognized on a straight-line basis over the vesting period.  Stock options granted to employees generally become exercisable over a three, four or five-year period from the date of grant and generally expire ten years after the date of grant.  Stock options granted to the Board of Directors generally become exercisable on the date of grant and generally expire ten years after the date of grant.

A summary of the status of the Company's stock options at September 30, 2019 and changes during the year then ended is presented below:
   
Options
   
Weighted Average Exercise
Price
   
Aggregate
Intrinsic
Value
 
Outstanding at September 30, 2018
   
290,000
   
$
2.40
       
Granted
   
480,000
   
$
1.32
       
Exercised
   
   
$
       
Expired
   
   
$
       
Forfeited
   
    $

       
Outstanding at September 30, 2019
   
770,000
   
$
1.73
   
$
352,700
 
Exercisable at September 30, 2019
   
443,334
   
$
1.99
   
$
146,400
 

There were no options exercised under the Plan for the years ended September 30, 2019, 2018 and 2017.

42

Information about the Company’s outstanding and exercisable stock options at September 30, 2019 is as follows:

Exercise Price
   
Stock Options
Outstanding
   
Exercisable
Stock Options
Outstanding
 
Remaining
Contractual
Life  
 
Aggregate
Intrinsic
Value (a)
 
                       
$
1.31
     
150,000
   
 
9.5 years
 
$
103,500
 
$
1.28
     
130,000
   
 
9.3 years
   
93,600
 
$
1.36
     
200,000
     
200,000
 
9.0 years
   
128,000
 
$
1.79
     
50,000
     
33,334
 
7.6 years
   
10,500
 
$
1.81
     
90,000
     
60,000
 
7.4 years
   
17,100
 
$
3.21
     
100,000
     
100,000
 
4.5 years
 
 
$
2.45
     
50,000
     
50,000
 
2.5 years
 
 
         
770,000
     
443,334
     
$
352,700
 
(a)
For stock options outstanding

The Company granted nonqualified stock options of 480,000, zero shares and 140,000 shares for the years ended September 30, 2019, 2018 and 2017, respectively.  The Company estimated the fair value of the options granted using the Black-Scholes option valuation model and the assumptions shown in the table below.  The Company estimated the expected term of options granted based on the historical grants and exercises of the Company's options.  The Company estimated the volatility of its common stock at the date of the grant based on both the historical volatility as well as the implied volatility on its common stock.  The Company based the risk-free rate that was used in the Black-Scholes option valuation model on the implied yield in effect at the time of the option grant on U.S. Treasury zero-coupon issues with equivalent expected terms.  The Company has never paid cash dividends on its common stock and does not anticipate paying any cash dividends in the foreseeable future.  Consequently, the Company used an expected dividend yield of zero in the Black-Scholes option valuation model.  The Company amortizes the resulting fair value of the options ratably over the vesting period of the awards.  The Company used historical data to estimate the pre-vesting options forfeitures and records share-based expense only for those awards that are expected to vest.

The estimated fair value at date of grant for stock options utilizing the Black-Scholes option valuation model and the assumptions that were used in the Black-Scholes option valuation model for the fiscal years 2019 and 2017 stock option grants are as follows:

   
2019
   
2017
 
Estimated fair value of options at grant date
 
$
196,970
   
$
96,690
 
Black-Scholes model assumptions:
               
Average expected life (years)
   
6