NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note 1 - Basis of Presentation and Accounting Policies
Basis of presentation
The consolidated condensed financial statements include the accounts of ADDvantage Technologies Group, Inc. and its subsidiaries, all of which are wholly owned (collectively, the “Company” or “we”). 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 approved by the
Company’s stockholders to be sold in May 2019, so the Company has classified the Cable TV segment as discontinued operations (see Note 4 – Discontinued Operations).
The accompanying unaudited consolidated condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial statements and do not
include all the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. However, the information furnished reflects all adjustments, consisting only of normal recurring
items which are, in the opinion of management, necessary in order to make the consolidated condensed financial statements not misleading. It is suggested that these consolidated condensed financial statements be read in conjunction with the audited
consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2018.
Reclassification
The Company adopted Accounting Standards Update (“ASU”) 2016-15: “Statement of Cash Flows (Topic 230) – Classification of Certain Cash Receipts and Cash Payments.” on October 1, 2018. The $667,000 of guaranteed
payments for acquisition of businesses have been reclassified from investing activities and are reported as a financing activity in the Consolidated Condensed Statement of Cash Flows for the nine month period ended June 30, 2018. This
reclassification had no effect on previously reported results of operations or retained earnings.
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 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 need to be reported as right of use assets and liabilities at an estimated amount of $4.6 million on the Company’s consolidated financial statements on the date of adoption.
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.
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.
The Company acquired the net assets of Fulton Technologies, Inc. and Mill City Communications, Inc. (collectively “Fulton”), wireless infrastructure services businesses, on January 4, 2019 (See Note 3 – Acquisition).
These companies 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 technology. The work under the purchase orders for wireless infrastructure services are generally completed in less
than a month. Under the guidance of the standard, revenue is recognized 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 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, recycled items or wireless infrastructure services to the customer.
|
3.
|
Determination of the transaction price which is specified in the purchase order based on product or services pricing negotiated between the Company and 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 sold or
repaired product from its warehouse locations. Transfer of control for the Wireless segment generally occurs over time as the Company installs or decommissions the equipment on the cell towers or performs other 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 labor costs incurred to date to management’s estimate of the total labor
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 $1.6 million and $2.1 million in the nine months ended
June 30, 2019 and 2018, 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 11% of consolidated revenues.
Our sales by type were as follows:
|
|
Three Months Ended June 30,
|
|
|
Nine Months Ended June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wireless service sales
|
|
$
|
8,733,444
|
|
|
$
|
‒
|
|
|
$
|
12,951,368
|
|
|
$
|
‒
|
|
Equipment sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Telco
|
|
|
7,989,318
|
|
|
|
7,110,920
|
|
|
|
22,876,047
|
|
|
|
19,647,811
|
|
Intersegment
|
|
|
(5,305
|
)
|
|
|
(5,562
|
)
|
|
|
(49,452
|
)
|
|
|
(7,872
|
)
|
Telco repair sales
|
|
|
31,142
|
|
|
‒
|
|
|
|
36,542
|
|
|
‒
|
|
Telco recycle sales
|
|
|
810,716
|
|
|
|
569,639
|
|
|
|
1,444,847
|
|
|
|
1,497,848
|
|
Total sales
|
|
$
|
17,559,315
|
|
|
$
|
7,674,997
|
|
|
$
|
37,259,352
|
|
|
$
|
21,137,787
|
|
With the acquisition of Fulton, the timing of revenue recognition results in contract assets and contract liabilities. Generally, billing occurs subsequent to revenue recognition, resulting in contract assets.
However, we sometimes receive advances or deposits from our customers before revenue is recognized, resulting in contract liabilities. Contract assets and contract liabilities are included in Unbilled revenue and Accrued expenses, respectively, in
the Consolidated Condensed Balance Sheets. At June 30, 2019 contract assets were $2.3 million.
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 and Mill City. Fulton provides turn-key wireless infrastructure services for
the four major U.S. wireless carriers, communication tower companies, national 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
|
|
$
|
1,307
|
|
Prepaid expenses
|
|
|
341
|
|
Property and equipment, net
|
|
|
1,201
|
|
Intangible assets
|
|
|
244
|
|
Goodwill
|
|
|
16
|
|
Other assets
|
|
|
35
|
|
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 Technologies for the three and nine months ended June 30, 2019 and June 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 three months ended June 30, 2018 were adjusted to include intangible amortization expense of $6 thousand. The pro forma earnings for the nine
months ended June 30, 2019 and June 30, 2018 were adjusted to include intangible amortization expense of $18 thousand. The $0.2 million of acquisition-related expenses were excluded from the nine months ended June 30, 2019 and included in the nine
month period ending June 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 our future consolidated results of operations.
|
|
Three Months Ended June 30,
|
|
|
Nine Months Ended June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
(in thousands)
|
|
Total net sales
|
|
$
|
17,559
|
|
|
$
|
12,560
|
|
|
$
|
41,078
|
|
|
$
|
36,592
|
|
Loss from continuing operations
|
|
$
|
(58
|
)
|
|
$
|
(1,223
|
)
|
|
$
|
(2,916
|
)
|
|
$
|
(5,877
|
)
|
Net loss
|
|
$
|
(1,485
|
)
|
|
$
|
(2,381
|
)
|
|
$
|
(4,184
|
)
|
|
$
|
(6,353
|
)
|
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 Chymiak) as well as our 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 $5,000,000
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 $1,350,000 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 $725,000 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
|
|
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, we will receive total proceeds of $14.2 million and have recorded a pretax loss on the
sales of $1.5 million for the nine months ended June 30, 2019 as follows:
Proceeds:
|
|
|
|
Cash received from real estate facility sales
|
|
$
|
7,075,000
|
|
Receivable 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 receivable from the sale of the Cable TV segment resulted from the down payment of $1.8 million due at the closing less the working capital adjustment of $1.1 million. This receivable will be settled in the fourth quarter of 2019. 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
|
|
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.
Assets and liabilities included within discontinued operations in the Company’s Consolidated Condensed Balance Sheets at June 30, 2019 and September 30, 2018, are as follows:
|
|
June 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
Condensed Statements of Operations for the three months and nine months ended June 30, are as follows:
|
|
Three Months Ended June 30,
|
|
|
Nine Months Ended June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Total net sales
|
|
$
|
4,897,987
|
|
|
$
|
4,898,903
|
|
|
$
|
13,743,339
|
|
|
$
|
15,370,405
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
3,661,352
|
|
|
|
3,809,320
|
|
|
|
10,096,553
|
|
|
|
11,540,313
|
|
Operating, selling, general and administrative expenses
|
|
|
1,156,368
|
|
|
|
2,130,001
|
|
|
|
3,411,869
|
|
|
|
4,152,246
|
|
Other expenses
|
|
|
−
|
|
|
|
5,568
|
|
|
|
1,886
|
|
|
|
16,137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations
|
|
|
80,267
|
|
|
|
(1,045,986
|
)
|
|
|
233,031
|
|
|
|
(338,291
|
)
|
Loss on sale of discontinued operations
|
|
|
(1,533,236
|
)
|
|
|
−
|
|
|
|
(1,492,375
|
)
|
|
|
−
|
|
Income tax provision (benefit)
|
|
|
(26,000
|
)
|
|
|
112,000
|
|
|
|
8,000
|
|
|
|
138,000
|
|
Discontinued operations, net of tax
|
|
$
|
(1,426,969
|
)
|
|
$
|
(1,157,986
|
)
|
|
$
|
(1,267,344
|
)
|
|
$
|
(476,291
|
)
|
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 June 30, 2019, the third-party financial institution
has a reserve against the sold receivables of $0.3 million, which is reflected as restricted cash. For the receivables 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 $1.6 million at June 30, 2019. Although the sale of receivables are with
recourse, the Company did not record a recourse obligation at June 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 nine months ended June 30, 2019, the Company received proceeds from the sold receivables under all of their various agreements of $9.9 million and included the proceeds in net cash provided by operating
activities in the Consolidated Condensed Statements of Cash Flows. The cost of selling these receivables ranges from 1.0% to 1.8% for these programs. The Company recorded costs of $122 thousand and $165 thousand for the three and nine months ended
June 30, 2019, respectively, in other expense in the Consolidated Condensed 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 Condensed 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.
Note 6 – Inventories
Inventories, which are all within the Telco segment, at June 30, 2019 and September 30, 2018 are as follows:
|
|
June 30,
2019
|
|
|
September 30,
2018
|
|
|
|
|
|
|
|
|
New equipment
|
|
$
|
1,911,995
|
|
|
$
|
1,371,545
|
|
Refurbished and new equipment
|
|
|
7,982,007
|
|
|
|
6,905,946
|
|
Allowance for excess and obsolete inventory:
|
|
|
(800,000
|
)
|
|
|
(815,000
|
)
|
|
|
|
|
|
|
|
|
|
Total inventories
|
|
$
|
9,094,002
|
|
|
$
|
7,462,491
|
|
New inventory includes products purchased from manufacturers plus “surplus-new”, which are unused products purchased from other distributors or multiple system operators. Refurbished inventory includes factory
refurbished, Company refurbished and used products. Generally, the Company does not refurbish its used inventory until there is a sale of that product or to keep a certain quantity on hand.
In the nine months ended June 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 $0.8 million allowance at June 30, 2019.
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
June 30
, 2019 and September 30, 2018 are as follows:
|
|
|
|
|
|
Gross
|
|
|
Accumulated
Amortization
|
|
|
Net
|
|
Intangible assets:
|
|
|
|
|
|
|
|
|
|
Customer relationships – 10 years
|
|
$
|
8,396,000
|
|
|
$
|
(3,337,489
|
)
|
|
$
|
5,058,511
|
|
Trade name – 10 years
|
|
|
2,119,000
|
|
|
|
(913,305
|
)
|
|
|
1,205,695
|
|
Non-compete agreements – 3 years
|
|
|
374,000
|
|
|
|
(362,333
|
)
|
|
|
11,667
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
$
|
10,889,000
|
|
|
$
|
(4,613,127
|
)
|
|
$
|
6,275,873
|
|
|
|
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
|
|
Note 8 – Notes Payable and Line of Credit
New 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 (5.5% at June 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 beginning in December 2019. At June 30, 2019, $750,000 was outstanding under the line of credit and is reported in Bank revolving line of credit on the consolidated balance sheet. 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 June 30,
2019.
Subsequent to June 30, 2019, the Company paid off the $750,000 outstanding under the revolving line of credit.
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 is 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.
Revolving credit and term loans created under the Credit and Term Loan Agreement were collateralized by inventory, accounts receivable, equipment and fixtures, general intangibles and a mortgage on certain property.
Among other financial covenants, the Credit and Term Loan Agreement provided that the Company maintain a leverage ratio (total funded debt to EBITDA) of not more than 2.50 to 1.0.
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 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 9 – Earnings Per Share
Basic earnings per share are based on the sum of the average number of common shares outstanding and issuable, restricted and deferred shares. Diluted earnings per share include any dilutive effect of stock options
and restricted stock. In computing the diluted weighted average shares, the average share price for the period is used in determining the number of shares assumed to be reacquired under the treasury stock method from the exercise of options.
Basic and diluted earnings per share for the nine months ended June 30, 2019 and 2018 are:
|
|
Three Months Ended June 30,
|
|
|
Nine Months Ended June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Loss from continuing operations
|
|
$
|
(58,196
|
)
|
|
$
|
(348,713
|
)
|
|
$
|
(2,472,665
|
)
|
|
$
|
(1,996,867
|
)
|
Discontinued operations, net of tax
|
|
|
(1,426,969
|
)
|
|
|
(1,157,986
|
)
|
|
|
(1,267,344
|
)
|
|
|
(476,291
|
)
|
Net loss attributable to common shareholders
|
|
$
|
(1,485,165
|
)
|
|
$
|
(1,506,699
|
)
|
|
$
|
(3,740,009
|
)
|
|
$
|
(2,473,158
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares
|
|
|
10,361,292
|
|
|
|
10,306,145
|
|
|
|
10,361,292
|
|
|
|
10,261,617
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Diluted weighted average shares
|
|
|
10,361,292
|
|
|
|
10,306,145
|
|
|
|
10,361,292
|
|
|
|
10,261,617
|
|
Loss per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(0.00
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.24
|
)
|
|
$
|
(0.19
|
)
|
Discontinued operations
|
|
|
(0.14
|
)
|
|
|
(0.12
|
)
|
|
|
(0.12
|
)
|
|
|
(0.05
|
)
|
Net loss
|
|
$
|
(0.14
|
)
|
|
$
|
(0.15
|
)
|
|
$
|
(0.36
|
)
|
|
$
|
(0.24
|
)
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(0.00
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.24
|
)
|
|
$
|
(0.19
|
)
|
Discontinued operations
|
|
|
(0.14
|
)
|
|
|
(0.12
|
)
|
|
|
(0.12
|
)
|
|
|
(0.05
|
)
|
Net loss
|
|
$
|
(0.14
|
)
|
|
$
|
(0.15
|
)
|
|
$
|
(0.36
|
)
|
|
$
|
(0.24
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The table below includes information related to stock options that were outstanding at the end of each respective three and nine month periods ended June 30, but have been excluded from the computation of
weighted-average stock options for dilutive securities because their effect would be anti-dilutive. The stock options were anti-dilutive because the Company had a net loss for the periods presented. Additionally, for certain stock options, the
exercise price exceeded the average market price per share of our common stock for the three and nine months ended June 30, 2019 and 2018.
|
|
Three Months Ended June 30,
|
|
|
Nine Months Ended June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Stock options excluded
|
|
|
770,000
|
|
|
|
645,000
|
|
|
|
770,000
|
|
|
|
645,000
|
|
Weighted average exercise price of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
stock options
|
|
$
|
1.73
|
|
|
$
|
2.59
|
|
|
$
|
1.73
|
|
|
$
|
2.59
|
|
Average market price of common stock
|
|
$
|
1.38
|
|
|
$
|
1.29
|
|
|
$
|
1.37
|
|
|
$
|
1.38
|
|
Note 10 – 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 June 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 financial statements based on their grant date fair value over the requisite service period. Compensation
expense for share-based awards is included in the operating, selling, general and administrative expense section of the Company’s consolidated condensed statements of operations.
Stock options are valued at the date of the award, which does not precede the approval date, and compensation cost is recognized on a straight-line basis over the vesting period. Stock options granted to employees
generally become exercisable over a three, four or five-year period from the date of grant and generally expire ten years after the date of grant. Stock options granted to the Board of Directors generally become exercisable on the date of grant and
generally expire ten years after the grant.
A summary of the status of the Company's stock options at June 30, 2019 and changes during the nine months then ended is presented below:
|
|
Shares
|
|
|
Wtd. Avg.
Ex. Price
|
|
Outstanding at September 30, 2018
|
|
|
290,000
|
|
|
$
|
2.40
|
|
Granted
|
|
|
480,000
|
|
|
$
|
1.32
|
|
Exercised
|
|
|
–
|
|
|
|
–
|
|
Expired
|
|
|
–
|
|
|
|
–
|
|
Forfeited
|
|
‒
|
|
|
‒
|
|
Outstanding at June 30, 2019
|
|
|
770,000
|
|
|
$
|
1.73
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2019
|
|
|
443,334
|
|
|
$
|
1.99
|
|
The Company granted 480,000 nonqualified stock options for the nine months ended June 30, 2019. The Company estimates the fair value of the options granted using the Black-Scholes option valuation model. The Company
estimates the expected term of options granted based on the historical grants and exercises of the Company’s options. The Company estimates the volatility of its common stock at the date of the grant based on both the historical volatility as well
as the implied volatility on its common stock. The Company bases the risk-free rate that is used in the Black-Scholes option valuation model on the implied yield in effect at the time of the option grant on U.S. Treasury zero-coupon issues with
equivalent expected term. The Company has never paid cash dividends on its common stock and does not anticipate paying cash dividends in the foreseeable future. Consequently, the Company uses an expected dividend yield of zero in the Black-Scholes
option valuation model. The Company amortizes the resulting fair value of the options ratably over the vesting period of the awards. The Company recognizes forfeitures as they occur.
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 nine months ended
June 30, 2019 are as follows:
|
|
Nine Months Ended
June 30, 2019
|
|
Estimated fair value of options at grant date
|
|
$
|
196,970
|
|
Black-Scholes model assumptions:
|
|
|
|
|
Average expected life (years)
|
|
|
5
|
|
Average expected volatility factor
|
|
|
29
|
%
|
Average risk-free interest rate
|
|
|
2.8
|
%
|
Average expected dividends yield
|
|
|
–
|
|
Compensation expense related to unvested stock options recorded for the nine months ended June 30, 2019 is as follows:
|
|
Nine Months Ended
June 30, 2019
|
|
Fiscal year 2017 grants
|
|
$
|
13,782
|
|
Fiscal year 2019 grants
|
|
$
|
90,162
|
|
The Company records compensation expense over the vesting term of the related options. At June 30, 2019, compensation costs related to these unvested stock options not yet recognized in the consolidated condensed statements of operations was $116,495.
Restricted Stock
The Company granted restricted stock in October 2018 to its Chairman of the Board of Directors totaling 55,147 shares, which were valued at market value on the date of grant. The shares will vest 20% per year with the
first installment vesting on the first anniversary of the grant date. The unamortized portion of the restricted stock is included in prepaid expenses on the Company’s consolidated condensed balance sheets.
Note 11 – Segment Reporting
The Company is reporting its financial performance based on its external reporting segments: Wireless Infrastructure Services 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.
The Company evaluates performance and allocates its resources based on operating income. The accounting policies of its reportable segments are the same as those described in the summary of significant accounting
policies. Segment assets consist primarily of cash and cash equivalents, accounts receivable, inventory, property and equipment, goodwill and intangible assets.
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
June 30,
2019
|
|
|
June 30,
2018
|
|
|
June 30,
2019
|
|
|
June 30,
2018
|
|
Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
Wireless
|
|
$
|
8,733,444
|
|
|
$
|
‒
|
|
|
$
|
12,951,368
|
|
|
$
|
‒
|
|
Telco
|
|
|
8,831,176
|
|
|
|
7,680,559
|
|
|
|
24,357,436
|
|
|
|
21,145,659
|
|
Intercompany
|
|
|
(5,305
|
)
|
|
|
(5,562
|
)
|
|
|
(49,452
|
)
|
|
|
(7,872
|
)
|
Total sales
|
|
$
|
17,559,315
|
|
|
$
|
7,674,997
|
|
|
$
|
37,259,352
|
|
|
$
|
21,137,787
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wireless
|
|
$
|
899,429
|
|
|
$
|
‒
|
|
|
$
|
983,372
|
|
|
$
|
‒
|
|
Telco
|
|
|
2,411,206
|
|
|
|
1,993,351
|
|
|
|
6,322,688
|
|
|
|
5,979,062
|
|
Total gross profit
|
|
$
|
3,310,635
|
|
|
$
|
1,993,351
|
|
|
$
|
7,306,060
|
|
|
$
|
5,979,062
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wireless
|
|
$
|
(147,463
|
)
|
|
$
|
‒
|
|
|
$
|
(1,334,215
|
)
|
|
$
|
‒
|
|
Telco
|
|
|
142,830
|
|
|
|
(668,142
|
)
|
|
|
(1,024,876
|
)
|
|
|
(1,736,292
|
)
|
Total loss from operations
|
|
$
|
(4,633
|
)
|
|
$
|
(668,142
|
)
|
|
$
|
(2,359,091
|
)
|
|
$
|
(1,736,292
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2019
|
|
|
September 30,
2018
|
|
Segment assets
|
|
|
|
|
|
|
Wireless
|
|
$
|
5,766,141
|
|
|
$
|
‒
|
|
Telco
|
|
|
24,598,393
|
|
|
|
22,173,797
|
|
Discontinued operations
|
|
‒
|
|
|
|
18,450,498
|
|
Non-allocated
|
|
|
10,804,890
|
|
|
|
3,770,325
|
|
Total assets
|
|
$
|
41,169,424
|
|
|
$
|
44,394,620
|
|