q32014_10q.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
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x
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QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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FOR THE QUARTERLY PERIOD ENDED June 30, 2014
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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FOR THE TRANSITION PERIOD FROM________________ TO ______________
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Commission File number 1-10799
ADDvantage Technologies Group, Inc.
(Exact name of registrant as specified in its charter)
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OKLAHOMA
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73-1351610
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.)
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1221 E. Houston
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Broken Arrow, Oklahoma 74012
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(Address of principal executive office)
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(918) 251-9121
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(Registrant's telephone number, including area code)
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
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Yes x No o
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Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
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Yes x No o
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule12b-2 of the Exchange Act.
Large accelerated filer o Accelerated filero
Non-accelerated filer o (do not check if a smaller reporting company) Smaller reporting company x
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
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Yes o No x
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Shares outstanding of the issuer's $.01 par value common stock as of July 31, 2014 were
10,041,206.
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ADDVANTAGE TECHNOLOGIES GROUP, INC.
Form 10-Q
For the Period Ended June 30, 2014
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PART I. FINANCIAL INFORMATION
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Page
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Item 1.
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Financial Statements.
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Consolidated Condensed Balance Sheets (unaudited)
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June 30, 2014 and September 30, 2013
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Consolidated Condensed Statements of Operations (unaudited)
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Three and Nine Months Ended June 30, 2014 and 2013
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Consolidated Condensed Statements of Cash Flows (unaudited)
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Nine Months Ended June 30, 2014 and 2013
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Notes to Unaudited Consolidated Condensed Financial Statements
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Item 2.
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Management's Discussion and Analysis of Financial Condition and Results of Operations.
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Item 4.
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Controls and Procedures.
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PART II. OTHER INFORMATION
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Item 6.
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Exhibits.
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SIGNATURES
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
ADDVANTAGE TECHNOLOGIES GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
| |
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Assets
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Current assets:
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Cash and cash equivalents
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$ |
3,989,694 |
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$ |
8,476,725 |
|
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Accounts receivable, net of allowance of $200,000 and $300,000,
respectively
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3,828,916 |
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2,390,979 |
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Other receivable
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1,413,001 |
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|
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− |
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Income tax refund receivable
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553,912 |
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258,790 |
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Inventories, net of allowance for excess and obsolete
inventory of $2,200,000 and $1,600,000, respectively
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23,728,181 |
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18,011,706 |
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Prepaid expenses
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187,234 |
|
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106,509 |
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Deferred income taxes
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|
1,257,000 |
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1,066,000 |
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Current assets of discontinued operations held for sale
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12,590 |
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3,267,917 |
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Total current assets
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34,970,528 |
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33,578,626 |
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Property and equipment, at cost:
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Land and buildings
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7,208,679 |
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7,208,679 |
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Machinery and equipment
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3,306,754 |
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2,991,412 |
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Leasehold improvements
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129,472 |
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9,633 |
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Total property and equipment, at cost
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10,644,905 |
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10,209,724 |
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Less accumulated depreciation
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(4,090,033 |
) |
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(3,831,238 |
) |
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Net property and equipment
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6,554,872 |
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6,378,486 |
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Intangibles, net of accumulated amortization
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7,905,017 |
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− |
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Goodwill
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3,004,482 |
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1,150,060 |
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Other assets
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131,428 |
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11,428 |
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Assets of discontinued operations held for sale
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− |
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1,997,520 |
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| |
|
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Total assets
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$ |
52,566,327 |
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$ |
43,116,120 |
|
See notes to unaudited consolidated condensed financial statements.
ADDVANTAGE TECHNOLOGIES GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
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Liabilities and Shareholders’ Equity
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Current liabilities:
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Accounts payable
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$ |
3,229,664 |
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$ |
1,138,494 |
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Accrued expenses
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1,008,286 |
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878,474 |
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Notes payable – current portion
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943,850 |
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184,008 |
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Other current liabilities
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973,230 |
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− |
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Current liabilities of discontinued operations held for sale
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4,500 |
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226,757 |
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Total current liabilities
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6,159,530 |
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2,427,733 |
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Notes payable, less current portion
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5,436,617 |
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1,318,604 |
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Deferred income taxes
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|
236,000 |
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193,000 |
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Other liabilities
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1,968,747 |
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− |
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Shareholders’ equity:
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Common stock, $.01 par value; 30,000,000 shares authorized;
10,541,864 and 10,499,138 shares issued, respectively; and
10,041,206 and 9,998,480 shares outstanding, respectively
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105,419 |
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104,991 |
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Paid in capital
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(5,364,063 |
) |
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(5,578,500 |
) |
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Retained earnings
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45,024,091 |
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45,650,306 |
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Total shareholders’ equity before treasury stock
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39,765,447 |
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40,176,797 |
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Less: Treasury stock, 500,658 shares, at cost
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(1,000,014 |
) |
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(1,000,014 |
) |
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Total shareholders’ equity
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38,765,433 |
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39,176,783 |
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Total liabilities and shareholders’ equity
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$ |
52,566,327 |
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$ |
43,116,120 |
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See notes to unaudited consolidated condensed financial statements.
ADDVANTAGE TECHNOLOGIES GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
| |
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Three Months Ended June 30,
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Nine Months Ended June 30,
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2014
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2013
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2014
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2013
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Sales
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$ |
9,323,158 |
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$ |
6,372,108 |
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$ |
23,756,707 |
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$ |
21,035,707 |
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Cost of sales
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6,103,103 |
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4,520,253 |
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16,442,257 |
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14,698,776 |
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Gross profit
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3,220,055 |
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1,851,855 |
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7,314,450 |
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6,336,931 |
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Operating, selling, general and
administrative expenses
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2,898,216 |
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1,410,494 |
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7,187,512 |
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|
4,344,895 |
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Operating income
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|
321,839 |
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|
441,361 |
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|
126,938 |
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|
1,992,036 |
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Interest expense
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|
|
100,113 |
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|
|
6,377 |
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|
131,107 |
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|
19,767 |
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Income (loss) before provision for income
taxes
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|
221,726 |
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|
|
434,984 |
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(4,169 |
) |
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|
1,972,269 |
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Provision (benefit) for income taxes
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|
|
44,000 |
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|
|
165,000 |
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(44,000 |
) |
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|
749,000 |
|
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Income from continuing operations
|
|
|
177,726 |
|
|
|
269,984 |
|
|
|
39,831 |
|
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|
1,223,269 |
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| |
|
|
|
|
|
|
|
|
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|
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|
|
|
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Discontinued operations:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
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Income (loss) from discontinued
operations, net of tax
|
|
|
(2,135 |
) |
|
|
(34,464 |
) |
|
|
(36,211 |
) |
|
|
105,977 |
|
|
Loss on sale of discontinued
operations, net of tax
|
|
|
(73,393 |
) |
|
|
− |
|
|
|
(629,835 |
) |
|
|
− |
|
|
Discontinued operations, net of tax
|
|
|
(75,528 |
) |
|
|
(34,464 |
) |
|
|
(666,046 |
) |
|
|
105,977 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Net income (loss)
|
|
$ |
102,198 |
|
|
$ |
235,520 |
|
|
$ |
(626,215 |
) |
|
$ |
1,329,246 |
|
| |
|
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Earnings (loss) per share:
|
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|
|
|
|
|
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|
|
|
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Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$ |
0.02 |
|
|
$ |
0.03 |
|
|
$ |
− |
|
|
$ |
0.12 |
|
|
Discontinued operations
|
|
|
(0.01 |
) |
|
|
− |
|
|
|
(0.07 |
) |
|
|
0.01 |
|
|
Net income (loss)
|
|
$ |
0.01 |
|
|
$ |
0.02 |
|
|
$ |
(0.06 |
) |
|
$ |
0.13 |
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Continuing operations
|
|
$ |
0.02 |
|
|
$ |
0.03 |
|
|
$ |
− |
|
|
$ |
0.12 |
|
|
Discontinued operations
|
|
|
(0.01 |
) |
|
|
− |
|
|
|
(0.07 |
) |
|
|
0.01 |
|
|
Net income (loss)
|
|
$ |
0.01 |
|
|
$ |
0.02 |
|
|
$ |
(0.06 |
) |
|
$ |
0.13 |
|
|
Weighted average shares used in per
share calculation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Basic
|
|
|
10,041,206 |
|
|
|
9,998,480 |
|
|
|
10,014,839 |
|
|
|
10,070,567 |
|
|
Diluted
|
|
|
10,087,115 |
|
|
|
9,998,480 |
|
|
|
10,051,242 |
|
|
|
10,070,781 |
|
See notes to unaudited consolidated condensed financial statements.
ADDVANTAGE TECHNOLOGIES GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| |
|
Nine Months Ended June 30,
|
|
| |
|
2014
|
|
|
2013
|
|
|
Operating Activities
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
(626,215 |
) |
|
$ |
1,329,246 |
|
|
Net income (loss) from discontinued operations
|
|
|
(666,046 |
) |
|
|
105,977 |
|
|
Net income from continuing operations
|
|
|
39,831 |
|
|
|
1,223,269 |
|
|
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
581,779 |
|
|
|
199,790 |
|
|
Provision for excess and obsolete inventories
|
|
|
451,351 |
|
|
|
450,000 |
|
|
Deferred income tax benefit
|
|
|
(148,000 |
) |
|
|
(5,000 |
) |
|
Share based compensation expense
|
|
|
134,643 |
|
|
|
125,651 |
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
213,205 |
|
|
|
684,944 |
|
|
Income tax refund receivable
|
|
|
(295,122 |
) |
|
|
396,337 |
|
|
Inventories
|
|
|
(3,201,256 |
) |
|
|
907,996 |
|
|
Prepaid expenses
|
|
|
(502 |
) |
|
|
10,792 |
|
|
Other assets
|
|
|
− |
|
|
|
2,350 |
|
|
Accounts payable
|
|
|
270,233 |
|
|
|
390,330 |
|
|
Income tax payable
|
|
|
− |
|
|
|
84,363 |
|
|
Accrued expenses
|
|
|
52,706 |
|
|
|
(202,591 |
) |
|
Net cash provided by (used in) operating activities – continuing
operations
|
|
|
(1,901,132 |
) |
|
|
4,268,231 |
|
|
Net cash provided by (used in) operating activities – discontinued
operations
|
|
|
272,372 |
|
|
|
(476,978 |
) |
|
Net cash provided by (used in) operating activities
|
|
|
(1,628,760 |
) |
|
|
3,791,253 |
|
| |
|
|
|
|
|
|
|
|
|
Investing Activities
|
|
|
|
|
|
|
|
|
|
Acquisition of business, net of cash acquired
|
|
|
(9,630,647 |
) |
|
|
− |
|
|
Additions to machinery and equipment
|
|
|
(29,658 |
) |
|
|
(136,873 |
) |
|
Proceeds from sale of discontinued operations
|
|
|
2,000,000 |
|
|
|
− |
|
|
Net cash used in investing activities
|
|
|
(7,660,305 |
) |
|
|
(136,873 |
) |
| |
|
|
|
|
|
|
|
|
|
Financing Activities
|
|
|
|
|
|
|
|
|
|
Proceeds on notes payable
|
|
|
5,000,000 |
|
|
|
− |
|
|
Payments on notes payable
|
|
|
(197,966 |
) |
|
|
(138,006 |
) |
|
Purchase of treasury stock
|
|
|
− |
|
|
|
(479,914 |
) |
|
Proceeds from stock options exercised
|
|
|
− |
|
|
|
3,300 |
|
|
Net cash provided by (used in) financing activities
|
|
|
4,802,034 |
|
|
|
(614,620 |
) |
| |
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(4,487,031 |
) |
|
|
3,039,760 |
|
|
Cash and cash equivalents at beginning of period
|
|
|
8,476,725 |
|
|
|
5,229,743 |
|
|
Cash and cash equivalents at end of period
|
|
$ |
3,989,694 |
|
|
$ |
8,269,503 |
|
| |
|
|
|
|
|
|
|
|
|
Supplemental cash flow information:
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$ |
80,319 |
|
|
$ |
19,885 |
|
|
Cash paid for income taxes
|
|
$ |
32,000 |
|
|
$ |
399,000 |
|
| |
|
|
|
|
|
|
|
|
|
Supplemental noncash investing activities:
|
|
|
|
|
|
|
|
|
|
Deferred guaranteed payments for acquisition of business
|
|
$ |
(2,744,338 |
) |
|
$ |
− |
|
| Other receivable related to proceeds from the sale of asset held for sale |
|
$ |
1,413,001 |
|
|
$ |
– |
|
See notes to unaudited consolidated condensed financial statements.
ADDVANTAGE TECHNOLOGIES GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Note 1 - Basis of Presentation and Description of Business
Basis of presentation
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/A for the fiscal year ended September 30, 2013.
ADDvantage Technologies Group, Inc., through its subsidiaries Tulsat Corporation, Tulsat-Atlanta LLC, ADDvantage Technologies Group of Nebraska, Inc. (dba Tulsat-Nebraska), ADDvantage Technologies Group of Texas, Inc. (dba Tulsat-Texas), NCS Industries, Inc., ADDvantage Technologies Group of Missouri, Inc. (dba ComTech Services), and Nave Communications Company (“Nave Communications”) (collectively, the “Company”), sells new, surplus and re-manufactured cable television equipment throughout North America, Central America, South America and, to a substantially lesser extent, other international regions that utilize the same technology. In addition, the Company also repairs cable television equipment for various cable companies. Through Nave Communications, the Company sells certified used telecommunications networking equipment primarily in North America. In addition, Nave Communications also provides decommissioning services for surplus and obsolete equipment, which Nave Communications in turn processes through its recycling services. The Company operates in two business segments, cable television and telecommunications, and product sales consist of different types of equipment used in the cable television and telecommunications equipment industries.
Fair value of financial instruments
The carrying amounts of accounts receivable and accounts payable approximate fair value due to their short maturities.
Note 2 – Acquisition
As part of the Company’s growth strategy, the Company is pursuing an acquisition strategy to expand into the broader telecommunications industry. On February 28, 2014, the Company acquired all of the outstanding common stock of Nave Communications, a telecommunications distributor of certified used telecommunication networking equipment and a recycler of surplus and obsolete telecommunications equipment. This acquisition, along with its retained management team, will diversify the Company’s business outside of the cable television industry and will also allow the Company to capitalize on growth opportunities in both the cable television and telecommunication industries. The preliminary estimated purchase price for Nave Communications includes the following:
| |
|
|
|
|
Cash payments, net of cash received
|
|
$ |
9,630,647 |
|
|
Deferred guaranteed payments (a)
|
|
|
2,744,338 |
|
|
Net purchase price
|
|
$ |
12,374,985 |
|
|
(a)
|
This amount represents the present value of $3.0 million in deferred payments, which will be paid in equal annual installments over the next three years. Over the three year period, the Company will ratably record interest expense with the offset being the deferred payment liability. As of June 30, 2014, the deferred guaranteed payments balance is $1.0 million in other current liabilities and $1.8 million in other long-term liabilities.
|
Under the acquisition method of accounting, the total estimated purchase price is allocated to Nave Communications’ net tangible and intangible assets acquired and liabilities assumed based on their estimated fair values as of February 28, 2014, the effective date of the acquisition. Any remaining amount is recorded as goodwill.
The following summarizes the preliminary purchase price allocation of the fair value of the assets acquired and the liabilities assumed at February 28, 2014:
|
Assets acquired:
|
|
(in thousands)
|
|
|
Cash and cash equivalents
|
|
$ |
113 |
|
|
Accounts receivable
|
|
|
1,651 |
|
|
Inventories
|
|
|
2,287 |
|
|
Property and equipment
|
|
|
406 |
|
|
Other non-current assets
|
|
|
120 |
|
|
Intangible assets
|
|
|
8,228 |
|
|
Goodwill
|
|
|
1,855 |
|
|
Total assets acquired
|
|
|
14,660 |
|
| |
|
|
|
|
|
Liabilities assumed:
|
|
|
|
|
|
Accounts payable
|
|
|
1,821 |
|
|
Accrued expenses
|
|
|
275 |
|
|
Capital lease obligation – current portion
|
|
|
21 |
|
|
Capital lease obligation
|
|
|
55 |
|
|
Total liabilities assumed
|
|
|
2,172 |
|
|
Net assets acquired
|
|
|
12,488 |
|
|
Less cash acquired
|
|
|
113 |
|
|
Net purchase price
|
|
$ |
12,375 |
|
The acquired intangible assets of approximately $8.2 million consist primarily of customer relationships, technology, trade name, and non-compete agreements with the former owners.
The Company will also make payments over the next three years equal to 70% of Nave Communications’ annual EBITDA in excess of $2.0 million per year. The Company will recognize the expense ratably over the three year period as compensation expense.
The Company has one year from the date of the acquisition to finalize the purchase price allocation, and there may be a material change in the purchase price allocation as presented. The Company is still working with its valuation experts on the valuation of identifiable intangibles and inventories for which any change may impact the goodwill amount recorded. If information becomes available which would indicate material adjustments are required to the preliminary purchase price allocation, such adjustments will be included in the purchase price allocation retrospectively.
The unaudited financial information in the table below summarizes the combined results of operations of ADDvantage Technologies Group and Nave Communications for the three and nine months ended June 30, 2014 and June 30, 2013, on a pro forma basis, as though the companies had been combined as of October 1, 2012. The pro forma earnings for the three months ended June 30, 2013 were adjusted to include intangible amortization expense of $0.2 million. The pro forma earnings for the nine months ended June 30, 2014 and June 30, 2013 were adjusted to include intangible amortization expense of $0.7 million. Incremental interest expense of $51 thousand was included in the pro forma earnings for the three months ended June 30, 2013 and $153 thousand in the nine months ended June 30, 2014 and June 30, 2013, as if the $5.0 million term loan used to help fund the acquisition had been entered into on October 1, 2012. The $0.6 million of acquisition-related expenses were excluded from the nine months ended June 30, 2014 and included in the nine month period ending June 30, 2013 as if the acquisition occurred at October 1, 2012. The unaudited pro forma financial information is provided for informational purposes only and does not purport to be indicative of the Company’s combined results of operations which would actually have been obtained had the acquisition taken place on October 1, 2012 nor should it be taken as indicative of our future consolidated results of operations.
| |
|
Three Months Ended June 30,
|
|
|
Nine Months Ended June 30,
|
|
| |
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
| |
|
(in thousands, except per share amounts)
|
|
|
Total net sales
|
|
|
n/a |
(1) |
|
$ |
9,810 |
|
|
$ |
29,822 |
|
|
$ |
30,679 |
|
|
Income from continuing operations
|
|
|
n/a |
(1) |
|
$ |
52 |
|
|
$ |
567 |
|
|
$ |
1,241 |
|
|
Net income (loss)
|
|
|
n/a |
(1) |
|
$ |
18 |
|
|
$ |
(100 |
) |
|
$ |
1,347 |
|
|
Earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
|
n/a |
(1) |
|
$ |
0.01 |
|
|
$ |
0.06 |
|
|
$ |
0.12 |
|
|
Net income (loss)
|
|
|
n/a |
(1) |
|
$ |
− |
|
|
$ |
(0.01 |
) |
|
$ |
0.13 |
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
|
n/a |
(1) |
|
$ |
0.01 |
|
|
$ |
0.06 |
|
|
$ |
0.12 |
|
|
Net income (loss)
|
|
|
n/a |
(1) |
|
$ |
− |
|
|
$ |
(0.01 |
) |
|
$ |
0.13 |
|
|
(1)
|
These amounts are presented in the unaudited Consolidated Condensed Statement of Operations for the quarter ended June 30, 2014.
|
Note 3 – Discontinued Operations and Assets Held for Sale
On January 31, 2014, the Company entered into an agreement to sell the majority of the net assets and operations of Adams Global Communications, LLC (“AGC”) to Adams Cable Equipment, a supplier of customer premise equipment (“CPE”) and other products for the cable television industry, for $2 million in cash, which yielded an after tax loss of $0.6 million. As part of the sales agreement, ADDvantage retained their existing relationship with ARRIS, as well as non-CPE inventory consisting primarily of headend and access and transport equipment. In addition, ADDvantage retained the AGC facility. As part of the agreement, the Company also agreed to not compete in the used CPE market for three years. The Company elected to pursue this opportunity to sell AGC as management determined that AGC did not fit within the Company’s primary cable television equipment distribution business of selling new and used headend and access and transport equipment, and AGC was not performing to the Company’s expectations.
The calculation of the pretax loss on sale of AGC is as follows:
|
Cash proceeds
|
|
$ |
2,000,000 |
|
| |
|
|
|
|
|
Assets sold:
|
|
|
|
|
|
Accounts receivable
|
|
|
454,269 |
|
|
Inventories
|
|
|
2,044,135 |
|
|
Prepaid expenses
|
|
|
12,054 |
|
|
Property and equipment
|
|
|
60,586 |
|
|
Goodwill
|
|
|
410,123 |
|
|
Other
|
|
|
10,805 |
|
| |
|
|
2,991,972 |
|
|
Liabilities transferred:
|
|
|
|
|
|
Accounts payable
|
|
|
77,675 |
|
|
Accrued expenses
|
|
|
6,075 |
|
| |
|
|
83,750 |
|
|
Net assets sold
|
|
|
2,908,222 |
|
| |
|
|
|
|
|
Pretax loss on sale of net assets of AGC
|
|
$ |
908,222 |
|
Assets and liabilities included within discontinued operations held for sale in the Company’s Consolidated Condensed Balance Sheets at June 30, 2014 and September 30, 2013, are as follows:
| |
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
− |
|
|
$ |
(110,068 |
) |
|
Accounts receivable, net
|
|
|
− |
|
|
|
629,874 |
|
|
Income tax receivable
|
|
|
12,590 |
|
|
|
13,590 |
|
|
Inventories
|
|
|
− |
|
|
|
2,718,747 |
|
|
Prepaid expenses
|
|
|
− |
|
|
|
15,774 |
|
|
Current assets of discontinued operations held for sale
|
|
$ |
12,590 |
|
|
$ |
3,267,917 |
|
| |
|
|
|
|
|
|
|
|
|
Property and equipment, at cost:
|
|
|
|
|
|
|
|
|
|
Land and building
|
|
$ |
− |
|
|
$ |
1,585,594 |
|
|
Machinery and equipment
|
|
|
− |
|
|
|
134,010 |
|
|
Less accumulated depreciation
|
|
|
− |
|
|
|
(132,207 |
) |
|
Net property and equipment
|
|
|
− |
|
|
|
1,587,397 |
|
|
Goodwill
|
|
|
− |
|
|
|
410,123 |
|
|
Non-current assets of discontinued operations held for
sale
|
|
$ |
− |
|
|
$ |
1,997,520 |
|
| |
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$ |
− |
|
|
$ |
170,375 |
|
|
Accrued expenses
|
|
|
4,500 |
|
|
|
56,382 |
|
|
Current liabilities of discontinued operations held for
sale
|
|
$ |
4,500 |
|
|
$ |
226,757 |
|
The Company retained the AGC facility following the disposition and actively marketed the facility with a real estate broker. Therefore, the Company had classified this facility as “Assets held for sale” on the Consolidated Condensed Balance Sheet, net of accumulated depreciation. On June 30, 2014, the Company sold the AGC facility for $1.5 million with net settlement proceeds of $1.4 million received on July 1, 2014. As of June 30, 2014, the Company has $1.4 million recorded in other receivable related to the sale. The sale resulted in a pretax loss of $0.1 million.
Income (loss) from discontinued operations, net of tax and the loss on sale of discontinued operations, net of tax, of AGC which are presented in total as discontinued operations, net of tax in the Company’s Consolidated 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,
|
|
| |
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
Total net sales
|
|
$ |
− |
|
|
$ |
1,103,873 |
|
|
$ |
1,408,462 |
|
|
$ |
5,020,780 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before provision for income
taxes
|
|
|
(1,135 |
) |
|
|
(55,464 |
) |
|
|
(57,211 |
) |
|
|
171,977 |
|
|
Income tax provision (benefit)
|
|
|
1,000 |
|
|
|
(21,000 |
) |
|
|
(21,000 |
) |
|
|
66,000 |
|
|
Income (loss) from discontinued
operations, net of tax
|
|
|
(2,135 |
) |
|
|
(34,464 |
) |
|
|
(36,211 |
) |
|
|
105,977 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on sale of discontinued operations
|
|
|
(82,393 |
) |
|
|
− |
|
|
|
(993,835 |
) |
|
|
− |
|
|
Income tax benefit
|
|
|
(9,000 |
) |
|
|
− |
|
|
|
(364,000 |
) |
|
|
− |
|
|
Loss on sale of discontinued operations,
net of tax
|
|
|
(73,393 |
) |
|
|
− |
|
|
|
(629,835 |
) |
|
|
− |
|
|
Discontinued operations, net of tax
|
|
$ |
(75,528 |
) |
|
$ |
(34,464 |
) |
|
$ |
(666,046 |
) |
|
$ |
105,977 |
|
Note 4 – Inventories
Inventories at June 30, 2014 and September 30, 2013 are as follows:
| |
|
|
|
|
|
|
|
New
|
|
$ |
18,695,780 |
|
|
$ |
15,679,789 |
|
|
Refurbished
|
|
|
7,232,401 |
|
|
|
3,931,917 |
|
|
Allowance for excess and obsolete inventory
|
|
|
(2,200,000 |
) |
|
|
(1,600,000 |
) |
| |
|
$ |
23,728,181 |
|
|
$ |
18,011,706 |
|
New inventory includes products purchased from the manufacturers plus “surplus-new”, which are unused products purchased from other distributors or multiple system operators. Refurbished inventory includes factory refurbished, Company refurbished and used products. Generally, the Company does not refurbish its used inventory until there is a sale of that product or to keep a certain quantity on hand. The refurbished inventory at June 30, 2014 includes $3.3 million from the Nave Communications acquisition.
The Company regularly reviews the cable television segment inventory quantities on hand, and an adjustment to cost is recognized when the loss of usefulness of an item or other factors, such as obsolete and excess inventories, indicate that cost will not be recovered when an item is sold. The Company recorded charges to allow for cable television obsolete inventory, increasing the cost of sales by approximately $0.5 million for the nine months ended June 30, 2014, and 2013. Any obsolete and excess telecommunications inventory is processed through Nave Communications’ recycling program.
Note 5 – Intangible Assets
As a result of the Nave Communications acquisition, the Company now has intangible assets with finite useful lives based on the preliminary purchase price allocation (see Note 2). Intangible assets that have finite useful lives are amortized on a straight-line basis over their estimated useful lives ranging from 3 years to 10 years. The intangible assets at June 30, 2014 are as follows:
| |
|
|
|
|
Intangible assets:
|
|
|
|
|
Customer relationships
|
|
$ |
4,496,000 |
|
|
Technology
|
|
|
2,098,000 |
|
|
Trade name
|
|
|
1,393,000 |
|
|
Non-compete agreements
|
|
|
241,000 |
|
| |
|
|
8,228,000 |
|
|
Accumulated amortization
|
|
|
(322,983 |
) |
|
Total intangible assets, net of accumulated amortization
|
|
$ |
7,905,017 |
|
Note 6 – Notes Payable and Line of Credit
Notes Payable
The Company has an Amended and Restated Revolving Credit and Term Loan Agreement (“Credit and Term Loan Agreement”), which is collateralized by inventory, accounts receivable, equipment and fixtures and general intangibles. One of the outstanding term loans under the Credit and Term Loan Agreement has an outstanding balance of approximately $1.4 million at June 30, 2014 and is due on November 20, 2021, with monthly principal payments of $15,334 plus accrued interest. The interest rate is the prevailing 30-day LIBOR rate plus 1.4% (1.55% at June 30, 2014) and is reset monthly.
In connection with the acquisition of Nave, ADDvantage entered into a $5.0 million term loan under the Credit and Term Loan Agreement. The term loan is a five year term loan with a seven year amortization payment schedule. The term loan outstanding balance is $4.9 million at June 30, 2014 and is due March 4, 2019, with monthly principal and interest payments of $68,505. The interest rate is a fixed rate of 4.07%.
Line of Credit
The Company has a $7.0 million Revolving Line of Credit (“Line of Credit”) under the Credit and Term Loan Agreement. At June 30, 2014, the Company had no balance outstanding under the Line of Credit. The Line of Credit requires quarterly interest payments based on the prevailing 30-day LIBOR rate plus 2.75% (2.90% at June 30, 2014), and the interest rate is reset monthly. Any future borrowings under the Line of Credit are due on November 28, 2014. Future borrowings under the Line of Credit are limited to the lesser of $7.0 million or the net balance of 80% of qualified accounts receivable plus 50% of qualified inventory. Under these limitations, the Company’s total available Line of Credit borrowing base was $7.0 million at June 30, 2014. Among other financial covenants, the Line of Credit agreement provides that the Company maintain a fixed charge ratio of coverage (EBITDA to total fixed charges) of not less than 1.25 to 1.0, determined quarterly. The Line of Credit is collateralized by inventory, accounts receivable, equipment and fixtures and general intangibles.
Fair Value of Debt
The carrying value of the Company’s variable-rate term loan approximates its fair value since the interest rate fluctuates periodically based on a floating interest rate.
FASB ASC 820, Fair Value Measurements and Disclosures, defines fair value, establishes a consistent framework for measuring fair value and establishes a fair value hierarchy based on the observability of inputs used to measure fair value. The three levels of the fair value hierarchy are as follows:
|
·
|
Level 1 – Quoted prices for identical assets in active markets or liabilities that we have the ability to access. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.
|
|
·
|
Level 2 – Inputs are other than quoted prices in active markets included in Level 1 that are either directly or indirectly observable. These inputs are either directly observable in the marketplace or indirectly observable through corroboration with market data for substantially the full contractual term of the asset or liability being measured.
|
|
·
|
Level 3 – Inputs that are not observable for which there is little, if any, market activity for the asset or liability being measured. These inputs reflect management’s best estimate of the assumptions market participants would use in determining fair value.
|
The Company has determined the fair value of its fixed-rate term loan utilizing the Level 2 hierarchy as the fair value can be estimated from broker quotes corroborated by other market data. These broker quotes are based on observable market interest rates at which loans with similar terms and maturities could currently be executed. The Company then estimated the fair value of the fixed-rate term loan using cash flows discounted at the current market interest rate obtained. The fair value of the Company’s fixed rate loan was $4.9 million as of June 30, 2014.
Note 7 – Earnings Per Share
Basic earnings per share are based on the sum of the average number of common shares outstanding and issuable restricted and deferred shares. Diluted earnings per share include any dilutive effect of stock options and restricted stock. In computing the diluted weighted average shares, the average stock price for the period is used in determining the number of shares assumed to be reacquired under the treasury stock method from the exercise of options.
Basic and diluted earnings per share for the three and nine months ended June 30, 2014 and 2013 are:
| |
|
Three Months Ended June 30,
|
|
|
Nine Months Ended June 30,
|
|
| |
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
Income from continuing operations
|
|
$ |
177,726 |
|
|
$ |
269,984 |
|
|
$ |
39,831 |
|
|
$ |
1,223,269 |
|
|
Discontinued operations, net of tax
|
|
|
(75,528 |
) |
|
|
(34,464 |
) |
|
|
(666,046 |
) |
|
|
105,977 |
|
|
Net income (loss) attributable to common
shareholders
|
|
$ |
102,198 |
|
|
$ |
235,520 |
|
|
$ |
(626,215 |
) |
|
$ |
1,329,246 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares
|
|
|
10,041,206 |
|
|
|
9,998,480 |
|
|
|
10,014,839 |
|
|
|
10,070,567 |
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
45,909 |
|
|
|
– |
|
|
|
36,403 |
|
|
|
214 |
|
|
Diluted weighted average shares
|
|
|
10,087,115 |
|
|
|
9,998,480 |
|
|
|
10,051,242 |
|
|
|
10,070,781 |
|
|
Earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$ |
0.02 |
|
|
$ |
0.03 |
|
|
$ |
− |
|
|
$ |
0.12 |
|
|
Discontinued operations
|
|
|
(0.01 |
) |
|
|
− |
|
|
|
(0.07 |
) |
|
|
0.01 |
|
|
Net income (loss)
|
|
$ |
0.01 |
|
|
$ |
0.02 |
|
|
$ |
(0.06 |
) |
|
$ |
0.13 |
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$ |
0.02 |
|
|
$ |
0.03 |
|
|
$ |
− |
|
|
$ |
0.12 |
|
|
Discontinued operations
|
|
|
(0.01 |
) |
|
|
− |
|
|
|
(0.07 |
) |
|
|
0.01 |
|
|
Net income (loss)
|
|
$ |
0.01 |
|
|
$ |
0.02 |
|
|
$ |
(0.06 |
) |
|
$ |
0.13 |
|
Note 8 – Stock Option Plans
Plan Information
The 1998 Incentive Stock Plan (the “Plan”) provides for awards of stock options and restricted stock to officers, directors, key employees and consultants. The Plan provides that upon any issuance of additional shares of common stock by the Company, other than pursuant to the Plan, the number of shares covered by the Plan will increase to an amount equal to 10% of the then outstanding shares of common stock. Under the Plan, option prices will be set by the Board of Directors and may be greater than, equal to, or less than fair market value on the grant date.
At June 30, 2014, 1,024,656 shares of common stock were reserved for the exercise of, or lapse of restrictions on, stock awards under the Plan. Of these reserved shares, 40,415 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 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, 2014 and changes during the nine months then ended is presented below:
| |
|
Shares
|
|
|
Wtd. Avg.
Ex. Price
|
|
|
Outstanding at September 30, 2013
|
|
|
363,000 |
|
|
$ |
2.83 |
|
|
Granted
|
|
|
200,000 |
|
|
$ |
3.21 |
|
|
Exercised
|
|
|
– |
|
|
|
– |
|
|
Expired
|
|
|
3,000 |
|
|
$ |
4.40 |
|
|
Forfeited
|
|
|
− |
|
|
|
− |
|
|
Outstanding at June 30, 2014
|
|
|
560,000 |
|
|
$ |
2.96 |
|
| |
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2014
|
|
|
160,000 |
|
|
$ |
3.28 |
|
The Company granted nonqualified stock options of 200,000 shares for the nine months ended June 30, 2014. The Company estimates the fair value of the options granted using the Black-Scholes option valuation model. The Company estimates the expected term of options granted based on the historical grants and exercises of the Company’s options. The Company estimates the volatility of its common stock at the date of the grant based on both the historical volatility as well as the implied volatility on its common stock. The Company bases the risk-free rate that is used in the Black-Scholes option valuation model on the implied yield in effect at the time of the option grant on U.S. Treasury zero-coupon issues with equivalent expected term. The Company has never paid cash dividends on its common stock and does not anticipate paying cash dividends in the foreseeable future. Consequently, the Company uses an expected dividend yield of zero in the Black-Scholes option valuation model. The Company amortizes the resulting fair value of the options ratably over the vesting period of the awards. The Company uses historical data to estimate the pre-vesting option forfeitures and records share-based expense only for those awards that are expected to vest.
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, 2014 are as follows:
| |
|
Nine Months Ended
June 30, 2014
|
|
|
Estimated fair value of options at grant date
|
|
$ |
244,400 |
|
|
Black-Scholes model assumptions:
|
|
|
|
|
|
Average expected life (years)
|
|
|
6 |
|
|
Average expected volatility factor
|
|
|
34 |
% |
|
Average risk-free interest rate
|
|
|
2.79 |
% |
|
Average expected dividends yield
|
|
|
– |
|
| |
|
|
|
|
Compensation expense related to unvested stock options recorded for the nine months ended June 30, 2014 is as follows:
| |
|
Nine Months Ended
|
|
| |
|
June 30, 2014
|
|
|
Fiscal year 2012 grant
|
|
$ |
41,528 |
|
|
Fiscal year 2014 grant
|
|
$ |
37,339 |
|
The Company records compensation expense over the vesting term of the related options. At June 30, 2014, compensation costs related to these unvested stock options not yet recognized in the consolidated condensed statements of operations was $276,724.
Restricted Stock
The Company granted restricted stock in March 2014 to its Board of Directors totaling 19,050 shares, which were valued at market value on the date of grant. The fair value of these shares upon issuance totaled $60,000 and is being amortized over the 12 month holding period as compensation expense. The Company granted restricted stock in April of 2014 to certain employees totaling 23,676 shares, which were valued at market value on the date of grant. The shares have a holding restriction, which will expire in equal annual installments of 7,892 shares over three years starting in April 2015. The fair value of these shares upon issuance totaled $76,000 and is being amortized over the respective one, two and three year holding periods as compensation expense. The unamortized portion of the restricted stock is included in prepaid expenses on the Company’s Consolidated Condensed Balance Sheets.
Note 9 – Segment Reporting
During the second quarter of fiscal year 2014, the Company changed its organizational structure with the acquisition of Nave Communications. As a result of this acquisition, information that the Company’s management team regularly reviews for purposes of allocating resources and assessing performance changed. Therefore, beginning in fiscal year 2014, the Company is reporting its financial performance based on its new external reporting segments: Cable Television and Telecommunications. These reportable segments are described below.
Cable Television (“Cable TV”)
The Company’s Cable TV segment sells new, surplus and re-manufactured cable television equipment throughout North America, Central America, South America and, to a substantially lesser extent, other international regions that utilize the same technology. In addition, this segment also repairs cable television equipment for various cable companies.
Telecommunications (“Telco”)
The Company’s Telecommunications segment consists of Nave Communications. Through Nave Communications’ diverse customer base and its broad range of manufacturer systems and components, Nave Communications’ provides cost effective telecommunications and networking solutions to expand network capacity and infrastructure for its customers. Nave Communications specializes in the sale of certified used telecommunications networking equipment. In addition, Nave Communications offers its customers decommissioning services for surplus and obsolete equipment, which Nave Communications in turn processes through its recycling services.
The Company evaluates performance and allocates its resources based on operating income. The accounting policies of its reportable segments are the same as those described in the summary of significant accounting policies.
The Company did not have any intersegment sales for the three and nine months ended June 30, 2014 and 2013. Segment assets consist primarily of cash and cash equivalents, accounts receivable, inventory, property, plant and equipment, goodwill and other intangible assets.
| |
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cable TV
|
|
$ |
6,506,763 |
|
|
$ |
6,372,108 |
|
|
$ |
19,874,687 |
|
|
$ |
21,035,707 |
|
|
Telco
|
|
|
2,816,395 |
|
|
|
− |
|
|
|
3,882,020 |
|
|
|
− |
|
|
Total sales
|
|
$ |
9,323,158 |
|
|
$ |
6,372,108 |
|
|
$ |
23,756,707 |
|
|
$ |
21,035,707 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cable TV
|
|
$ |
1,903,435 |
|
|
$ |
1,851,855 |
|
|
$ |
5,619,323 |
|
|
$ |
6,336,931 |
|
|
Telco
|
|
|
1,316,620 |
|
|
|
− |
|
|
|
1,695,127 |
|
|
|
− |
|
|
Total gross profit
|
|
$ |
3,220,055 |
|
|
$ |
1,851,855 |
|
|
$ |
7,314,450 |
|
|
$ |
6,336,931 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cable TV
|
|
$ |
385,309 |
|
|
$ |
441,361 |
|
|
$ |
867,762 |
|
|
$ |
1,992,036 |
|
|
Telco
|
|
|
(63,470 |
) |
|
|
− |
|
|
|
(740,824 |
) |
|
|
− |
|
|
Total operating income (loss)
|
|
$ |
321,839 |
|
|
$ |
441,361 |
|
|
$ |
126,938 |
|
|
$ |
1,992,036 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cable TV
|
|
$ |
29,601,308 |
|
|
$ |
28,398,343 |
|
|
$ |
29,601,308 |
|
|
$ |
28,398,343 |
|
|
Telco
|
|
|
15,578,772 |
|
|
|
− |
|
|
|
15,578,772 |
|
|
|
− |
|
|
Non-allocated (A)
|
|
|
7,386,247 |
|
|
|
14,574,439 |
|
|
|
7,386,247 |
|
|
|
14,574,439 |
|
|
Total assets
|
|
$ |
52,566,327 |
|
|
$ |
42,972,782 |
|
|
$ |
52,566,327 |
|
|
$ |
42,972,782 |
|
|
(A)
|
June 30, 2013 balances include $5.8 million of discontinued operations assets as a result of the sale of Adams Global Communications in the second fiscal quarter of 2014.
|
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Special Note on Forward-Looking Statements
Certain statements in Management's Discussion and Analysis (“MD&A”), other than purely historical information, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements generally are identified by the words “estimates,” “projects,” “believes,” “plans,” “intends,” “will likely result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. These statements are subject to a number of risks, uncertainties and developments beyond our control or foresight, including changes in the trends of the cable television industry, changes in our supplier agreements, technological developments, changes in the economic environment generally, the growth or formation of competitors, changes in governmental regulation or taxation, changes in our personnel and other such factors. Our actual results, performance or achievements may differ significantly from the results, performance or achievement expressed or implied in the forward-looking statements. We do not undertake any obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events.
Overview
The following MD&A is intended to help the reader understand the results of operations, financial condition, and cash flows of the Company. MD&A is provided as a supplement to, and should be read in conjunction with the information presented elsewhere in this quarterly report on Form 10-Q and with the information presented in our annual report on Form 10-K/A for the year ended September 30, 2013, which includes our audited consolidated financial statements and the accompanying notes to the consolidated financial statements.
During the second quarter of fiscal year 2014, the Company changed its organizational structure with the acquisition of Nave Communications. As a result of this acquisition, information that the Company’s management team regularly reviews for purposes of allocating resources and assessing performance changed. Therefore, beginning in fiscal year 2014, the Company is reporting its financial performance based on its new external reporting segments: Cable Television and Telecommunications. These reportable segments are described below.
Cable Television (“Cable TV”)
The Company’s Cable TV segment sells new, surplus and re-manufactured cable television equipment throughout North America, Central America and South America. In addition, this segment also repairs cable television equipment for various cable companies.
Telecommunications (“Telco”)
The Company’s Telecommunications segment sells certified used telecommunications networking equipment from a broad range of manufacturers primarily in North America. In addition, this segment offers its customers decommissioning services for surplus and obsolete equipment, which it then processes through its recycling services.
Recent Business Developments
Sale of Adams Global Communications
On January 31, 2014, the Company executed an agreement to sell the majority of the net assets and operations of Adams Global Communications ("AGC") to Adams Cable Equipment, a supplier of customer premise equipment (“CPE”) and other products for the cable television industry, for approximately $2 million in cash, which yielded an after tax loss of $0.6 million. As part of the sales agreement, ADDvantage retained their existing relationship with ARRIS, as well as non-CPE inventory consisting primarily of headend and access and transport equipment. In addition, ADDvantage retained the AGC facility, which was actively marketed for sale. As part of the agreement,
the Company also agreed to not compete in the used CPE market for three years. AGC’s net assets that were disposed of consisted of approximately $2.5 million of current assets, $0.5 million of noncurrent assets and $0.1 million of current liabilities, which yielded a loss on the sale, net of tax, of approximately $0.6 million.
Assets Held for Sale
As a result of the sale of the net assets of AGC discussed above, the Company retained the AGC facility and engaged a real estate broker to sell the facility. On June 30, 2014, the Company sold the AGC facility for $1.5 million with net settlement proceeds of $1.4 million received on July 1, 2014. The sale resulted in a pretax loss of $0.1 million.
Acquisition of Nave Communications Company
On February 28, 2014, the Company acquired all of the outstanding common stock of Nave Communications, a provider of quality used telecommunication networking equipment. The purchase price for Nave Communications included approximately $9.6 million in cash payments, as well as $3.0 million in deferred payments over the next three years. In addition, the Company will make future earn-out payments equal to 70% of Nave Communications’ annual EBITDA in excess of an EBITDA target of $2 million per year over the next three years, which is estimated to be between $0.7 million and $1.0 million annually.
Results of Operations
Comparison of Results of Operations for the Three Months Ended June 30, 2014 and June 30, 2013
Consolidated
Consolidated net sales increased $2.9 million, or 46%, to $9.3 million for the three months ended June 30, 2014 from $6.4 million for the three months ended June 30, 2013. The increase in net sales was primarily a result of the Telco segment as a result of the Nave Communications acquisition, while net sales from the Cable TV segment increased $0.1 million compared to the same period last year. Consolidated gross profit increased $1.3 million, or 74%, to $3.2 million for the three months ended June 30, 2014 from $1.9 million for the same period last year. The increase in gross profit was due primarily to gross profit from the Telco segment as a result of the Nave Communications acquisition, while gross profit from the Cable TV segment was relatively flat compared to the same period last year.
Consolidated operating, selling, general and administrative expenses include all personnel costs, which include fringe benefits, insurance and business taxes, as well as occupancy, communication and professional services, among other less significant cost categories. Operating, selling, general and administrative expenses increased $1.5 million, or 105%, to $2.9 million for the three months ended June 30, 2014 from $1.4 million for the same period last year. This increase was primarily due to increased expenses of the Cable TV segment of $0.1 million and the Telco segment of $1.4 million as a result of the Nave Communications acquisition.
Interest expense increased $0.1 million to $0.1 million for the three months ended June 30, 2014 from $6 thousand for the same period last year. The increase was due primarily to interest expense incurred on the $5.0 million term loan entered into in connection with the Nave Communications acquisition.
The provision for income taxes was $44 thousand for the three months ended June 30, 2014, or an effective rate of 20%, from a provision for income taxes of $0.2 million for the three months ended June 30, 2013, or an effective rate of 38%. The three months ended June 30, 2014 provision for income taxes includes an adjustment to the federal tax provision for an additional deduction for state income taxes with an impact of approximately $40 thousand.
Segment Results
Cable TV
Net sales for the Cable TV segment increased $0.1 million to $6.5 million for the three months ended June 30, 2014 from $6.4 million for the same period last year. The increase in sales was due primarily to an increase in new
equipment sales of $0.2 million, partially offset by a decrease in refurbished equipment sales of $0.1 million. Gross margin was 29% for the three months ended June 30, 2014 and 2013.
Operating, selling, general and administrative expenses increased $0.1 million to $1.5 million for the three months ended June 30, 2014 from $1.4 million for the same period last year. The increase was due primarily to increased personnel costs.
Telco
Net sales for the Telco segment were $2.8 million for the three months ended June 30, 2014 and zero for the same period last year as a result of the acquisition of Nave Communications. Net sales for the Telco segment consisted of $2.4 million of refurbished equipment sales and $0.4 million of recycling revenue. Gross margin was 47% for the three months ended June 30, 2014.
Operating, selling, general and administrative expenses were $1.4 million for the three months ended June 30, 2014.
Discontinued Operations
Loss from discontinued operations, net of tax, was $2 thousand for the three months ended June 30, 2014 compared to $34 thousand for the same period last year. This activity included the operations of Adams Global Communications prior to the sale on January 31, 2014.
Loss on sale of discontinued operations, net of tax, was $0.1 million for the three months ended June 30, 2014 due to the Company selling the AGC facility on June 30, 2014.
Comparison of Results of Operations for the Nine Months Ended June 30, 2014 and June 30, 2013
Consolidated
Consolidated net sales increased $2.8 million, or 13%, to $23.8 million for the nine months ended June 30, 2014 from $21.0 million for the nine months ended June 30, 2013. The increase in net sales was a result of an increase in the Telco segment of $3.9 million as a result of the Nave Communications acquisition, partially offset by a decrease in the Cable TV segment of $1.1 million. Consolidated gross profit increased $1.0 million, or 15%, to $7.3 million for the nine months ended June 30, 2014 from $6.3 million for the same period last year. The increase in gross profit was due primarily to an increase in the Telco segment of $1.7 million as a result of the Nave Communications acquisition, partially offset by a decrease in the Cable TV segment of $0.7 million.
Consolidated operating, selling, general and administrative expenses include all personnel costs, which include fringe benefits, insurance and business taxes, as well as occupancy, communication and professional services, among other less significant cost categories. Operating, selling, general and administrative expenses increased $2.9 million, or 65%, to $7.2 million for the nine months ended June 30, 2014 from $4.3 million for the same period last year. This increase was primarily due to increased expenses of the Cable TV segment of $0.4 million and the Telco segment of $2.4 million as a result of the Nave Communications acquisition.
Interest expense increased $0.1 million to $0.1 million for the nine months ended June 30, 2014 from $20 thousand for the same period last year. The increase was due primarily to interest expense incurred on the $5.0 million term loan entered into in connection with the Nave Communications acquisition.
The benefit from income taxes was $44 thousand for the nine months ended June 30, 2014 from a provision for income taxes of $0.7 million for the nine months ended June 30, 2013, or an effective rate of 38%. The nine months ended June 30, 2014 includes an adjustment to the federal tax provision for an additional deduction for state income taxes with an impact of approximately $40 thousand.
Segment Results
Cable TV
Net sales for the Cable TV segment decreased $1.1 million to $19.9 million for the nine months ended June 30, 2014 from $21.0 million for the same period last year. The decrease in sales was due primarily to a decrease in refurbished equipment sales of $0.9 million, while new equipment sales decreased $0.1 million. The decrease in equipment sales was due primarily to the continued decrease in plant expansions and bandwidth upgrades in the cable television industry and the absence of equipment sales as a result of Hurricane Sandy for the three months ended December 31, 2012, partially offset by supplying a major MSO equipment for certain projects. Gross margin was 28% for the nine months ended June 30, 2014 and 30% for the same period last year. The decrease in gross margin was due primarily to lower sales from refurbished equipment sales, which typically yield higher margins.
Operating, selling, general and administrative expenses increased $0.4 million to $4.7 million for the nine months ended June 30, 2014 from $4.3 million for the same period last year. The increase was due primarily to increased personnel costs and travel expenses.
Telco
Revenues for the Telco segment were $3.9 million for the nine months ended June 30, 2014 and zero for the same period last year as a result of the acquisition of Nave Communications. Net sales for the Telco segment consisted of $3.4 million of refurbished equipment sales and $0.5 million of recycling revenue. Gross margin was 44% for the nine months ended June 30, 2014.
Operating, selling, general and administrative expenses were $2.4 million for the nine months ended June 30, 2014. These expenses included $0.6 million of direct costs in connection with the acquisition of Nave Communications.
Discontinued Operations
Income (loss) from discontinued operations, net of tax, was a loss of $36 thousand for the nine months ended June 30, 2014 compared to income of $106 thousand for the same period last year. This activity included the operations of Adams Global Communications prior to the sale on January 31, 2014.
Loss on sale of discontinued operations, net of tax, was $0.6 million. This loss consisted of a pretax loss of $0.9 million from the sale of the net assets of Adams Global Communications on January 31, 2014 for $2 million in cash and a pretax loss of $0.1 million from the sale of the Adams Global Communications facility on June 30, 2014 for $1.5 million.
Non-GAAP Financial Measure
EBITDA is a supplemental, non-GAAP financial measure. EBITDA is defined as earnings before interest expense, income taxes, depreciation and amortization. EBITDA is presented below because this metric is used by the financial community as a method of measuring our financial performance and of evaluating the market value of companies considered to be in similar businesses. Since EBITDA is not a measure of performance calculated in accordance with GAAP, it should not be considered in isolation of, or as a substitute for, net earnings as an indicator of operating performance. EBITDA, as calculated below, may not be comparable to similarly titled measures employed by other companies. In addition, EBITDA is not necessarily a measure of our ability to fund our cash needs.
A reconciliation by segment of operating income (loss) to EBITDA follows:
| |
|
Three Months Ended June 30, 2014
|
|
|
Three Months Ended June 30, 2013
|
|
| |
|
Cable TV
|
|
|
Telco
|
|
|
Total
|
|
|
Cable TV
|
|
|
Telco
|
|
|
Total
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
$ |
385,309 |
|
|
$ |
(63,470 |
) |
|
$ |
321,839 |
|
|
$ |
441,361 |
|
|
$ |
− |
|
|
$ |
441,361 |
|
|
Depreciation
|
|
|
76,800 |
|
|
|
21,819 |
|
|
|
98,619 |
|
|
|
49,799 |
|
|
|
− |
|
|
|
49,799 |
|
|
Amortization
|
|
|
− |
|
|
|
246,327 |
|
|
|
246,327 |
|
|
|
− |
|
|
|
− |
|
|
|
− |
|
|
EBITDA
|
|
$ |
462,109 |
|
|
$ |
204,676 |
|
|
$ |
666,785 |
|
|
$ |
491,160 |
|
|
$ |
− |
|
|
$ |
491,160 |
|
| |
|
Nine Months Ended June 30, 2014
|
|
|
Nine Months Ended June 30, 2013
|
|
| |
|
Cable TV
|
|
|
Telco
|
|
|
Total
|
|
|
Cable TV
|
|
|
Telco
|
|
|
Total
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
$ |
867,762 |
|
|
$ |
(740,824 |
) |
|
$ |
126,938 |
|
|
$ |
1,992,036 |
|
|
$ |
− |
|
|
$ |
1,992,036 |
|
|
Depreciation
|
|
|
228,441 |
|
|
|
30,355 |
|
|
|
258,796 |
|
|
|
199,791 |
|
|
|
− |
|
|
|
199,791 |
|
|
Amortization
|
|
|
− |
|
|
|
322,983 |
|
|
|
322,983 |
|
|
|
− |
|
|
|
− |
|
|
|
− |
|
|
EBITDA (a)
|
|
$ |
1,096,203 |
|
|
$ |
(387,486 |
) |
|
$ |
708,717 |
|
|
$ |
2,191,827 |
|
|
$ |
− |
|
|
$ |
2,191,827 |
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|
(a)
|
The Telco segment for the nine months ended June 30, 2014 includes acquisition-related costs of $0.6 million related to the acquisition of Nave Communications.
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Critical Accounting Policies
Note 1 to the Consolidated Financial Statements in Form 10-K/A for fiscal 2013 includes a summary of the significant accounting policies or methods used in the preparation of our Consolidated Condensed Financial Statements. Some of those significant accounting policies or methods require us to make estimates and assumptions that affect the amounts reported by us. We believe the following items require the most significant judgments and often involve complex estimates.
General
The preparation of financial statements in conformity with United States generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. We base our estimates and judgments on historical experience, current market conditions, and various other factors we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The most significant estimates and assumptions relate to the carrying value of our inventory and, to a lesser extent, the adequacy of our allowance for doubtful accounts.
Inventory Valuation
Our position in the industry requires us to carry large inventory quantities relative to annual sales, but it also allows us to realize high overall gross profit margins on our sales. We market our products primarily to MSOs and other users of cable television equipment who are seeking products for which manufacturers have discontinued production or cannot ship new equipment on a same-day basis. Carrying these large inventory quantities represents our largest risk.
Our inventory consists of new and used electronic components for the cable television industry. Inventory is stated at the lower of cost or market, and our cost is determined using the weighted-average method. At June 30, 2014, we had total inventory of $25.9 million, against which we have a reserve of $2.2 million for excess and obsolete inventory, leaving us a net inventory of $23.7 million.
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. For the nine months ended June 30, 2014, we recorded charges to our reserve for excess and obsolete inventory of $0.5 million. If actual market conditions are less favorable than those projected by management, and our estimates prove to be inaccurate, we could be required to increase our inventory reserve and our gross margins could be adversely affected.
Inbound freight charges are included in cost of sales. Purchasing and receiving costs, inspection costs, warehousing costs, internal transfer costs and other inventory expenditures are included in operating expenses, since the amounts involved are not considered material.
Accounts Receivable Valuation
Management judgments and estimates are made in connection with establishing the allowance for returns and doubtful accounts. Specifically, we analyze historical return volumes, the aging of accounts receivable balances, historical bad debts, customer concentrations, customer creditworthiness, current economic trends and changes in our customer payment terms. Significant changes in customer concentration or payment terms, deterioration of customer creditworthiness, 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, additional allowances may be required. At June 30, 2014, accounts receivable, net of allowance for returns and doubtful accounts of $0.2 million, amounted to $5.2 million.
Goodwill
Goodwill represents the excess of purchase price of acquisitions over the acquisition date fair value of the net assets of businesses acquired. Goodwill and intangible assets with indefinite useful lives are not amortized and are tested at least annually for impairment. We perform our annual analysis during the fourth quarter of each fiscal year and in any other period in which indicators of impairment warrant additional analysis. Goodwill is evaluated for impairment by first comparing our estimate of the fair value of the reporting unit, or operating segment, with the reporting unit’s carrying value, including goodwill. Our reporting unit for purposes of the goodwill impairment calculation is our consolidated entity.
Management utilizes a discounted cash flow analysis to determine the estimated fair value of our reporting unit. Significant judgments and assumptions including the discount rate and anticipated revenue growth rate, gross margins and operating expenses are inherent in these fair value estimates, which are based on historical operating results. As a result, actual results may differ from the estimates utilized in our discounted cash flow analysis. The use of alternate judgments and/or assumptions could result in the recognition of different levels of impairment charges in the financial statements. If the carrying value of the reporting unit exceeds its fair value, a computation of the implied fair value of goodwill would then be compared to its related carrying value. If the carrying value of the reporting unit’s goodwill exceeds the implied fair value of goodwill, an impairment loss would be recognized in the amount of the excess. If an impairment charge is incurred, it would negatively impact our results of operations and financial position.
Although we do not anticipate a future impairment charge, certain events could occur that might adversely affect the reported value of goodwill. Such events could include, but are not limited to, economic or competitive conditions, a significant change in technology, the economic condition of the customers and industries we serve, a significant decline in the real estate markets we operate in, and a material negative change in the relationships with one or more of our significant customers or equipment suppliers. If our judgments and assumptions change as a result of the occurrence of any of these events or other events that we do not currently anticipate, our expectations as to future results and our estimate of the implied value of our reporting unit also may change.
Other Intangible Assets
As a result of the Nave Communications acquisition, we have intangible assets with finite useful lives. Intangible assets that have finite useful lives are amortized on a straight-line basis over their estimated useful lives ranging from 3 years to 10 years.
Liquidity and Capital Resources
Cash Flows Provided by (Used in) Operating Activities
We finance our operations primarily through internally generated funds, and we also have available to us a bank line of credit of $7.0 million. During the nine months ended June 30, 2014, we used $1.9 million of cash flow for continuing operations. The cash flow from operations was unfavorably impacted by $3.2 million from a net increase in inventory due primarily to purchases of new inventory with certain manufacturer incentives and purchases of refurbished telecommunications inventory.
Cash Flows Used for Investing Activities
During the nine months ended June 30, 2014, cash used in investing activities was $7.7 million. This was primarily due to the acquisition of Nave Communications in the amount of approximately $9.6 million, net of cash acquired, partially offset by the sale of the net assets of Adams Global Communications for $2.0 million. In addition, the Company sold the Adams Global Communications facility on June 30, 2014 for $1.5 million with net settlement proceeds of $1.4 million received on July 1, 2014. The Company has a $1.4 million receivable recorded in other receivable as of June 30, 2014. The acquisition and sales are discussed in Note 2 and Note 3, respectively, of the Notes to the Consolidated Condensed Financial Statements included in Part 1, Item 1 of this Quarterly Report on Form 10-Q. We also recorded an accrual at present value for deferred consideration of $2.7 million related to the Nave Communications acquisition, which consists of $3.0 million to be paid in equal annual installments over three years to the Nave Communications owners. In addition, we will make future earn-out payments equal to 70% of Nave Communications EBITDA earnings in excess of $2.0 million over the next three years, which we estimate will be between $0.7 million and $1.0 million annually based on our preliminary purchase price allocation.
Cash Flows Provided by Financing Activities
During the nine months ended June 30, 2014, cash provided by financing activities was $4.8 million primarily due to cash borrowings of $5.0 million, partially offset by note payable payments of $0.2 million. Cash borrowings were due to a new term loan of $5.0 million under our Credit and Term Loan Agreement. This term loan was used to assist in the funding of the acquisition of Nave Communications.
During the nine months ended June 30, 2014, we made principal payments $0.2 million on our two term loans under our Credit and Term Loan Agreement with our primary lender. The first term loan requires monthly payments of $15,334 plus accrued interest through November 2021. Our second term loan, entered into in connection with the acquisition of Nave Communications, is a five year term loan with a seven year amortization payment schedule with monthly principal and interest payments of $68,505 through March 2019. During the third quarter ended June 30, 2014, the lending bank only billed the Company for one payment, so the Company has recorded two additional principal and interest payments in the current portion of notes payable and interest payable as of June 30, 2014.
At June 30, 2014, there was not a balance outstanding under our line of credit. The lesser of $7.0 million or the total of 80% of the qualified accounts receivable plus 50% of qualified inventory is available to us under the revolving credit facility ($7.0 million at June 30, 2014). Any future borrowings under the revolving credit facility are due at maturity.
We believe that our cash and cash equivalents of $4.0 million at June 30, 2014, cash flow from operations and our existing line of credit provide sufficient liquidity and capital resources to meet our working capital and debt payment needs.
Item 4. Controls and Procedures.
We maintain disclosure controls and procedures that are designed to ensure the information we are required to disclose in the reports we file or submit under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Based on their evaluation as of June 30, 2014, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective to accomplish their objectives and to ensure the information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
We have completed the acquisition of Nave Communications effective February 28, 2014. We are in the process of assessing and, to the extent necessary, making changes to the internal control over financial reporting of Nave Communications to conform such internal control to that used in our other operations. However, we are not yet required to evaluate, and have not yet fully evaluated, changes in Nave Communications’ internal control over financial reporting. Subject to the foregoing, during the period covered by this report on Form 10-Q, there have been no changes in our internal control over financial reporting that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
PART II. OTHER INFORMATION
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Exhibit No.
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Description
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3.1
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Certificate of Incorporation of the Company and amendments thereto incorporated by
reference to Exhibit 3.1 to the Annual Report on Form 10-KSB filed with the Securities and
Exchange Commission by the Company on January 10, 2003.
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3.2
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Bylaws of the Company, as amended, incorporated by reference to Exhibit 3.1 to the Current
Report on Form 8-K filed with the Securities and Exchange Commission by the Company on
December 31, 2007.
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10.1
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ADDvantage Technologies Group, Inc. 1998 Incentive Stock Plan.
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31.1
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Certification of Chief Executive Officer under Section 302 of the Sarbanes Oxley Act of 2002.
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31.2
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Certification of Chief Financial Officer under Section 302 of the Sarbanes Oxley Act of 2002.
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32.1
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Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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32.2
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Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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101.INS
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XBRL Instance Document.
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101.SCH
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XBRL Taxonomy Extension Schema.
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101.CAL
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XBRL Taxonomy Extension Calculation Linkbase.
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101.DEF
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XBRL Taxonomy Extension Definition Linkbase.
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101.LAB
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XBRL Taxonomy Extension Label Linkbase.
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101.PRE
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XBRL Taxonomy Extension Presentation Linkbase.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
ADDVANTAGE TECHNOLOGIES GROUP, INC.
(Registrant)
Date: August 12, 2014 /s/ David L. Humphrey
David L. Humphrey,
President and Chief Executive Officer
(Principal Executive Officer)
Date: August 12, 2014 /s/ Scott A. Francis
Scott A. Francis,
Chief Financial Officer
(Principal Financial Officer)
Exhibit Index
The following documents are included as exhibits to this Form 10-Q:
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Exhibit No.
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Description
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3.1
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Certificate of Incorporation of the Company and amendments thereto incorporated by
reference to Exhibit 3.1 to the Annual Report on Form 10-KSB filed with the Securities and
Exchange Commission by the Company on January 10, 2003.
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3.2
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Bylaws of the Company, as amended, incorporated by reference to Exhibit 3.1 to the Current
Report on Form 8-K filed with the Securities and Exchange Commission by the Company on
December 31, 2007.
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10.1
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ADDvantage Technologies Group, Inc. 1998 Incentive Stock Plan.
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31.1
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Certification of Chief Executive Officer under Section 302 of the Sarbanes Oxley Act of 2002.
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31.2
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Certification of Chief Financial Officer under Section 302 of the Sarbanes Oxley Act of 2002.
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32.1
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Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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32.2
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Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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101.INS
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XBRL Instance Document.
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101.SCH
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XBRL Taxonomy Extension Schema.
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101.CAL
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XBRL Taxonomy Extension Calculation Linkbase.
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101.DEF
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XBRL Taxonomy Extension Definition Linkbase.
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101.LAB
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XBRL Taxonomy Extension Label Linkbase.
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101.PRE
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XBRL Taxonomy Extension Presentation Linkbase.
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