UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)
☒  
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE    SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED March 31, 2017

OR

☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

            FOR THE TRANSITION PERIOD FROM________________ TO ______________

Commission File number 1‑10799

ADDvantage Technologies Group, Inc.
(Exact name of registrant as specified in its charter)

OKLAHOMA
73‑1351610
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)

1221 E. Houston
Broken Arrow, Oklahoma 74012
(Address of principal executive office)
(918) 251-9121
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
 
 
Yes ☒     No  ☐
   
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (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).
 
 
 
Yes ☒     No  ☐
   
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   ☐ Accelerated filer   ☐
Non-accelerated filer   ☐ (do not check if a smaller reporting company)   Smaller reporting company   ☒
   
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes ☐     No  ☒
   
Shares outstanding of the issuer's $.01 par value common stock as of April 30, 2017 were
10,192,244.
 


ADDVANTAGE TECHNOLOGIES GROUP, INC.
Form 10-Q
For the Period Ended March 31, 2017


 
PART I.    FINANCIAL INFORMATION
   
Page
Item 1.
Financial Statements.
 
     
 
Consolidated Condensed Balance Sheets (unaudited)
 
March 31, 2017 and September 30, 2016
 
     
 
Consolidated Condensed Statements of Income (unaudited)
 
Three and Six Months Ended March 31, 2017 and 2016
 
     
 
Consolidated   Condensed   Statements of Cash Flows (unaudited )
 
Six Months Ended March 31, 2017 and 2016
 
     
 
Notes to Unaudited Consolidated Condensed Financial Statements
     
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations.
 
     
Item 4.
Controls and Procedures .
     
 
PART II - OTHER INFORMATION
     
Item 6.
Exhibits.
     
 
SIGNATURES
 





1


      






PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements.

ADDVANTAGE TECHNOLOGIES GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)


   
March 31,
2017
   
September 30,
2016
 
Assets
           
Current assets:
           
Cash and cash equivalents
 
$
3,885,330
   
$
4,508,126
 
Accounts receivable, net of allowance for doubtful accounts of
$250,000
   
5,320,216
     
4,278,855
 
Income tax receivable
   
367,112
     
480,837
 
Inventories, net of allowance for excess and obsolete
               
inventory of $2,855,445 and $2,570,868, respectively
   
22,118,030
     
21,524,919
 
Prepaid expenses
   
428,309
     
323,289
 
Total current assets
   
32,118,997
     
31,116,026
 
                 
Property and equipment, at cost:
               
Land and buildings
   
7,218,678
     
7,218,678
 
Machinery and equipment
   
3,981,476
     
3,833,230
 
Leasehold improvements
   
202,017
     
151,957
 
Total property and equipment, at cost
   
11,402,171
     
11,203,865
 
Less: Accumulated depreciation
   
(5,210,987
)
   
(4,993,102
)
Net property and equipment
   
6,191,184
     
6,210,763
 
                 
Investment in and loans to equity method investee
   
361,237
     
2,588,624
 
Intangibles, net of accumulated amortization
   
9,174,109
     
4,973,669
 
Goodwill
   
6,031,511
     
3,910,089
 
Deferred income taxes
   
1,358,000
     
1,333,000
 
Other assets
   
136,412
     
135,988
 
                 
Total assets
 
$
55,371,450
   
$
50,268,159
 
















See notes to unaudited consolidated condensed financial statements.
 
2
ADDVANTAGE TECHNOLOGIES GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)


   
March 31,
2017
   
September 30,
2016
 
Liabilities and Shareholders’ Equity
           
Current liabilities:
           
Accounts payable
 
$
2,816,766
   
$
1,857,953
 
Accrued expenses
   
1,130,947
     
1,324,652
 
Notes payable – current portion
   
2,193,701
     
899,603
 
Other current liabilities
   
656,607
     
963,127
 
Total current liabilities
   
6,798,021
     
5,045,335
 
                 
Notes payable, less current portion
   
5,179,127
     
3,466,358
 
Other liabilities
   
1,406,134
     
131,410
 
Total liabilities
   
13,383,282
     
8,643,103
 
                 
Shareholders’ equity:
               
Common stock, $.01 par value; 30,000,000 shares authorized;  
  10,692,902 and 10,634,893 shares issued, respectively;  
  10,192,244 and 10,134,235 shares outstanding, respectively
   
106,929
     
106,349
 
Paid in capital
   
(4,782,091
)
   
(4,916,791
)
Retained earnings
   
47,663,344
     
47,435,512
 
Total shareholders’ equity before treasury stock
   
42,988,182
     
42,625,070
 
                 
Less: Treasury stock, 500,658 shares, at cost
   
(1,000,014
)
   
(1,000,014
)
Total shareholders’ equity
   
41,988,168
     
41,625,056
 
                 
Total liabilities and shareholders’ equity
 
$
55,371,450
   
$
50,268,159
 
























See notes to unaudited consolidated condensed financial statements.
 
3
ADDVANTAGE TECHNOLOGIES GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED)



   
Three Months Ended March 31,
   
Six Months Ended March 31,
 
   
2017
   
2016
   
2017
   
2016
 
Sales
 
$
11,294,756
   
$
10,587,187
   
$
23,390,582
   
$
18,836,855
 
Cost of sales
   
7,530,327
     
7,002,575
     
15,602,524
     
12,486,863
 
Gross profit
   
3,764,429
     
3,584,612
     
7,788,058
     
6,349,992
 
Operating, selling, general and administrative expenses
   
3,677,425
     
3,256,403
     
7,274,249
     
5,925,0 28
 
Income from operations
   
87,004
     
328,209
     
513,809
     
424,964
 
Other income (expense):
                               
Other income
   
–
     
109,554
     
–
     
109,554
 
Interest income
   
–
     
2,172
     
–
     
2,172
 
Loss from equity method investment
   
–
     
(140,998
)
   
–
     
(140,998
)
Interest expense
   
(97,333
)
   
(62,307
)
   
(193,977
)
   
(130,068
)
Total other expense, net
   
(97,333
)
   
(91,579
)
   
(193,977
)
   
(159,340
)
                                 
Income (loss) before income taxes
   
(10,329
)
   
236,630
     
319,832
     
265,624
 
Provision (benefit) for income taxes
   
(21,000
)
   
91,000
     
92,000
     
96,000
 
                                 
Net income
 
$
10,671
   
$
145,630
   
$
227,832
   
$
169,624
 
                                 
Earnings per share:
                               
Basic
 
$
0.00
   
$
0.01
   
$
0.02
   
$
0.02
 
Diluted
 
$
0.00
   
$
0.01
   
$
0.02
   
$
0.02
 
Shares used in per share calculation:
                               
Basic
   
10,153,571
     
10,092,319
     
10,143,903
     
10,080,729
 
Diluted
   
10,156,426
     
10,092,319
     
10,145,112
     
10,080,729
 























See notes to unaudited consolidated condensed financial statements.
 
4
ADDVANTAGE TECHNOLOGIES GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)


   
Six Months Ended March 31,
 
   
2017
   
2016
 
Operating Activities
           
Net income
 
$
227,832
   
$
169,624
 
Adjustments to reconcile net income to net cash
               
provided by operating activities:
               
Depreciation
   
217,886
     
203,349
 
Amortization
   
640,560
     
412,902
 
Provision for excess and obsolete inventories
   
284,577
     
300,000
 
Deferred income tax provision (benefit)
   
(25,000
)
   
46,000
 
Share based compensation expense
   
87,002
     
94,275
 
Loss from equity method investment
   
–
     
140,998
 
Changes in assets and liabilities:
               
  Accounts receivable
   
75,535
     
(1,255,966
)
  Income tax receivable\payable
   
113,725
     
(297,588
)
Inventories
   
270,905
     
1,559,195
 
Prepaid expenses
   
(55,560
)
   
(140,813
)
Other assets
   
(424
)
   
(1,310
)
Accounts payable
   
375,140
     
213,280
 
Accrued expenses
   
(365,778
)
   
(378,903
)
Other liabilities
   
70,240
     
9,402
 
Net cash provided by operating activities
   
1,916,640
     
1,074,445
 
                 
Investing Activities
               
Acquisition of net operating assets
   
(6,643,540
)
   
(178,000
)
Guaranteed payments for acquisition of business
   
(1,000,000
)
   
(1,000,000
)
Loan repayments from (investment in and loans to) equity method  
investee
   
2,227,387
     
(421,560
)
Purchases of property and equipment
   
(130,150
)
   
(182,869
)
Net cash used in investing activities
   
(5,546,303
)
   
(1,782,429
)
                 
Financing Activities
               
Proceeds from notes payable
   
4,000,000
     
–
 
Debt issuance costs
   
(16,300
)
   
–
 
Payments on notes payable
   
(976,833
)
   
(433,748
)
Net cash provided by (used in) financing activities
   
3,006,867
     
(433,748
)
                 
Net decrease in cash and cash equivalents
   
(622,796
)
   
(1,141,732
)
Cash and cash equivalents at beginning of period
   
4,508,126
     
6,110,986
 
Cash and cash equivalents at end of period
 
$
3,885,330
   
$
4,969,254
 
                 
Supplemental cash flow information:
               
Cash paid for interest
 
$
161,612
   
$
110,073
 
Cash paid for income taxes
 
$
–
   
$
319,200
 
                 
Supplemental noncash investing activities:
               
Deferred guaranteed payments for acquisition of business
 
$
(1,897,372
)
 
$
–
 



See notes to unaudited consolidated condensed financial statements.
 
5
ADDVANTAGE TECHNOLOGIES GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

Note 1 - Basis of Presentation and Accounting Policies

Basis of presentation

The consolidated condensed financial statements include the accounts of ADDvantage Technologies Group, Inc. and its subsidiaries, all of which are wholly owned (collectively, the “Company”).  Intercompany balances and transactions have been eliminated in consolidation.  The Company’s reportable segments are Cable Television (“Cable TV”) and Telecommunications (“Telco”).

The accompanying unaudited consolidated condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial statements and do not include all the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.  However, the information furnished reflects all adjustments, consisting only of normal recurring items which are, in the opinion of management, necessary in order to make the consolidated condensed financial statements not misleading.  It is suggested that these consolidated condensed financial statements be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2016.

Reclassification

Certain prior year amounts have been reclassified to conform to the current year presentation.  These reclassifications had no effect on previously reported results of operations or retained earnings.

Recently Issued Accounting Standards

In May 2014, the FASB issued ASU No. 2014-09: “Revenue from Contracts with Customers (Topic 606)”. This guidance was issued to clarify the principles for recognizing revenue and develop a common revenue standard for U.S. GAAP and International Financial Reporting Standards (“IFRS”). In addition, in August 2015, the FASB issued ASU No. 2015-14: “Revenue from Contracts with Customers (Topic 606).  This update was issued to defer the effective date of ASU No. 2014-09 by one year.  Therefore, the effective date of ASU No. 2014-09 is for annual reporting periods beginning after December 15, 2017.  Management is evaluating the impact that ASU No. 2014-09 will have on the Company’s consolidated financial statements.  Based on management’s initial assessment of ASU 2014-09, management does not expect that ASU No. 2014-09 will have a material impact on the Company’s consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02: “Leases (Topic 842)” which is intended to improve financial reporting about leasing transactions.  The 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, the 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.  Management is evaluating the impact that ASU No. 2016-02 will have on the Company’s consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-09: “Compensation – Stock Compensation (Topic 718)” which is intended to improve employee share-based payment accounting.  This ASU identifies areas for simplification involving several aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, an option to recognize gross stock compensation expense with actual forfeitures recognized as they occur, as well as certain classifications on the statement of cash flows.  The guidance is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods.  Early adoption is permitted.  Management is evaluating the impact that ASU No. 2016-09 will have on the Company’s consolidated financial statements.

6
In August 2016, the FASB issued ASU 2016-15: “Statement of Cash Flows (Topic 230) – Classification of Certain Cash Receipts and Cash Payments.”  This ASU addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice.  The amendments in this ASU are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years.  Early adoption is permitted.  Management is evaluating the impact that ASU No. 2016-15 will have on the Company’s consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-01: “Business Combinations (Topic 805) – Clarifying the definition of a Business.”  This ASU clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses.  The guidance is effective for annual periods beginning after December 15, 2017, including interim periods within those periods.  Management is evaluating the impact that ASU 2017-01 will have on the Company’s consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04: “Intangibles – Goodwill and Other (Topic 350) – Simplifying the Test for Goodwill Impairment.”  This ASU eliminates the second step in the goodwill impairment test which requires an entity to determine the implied fair value of the reporting unit’s goodwill.  Instead, an entity should recognize an impairment loss if the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, with the impairment loss not to exceed the amount of goodwill allocated to the reporting unit. This ASU is effective for annual and interim goodwill impairment tests conducted in fiscal years beginning after December 15, 2019, with early adoption permitted.  Management is evaluating the impact that ASU No. 2017-04 will have on the Company’s consolidated financial statements.

Note 2 – Acquisition

As part of the Company’s growth strategy, the Company is pursuing an acquisition strategy to expand into the broader telecommunications industry.  The Company formed a new subsidiary called ADDvantage Triton, LLC (“Triton Datacom”) which on October 14, 2016 acquired substantially all of the net assets of Triton Miami, Inc. (“Triton Miami”).  Triton Datacom is a provider of new and refurbished enterprise networking products, including IP desktop phones, enterprise switches and wireless routers.  This acquisition, along with its retained management team, is part of the overall growth strategy of the Company in that it further diversifies the Company into the broader telecommunications industry by reselling refurbished products into the enterprise customer market.

The preliminary estimated purchase price for Triton Miami includes the following:
       
Upfront cash payment
 
$
6,500,000
 
Deferred guaranteed payments (a)
   
1,897,372
 
Working capital purchase adjustment
   
143,540
 
Net purchase price
 
$
8,540,912
 

(a)
This amount represents the present value of $2.0 million in deferred payments, which will be paid in equal annual installments over the next three years.  These deferred payments are recorded in other current liabilities ($0.7 million) and other long-term liabilities ($1.2 million).


The Company will also make annual payments to the Triton Miami owners, if they have not resigned from Triton Datacom, over the next three years equal to 60% of Triton Datacom’s annual EBITDA in excess of $1.2 million per year.  The Company will recognize the payments ratably over the three-year period as compensation expense.

Under the acquisition method of accounting, the total estimated purchase price is allocated to Triton Miami’s tangible and intangible assets acquired and liabilities assumed based on their estimated fair values as of October 14, 2016, the effective date of the acquisition.  Any remaining amount is recorded as goodwill.

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
7
amount recorded and prior quarter earnings.  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 following summarizes the preliminary purchase price allocation of the fair value of the assets acquired and the liabilities assumed at October 14, 2016:

Assets acquired:
 
(in thousands)
 
Accounts receivable
 
$
1,117
 
Inventories
   
1,149
 
Property and equipment, net
   
68
 
Other non-current assets
   
1
 
Intangible assets
   
4,841
 
Goodwill
   
2,121
 
Total assets acquired
   
9,297
 
         
Liabilities assumed:
       
Accounts payable
   
584
 
Accrued expenses
   
172
 
Total liabilities assumed
   
756
 
Net purchase price
 
$
8,541
 

The acquired intangible assets of approximately $4.8 million consist of customer relationships, trade name and non-compete agreements with the owners of Triton Miami.

The unaudited financial information in the table below summarizes the combined results of operations of ADDvantage Technologies Group and Triton Miami for the three and six months ended March 31, 2017 and March 31, 2016, on a pro forma basis, as though the companies had been combined as of October 1, 2015.  The unaudited pro forma earnings for the three months ended March 31, 2016 were adjusted to include intangible amortization expense of $0.1 million and Triton Datacom earn-out expenses of $0.1 million.  The pro forma earnings for the six months ended March 31, 2017 and March 31, 2016 were adjusted to include intangible amortization expense of $21 thousand and $0.3 million, respectively, and Triton Datacom earn-out expenses of $19 thousand and $0.2 million, respectively.  Incremental interest expense of $44 thousand was included in the three months ended March 31, 2016 and $7 thousand and $0.1 million for the six months ended March 31, 2017 and March 31, 2016, respectively, as if the $4.0 million term loan used to help fund the acquisition had been entered into on October 1, 2015.  The unaudited pro forma earnings for the three and six months ended March 31, 2016 were adjusted to include $0.2 million of acquisition-related costs recorded as operating, selling, general and administrative expenses in the Consolidated Condensed Statements of Income.  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, 2015, nor should it be taken as indicative of our future consolidated results of operations.


   
Three Months Ended March 31,
   
Six Months Ended March 31,
 
   
2017
   
2016
   
2017
   
2016
 
   
(in thousands, except per share amounts)
 
Sales
 
$
11,295
(1)  
 
$
13,783
   
$
23,829
   
$
25,160
 
Income from operations
 
$
87
(1)  
 
$
405
   
$
745
   
$
859
 
Net income
 
$
11
(1)  
 
$
164
   
$
362
   
$
400
 
Earnings per share:
                               
Basic
 
$
0.00
(1)  
 
$
0.02
   
$
0.04
   
$
0.04
 
Diluted
 
$
0.00
(1)  
 
$
0.02
   
$
0.04
   
$
0.04
 

(1)
These amounts are presented in the unaudited Consolidated Condensed Statement of Income for the quarter ended March 31, 2017.
 
8
Note 3 – Inventories
Inventories at March 31, 2017 and September 30, 2016 are as follows:

   
March 31,
2017
   
September 30,
2016
 
New:
           
Cable TV
 
$
14,500,705
   
$
15,087,495
 
Telco
   
362,089
     
–
 
Refurbished and used:
               
Cable TV
   
3,299,490
     
3,383,079
 
  Allowance for excess and obsolete inventory
   
(2,519,586
)
   
(2,219,586
)
Telco
   
6,811,191
     
5,625,213
 
  Allowance for excess and obsolete inventory
   
(335,859
)
   
(351,282
)
                 
   
$
22,118,030
   
$
21,524,919
 

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 Telco new and refurbished inventory at March 31, 2017 includes $0.2 million and $1.0 million, respectively from the Triton Miami acquisition.

The Company regularly reviews the Cable TV segment inventory quantities on hand, and an adjustment to cost is recognized when the loss of usefulness of an item or other factors, such as obsolete and excess inventories, indicate that cost will not be recovered when an item is sold.  The Company recorded charges in the Cable TV segment to allow for obsolete inventory, which increased the cost of sales during the six months ended March 31, 2017 and 2016, by $0.3 million, to an allowance of $2.5 million at March 31, 2017.

For the Telco segment, any obsolete or excess telecommunications inventory is generally processed through its recycling program when it is identified.  However, the Telco segment has identified certain inventory that more than likely will not be sold or that the cost will not be recovered when it is sold, and had not yet been processed through its recycling program.  Therefore, the Company has a $0.3 million allowance at March 31, 2017.

Note 4 – Investment In and Loans to Equity Method Investee

The Company entered into a joint venture, YKTG Solutions, LLC (“YKTG Solutions”), in March 2016, whose primary purpose is to support decommission work on cell tower sites across 13 states in the northeast on behalf of a major U.S. wireless provider.  YKTG Solutions is owned 51% by YKTG, LLC and 49% by the Company, and YTKG Solutions is certified as a minority-based enterprise.  The joint venture is governed by an operating agreement for the purpose of completing the decommission project, but the operating agreement can be expanded to include other projects upon agreement by both owners.  The Company accounts for its investment in YKTG Solutions using the equity-method of accounting.

In 2017, the U.S. wireless provider changed the process for assigning the various sites within the decommission project, which YKTG Solutions believes would result in a negative cash flow for the joint venture.  Accordingly, YKTG Solutions elected to suspend the acceptance of any further work under the decommission project unless and until the U.S. wireless provider resumes its previous process of assigning the sites under the decommission project.

For its role in the decommission project, the Company earns a management fee from YKTG Solutions based on billings.  The Company is financing the decommission project pursuant to the terms of a loan agreement between the Company and YKTG Solutions by providing a revolving line of credit.  The line of credit is for $4.0 million and is secured by all of the assets of YKTG Solutions, YKTG, LLC and the personal guarantees by the owners of YKTG, LLC.  The line of credit accrues interest at a fixed interest rate of 12% and is paid monthly.  At March 31, 2017, the
9
amount outstanding under this line of credit was $1.1 million.  The management fee encompasses any interest earned on outstanding advances under the line of credit.

The Company’s carrying value in YKTG Solutions was $0.4 million at March 31, 2017 and is reflected in investment in and loans to equity method investee in the Consolidated Condensed Balance Sheets.  During the three and six months ended March 31, 2017, the Company received payments, net of advances, totaling $1.2 million and $2.2 million, respectively from YKTG Solutions.  Since the decommission project has been suspended as a result of not accepting any further work, as of March 31, 2017, the Company is not advancing further amounts under the line of credit.  Therefore, the Company's total estimate of maximum exposure to loss as a result of its relationship with YKTG Solutions was approximately $1.1 million, which represents the Company’s outstanding line of credit with this entity as of March 31, 2017.  To help mitigate the risks associated with funding of the decommission project, the Company has obtained credit insurance for qualifying YKTG Solutions accounts receivable outstanding arising from the decommission project.  In addition, YKTG Solutions entered into a $2.0 million surety payment bond whereby the Company and YKTG, LLC are guarantors under the surety payment bond.

To date, this joint venture has incurred net operating losses, and, as of March 31, 2017, the total assets of the joint venture are less than the amount it owes to the Company.  Since YKTG Solutions has suspended any additional work for the U.S. wireless provider and YKTG Solutions will not have sufficient assets to repay the $1.1 million line of credit owed to the Company, the Company is pursuing collecting the outstanding line of credit from the YKTG, LLC owners under the personal guarantees they each have with the Company.  For the three and six months ended March 31, 2017, the Company did not record management fees related to the joint venture billings or equity income totaling $13 thousand and $360 thousand, respectively, as the collectability of the amounts are not reasonably assured.  As of March 31, 2017, the investment in and loans to equity method investee reflects the estimated net realizable amount of $0.4 million after considering the outstanding accounts receivable from and remaining billings to the U.S. wireless provider, the remaining vendor payments to YKTG Solutions’ subcontractors, and the personal guarantees the Company has with the joint venture partners.

Note 5 – Intangible Assets

Intangible assets that have finite useful lives are amortized on a straight-line basis over their estimated useful lives ranging from 3 years to 10 years.  As a result of the Triton Miami acquisition, the Company has recorded additional intangible assets for customer relationships, trade name and non-compete agreements (see Note 2).  The intangible assets with their associated accumulated amortization amounts at March 31, 2017 and September 30, 2016 are as follows:
   
March 31, 2017
 
   
Gross
   
Accumulated
Amortization
   
Net
 
Intangible assets:
                 
Customer relationships – 10 years
 
$
8,152,000
   
$
(1,491,091
)
 
$
6,660,909
 
Technology – 7 years
   
1,303,000
     
(573,937
)
   
729,063
 
Trade name – 10 years
   
2,119,000
     
(436,530
)
   
1,682,470
 
Non-compete agreements – 3 years
   
374,000
     
(272,333
)
   
101,667
 
                         
Total intangible assets
 
$
11,948,000
   
$
(2,773,891
)
 
$
9,174,109
 


   
September 30, 2016
 
   
Gross
   
Accumulated
Amortization
   
Net
 
Intangible assets:
                 
Customer relationships – 10 years
 
$
4,257,000
   
$
(1,099,721
)
 
$
3,157,279
 
Technology – 7 years
   
1,303,000
     
(480,866
)
   
822,134
 
Trade name – 10 years
   
1,293,000
     
(334,023
)
   
958,977
 
Non-compete agreements – 3 years
   
254,000
     
(218,721
)
   
35,279
 
                         
Total intangible assets
 
$
7,107,000
   
$
(2,133,331
)
 
$
4,973,669
 
 
10
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”) with its primary financial lender.  Revolving credit and term loans created under the Credit and Term Loan Agreement are collateralized by inventory, accounts receivable, equipment and fixtures and general intangibles.  At March 31, 2017, the Company has three term loans outstanding under the Credit and Term Loan Agreement.

The first outstanding term loan has an outstanding balance of $0.9 million at March 31, 2017 and is due on November 30, 2021, with monthly principal payments of $15,334 plus accrued interest.  The interest rate is the prevailing 30-day LIBOR rate plus 1.4% (2.21% at March 31, 2017) and is reset monthly.

The second outstanding term loan has an outstanding balance of $3.0 million at March 31, 2017 and is due March 4, 2019, with monthly principal and interest payments of $68,505, with the balance due at maturity.  It is a five year term loan with a seven year amortization payment schedule with a fixed interest rate of 4.07%.

In connection with the acquisition of Triton Miami, the Company entered into a third term loan under the Credit and Term Loan Agreement in the amount of $4.0 million.  This term loan has an outstanding balance of $3.5 million at March 31, 2017 and is due on October 14, 2019, with monthly principal and interest payments of $118,809.  The interest rate on the term loan is a fixed interest rate of 4.40%.

Line of Credit

The Company has a $7.0 million Revolving Line of Credit (“Line of Credit”) under the Credit and Term Loan Agreement.  On March 31, 2017, the Company executed the Eighth Amendment under the Credit and Term Loan Agreement.  This amendment extended the Revolving Line of Credit (“Line of Credit”) maturity to March 30, 2018, while other terms of the Line of Credit remained essentially the same.  At March 31, 2017, 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% (3.56% at March 31, 2017), and the interest rate is reset monthly.  Any future borrowings under the Line of Credit are due on March 30, 2018.  Future borrowings under the Line of Credit are limited to the lesser of $7.0 million or the net balance of 80% of qualified accounts receivable plus 50% of qualified inventory.  Under these limitations, the Company’s total available Line of Credit borrowing base was $7.0 million at March 31, 2017.  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.

Fair Value of Debt

FASB ASC 820, Fair Value Measurements and Disclosures, defines fair value, establishes a consistent framework for measuring fair value and establishes a fair value hierarchy based on the observability of inputs used to measure fair value.  The three levels of the fair value hierarchy are as follows:

·
Level 1 – Quoted prices for identical assets in active markets or liabilities that we have the ability to access. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.
·
Level 2 – Inputs are other than quoted prices in active markets included in Level 1 that are either directly or indirectly observable. These inputs are either directly observable in the marketplace or indirectly observable through corroboration with market data for substantially the full contractual term of the asset or liability being measured.
·
Level 3 – Inputs that are not observable for which there is little, if any, market activity for the asset or liability being measured. These inputs reflect management’s best estimate of the assumptions market participants would use in determining fair value.

The Company has determined the carrying value of its variable-rate term loan approximates its fair value since the interest rate fluctuates periodically based on a floating interest rate.
11
The Company has determined the fair value of its fixed-rate term loans 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 loans using cash flows discounted at the current market interest rate obtained.  The fair value of the Company’s second outstanding fixed rate loan was $3.0 million as of March 31, 2017.  The fair value of the Company’s third outstanding fixed rate loan was $3.4 million at March 31, 2017.

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 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 three and six months ended March 31, 2017 and 2016 are:
   
Three Months Ended March 31,
   
Six Months Ended March 31,
 
   
2017
   
2016
   
2017
   
2016
 
Net income attributable to common shareholders
 
$
10,671
   
$
145,630
   
$
227,832
   
$
169,624
 
                                 
Basic weighted average shares
   
10,153,571
     
10,092,319
     
10,143,903
     
10,080,729
 
Effect of dilutive securities:
                               
Stock options
   
2,855
     
−
     
1,209
     
−
 
Diluted weighted average shares
   
10,156,426
     
10,092,319
     
10,145,112
     
10,080,729
 
 
Earnings per common share:
                               
Basic
 
$
0.00
   
$
0.01
   
$
0.02
   
$
0.02
 
Diluted
 
$
0.00
   
$
0.01
   
$
0.02
   
$
0.02
 

The table below includes information related to stock options that were outstanding at the end of each respective three and six month periods ended March 31, but have been excluded from the computation of weighted-average stock options for dilutive securities due to the option exercise price exceeding the average market price per share of our common stock for the three and six months ended March 31, or their effect would be anti-dilutive.

   
Three Months Ended March 31,
   
Six Months Ended March 31,
 
   
2017
   
2016
   
2 017
   
2016
 
Stock options excluded
   
510,000
     
525,000
     
600,000
     
525,000
 
Weighted average exercise price of
                               
stock options
 
$
2.81
   
$
2.83
   
$
2.66
   
$
2.83
 
Average market price of common stock
 
$
1.83
   
$
1.77
   
$
1.79
   
$
1.77
 

Note 8 – 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 March 31, 2017, 1,100,415 shares of common stock were reserved for stock award grants under the Plan.  Of these reserved shares, 296,202 shares were available for future grants.
12
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 income.

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

A summary of the status of the Company's stock options at March 31, 2017 and changes during the six months then ended is presented below:

   
Shares
   
Wtd. Avg.
Ex. Price
 
Outstanding at September 30, 2016
   
570,000
   
$
2.73
 
Granted
   
90,000
     
1.81
 
Exercised
   
–
     
–
 
Expired
   
(10,000
)
   
3.45
 
Forfeited
   
–
     
–
 
Outstanding at March 31, 2017
   
650,000
   
$
2.59
 
                 
Exercisable at March 31, 2017
   
393,334
   
$
2.79
 

The Company granted nonqualified stock options of 90,000 shares for the six months ended March 31, 2017.  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 six months ended March 31, 2017 are as follows:

   
Six Months Ended
March 31, 2017
 
Estimated fair value of options at grant date
 
$
63,540
 
Black-Scholes model assumptions:
       
Average expected life (years)
   
6
 
Average expected volatility factor
   
36
%
Average risk-free interest rate
   
2.46
%
Average expected dividends yield
   
–
 

13
Compensation expense related to unvested stock options recorded for the six months ended March 31, 2017 is as follows:

   
Six Months Ended
March 31, 2017
 
Fiscal year 2012 grant
 
$
5,359
 
Fiscal year 2014 grant
 
$
13,575
 
Fiscal year 2016 grant
 
$
8,111
 
Fiscal year 2017 grant
 
$
3,235
 

The Company records compensation expense over the vesting term of the related options.  At March 31, 2017, compensation costs related to these unvested stock options not yet recognized in the consolidated condensed statements of income was $77,798.

Restricted Stock
The Company granted restricted stock in March 2017 to its Board of Directors and a Company officer totaling 58,009 shares, which were valued at market value on the date of grant.  The shares are being held by the Company for 12 months and will be delivered to the directors at the end of the 12 month holding period.  The fair value of these shares at issuance totaled $105,000, which is being amortized over the 12 month holding period as compensation expense.  The Company granted restricted stock in April 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

The Company is reporting its financial performance based on its external reporting segments: Cable Television and Telecommunications. These reportable segments are described below.

Cable Television (“Cable TV”)

The Company’s Cable TV segment sells new, surplus and re-manufactured cable television equipment throughout North America, Central America, South America and, to a substantially lesser extent, other international regions that utilize the same technology.  In addition, this segment also repairs cable television equipment for various cable companies.

Telecommunications (“Telco”)

The Company’s Telco segment primarily sells certified used telecommunications networking equipment from a broad range of manufacturers to customers primarily in North America.  In addition, this segment is a reseller of new telecommunications equipment from certain manufacturers.  Also, this segment offers its customers decommissioning services for surplus and obsolete equipment, which it in turn processes through its recycling services.  As a result of the Triton Miami acquisition (see Note 2), this segment also includes the Company’s newly formed Triton Datacom subsidiary, a provider of new and refurbished enterprise networking products, including IP desktop phones, enterprise switches and wireless routers.

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.

14
   
Three Months Ended
   
Six Months Ended
 
   
March 31,
2017
   
March 31,
2016
   
March 31,
2017
   
March 31,
2016
 
Sales
                       
Cable TV
 
$
4,996,965
   
$
6,018,891
   
$
11,571,790
   
$
11,023,888
 
Telco
   
6,363,466
     
4,601,172
     
11,903,442
     
7,918,903
 
Intercompany
   
(65,675
)
   
(32,876
)
   
(84,650
)
   
(105,936
)
Total sales
 
$
11,294,756
   
$
10,587,187
   
$
23,390,582
   
$
18,836,855
 
                                 
Gross profit
                               
Cable TV
 
$
1,755,059
   
$
1,906,675
   
$
4,155,401
   
$
3,485,946
 
Telco
   
2,009,370
     
1,677,937
     
3,632,657
     
2,864,046
 
Total gross profit
 
$
3,764,429
   
$
3,584,612
   
$
7,788,058
   
$
6,349,992
 
                                 
Income (loss) from operations
                               
Cable TV
 
$
262,648
   
$
336,279
   
$
1,171,631
   
$
453,119
 
Telco
   
(175,644
)
   
(8,070
)
   
(657,822
)
   
(28,155
)
Total income from operations
 
$
87,004
   
$
328,209
   
$
513,809
   
$
424,964
 


   
March 31,
2017
   
September 30,
2016
 
Segment assets
           
Cable TV
 
$
24,283,621
   
$
25,201,697
 
Telco
   
24,075,143
     
15,122,911
 
Non-allocated
   
7,012,686
     
9,943,551
 
Total assets
 
$
55,371,450
   
$
50,268,159
 



15
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Special Note on Forward-Looking Statements

Certain statements in Management's Discussion and Analysis (“MD&A”), other than purely historical information, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements generally are identified by the words “estimates,” “projects,” “believes,” “plans,” “intends,” “will likely result,” and similar expressions.  Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. These statements are subject to a number of risks, uncertainties and developments beyond our control or foresight, including changes in the trends of the cable television industry, changes in the trends of the telecommunications industry, changes in our supplier agreements, technological developments, changes in the economic environment generally, the growth or formation of competitors, changes in governmental regulation or taxation, changes in our personnel and other such factors.  Our actual results, performance or achievements may differ significantly from the results, performance or achievement expressed or implied in the forward-looking statements.  We do not undertake any obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events.

Overview

The following MD&A is intended to help the reader understand the results of operations, financial condition, and cash flows of the Company.  MD&A is provided as a supplement to, and should be read in conjunction with the information presented elsewhere in this quarterly report on Form 10-Q and with the information presented in our annual report on Form 10-K for the year ended September 30, 2016, which includes our audited consolidated financial statements and the accompanying notes to the consolidated financial statements.

The Company is reporting its financial performance based on its external reporting segments: Cable Television and Telecommunications. These reportable segments are described below.

Cable Television (“Cable TV”)

The Company’s Cable TV segment sells new, surplus and re-manufactured cable television equipment throughout North America, Central America and South America.  In addition, this segment also repairs cable television equipment for various cable companies.

Telecommunications (“Telco”)
The Company’s Telco segment sells certified used telecommunications networking equipment from a broad range of manufacturers primarily in North America.  In addition, this segment is a reseller of new telecommunications equipment from certain manufacturers.  Also, this segment offers its customers decommissioning services for surplus and obsolete equipment, which it then processes through its recycling program.  As a result of the Triton Miami acquisition (see Note 2), this segment also includes the Company’s newly formed Triton Datacom subsidiary, a provider of new and refurbished enterprise networking products, including IP desktop phones, enterprise switches and wireless routers.

Results of Operations

Comparison of Results of Operations for the Three Months Ended March 31, 2017 and March 31, 2016

Consolidated

Consolidated sales increased $0.7 million before the impact of intercompany sales, or 7%, to $11.3 million for the three months ended March 31, 2017 from $10.6 million for the three months ended March 31, 2016.  The increase in
16
sales was in the Telco segment of $1.8 million, offset by a decrease in sales in the Cable TV segment of $1.0 million.  Consolidated gross profit increased $0.2 million, or 5%, to $3.8 million for the three months ended March 31, 2017 from $3.6 million for the same period last year.  The increase in gross profit was in the Telco segment of $0.3 million, offset by a decrease in the Cable TV segment of $0.1 million.

Consolidated operating, selling, general and administrative expenses include all personnel costs, which include fringe benefits, insurance and business taxes, as well as occupancy, communication and professional services, among other less significant cost categories.  Operating, selling, general and administrative expenses increased $0.4 million, or 13%, to $3.7 million for the three months ended March 31, 2017 from $3.3 million for the same period last year.  This increase in expenses was due to the Telco segment of $0.5 million, while the Cable TV segment decreased by $0.1 million.

Other income and expense primarily consists of activity related to our investment in YKTG Solutions, including other income, interest income and equity earnings (losses).  Other income, which is our fee for our role in the YKTG Solutions joint venture, for the three months ended March 31, 2016 was $0.1 million.  Equity losses for the three months ended March 31, 2016 were $0.1 million.  For the three months ended March 31, 2017, the Company did not record other income or equity income related to YKTG Solutions as the fees owed to the Company may not ultimately be collectible from YKTG Solutions.

Interest expense remained relatively flat at $0.1 million for both the three months ended March 31, 2017 and March 31, 2016.

The benefit for income taxes was $21 thousand for the three months ended March 31, 2017, or an effective rate of 200%, from a provision for income taxes of $0.1 million for the three months ended March 31, 2016, or an effective rate of 38%. The effective rate for the three months ended March 31, 2017 was favorably impacted by net operating losses in states with higher tax rates.

Segment Results

Cable TV

Sales for the Cable TV segment decreased $1.0 million to $5.0 million for the three months ended March 31, 2017 from $6.0 million for the same period last year.  The decrease in sales was due to a decrease in new equipment sales and refurbished sales of $1.1 million and $0.2 million, respectively, partially offset by an increase in repair sales of $0.3 million.  The decrease in the new and refurbished equipment sales was due primarily to an overall decrease in demand for the three months ended March 31, 2017 as compared to last year.  Gross margin was 35% for the three months ended March 31, 2017 compared to 32% for the same period last year.

Operating, selling, general and administrative expenses decreased $0.1 million to $1.5 million for the three months ended March 31, 2017 from $1.6 million for the three months ended March 31, 2016.

Telco

Sales for the Telco segment increased $1.8 million to $6.4 million for the three months ended March 31, 2017 from $4.6 million for the same period last year.  The increase in sales for the Telco segment was due to an increase in used equipment sales and recycling revenue of $1.7 million and $0.1 million, respectively.  The increase in Telco used equipment sales was primarily due to Triton Datacom, which offset the continued lower sales from the remaining portion of this segment.  The Company is continuing to address the lower sales in this segment by expanding its sales force, targeting a broader end-user customer base, expanding the capacity of the recycling program and testing the used equipment inventory prior to sale to end-user customers.

Gross margin was 32% for the three months ended March 31, 2017 and 36% for the three months ended March 31, 2016.  The decrease in gross margin was due primarily to lower gross margins from equipment sales related to Triton Datacom and lower gross margins for refurbished equipment sales from the remaining portion of this segment as a result of an increased percentage of sales to resellers, which traditionally have lower gross margins, as compared to end-user customers.
17
Operating, selling, general and administrative expenses increased $0.5 million to $2.2 million for the three months ended March 31, 2017 from $1.7 million for the same period last year.  This increase was due primarily to operating expenses of $0.5 million from Triton Datacom and Triton Datacom earn-out expenses of $0.1 million.  In addition, for the three months ended March 31, 2016, the Company recorded an expense of $0.2 million for the March 2016 earn-out accrual related to the Nave Communications Company acquisition.

Comparison of Results of Operations for the Six Months Ended March 31, 2017 and March 31, 2016

Consolidated

Consolidated sales increased $4.6 million before the impact of intercompany sales, or 24%, to $23.4 million for the six months ended March 31, 2017 from $18.8 million for the six months ended March 31, 2016.  The increase in sales was in both the Cable TV and Telco segment of $0.6 million and $4.0 million, respectively.  Consolidated gross profit increased $1.5 million, or 23%, to $7.8 million for the six months ended March 31, 2017 from $6.3 million for the same period last year.  The increase in gross profit was in both the Cable TV and Telco segment of $0.7 million and $0.8 million, respectively.

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 $1.4 million, or 23%, to $7.3 million for the six months ended March 31, 2017 from $5.9 million for the same period last year.  This increase in expenses was due to the Telco segment of $1.4 million, while the Cable TV segment was relatively flat.

Other income and expense primarily consists of activity related to our investment in YKTG Solutions, including other income, interest income and equity earnings (losses).  Other income, which is our fee for our role in the YKTG Solutions joint venture, for the six months ended March 31, 2016 was $0.1 million.  Equity losses for the six months ended March 31, 2016 were $0.1 million.  For the six months ended March 31, 2017, the Company did not record other income or equity income totaling $0.4 million related to YKTG Solutions as the fees owed to the Company may not ultimately be collectible from YKTG Solutions.

Interest expense increased $0.1 million to $0.2 million for the six months ended March 31, 2017 from $0.1 million for the same period last year primarily related to financing for the Company’s acquisition of Triton Miami.

The provision for income taxes was $0.1 million for the six months ended March 31, 2017, or an effective rate of 29%, from a provision for income taxes of $0.1 million for the six months ended March 31, 2016, or an effective rate of 36%.  The effective rate for the six months ended March 31, 2017 was favorably impacted by net operating losses in states with higher tax rates.

Segment Results

Cable TV

Sales for the Cable TV segment increased $0.6 million to $11.6 million for the six months ended March 31, 2017 from $11.0 million for the same period last year.  The increase in sales was due to an increase in new equipment sales and repair sales of $0.3 million and $0.7 million, respectively, partially offset by a decrease in refurbished equipment revenue of $0.4 million.  The increase in the new equipment sales was due primarily to increased sales in the first quarter of 2017, partially offset by a general decrease in demand in the second quarter.  The increase in repair sales was due primarily to expanding our repair sales with one of our major customers.  Gross margin was 36% for the six months ended March 31, 2017 compared to 32% for the same period last year.

Operating, selling, general and administrative expenses was relatively flat at $3.0 million for both the six months ended March 31, 2017 and 2016.

18

Telco

Sales for the Telco segment increased $4.0 million to $11.9 million for the six months ended March 31, 2017 from $7.9 million for the same period last year.  The increase in sales for the Telco segment was due to an increase in used equipment sales and recycling revenue of $3.8 million and $0.4 million, respectively, partially offset by a decrease of new equipment sales of $0.2 million.  The increase in Telco equipment sales was primarily due to Triton Datacom, which offset the continued lower sales from the remaining portion of this segment.  The Company is continuing to address the lower sales in this segment by expanding its sales force, targeting a broader end-user customer base, expanding the capacity of the recycling program and testing the used equipment inventory prior to sale to end-user customers.

Gross margin was 31% for the six months ended March 31, 2017 and 36% for the six months ended March 31, 2016.  The decrease in gross margin was due primarily to lower gross margins from equipment sales related to Triton Datacom and lower gross margins for refurbished equipment sales from the remaining portion of this segment as a result of an increased percentage of sales to resellers, which traditionally have lower gross margins, as compared to end-user customers.

Operating, selling, general and administrative expenses increased $1.4 million to $4.3 million for the six months ended March 31, 2017 from $2.9 million for the same period last year.  This increase was due primarily to operating expenses of $1.0 million from Triton Datacom, acquisition-related costs of $0.2 million and Triton Datacom earn-out expenses of $0.1 million.  In addition, for the six months ended March 31, 2016, the Company recorded a reduction in expense of $0.2 million for the March 2016 earn-out accrual related to the Nave Communications Company acquisition.

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

A reconciliation by segment of operating income to EBITDA follows:

   
Three Months Ended March 31, 2017
   
Three Months Ended March 31, 2016
 
   
Cable TV
   
Telco
   
Total
   
Cable TV
   
Telco
   
Total
 
Income (loss) from operations
 
$
262,648
   
$
(175,644
)
 
$
87,004
   
$
336,279
   
$
(8,070
)
 
$
328,209
 
Depreciation
   
74,894
     
39,205
     
114,099
     
80,802
     
27,367
     
108,169
 
Amortization
   
−
     
328,574
     
328,574
     
−
     
206,451
     
206,451
 
EBITDA (a)
 
$
337,542
   
$
192,135
   
$
529,677
   
$
417,081
   
$
225,748
   
$
642,829
 

(a)
The Telco segment includes earn-out expenses of $0.1 million and $0.2 million for the three months ended March 31, 2017 and 2016, respectively, related to the acquisition of Triton Miami and Nave Communications.

19

   
Six Months Ended March 31, 2017
   
Six Months Ended March 31, 2016
 
   
Cable TV
   
Telco
   
Total
   
Cable TV
   
Telco
   
Total
 
Income (loss) from operations
 
$
1,171,631
   
$
(657,822
)
 
$
513,809
   
$
453,119
   
$
(28,155
)
 
$
424,964
 
Depreciation
   
148,138
     
69,748
     
217,886
     
153,266
     
50,083
     
203,349
 
Amortization
   
−
     
640,560
     
640,560
     
−
     
412,902
     
412,902
 
EBITDA (a)
 
$
1,319,769
   
$
52,486
   
$
1,372,255
   
$
606,385
   
$
434,830
   
$
1,041,215
 

(a)
The Telco segment for the six months ended March 31, 2017 includes acquisition-related costs of $0.2 million. The Telco segment includes earn-out expenses of $0.1 million and $0 for the six months ended March 31, 2017 and 2016, respectively, related to the acquisition of Triton Miami and Nave Communications.

Critical Accounting Policies

Note 1 to the Consolidated Financial Statements in Form 10-K for fiscal 2016 includes a summary of the significant accounting policies or methods used in the preparation of our Consolidated Financial Statements.  Some of those significant accounting policies or methods require us to make estimates and assumptions that affect the amounts reported by us.  We believe the following items require the most significant judgments and often involve complex estimates.

General

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

Inventory Valuation

Our position in the industry requires us to carry large inventory quantities relative to annual sales, but it also allows us to realize high overall gross profit margins on our sales.  We market our products primarily to MSOs, telecommunication providers and other users of cable television and telecommunication equipment who are seeking products for which manufacturers have discontinued production or cannot ship new equipment on a same-day basis as well as providing used products as an alternative to new products from the manufacturer.  Carrying these large inventory quantities represents our largest risk.

We are required to make judgments as to future demand requirements from our customers.  We regularly review the value of our inventory in detail with consideration given to rapidly changing technology which can significantly affect future customer demand.  For individual inventory items, we may carry inventory quantities that are excessive relative to market potential, or we may not be able to recover our acquisition costs for sales that we do make.  In order to address the risks associated with our investment in inventory, we review inventory quantities on hand and reduce the carrying value when the loss of usefulness of an item or other factors, such as obsolete and excess inventories, indicate that cost will not be recovered when an item is sold.

Our inventories consist of new and used electronic components for the cable television industry.  Inventory is stated at the lower of cost and net realizable value, with cost determined using the weighted-average method.  Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.  At March 31, 2017, we had total inventory, before the reserve for excess and obsolete inventory, of $25.0 million, consisting of $14.9 million in new products and $10.1 million in used or refurbished products.

20
For the Cable TV segment, our allowance at March 31, 2017 for excess and obsolete inventory was $2.5 million, which reflects an increase of $0.3 million to reflect deterioration in the market demand of that inventory.  If actual market conditions are less favorable than those projected by management, and our estimates prove to be inaccurate, we could be required to increase our inventory allowance and our gross margins could be materially adversely affected.

For the Telco segment, any obsolete or excess equipment on hand is generally processed through our recycling program when it is identified.  However, the Telco segment has identified certain inventory that more than likely will not be sold or that the cost will not be recovered when it is sold, and had not yet been processed through its recycling program.  Therefore, the Company has a $0.3 million allowance at March 31, 2017.

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

Accounts Receivable Valuation

Management judgments and estimates are made in connection with establishing the allowance for doubtful accounts. Specifically, we analyze the aging of accounts receivable balances, historical bad debts, customer concentrations, customer credit-worthiness, current economic trends and changes in our customer payment terms.  Significant changes in customer concentration or payment terms, deterioration of customer credit-worthiness, or weakening in economic trends could have a significant impact on the collectability of receivables and our operating results.  If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, an additional provision to the allowance for doubtful accounts may be required.  The reserve for bad debts was $0.3 million at March 31, 2017 and September 30, 2016.   At March 31, 2017, accounts receivable, net of allowance for doubtful accounts, was $5.3 million.

Note Receivable Valuation

Included in investment in and loans to equity method investee as of March 31, 2017 is a note receivable from the Company's joint venture partner, YKTG Solutions, of $1.1 million.  To date, this joint venture has incurred operating losses totaling $0.1 million and, as of March 31, 2017, the total assets of the joint venture are less than the amount it owes to ADDvantage.  In 2017, the U.S. wireless provider changed the process for assigning the various sites within the decommission project, which YKTG Solutions believes would result in a negative cash flow for the joint venture.  Accordingly, YKTG Solutions elected to suspend the acceptance of any further work under the decommission project unless and until the U.S. wireless provider resumes its previous process of assigning the sites under the decommission project.

Management judgements and estimates are made in connection with collection of the note receivable from the joint venture.  Specifically, since the decommission project on behalf of the U.S. wireless provider has been suspended, we determined the remaining billings and vendor payments to be incurred for this project to determine the ability of the joint venture to satisfy its obligations to the Company.  Based on this analysis, we determined that the remaining net assets of the joint venture will not satisfy the obligation to the Company.  Therefore, the Company did not record management fees or equity income totaling $0.4 million for the six months ended March 31, 2017, as the collectability of the amounts owed to the Company are not reasonably assured.  The Company is pursuing collections from the joint venture partners under personal guarantee agreements the Company has with the joint venture partners.  The investment in and loans to equity method investee reflects the estimated net realizable amount of $0.4 million, after considering the outstanding accounts receivable from and remaining billings to the U.S. wireless provider, which is secured by a credit insurance policy, the remaining vendor payments to YKTG Solutions’ subcontractors, and the personal guarantees the Company has with the joint venture partners.

Goodwill

Goodwill represents the excess of purchase price of acquisitions over the acquisition date fair value of the net assets of businesses acquired.  Goodwill is not amortized and is tested at least annually for impairment.  We perform our annual analysis during the fourth quarter of each fiscal year and in any other period in which indicators of impairment warrant additional analysis.  Goodwill is evaluated for impairment by first comparing our estimate of the fair value of
21
each reporting unit, or operating segment, with the reporting unit’s carrying value, including goodwill.  Our reporting units for purposes of the goodwill impairment calculation are the Cable TV operating segment and the Telco operating segment.

Management utilizes a discounted cash flow analysis to determine the estimated fair value of each reporting unit.  Significant judgments and assumptions including the discount rate and anticipated revenue growth rate, gross margins and operating expenses are inherent in these fair value estimates, which are based on historical operating results.  As a result, actual results may differ from the estimates utilized in our discounted cash flow analysis.  The use of alternate judgments and/or assumptions could result in the recognition of different levels of impairment charges in the financial statements.  If the carrying value of one of the reporting units exceeds its fair value, a computation of the implied fair value of goodwill would then be compared to its related carrying value. If the carrying value of the reporting unit’s goodwill exceeds the implied fair value of goodwill, an impairment loss would be recognized in the amount of the excess.  If an impairment charge is incurred, it would negatively impact our results of operations and financial position.

We performed our annual impairment test for both reporting units in the fourth quarter of 2016 and determined that the fair value of our reporting units exceeded their carrying values.  Therefore, no impairment existed as of September 30, 2016.

Although we do not anticipate a future impairment charge, certain events could occur that might adversely affect the reported value of goodwill.  Such events could include, but are not limited to, economic or competitive conditions, a significant change in technology, the economic condition of the customers and industries we serve, a significant decline in the real estate markets we operate in, and a material negative change in the relationships with one or more of our significant customers or equipment suppliers.  If our judgments and assumptions change as a result of the occurrence of any of these events or other events that we do not currently anticipate, our expectations as to future results and our estimate of the implied value of each reporting unit also may change.

As a result of the Triton Miami acquisition, the Company has recorded an additional provisional goodwill of $2.1 million as the purchase price exceeded the acquisition date fair value of the net assets based on the preliminary purchase price allocation.  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.

Intangibles

Intangible assets that have finite useful lives are amortized on a straight-line basis over their estimated useful lives ranging from 3 years to 10 years.  As a result of the Triton Miami acquisition, the Company has recorded additional intangible assets for customer relationships of $3.9 million, trade name of $0.8 million and non-compete agreements of $0.1 million based on the preliminary purchase price allocation.

Liquidity and Capital Resources

Cash Flows Provided by Operating Activities

We finance our operations primarily through operations, and have a bank line of credit of up to $7.0 million.  During the six months ended March 31, 2017, we generated $1.9 million of cash flows from operations.  The cash flows from operations was favorably impacted by $0.4 million from a net increase in accounts payable and $0.3 million from a net decrease in inventory.

Cash Flows Used for Investing Activities

During the six months ended March 31, 2017, cash used in investing activities was $5.5 million primarily related to payments of $6.6 million related to the acquisition of Triton Miami as discussed in Note 2 of the Notes to the Consolidated Condensed Financial Statements included in Item 1 of this Quarterly Report on Form 10-Q and payments of $1.0 million in March 2017 for the final annual installment payment to the Nave Communications owners for
22
deferred consideration resulting from the Nave Communications acquisition.  During the six months ended March 31, 2017, the Company received note receivable payments from the YKTG Solutions joint venture of $2.2 million.

The Company recorded an accrual at present value for deferred consideration of $1.9 million related to the acquisition of Triton Miami, which consists of $2.0 million to be paid in equal annual installments over three years to the Triton Miami owners.  The Company will also make annual payments to the Triton Miami owners, if they have not resigned from Triton Datacom, over the next three years equal to 60% of Triton Datacom’s annual EBITDA in excess of $1.2 million per year, which the Company estimates will be between $0.4 million and $0.7 million annually based on our preliminary purchase price allocation.

Cash Flows Provided by Financing Activities

During the six months ended March 31, 2017, cash provided by financing activities was $3.0 million primarily due to cash borrowings of $4.0 million, partially offset by notes payable payments of $1.0 million.  Cash borrowings were due to a new term loan of $4.0 million under our Credit and Term Loan Agreement.  This term loan was used to assist in the funding of the acquisition of Triton Miami.

During the six months ended March 31, 2017, we made principal payments of $1.0 million on our three term loans under our Credit and Term Loan Agreement with our primary lender.  The first term loan requires monthly payments of $15,334 plus accrued interest through November 2021.  Our second term loan is a five year term loan with a seven year amortization payment schedule with monthly principal and interest payments of $68,505 through March 2019.  Our third term loan, entered into in connection with the acquisition of Triton Miami, is a three year term loan with monthly principal and interest payments of $118,809 through October 2019.

At March 31, 2017, there was not a balance outstanding under our line of credit.  The lesser of $7.0 million or the total of 80% of the qualified accounts receivable plus 50% of qualified inventory is available to us under the revolving credit facility ($7.0 million at March 31, 2017).  On March 31, 2017, the Company executed the Eighth Amendment under the Credit and Term Loan Agreement, which extended the Line of Credit maturity to March 30, 2018.  The other terms of the Line of Credit remained essentially the same.

We believe that our cash and cash equivalents of $3.9 million at March 31, 2017, cash flows from operations and our existing line of credit provide sufficient liquidity and capital resources to meet our working capital and debt payment needs.

Item 4.  Controls and Procedures.

We maintain disclosure controls and procedures that are designed to ensure the information we are required to disclose in the reports we file or submit under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission.  Based on their evaluation as of March 31, 2017, 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 completed the acquisition of Triton Miami effective October 14, 2016.  We are in the process of assessing and, to the extent necessary, making changes to the internal control over financial reporting of Triton Datacom 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 Triton Datacom’s 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.

23

PART II   OTHER INFORMATION


Item 6.  Exhibits.
   
Exhibit No.
Description
   
10.1
Amendment Eight to Amended and Restated Revolving Credit and Term Loan Agreement dated March 31, 2017.
   
31.1
Certification of Chief Executive Officer under Section 302 of the Sarbanes Oxley Act of 2002.
   
31.2
Certification of Chief Financial Officer under Section 302 of the Sarbanes Oxley Act of 2002.
   
32.1
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   
32.2
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   
101.INS
XBRL Instance Document.
   
101.SCH
XBRL Taxonomy Extension Schema.
   
101.CAL
XBRL Taxonomy Extension Calculation Linkbase.
   
101.DEF
XBRL Taxonomy Extension Definition Linkbase.
   
101.LAB
XBRL Taxonomy Extension Label Linkbase.
   
101.PRE
XBRL Taxonomy Extension Presentation Linkbase.

24

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


ADDVANTAGE TECHNOLOGIES GROUP, INC.
( Registrant)


Date:  May 15, 2017                                   /s/ David L. Humphrey
David L. Humphrey,
President and Chief Executive Officer
(Principal Executive Officer)


Date:  May 15, 2017                                   /s/ Scott A. Francis
Scott A. Francis,
Chief Financial Officer
(Principal Financial Officer)

25

Exhibit Index

The following documents are included as exhibits to this Form 10-Q:

Exhibit No.
Description
   
10.1
Amendment Eight to Amended and Restated Revolving Credit and Term Loan Agreement dated March 31, 2017.
   
31.1
Certification of Chief Executive Officer under Section 302 of the Sarbanes Oxley Act of 2002.
   
31.2
Certification of Chief Financial Officer under Section 302 of the Sarbanes Oxley Act of 2002.
   
32.1
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   
32.2
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   
101.INS
XBRL Instance Document.
   
101.SCH
XBRL Taxonomy Extension Schema.
   
101.CAL
XBRL Taxonomy Extension Calculation Linkbase.
   
101.DEF
XBRL Taxonomy Extension Definition Linkbase.
   
101.LAB
XBRL Taxonomy Extension Label Linkbase.
   
101.PRE
XBRL Taxonomy Extension Presentation Linkbase.



 













26
AMENDMENT EIGHT TO AMENDED AND RESTATED
REVOLVING CREDIT AND TERM LOAN AGREEMENT


This Amendment Eight to Amended and Restated Revolving Credit and Term Loan Agreement (“ Amendment ”) is dated March 31, 2017 (“ Effective Date ”) by and between ADDVANTAGE TECHNOLOGIES GROUP, INC., an Oklahoma corporation (“ Borrower ”) and BOKF, NA dba Bank of Oklahoma, formerly known as Bank of Oklahoma, N.A. (“ Lender ”).

RECITALS

A.   Reference is made to the Amended and Restated Revolving Credit and Term Loan Agreement dated as of November 30, 2010 (as amended, the “ Loan Agreement ”), by and between Borrower and Lender, under which currently exists (i) a $7,000,000 revolving line (“ Line Facility ”), (ii) a $2,760,000 term loan facility (“ $2,760,000 Term Facility ”), (iii) a $5,000,000 term loan facility (“ $5,000,000 Term Facility ”); and (iv) a $4,000,00 term loan facility (“ $4,000,000 Term Facility ”) (separately and collectively, the “ Loan ”),  and pursuant to which other loan documents were executed and delivered to Lender, including without limitation the following (together with the Loan Agreement, separately and collectively, the “ Loan Documents ”):  (i) $7,000,000 Promissory Note (“ Existing   Line Note ”) dated November 27, 2015 payable by Borrower to Lender and maturing March 31, 2017; (ii) $2,760,000 Promissory Note (“ $2,760,000 Term Note ”) dated November 20, 2006 payable by Borrower to Lender,  maturing November 30, 2021; (iii) $5,000,000 Promissory Note (“ $5,000,000 Term Note ”) dated March 4, 2014 payable by Borrower to Lender, maturing March 4, 2019; (iv) $4,000,000 Promissory Note (“ $4,000,000 Term Note ”); (v) (Security Agreements and/or Joinder Agreements from the Borrower and each of the Guarantors; (vi) Guaranty Agreements and/or Joinder Agreements from each of the Guarantors; and (vii) other instruments, documents and agreements executed or delivered to Lender in connection with the Loan Agreement.

B.   Borrower has requested Lender to extend its Commitment as to the Revolving Line and the maturity date of the Existing Line Note to March 30, 2018; and Lender has agreed to such request, subject to the terms and conditions set forth in this Amendment.

AGREEMENT

For valuable consideration received, Borrower and Lender agree to the following:

1.   Definitions .  Capitalized terms used in this Amendment (including capitalized terms used in the Recitals) that are not otherwise defined herein have the respective meanings ascribed to them in the Loan Agreement.  The following definitions are hereby incorporated into the Loan Agreement.

“ Adjusted EBITDA ” means the sum of the Borrower’s pretax income, depreciation expense, amortization expense, obsolescence, interest expense and certain non-recurring charges or extraordinary items to be included at the Lender’s sole discretion.  In the event accretive EBITDA from an acquisition target is included for pro forma compliance testing, the
incremental EBITDA will burn off at a rate of twenty-five percent (25%) per quarter to be replace by actual results post-acquisition.

2.   Amendments to Loan Agreement.

2.1.
Revolving Line Commitment .  Subject to the terms and conditions of this Amendment, Lender agrees to extend its Commitment as to the Revolving Line to March 30, 2018; and in furtherance hereof: (i) Section 1.72 (Termination Date) is hereby amended to replace the date “March 31, 2017” to now read “March 30, 2018”; and (ii) Borrower shall execute and deliver to Lender a $7,000,000 Promissory Note (“ Renewal Line Note ”),  in form and content satisfactory to Lender, which evidences an extension, renewal and modification, but not a novation or payment, of the Existing Line Note.

2.2.
Section 1.37 (Leverage Ratio) is amended to read as follows:

“1.37.   “ Leverage Ratio ” means as of any Determination Date for any Reporting Period, the ratio of Funded Debt to Adjusted EBITDA.”

2.3.
Section 7.16 (Acquisitions and Asset Investments) is amended to read as follows:

“7.16. Acquisitions and Asset Investments .  Without the prior written consent of Lender, which shall not be withheld unreasonably, Borrower shall not expend funds during any given Reporting Period for the purpose of acquiring all or substantially all of the assets, stock or other ownership interests of a Person and/or investing in non-current assets (including without limitation fixed assets and capitalized value of leased equipment and leased real property). In any instance, however, no acquisition or asset investment shall not occur if any Initial Default or Matured Default has occurred and is continuing or will result therefrom. With respect to the acquisition of Triton Miami Inc. approved under Amendment Seven to Amended and Restated Revolving Credit and Term Loan Agreement dated October 14, 2016, add-backs to Adjusted EBITDA used in pro forma covenant calculations must be approved by Lender including, but not limited to, accretive EBITDA from the target company.  The initial add-back to Adjusted EBITDA will be based on the most recent audited EBITDA for the target company.  The incremental EBITDA shall burn off at a rate of twenty-five percent (25%) per quarter to be replaced by actual results post-acquisition.”

2.4.
Negative Pledge .  Borrower shall not assign, convey, transfer or encumber in part or in whole any interest in any real property now owned or hereafter acquired without the prior written consent of Lender.

2.5.
Subsidiaries . Borrower represents to Lender that the entities on the Ratification of Collateral Documents and Ratification of Guaranty attached hereto are the only Subsidiaries of the Borrower as of the Effective Date.

3.   Conditions .  The effectiveness of this Amendment is subject to satisfaction of the following.
2

3.1.
Loan Documents .  The following loan documents and other instruments, documents and agreement shall be duly executed and/or delivered to Lender,  each in form and substance satisfactory to the Lender:

3.1.1.
Execute and deliver to Lender this fully executed Amendment and all Ratifications attached hereto;

3.1.2.
Executed and deliver to Lender the fully executed Renewal Line Note; and

3.1.3.
Execute and deliver to Lender any other instruments, documents or agreements reasonably requested by Lender in connection herewith.

3.2.
No Default .  No Event of Default shall have occurred and be continuing under the Loan Agreement or any other Loan Documents or will result from the execution of or performance under this Amendment or the documents executed pursuant hereto.

3.3.
Legal Matters .  All legal matters required by Lender and Lender’s legal counsel to be satisfied by the Borrower and any other Loan Party and the transactions contemplated hereby shall have been satisfied satisfactory to the Lender and its legal counsel.

3.4.
Ratification of Borrower .  Borrower  hereby (i) ratifies, affirms and restates its obligations under, and acknowledges, renews and extends its continued liability under, the Loan Agreement (as amended hereby) and all other Loan Documents to which it is a party, (ii) agrees that the Loan Agreement (as amended hereby) and all other Loan Documents to which it is a party remain in full force and effect, and (iii) represents that each representation and warranty set forth in the Loan Agreement (as amended hereby) and other Loan Documents to which it is a party remains true, correct and accurate as of the Effective Date, and are hereby restated.  Borrower further agrees and represents to Lender that the facts set forth in the Recitals are true and correct.

3.5.
Ratification of Guarantor .  Each Guarantor, by execution of the ratification following the signature page hereof, hereby (i) agrees to this Amendment, (ii) ratifies,  affirms and restates its obligations under, and acknowledges, renews and extends its continued liability under, its Guaranty as to all Obligations of the Borrower, including without limitation the Renewal Line Note, (iii) confirms that, after giving effect to the amendments provided for herein, its Guaranty remains in full force and effect, (iv) represents that each representation and warranty set forth in its Guaranty remains true, correct and accurate as of the Effective Date, and are hereby restated, and (v) acknowledges and agrees that nothing in this Amendment shall affect or impair any rights, remedies or powers which Lender may have under any of the Loan Documents, including without limitation the Guaranty.

3
3.6.
Ratification of Collateral Documents .  Each of the Borrower and other Loan Parties to any instruments, documents, agreements, assignments, security agreements or similar security instruments (separately and collectively, the “ Collateral Documents ”) executed under and pursuant to the Loan Agreement to secure payment of the Obligations of Borrower to Lender, by execution of the ratification following the signature page hereof, hereby (i) agrees to this Amendment, (ii) ratifies, affirms and restates each Collateral Document to which it is a party and agrees that the Collateral Documents are, and shall remain at all times during the term of the Loan, first and valid liens and security interests, (iii) confirms that, after giving effect to the amendments provided for herein, the Collateral Documents remain in full force and effect,  (iv) represents that each representation and warranty set forth in the Collateral Documents remains true and correct as of the Effective Date, and are hereby restated as of the Effective Date, and (v) ratifies and confirms that all Exhibits and Schedules attached to the Loan Agreement and other Loan Documents remain true, correct and accurate as of the Effective Date, and are hereby restated.

4.
REPRESENTATIONS AND WARRANTIES .

4.1.
Additional Representations and Warranties .  The Borrower further represents and warrants to the Lender that:

4.1.1.
Each Borrower, and each other Loan Party to any Loan Document  has the requisite power and authority and has been duly authorized to execute, deliver and perform its obligations under this Amendment, the Loan Agreement (as amended by this Amendment), and the other Loan Documents set forth under Section 3.1 (separately and collectively, the “ Amendment Documents ”).
 
4.1.2.
The Amendment Documents are valid and legally binding obligations of each respective Loan Party, enforceable in accordance with their respective terms, except as limited by applicable bankruptcy, insolvency or other laws affecting the enforcement of creditors’ rights generally.

4.1.3.
The execution, delivery and performance of the Amendment Documents by the Loan Parties do not and will not (a) conflict with, result in a breach of the terms, conditions or provisions of, constitute a default under, or result in any violation of the organizational and operating agreements and documents of Borrower or any Loan Party, or any agreement, instrument, undertaking, judgment, decree, order, writ, injunction, statute, law, rule or regulation to which Borrower or any Loan Party is subject or by which the assets and property of the Borrower or any Loan Party is bound or affected, (b) result in the creation or imposition of any lien on any assets or property now or hereafter owned by the Borrower or any Loan Party pursuant to the provisions of any mortgage, indenture, security agreement, contract, undertaking or other agreement to which Borrower or any Loan Party is a party, other than liens in favor of the Lender, (c) require any authorization, consent, license, approval or authorization of, or other action by, notice or declaration to, registration with, any governmental agency or authority or, to the extent any such consent or other action may be required, it has
 
4
been validly procured or duly taken, or (d) result in the occurrence of an event materially adversely affecting the validity or enforceability of any rights or remedies of the Lender or the Borrower’s or any Loan Party’s ability to
perform its obligations under the Loan Agreement and related Loan Documents.
 
5.   MISCELLANEOUS .

5.1.
Effect of Amendment .  The terms of this Amendment shall be incorporated into and form a part of the Loan Agreement. Except as amended, modified and supplemented by this Amendment, the Loan Agreement shall continue in full force and effect in accordance with its stated terms, all of which are hereby reaffirmed, confirmed and restated in every respect as of the date hereof. In the event of any irreconcilable inconsistency between the terms of this Amendment and the terms of the Loan Agreement, the terms of this Amendment shall control and govern, and the agreements shall be interpreted so as to carry out and give full effect to the intent of this Amendment. All references to the Loan Agreement appearing in any of the Loan Documents shall hereafter be deemed references to the Loan Agreement as amended, modified and supplemented by this Amendment.  This Amendment supersedes any prior or contemporaneous discussions, representations or agreements, oral or written, concerning the subject matter of this Amendment.

5.2.
Descriptive Headings .  The descriptive headings of the several paragraphs of this Amendment are inserted for convenience only and shall not be used in the construction of the content of this Amendment.

5.3.
Governing Law .  This Amendment, the Loan Agreement, and all other Loan Documents and all matters relating hereto or thereto or arising therefrom (whether sounding in contract law, tort law or otherwise), shall be governed by, and shall be construed and enforced in accordance with, the laws of the State of Oklahoma, without regard to conflicts of laws principles.  Borrower hereby consents to the jurisdiction of any state or federal court located within the County of Tulsa, State of Oklahoma and irrevocably agrees that, subject to Lender’s election, all actions or proceedings arising out of or relating to the foregoing described documents and matters shall be litigated in such courts.  Borrower expressly submits and consents to the jurisdiction of the aforesaid courts and waives any defense of forum non conveniens.  Borrower hereby waives personal service of any and all process and agrees that all such service of process may be made upon Borrower by certified or registered mail, return receipt requested, addressed to Borrower at the address set forth in the Loan Agreement and service so made shall be complete ten (10) days after the same has been posted.

5.4.
Reimbursement of Expenses.   Borrower agrees to pay the reasonable costs, expenses and fees, including without limitation reasonable legal fees and out-of-pocket expenses of Riggs, Abney, Neal, Turpen, Orbison & Lewis, legal counsel to the Lender, incurred by Lender in connection herewith.

5
5.5.
Release of Lender .  In consideration of the amendments contained herein, the Loan Parties hereby waive and release the Lender (and its employees, loan participants, agents attorneys, officers, directors, partners, successors and assigns) from any and all claims, damages, expenses, liabilities, disputes, defenses and setoffs of any and every character, known or unknown, with respect to the Loan Agreement and the other Loan Documents and the transactions contemplated thereby accruing or arising on or before the date hereof.  Each Loan Party acknowledges that it has consulted by legal counsel of its choice and that each Loan Party has voluntarily and without coercion or duress of any kind entered into this Amendment.

5.6.
No Waiver .  Borrower expressly acknowledges and agrees that the execution of this Amendment shall not constitute a waiver, and shall not preclude the exercise, of any right, power or remedy granted to Lender in any Loan Document, or as provided by applicable law.  No previous amendment, modification, extension or compromise entered into with respect to any obligations of Borrower to Lender shall constitute a course of dealing or be inferred or construed as constituting an expressed or implied understanding to enter into any future modification, extension, waiver or compromise.  No delay on the part of Lender in exercising any right, power, or remedy shall operate as a waiver thereof, or otherwise prejudice Lender’s rights, powers, or remedies.

5.7.
Entire Agreement .  This Amendment reflects the entire understanding of the Borrower and other Loan Parties as to the matters set forth herein.

5.8.
Counterparts .  This Amendment may be executed in any number of counterparts, all of which taken together shall constitute one agreement, and any of the parties hereto may execute this Amendment by signing any such counterpart.

5.9.
USA Patriot Act Notification .  The Lender hereby notifies the Borrower that pursuant to the requirements of the USA PATRIOT Act of 2001, 31 U.S.C. Section 5318, it is required to obtain, verify and record information that identifies the Borrower, which information includes the name and address of the Borrower and other information that will allow the Lender to identify the Borrower in accordance therewith.
5.10.
Late Fees .  To the extent any payment due under any Loan Document is not paid within 10 calendar days of the due date therefore, and, to the extent that the following described fee is deemed to constitute interest, subject to any usury savings clause in the Loan Documents and to the extent permitted by law, in addition to any interest or other fees and charges due under the applicable Loan Document, Borrower shall pay Lender a late fee equal to 5% of the amount of the payment that was required to have been made.  Borrower agrees that the charges set forth herein are reasonable compensation to Lender for the acceptance and handling of such late payments.

5.11.
Waiver of Jury Trial .  Each of Borrower and Lender hereby irrevocably waives any and all right to trial by jury in any legal actions or proceeding arising out of or relating to the Loan Documents or the transactions contemplated thereby and agrees that any
 
6
such action or proceeding shall be tried before a court and not before a jury.  Each of Borrower and Lender acknowledges that this waiver is a material inducement to enter into a business relationship, and that each has relied on the waiver in entering into this Amendment and the other Loan Documents, and that each will continue to rely on this waiver in their related future dealings.  Each of Borrower and Lender warrants and represents that each has had the opportunity of reviewing this jury waiver with legal counsel, and that each knowingly and voluntarily waives its jury trial rights.

5.12.
Flood Insurance .  Borrower must provide evidence that flood insurance is not required of Lender; provided, that if the Mortgaged Property is located in a special flood hazard area, a notification thereof shall be provided to and acknowledged by the mortgagor, and adequate proof of flood insurance (either a declaration page or an application for flood insurance accompanied by proof of payment) must be delivered to Lender, equal to the lesser of (i) the outstanding principal balance of the Loan, (ii) the maximum amount available under the NFIP for the particular type of improvement, or (iii) the full insurable value of the improvement.




 ( Signature page follows )


7

“Borrower”

ADDVANTAGE TECHNOLOGIES GROUP, INC.,
an Oklahoma corporation


By:         /s/ Scott A. Francis
Scott A. Francis, Vice President, Chief Financial Officer and Chief Accounting Officer




“Lender”

BOKF, NA dba Bank of Oklahoma


By:         /s/ Timberly Harding  
Timberly Harding,
Vice President



















[Signature page to Amendment Eight to Revolving Credit and Term Loan Agreement]

8

RATIFICATION OF GUARANTY

As inducement for the Lender to enter into the Amendment Eight to Amended and Restated Revolving Credit and Term Loan Agreement (“ Amendment ”) dated effective March 31, 2017, to which this Ratification is affixed, the undersigned Guarantors each hereby agrees to the Amendment, including Section 3.5 thereof. This Ratification may be executed in multiple counterparts.

ADDVANTAGE TECHNOLOGIES GROUP OF MISSOURI, INC.,
a Missouri corporation


By:       /s/ Scott A. Francis  
Scott A. Francis, Secretary/Treasurer

ADDVANTAGE TECHNOLOGIES GROUP OF NEBRASKA, INC.,
a Nebraska corporation


By:       /s/ Scott A. Francis  
Scott A. Francis, Secretary/Treasurer

ADDVANTAGE TECHNOLOGIES GROUP OF TEXAS, INC.,
a Texas corporation


By:       /s/ Scott A. Francis  
Scott A. Francis, Secretary/Treasurer

NCS INDUSTRIES, INC.,
a Pennsylvania corporation


By:       /s/ Scott A. Francis  
Scott A. Francis, Secretary/Treasurer



Signature page to Ratification of Guaranty to Amendment Eight
to Amended and Restated Revolving Credit and Term Loan Agreement

9
TULSAT, LLC, an Oklahoma limited liability company, by conversion of Tulsat Corporation


By:     /s/ Scott A. Francis  
Scott A. Francis, Secretary/Treasurer

TULSAT-ATLANTA, L.L.C.,
an Oklahoma limited liability company


By:       ADDvantage Technologies Group, Inc.,
an Oklahoma corporation,
Its sole member and manager


By:       /s/ Scott A. Francis  
Scott A. Francis, Vice President, Chief Financial Officer and Chief Accounting Officer

NAVE COMMUNICATIONS COMPANY,
a Maryland company


By:       /s/ Scott A. Francis  
Scott A. Francis, CFO/Secretary/Treasurer

ADDVANTAGE ACQUISITION CORPORATION,
an Oklahoma corporation


By:       /s/ Scott A. Francis  
Scott A. Francis, CFO/Secretary/Treasurer






Signature page to Ratification of Guaranty to Amendment Eight
to Amended and Restated Revolving Credit and Term Loan Agreement

10
TULSAT-ARIZONA, LLC, an Oklahoma limited liability company

By:       /s/ Scott A. Francis  
Scott A. Francis, Chief Financial Officer,
Treasurer and Secretary


ADDVANTAGE TRITON, LLC,
an Oklahoma limited liability company


By:       /s/ David L. Humphrey  
David L. Humphrey, President




























Signature page to Ratification of Guaranty to Amendment Eight
to Amended and Restated Revolving Credit and Term Loan Agreement

11
RATIFICATION OF COLLATERAL DOCUMENTS

As inducement for the Lender to enter into the Amendment Eight to Amended and Restated Revolving Credit and Term Loan Agreement (“ Amendment ”) dated effective March 31, 2017, to which this Ratification is affixed, the undersigned hereby agrees to the Amendment, including Section 3.6 thereof.  This Ratification may be executed in multiple counterparts.

ADDVANTAGE TECHNOLOGIES GROUP, INC.,
an Oklahoma corporation


By:       /s/ Scott A. Francis  
Scott A. Francis, Vice President, Chief Financial Officer and Chief Accounting Officer

ADDVANTAGE TECHNOLOGIES GROUP OF MISSOURI, INC.,
a Missouri corporation


By:       /s/ Scott A. Francis  
Scott A. Francis, Secretary/Treasurer

ADDVANTAGE TECHNOLOGIES GROUP OF NEBRASKA, INC.,
a Nebraska corporation


By:       /s/ Scott A. Francis  
Scott A. Francis, Secretary/Treasurer

ADDVANTAGE TECHNOLOGIES GROUP OF TEXAS, INC.,
a Texas corporation


By:       /s/ Scott A. Francis  
Scott A. Francis, Secretary/Treasurer


Signature page to Ratification of Collateral Documents to Amendment Eight
to Amended and Restated Revolving Credit and Term Loan Agreement

12
NCS INDUSTRIES, INC.,
a Pennsylvania corporation


By:       /s/ Scott A. Francis  
Scott A. Francis, Secretary/Treasurer

TULSAT, LLC, an Oklahoma limited liability company, by conversion of Tulsat Corporation


By:       /s/ Scott A. Francis  
Scott A. Francis, Secretary/Treasurer

TULSAT-ATLANTA, L.L.C.,
an Oklahoma limited liability company


By:       ADDvantage Technologies Group, Inc.,
an Oklahoma corporation,
Its sole member and manager


By        /s/ Scott A. Francis  
Scott A. Francis, Vice President, Chief Financial Officer and Chief Accounting Officer

NAVE COMMUNICATIONS COMPANY,
a Maryland company


By:       /s/ Scott A. Francis  
Scott A. Francis, CFO/Secretary/Treasurer






Signature page to Ratification of Collateral Documents to Amendment Eight
to Amended and Restated Revolving Credit and Term Loan Agreement


13

ADDVANTAGE ACQUISITION CORPORATION,
an Oklahoma corporation


By:       /s/ Scott A. Francis
Scott A. Francis, CFO/Secretary/Treasurer

TULSAT-ARIZONA, LLC, an Oklahoma limited liability company


By:       /s/ Scott A. Francis  
Scott A. Francis, Chief Financial Officer,
Treasurer and Secretary

ADDVANTAGE TRITON, LLC,
an Oklahoma limited liability company


By:       /s/ David L. Humphrey  
David L. Humphrey, President


















Signature page to Ratification of Collateral Documents to Amendment Eight
to Amended and Restated Revolving Credit and Term Loan Agreement


14



Exhibit 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, David L. Humphrey, certify that:

1.
I have reviewed this quarterly report on Form 10-Q of ADDvantage Technologies Group, Inc.;

2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b.
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c.
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d.
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a.
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b.
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date:   May 15, 2017
/s/ David L. Humphrey  
David L. Humphrey
President and Chief Executive Officer




Exhibit 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Scott A. Francis, certify that:

1.
I have reviewed this quarterly report on Form 10-Q of ADDvantage Technologies Group, Inc.;

2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b.
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c.
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d.
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

c.
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

d.
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date:  May 15, 2017
/s/ Scott A. Francis  
Scott A. Francis
Chief Financial Officer


Exhibit 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of ADDvantage Technologies Group, Inc. (the “Company”) for the fiscal quarter ended March 31, 2017, as filed with the Securities and Exchange Commission on the date hereof (the “Report”) I, David L. Humphrey, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ David L. Humphrey  
Name:   David L. Humphrey
Title:   President and Chief Executive Officer
Date:   May 15, 2017


Exhibit 32.2

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of ADDvantage Technologies Group, Inc. (the “Company”) for the fiscal quarter ended March 31, 2017, as filed with the Securities and Exchange Commission on the date hereof (the “Report”) I, Scott A. Francis, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Scott A. Francis  
Name:   Scott A. Francis
Title:   Chief Financial Officer
Date:   May 15, 2017