Note 1 - Summary of Significant Accounting Policies

12 Months Ended

Sep. 30, 2019

Notes to Financial Statements

Significant Accounting Policies [Text Block]

Note

1

–

Summary of Significant Accounting Policies

Organization

and

basis of presentation

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

June 30, 2019,

so the Company has classified the Cable TV segment as discontinued operations (see Note

4

– Discontinued Operations).

Cash

,

cash equivalents

and restricted cash

Cash and cash equivalents includes demand and time deposits, money market funds and other marketable securities with maturities of

three

months or less when acquired. Restricted cash consists of cash held by a

third

-party financial institution as a reserve in connection with an agreement to sell certain receivables with recourse in the Wireless segment.

Accounts receivable

Trade receivables are carried at original invoice amount less an estimate made for doubtful accounts.  Management determines the allowance for doubtful accounts by regularly evaluating individual customer receivables and considering a customer’s financial condition, credit history and current economic conditions.  Trade receivables are written off against the allowance when deemed uncollectible.  Recoveries of trade receivables previously written off are recorded when received.  The Company generally does

not

charge interest on past due accounts.

For the Company’s Wireless segment, the Company has entered into various agreements,

one

with recourse, to sell certain receivables to unrelated

third

-party financial institutions. For the agreement with recourse, the Company is responsible for collecting payments on the sold receivables from its customers. Under this agreement, the

third

-party financial institution advances the Company

90%

of the sold receivables and establishes a reserve of

10%

of the sold receivables until the Company collects the sold receivables. As the Company collects the sold receivables, the

third

-party financial institution will remit the remaining

10%

to the Company. The other agreements without recourse are under programs offered by certain customers of the Wireless segment. The Company accounts for these transactions in accordance with Accounting Standards Codification (“ASC”)

860,

“Transfers and Servicing” (“ASC

860”

). ASC

860

allows for the ownership transfer of accounts receivable to qualify for sale treatment when the appropriate criteria is met, which permits the Company to present the balances sold under the program to be excluded from accounts receivable, net on the consolidated balance sheet. Receivables are considered sold when they are transferred beyond the reach of the Company and its creditors, the purchaser has the right to pledge or exchange the receivables and the Company has surrendered control over the transferred receivables.

Inventor

ies

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

Property and equipment

Property and equipment consists of software, office equipment, wireless services equipment and warehouse and service equipmentwith estimated useful lives generally of

3

years,

5

years,

7

years, and

10

years, respectively.  The wireless services equipment includes mobile wireless temporary towers, equipment trailers and construction equipment. Depreciation is provided using the straight-line method over the estimated useful lives of the related assets.  Leasehold improvements are amortized over the shorter of the useful lives or the remainder of the lease agreement.  Gains or losses from the ordinary sale or retirement of property and equipment are recorded in other income (expense). Repairs and maintenance costs are generally expensed as incurred, whereas major improvements are capitalized.  Depreciation expense was

$0.4

million,

$0.1

million and

$0.2

million for the years ended

September 30, 2019,

2018

and

2017,

respectively.

Goodwill

Goodwill represents the excess of purchase price of acquisitions over the acquisition date fair value of the net assets of businesses acquired. Goodwill is

not

amortized and is tested at least annually for impairment. The Company performs its annual analysis during the

fourth

quarter of each fiscal year and in any other period in which indicators of impairment warrant additional analysis. Goodwill is evaluated for impairment by comparing the estimate of the fair value of each reporting unit, or operating segment, with the reporting unit’s carrying value, including goodwill. The reporting units for purposes of the goodwill impairment calculation are aggregated into the Wireless operating segment and the Telco operating segment.

Management utilizes a discounted cash flow analysis to determine the estimated fair value of each reporting unit. Significant judgments and assumptions including the discount rate, anticipated revenue growth rate, gross margins and operating expenses are inherent in these fair value estimates. As a result, actual results

may

differ from the estimates utilized in the discounted cash flow analysis. The use of alternate judgments and/or assumptions could result in the recognition of different levels of impairment charges in the financial statements. At

September 30, 2019

and

2018,

the estimated fair value of each of the reporting units exceeded their individual carrying values, so goodwill was

not

impaired at either of the reporting units.

As a result of the Fulton Technologies acquisition, the Company recorded additional goodwill of

$57

thousand as the purchase price exceeded the acquisition date fair value of the net assets based on the final purchase price allocation.

Intangible

a

ssets

Intangible assets that have finite useful lives are amortized on a straight-line basis over their estimated useful lives ranging from

3

years to

10

years. As a result of the Fulton acquisition, the Company has recorded an additional intangible asset for customer relationships of

$0.2

million based on the purchase price allocation.

Impairment of

l

ong-

l

ived

a

ssets

The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the asset’s carrying amount

may

not

be recoverable. The Company conducts its long-lived asset impairment analyses in accordance with ASC

360

-

10

-

15,

“Impairment or Disposal of Long-Lived Assets.” ASC

360

-

10

-

15

requires the Company to group assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities and evaluate the asset group against the sum of the undiscounted future cash flows. If the undiscounted cash flows do

not

indicate the carrying amount of the asset is recoverable, an impairment charge is measured as the amount by which the carrying amount of the asset group exceeds its fair value based on discounted cash flow analysis or appraisals.

Income taxes

The Company provides for income taxes in accordance with the liability method of accounting.  Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and tax carryforward amounts.  Management provides a valuation allowance against deferred tax assets for amounts which are

not

considered “more likely than

not”

to be realized.

Advertising costs

Advertising costs are expensed as incurred.  Advertising expense was

$0.6

million,

$0.5

million and

$0.4

million for the years ended

September 30, 2019,

2018

and

2017,

respectively.

Management estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period.  Actual results could differ from those estimates.

Any significant, unanticipated changes in product demand, technological developments or continued economic trends affecting the wireless infrastructure or telecommunications industries could have a significant impact on the value of the Company's inventory and operating results.

Concentrations of risk

The Company holds cash with

one

major financial institution, which at times exceeds FDIC insured limits. Historically, the Company has

not

experienced any losses due to such concentration of credit risk.

Other financial instruments that potentially subject the Company to concentration of credit risk consist principally of trade receivables.  Concentrations of credit risk with respect to trade receivables are limited because a large number of geographically diverse customers make up the Company’s customer base, thus spreading the trade credit risk.  The Company controls credit risk through credit approvals, credit limits and monitoring procedures.  The Company performs credit evaluations for all new customers but does

not

require collateral to support customer receivables.  

The Company had

one

customer in

2019

in the Wireless segment that represented

12%

of the total sales.  The Company had

no

customer in

2018

or

2017

that represented in excess of

10%

of the total sales. The Company’s sales to foreign (non-U.S. based) customers were

$2.4

million,

$2.9

million and

$3.1

million for the years ended

September 30, 2019,

2018

and

2017,

respectively. The Telco segment did

not

purchase over

10%

of its total inventory purchases from any

one

supplier.

Employee stock-based awards

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

Earnings per share

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

Fair value of financial instruments

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

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

Recent

ly

i

ssued

a

ccounting

s

tandards

In

February 2016,

the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)

2016

-

02:

“Leases (Topic

842

)” which is intended to improve financial reporting about leasing transactions. This ASU will require organizations (“lessees”) that lease assets with lease terms of more than

twelve

months to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. Organizations that own the assets leased by lessees (“lessors”) will remain largely unchanged from current GAAP. In addition, this ASU will require disclosures to help investors and other financial statement users better understand the amount, timing and uncertainty of cash flows arising from leases. The guidance is effective for annual periods beginning after

December 15, 2018

and early adoption is permitted. Based on management’s assessment, ASU

2016

-

02

will have a material impact on the Company’s consolidated financial statements. Management reviewed its lease obligations and determined that the Company generally does

not

enter into long-term lease obligations with the exception of its real estate leases for its facilities and its fleet leases for the Wireless segment. The Company is a lessee on certain real estate leases and vehicle leases that will be reported as right of use assets and liabilities at an amount of

$5.4

million on the Company’s consolidated balance sheets on the date of adoption, which is

October 1, 2019.

In

June 2016,

the FASB issued ASU

2016

-

13:

“Financial Instruments – Credit Losses (Topic

326

) – Measurement of Credit Losses on Financial Instruments.” This ASU requires entities to measure all expected credit losses for most financial assets held at the reporting date based on an expected loss model which includes historical experience, current conditions, and reasonable and supportable forecasts. Entities will now use forward-looking information to better form their credit loss estimates. This ASU also requires enhanced disclosures to help financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an entity’s portfolio. ASU

2016

-

13

is effective for annual periods beginning after

December 15, 2019,

including interim periods within those fiscal periods. Entities

may

adopt earlier as of the fiscal year beginning after

December 15, 2018,

including interim periods within those fiscal years. Management is currently in the process of evaluating this new standard update.

Reclassification

The Company adopted ASU

2016

-

15:

“Statement of Cash Flows (Topic

230

) – Classification of Certain Cash Receipts and Cash Payments.” on

October 1, 2018.

The

$667,000

and

$1,000,000

of guaranteed payments for acquisition of businesses for the years ended

September 30, 2018

and

September 30, 2017,

respectively, have been reclassified from investing activities and are reported as a financing activity in the Consolidated Statement of Cash Flows. Certain prior period amounts have been reclassified to conform to the current year presentation. This reclassification had

no

effect on previously reported results of operations or retained earnings.