ADDVANTAGE TECHNOLOGIES GROUP INC - Quarter Report: 2011 June (Form 10-Q)

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

OR

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

FOR THE TRANSITION PERIOD FROM________________ TO ______________

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 x    No  o
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 x    No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule12b-2 of the Exchange Act. Large accelerated filer                                                                                           o                                   Accelerated filero Non-accelerated filer                                                                                           o (do not check if a smaller reporting company) Smaller reporting company x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).	Yes o    No  x
Shares outstanding of the issuer's $.01 par value common stock as of July 29, 2011 were 10,207,390.

	PART I.    FINANCIAL INFORMATION
		Page
Item 1.	Financial Statements.
	Consolidated Balance Sheets	2
	June 30, 2011 (unaudited) and September 30, 2010 (audited)
	Consolidated Statements of Income and Comprehensive Income (unaudited)	4
	Three and Nine Months Ended June 30, 2011 and 2010
	Consolidated Statements of Cash Flows (unaudited)	5
	Nine Months Ended June 30, 2011 and 2010
	Notes to Unaudited Consolidated Financial Statements	6
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations.	10
Item 4.	Controls and Procedures.	15
	PART II - OTHER INFORMATION
Item 6.	Exhibits.	15
	SIGNATURES

 
 

 
 

		June 30, 2011 (unaudited)				September 30, 2010 (audited)
Assets
Current assets:
Cash and cash equivalents		$	12,031,640			$	8,739,151
Accounts receivable, net of allowance of $300,000			3,283,493				4,905,733
Income tax refund receivable			242,475				203,405
Inventories, net of allowance for excess and obsolete
inventory of $2,300,000 and $2,545,000, respectively			26,739,349				27,410,722
Prepaid expenses			231,571				92,567
Deferred income taxes			1,314,000				1,423,000
Total current assets			43,842,528				42,774,578
Property and equipment, at cost:
Land and buildings			7,208,679				7,208,679
Machinery and equipment			3,023,739				3,203,701
Leasehold improvements			205,797				205,797
Total property and equipment, at cost			10,438,215				10,618,177
Less accumulated depreciation and amortization			(3,455,153	)			(3,393,921	)
Net property and equipment			6,983,062				7,224,256
Other assets:
Deferred income taxes			516,000				678,000
Goodwill			1,560,183				1,560,183
Other assets			11,237				23,236
Total other assets			2,087,420				2,261,419
Total assets		$	52,913,010			$	52,260,253

		June 30, 2011 (unaudited)				September 30, 2010 (audited)
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable		$	3,249,235			$	2,751,498
Accrued expenses			987,126				1,340,414
Notes payable – current portion			1,814,008				1,814,008
Total current liabilities			6,050,369				5,905,920
Notes payable			10,697,622				12,058,128
Other liabilities			928,730				1,252,683
Shareholders’ equity:
Common stock, $.01 par value; 30,000,000 shares authorized; 10,431,354 and 10,367,934 shares issued, respectively; and 10,207,390 and 10,143,970 shares outstanding, respectively			104,314				103,679
Paid in capital			(5,886,725	)			(6,070,986	)
Retained earnings			42,000,709				40,193,791
Accumulated other comprehensive income (loss):
Unrealized loss on interest rate swap, net of tax			(575,730	)			(776,683	)
Total shareholders’ equity before treasury stock			35,642,568				33,449,801
Less: Treasury stock, 223,964 shares, at cost			(406,279	)			(406,279	)
Total shareholders’ equity			35,236,289				33,043,522
Total liabilities and shareholders’ equity		$	52,913,010			$	52,260,253

 
 

		Three Months Ended June 30,								Nine Months Ended June 30,
		2011				2010				2011				2010
Sales:
Net new sales income		$	5,568,777			$	9,386,857			$	18,510,943			$	23,749,544
Net refurbished sales income			1,923,665				2,492,755				4,624,947				7,613,522
Net service income			1,202,763				1,417,837				3,685,466				4,209,125
Total net sales			8,695,205				13,297,449				26,821,356				35,572,191
Cost of sales			6,127,808				9,089,475				18,689,684				24,414,081
Gross profit			2,567,397				4,207,974				8,131,672				11,158,110
Operating, selling, general and administrative expenses			1,642,403				1,758,724				4,686,050				5,164,803
Income from operations			924,994				2,449,250				3,445,622				5,993,307
Interest expense			170,417				197,016				530,704				609,589
Income before provision for income taxes			754,577				2,252,234				2,914,918				5,383,718
Provision for income taxes			287,000				856,000				1,108,000				2,046,000
Net income attributable to common shareholders			467,577				1,396,234				1,806,918				3,337,718
Other comprehensive income:
Unrealized gain (loss) on interest rate swap, net of taxes			(29,838	)			(113,419	)			200,953				(67,757	)
Comprehensive income		$	437,739			$	1,282,815			$	2,007,871			$	3,269,961
Earnings per share:
Basic		$	0.05			$	0.14			$	0.18			$	0.33
Diluted		$	0.05			$	0.14			$	0.18			$	0.33
Shares used in per share calculation:
Basic			10,195,135				10,143,970				10,164,487				10,128,887
Diluted			10,197,372				10,148,303				10,168,613				10,132,548

 
 

 

		Nine Months Ended June 30,
		2011				2010
Operating Activities
Net income		$	1,806,918			$	3,337,718
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization			263,918				297,705
Provision for losses on accounts receivable			–				25,477
Provision for excess and obsolete inventories			306,247				603,806
(Gain) loss on disposal of property and equipment			(1,350	)			13,854
Deferred income tax (benefit)			148,000				(46,000	)
Share based compensation expense			64,812				64,784
Changes in assets and liabilities:
Accounts receivable			1,853,015				(984,958	)
Income tax refund receivable			(39,070	)			67,895
Inventories			1,035,459				4,016,800
Prepaid expenses			(106,536	)			15,083
Other assets			125,333				15,120
Accounts payable			169,538				(345,525	)
Accrued expenses			(452,880	)			141,060
Net cash provided by operating activities			5,173,404				7,222,819
Investing Activities
Acquisition of net operating assets, net of cash acquired			(549,785	)			–
Additions to machinery and equipment			(20,386	)			(57,087	)
Disposals of machinery and equipment			43,012				16,600
Additions of land and buildings			–				(19,743	)
Net cash used in investing activities			(527,159	)			(60,230	)
Financing Activities
Payments on notes payable			(1,360,506	)			(1,531,002	)
Proceeds from stock options exercised			6,750				–
Net cash used in financing activities			(1,353,756	)			(1,531,002	)
Net increase in cash and cash equivalents			3,292,489				5,631,587
Cash and cash equivalents at beginning of period			8,739,151				700,004
Cash and cash equivalents at end of period		$	12,031,640			$	6,331,591
Supplemental cash flow information:
Cash paid for interest		$	536,865			$	616,219
Cash paid for income taxes		$	1,026,575			$	2,058,180
Supplemental schedule of noncash operating activities:
Unrealized (gain) loss on interest rate swap		$	323,953			$	(100,757	)
Deferred tax provision (benefit)			(123,000	)			33,000
Unrealized (gain) loss on interest rate swap, net of tax		$	200,953			$	(67,757	)

 

Current assets, excluding inventory		$	313,458
Inventory			670,333
Property and equipment			44,000
Current liabilities			(427,791	)
Total			600,000
Cash acquired			(50,215	)
Acquisition price, net of cash acquired		$	549,785

 

 
 

		Amount of Income (Loss) Recognized in OCI on Derivative, Net of Tax								Amount of Loss Recognized in Accumulated OCI, Net of Tax
		Nine Months Ended June 30,								June 30,				September 30,
		2011				2010				2011				2010
Interest rate swap agreement		$	200,953			$	(67,757	)		$	(575,730	)		$	(776,683	)

·	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.

 

		Shares				Wtd. Avg. Ex. Price
Outstanding at September 30, 2010			136,850			$	3.46
Granted			–				–
Exercised			(4,500	)		$	1.50
Expired			–				–
Forfeited			(350	)		$	1.50
Outstanding at June 30, 2011			132,000			$	3.53
Exercisable at June 30, 2011			92,000			$	3.76

 

		Three Months Ended				Nine Months  Ended
		June 30, 2011				June 30, 2011
Fiscal year 2008 grant		$	2,715			$	8,145

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

Inventory Valuation

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

 
 

 

Item 6.  Exhibits.
Exhibit No.	Description
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.