ADDvantage Technologies Group, Inc.
Q4 2016 Earnings Call Transcript

Published: 13 Dec 2016

[Operator:]

Good day and welcome to the ADDvantage Technologies’ Fourth Quarter 2016 Earnings Conference Call. Today’s conference is being recorded. At this time, we would like to turn the conference over to Garth Russell of KCSA Strategic Communications. Please go ahead, sir.

[Garth Russell:]

Thank you. Before we begin today’s call, I’d like to remind you that this conference call may contain certain forward-looking statements, which are subject to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, among other things, statements regarding the future events, such as the availability or ability of ADDvantage Technologies and its subsidiaries to maintain strategic relationships and agreements with certain original equipment manufacturers and multiple system operators, as well as the future financial performance of ADDvantage Technologies. These statements involve a number of risks and uncertainties. Participants are cautioned that these forward-looking statements are only predictions and may materially differ from actual future events or results due to a variety of factors, such as those contained in ADDvantage Technologies’ most recent report on Form 10-K on file with the Securities and Exchange Commission. Financial information presented on this conference call should be considered in conjunction with the consolidated financial statements and notes included in the company’s press release issued earlier today and included in ADDvantage Technologies most recent report on Form 10-K filed earlier today. The guidance regarding anticipated future results on this call is based on limited information currently available on ADDvantage Technologies, which are subject to change. Although any such guidance and factors influencing it may change, ADDvantage Technologies does not necessarily update the information as the company is only to provide guidance at certain points during the year. Such information speaks only as of the date of this call. During this call, we will also present certain non-GAAP financial measures in our press release, which are included in our press release financial tables issued earlier today, which is located on our website at addvantagetechnologies.com. This release, you’ll find a reconciliation of these non-GAAP financial measures with the closest GAAP financial measures and a discussion about why we think these non-GAAP financial measures are relevant. These financial measures are included for the benefit of investors and should be considered in addition to and not instead of GAAP measures. With nothing further, I’d now like to turn the call over to David Humphrey, President and Chief Executive Officer of ADDvantage Technologies. David, the floor is yours.

[David Humphrey:]

Thank you, Garth. Welcome everyone to the ADDvantage Technologies fourth quarter fiscal year-end 2016 conference call. With me today is Dave Chymiak, our Chief Technology Officer; and Scott Francis, our Chief Financial Officer. Before I turn the call over to Scott, who will provide the detailed financial results, I want to provide an update on our recent performance and briefly comment on our ongoing strategic initiatives. Excuse me, the highlight of the quarter was a solid sales performance turn in by our Cable TV segment in the fourth quarter, which offset the decline in sales from the Telco segment. For three consecutive quarters, our Cable TV segment has experienced a steady performance both in top line revenue and bottom line results. We believe that this trend can continue as we move into fiscal year 2017, based on the growth strategy we have previously discussed. As part of the strategy, we have expanded our sales force that will enable us to sell a more diverse selection of products and services. These changes will allow us to sell higher value products starting in the next several quarters. In addition, earlier this year, we expanded our repair service capabilities by acquiring a service center in Kingsport, Tennessee, which expanded our geographic footprint in the southeast. Given the performance over the past three quarters, coupled with the changes we’re making, we believe that this segment is well-positioned moving into fiscal 2017. In terms of the Telco segment, we continue to make adjustments to our Nave Communications business. This includes enhancing the quality controls for used products and improving our packaging and shipping methods in order to better cater to end-users. We are also offering a more diverse range of used products and increasing our sales of new product lines, as well as expanding our sales force to further penetrate the markets we serve. Also, we have expanded the capacity of our recycling program. Once fully implemented, these improvements to the business are expected to drive growth in future quarters. Building on our growth strategy to diversify our business and make complementary acquisitions, in October 2016, we acquired the assets of Triton Datacom, a leading provider of new and refurbished enterprise networking products, including [white] desktop phones, enterprise switches and wireless routers. We believe, there are many areas, where our business are complementary in nature in the telecommunications sector, while we still diversified our business further. Also, the steady demand in the desktop phone segment is an exciting new niche market for us to tap into. Considering all these points, we believe that combined with our balance sheet, positive cash flows, and the complementary nature of our businesses, ADDvantage will be able to support Triton’s future growth. During the quarter, there was also progress with our strategic joint venture, YKTG Solutions, LLC, in connection with the cell tower decommissioning project for a U.S. wireless provider. While the timeline for this project has been pushed out to July 2017 due to the customer, the expectation is for it to still positively add to our bottom line. This venture as well as the recent acquisition show how we look to capitalize on our strong balance sheet and positive cash flow. The key factor as we run through each of these operating segments is that, we have diversified our operations to the point, where we’re no longer overly dependent on demand in one market within the broader telecommunications industry. And as we saw this quarter, the strength in one segment has helped to offset what we believe is a temporary decrease in demand for another segment. Looking ahead, our goal is to successfully execute on each of the initiatives, I mentioned, across our business segments to maximize sales opportunities and drive revenue growth in fiscal year 2017. With that, I will now turn the call over Scott Francis, our Chief Financial Officer, who will take you through the financial results in more detail.

[Scott Francis:]

Thank you, David. For the fiscal fourth quarter of 2016, our total sales increased $200,000 to $9.8 million from $9.6 million for the same period of last year. Sales for the Cable TV and Telco segments were relatively flat at $6 million and $3.7 million, respectively, for the three months ended September 30, 2016 compared to the same period of last year. Our inter-segment sales decreased almost $200,000, which was the primary cause of an increase in the consolidated sales relative to the same period of last year. Our consolidated gross profit decreased $500,000, or 15% to $2.6 million for the three months ended September 30, 2016 from $3.1 million for the same period of last year. The decrease in gross profit was due primarily to a decrease in gross profit from the Telco segment of $800,000, which was partially offset by an increase in gross profit from the Cable TV segment of $300,000. The Telco gross profit for the fourth quarter of 2016 was impacted by $400,000 charge for the obsolete and excess inventory reserve and $200,000 charge related to the lower cost or market inventory adjustment. Gross profit margin for the Cable TV segment increased to 36% for the three months ended September 30, 2016 from 31% for the same period of last year. Our gross profit margin for the Telco segment decreased to 13% for the three months ended September 30, 2016 from 33% for the same period of last year. This decrease reflects the charge for the obsolete and excess inventory reserve adjustments, as well as the lower cost or market adjustment. Excluding the impact of these two adjustments, the Telco segment gross margin would have been 28%, as compared to the 33% for the prior year. Our operating, selling and general administrative expenses increased $500,000 to $3.1 million for the three months ended September 30, 2016 from $2.6 million for the same period of last year. This increase was due primarily to increased payroll expenses. Our other income and expense consist of activity related to our investment in YKTG Solutions and interest expense related to our notes payable, other income, which represents our fee for our role in the YKTG Solutions project and interest income resulting from advances to the YKTG Solutions joint venture was a total of $300,000 for the three months ended September 30, 2016. Equity losses recognized related to the YKTG Solutions projects was $100,000 for the three months ended September 30, 2016. Interest expense was relatively flat for both the three months September 30, 2016 and 2015. Our net loss from the three months ended September 30, 2016 was $0.2 million, or $0.02 per share, compared with a net income of $0.2 million, or $0.02 per share for the same period of last year. Our consolidated EBITDA decreased $900,000 to a loss of $0.2 for the three months period ended September 30, 2016 from income of $0.7 million for the same period of last year. The Cable TV segment EBITDA increased $100,000 to $0.6 million for the three months period ended September 30, 2016 from $0.5 million for the same period of last year. The Telco segment EBITDA decreased $1 million to a loss of $0.7 million for the three months period ended September 30, 2016 from income of $0.3 million for the same period of last year. The Telco segment EBITDA includes the impact of the $400,000 charge for the excess obsolete and inventory reserve and the $200,000 lower cost or market inventory charge discussed earlier. Now turning to results for the fiscal year ended September 30, 2016, our total sales decreased $5 million before the impact of inter-segment sales or 12% to $38.7 million for the fiscal year ended September 30, 2016 from $43.7 million for the same period of last year. Sales for the Cable TV segment decreased $2.4 million to $23 million for the fiscal year ended September 30, 2016, or $25.4 million for the same period of last year. The decrease in sales was primarily due to a decrease of $3.4 million in new equipment sales, partially offset by an increase of $300,000 and $700,000 and refurbished equipment sales and repairs services revenue, respectively. The Cable-TV segment has experienced declining equipment sales over the past several years for the products we traditionally carry due to the continued consolidation of the cable television operators and pure upgrades of the cable television networks and system expansion. For the first quarter of fiscal year 2016, our equipment sales decreased to the lowest level during this downturn. However, we believe some of that decrease in sales due to uncertainty caused by pending merger activity in the market. In the past consecutive three quarters of fiscal year 2016, we did see our equipment sales increase back to levels we experienced last year. Sales for the Telco segment decreased $3 million to $15.8 million for the fiscal year ended September 30, 2016 from $18.3 million for the same period of last year. For Telco segment, decrease in sales was primarily due to the absence of $2.3 million in equipment sales to an end-user customer in the second and third quarters of 2015. In addition, we believe that the decrease sales volume was due largely to delays in capital expenditure of our major – from our major customers due to weak economic conditions and budgetary constraints. Our consolidated gross profit decreased $2.9 million, or 19% to $12.4 million for the fiscal year ended September 30, 2016 from $15.3 million for the same period of last year. The decrease in gross profit was due to a decrease in the Telco segment of $2.6 million. As I mentioned earlier, the Telco segments gross profit reflects the impact of a $400,000 charge for the obsolete and excess inventory reserve and a $200,000 charge for the lower cost or market inventory adjustment. The Cable Television segment saw a decrease in gross profit of $0.3 million due primarily to the lower equipment sales. Gross profit margin for the Cable TV segment increased to 34% for the fiscal year ended September 30, 2016 from 32% for the same period of last year, while the gross margin for the Telco segment decreased to 30% for the fiscal year ended September 30, 2016 from 39% for the same period of last year. Excluding the impact of the $400,000 inventory reserve charge and the $200,000 lower cost or market inventory charge, the Telco segment gross margin would have been 33% for the fiscal year ended September 30, 2016. Our consolidated operating, selling, general and administrative expenses decreased $600,000, or 5% to $12.1 million for the fiscal year ended September 30, 2016 from $12.7 million for the fiscal year 2015. This decrease was primarily due to a decrease in expenses for the Telco segment of $1.1 million, partially offset by an increase in Cable TV segment expenses of $0.5 million. The decrease in expenses for the Telco segment included a $500,000 decrease in expenses for the annual earn-out payments related to the acquisition of Nave Communications and a $300,000 decrease in personnel costs. Other income and expense consist of activity related to our investment in YKTG Solutions and our interest expense related to our note. Other income, which represents our fee for the role and YKTG Solutions project and interest income resulting from advances to the YKTG Solutions joint venture was $500,000 and $100,000, respectively, for the fiscal year ended September 30, 2016. Our equity losses recognized related to the YKTG Solutions project was $200,000 for the fiscal year ended September 30, 2016. Our interest expense decreased $100,000 to $200,000 for the fiscal year ended September 30, 2016 from $300,000 for the same period of last year. Our net income for the fiscal year ended September 30 2016 was $0.3 million, or $0.03 per share, compared to $1.5 million, or $0.15 per share for the same period of last year. Our consolidated EBITDA decreased $2.2 million to $1.6 million for the fiscal year ended September 30, 2016 from $3.8 million for the same period in 2015. The Cable TV segment EBITDA decreased $700,000 to $1.8 million for the fiscal year ended September 30, 2016 from $2.5 million for the same period of last year, while the Telco segment EBITDA decreased $1.5 million to a loss of $200,000 for the fiscal year ended September 30, 2016 from $1.3 million for the same period of last year. Cash and cash equivalents were $4.5 million at September – as of September 30, 2016, compared with $6.1 million as of September 30, 2015. The company did generate $3.5 million of cash from operations for the fiscal year ended September 30, 2016. This was offset by a $3 million of advances to the strategic point venture of YKTG Solutions, in connection with the cell tower decommission project for a U.S. wireless provider. $1 million of deferred consideration payments related to the Nave Communications acquisition and $900,000 of principal payments on the company’s note payable. As of September 30, 2016, the company had net inventory of $21.5 million, compared with $23.6 million as of September 30, 2015. This does conclude the financial overview for the fourth quarter and fiscal year end – ended September 30, 2016. I’ll now turn the call over to the operator for questions.

[Operator:]

Thank you. [Operator Instructions] We’ll hear first from George Gasper as a private investor.

[Unidentified Analyst:]

Yes, good morning.

[David Humphrey:]

Good morning, George.

[Unidentified Analyst:]

First question, on the YKTG, is it…

[David Humphrey:]

Correct, YKTG.

[Unidentified Analyst:]

Yes, your investment to-date is how much when you accumulated, and I assume that there’s no revenue stream that’s been recorded up to now yet?

[David Humphrey:]

Yes, please, Scott?

[Scott Francis:]

Yes. Yes, George, this is Scott. We have – we’ve got an investment basically in advance to the joint venture of $3 million right now as of September 30. On the 10-K, you’ll see references about $2.6 million and that’s because of the equity losses we recognized. So, therefore, but that’s where we’re at right now. You are correct that there’s no revenue stream on that, because it’s accounted for as an equity-based investment.

[Unidentified Analyst:]

Okay.

[Scott Francis:]

Which means basically recorded net, not gross, and so, we’re pushing through. You are seeing the project fees come through, because that’s a direct revenue stream or a fee that we’re charging to join venture as ADDvantage Technologies Group. So that’s the fee that you’re getting another income from it. Does that help?

[Unidentified Analyst:]

Yes. And but as far as can you just describe the momentum of the project area? How much coverage are you doing on this joint venture geographically speaking?

[Scott Francis:]

This project that we’re doing for this provider is primarily in a certain geographic location in the United States is basically in the Northeast and Midwest – upper Midwest. So and effectively what’s happening is, the project is still moving. It’s just gotten delayed by the wireless provider. And so, instead of being done at the end of the year in the calendar like we’re hoping, it’s gotten pushed out to this summer of 2017. But it’s still moving and still on track to do the same amount of revenue, it’s just being pushed out.

[Unidentified Analyst:]

Gotcha. Okay, all right. And then question on, looking ahead here generally, you’re near – you’re pretty far along in your first quarter being that we’re close to mid-December. And I’m assuming that the acquisition, which was recently made is going to be incorporated through the whole first quarter, is that correct?

[Scott Francis:]

Yes.

[Unidentified Analyst:]

Okay.

[Scott Francis:]

It’s that, say from October 14, forward, yes.

[David Humphrey:]

Yes, less a quarter, half a month. So you’ve got 2.5 months worth of revenue constraint.

[Unidentified Analyst:]

Okay. And that that acquisition, if I recall, and what you released was about $12 million in revenues, it – could we look at that your revenue stream for the first quarter bumping from where it was for the fourth quarter to the $12 million range with this incorporated into the overall revenue stream?

[David Humphrey:]

Yes, of course, $12 million is annualized. So you’re looking for $1 million a month.

[Unidentified Analyst:]

Oh, I’m sorry, I meant $12 million for the whole company and I was looking at $3 million for the acquisition?

[David Humphrey:]

We don’t make forward-looking projections. I would tell you that that’s not an unreasonable assumption for you to make. But we won’t necessarily respond to that.

[Unidentified Analyst:]

Okay.

[David Humphrey:]

We’ll wait for the numbers to come out and report those in February, George.

[Unidentified Analyst:]

Okay, all right. And then question on Nave, it looks like this has needed a lot of attention along the way that’s, at least, in the last six to nine months maybe more. Do you feel that – have you changed the management out in terms of the direction it’s going? That’s the first part of the question. And secondly, is there some integration that could come from the Nave and the recent acquisition that you made, or are you going to try to keep those totally separate from one another?

[David Humphrey:]

Okay so I’ll take both of your questions. The first answer – the answer to your first question is, there have been changes at Nave from a management standpoint. We had five managers that came with the excess five owners and we’re down to two of those owners. So and we have changed the person that’s at the top as well. So we have made changes within the organization. We feel more confident about the management style and the integration of the businesses today. We’ve got a number of initiatives, we’ve talked about over the last couple of quarters. And we’re trying to move forward as a company, and yes, they have taken a lot of, particularly, my attention than Scott’s. They still – he’s still driving our Cable business for us and that’s really important as well as we all know.

[Unidentified Analyst:]

Yes, okay.

[David Humphrey:]

And your second question was integration of the two?

[Unidentified Analyst:]

Yes.

[David Humphrey:]

They will not be integrated from a management standpoint. There are different customer bases again. One is really selling to enterprise customers, i.e., other businesses, where the others ones are selling predominately to carriers or brokers that sell to those carriers. So the equipment is somewhat similar. And so we’re hoping that there will be some not an integration to management, but maybe some synergies between the two businesses, but we’re not banking on those nor did we do the acquisition based on synergies

[Unidentified Analyst:]

Okay.

[David Humphrey:]

And we’re certainly hopeful for that.

[Unidentified Analyst:]

All right. Okay. And then if I could ask a question about the Cable TV area, what are you experiencing in the market at this point in time? Do you see any particular momentum? Is there anything going on in that market that’s allowing you to expand your operations either in equipment supplied or in service you’re doing?

[David Chymiak:]

George, this is Dave. We’re seeing an increase of request for product quotes and everything. So everything is on schedule, a lot of things have been postponed. We’re looking at year 2017.

[Unidentified Analyst:]

Okay. And where is this, I know, we’ve talked about this for well more than a year about this potential change out in the amplifier side of the market, and if that appears to be I have been delayed significantly. Do you envision that’s coming around and contributing in fiscal 2017?

[David Chymiak:]

I do. We used to get request and quotes for every month coming in. We’re now seeing them weekly. There’s a lot of planning going on for next year. We look for the last part of next year of calendar year to be a good period of time for upgrades and push out to 2018, when we talk to the large MSOs.

[Unidentified Analyst:]

I see. Okay, all right. Thank you.

[David Humphrey:]

Thank you, George.

[Operator:]

[Operator Instructions] We’ll hear next from Doug Ruth with Lenox Financial Services.

[Doug Ruth:]

I want to thank you for hosting the call. I had just one question. Looking at the three businesses, could you tell us where you think the single best opportunity is for the company looking out into the phase of first-half of 2017?

[David Humphrey:]

Well, I’ll answer it two ways. One is, from a base standpoint and that’s going to be our Cable group. There are base operation and they’re showing good potential right now. As Dave mentioned, we’ve added salespeople to this organization. We’ve added an operations to the organization. And so, I think that will be our best most profitable operation during this next year, as it was in the past year. From a change standpoint, certainly, Triton is going to – it wasn’t part of our operation, so there will be a significant add to our business. And it’s certainly our intention to work with Nave to try to increase its profitability over the next year. So we have three different tactics, George. One, I’m sorry, Doug, one is to Dave keep plugging along and doing what he does really well turn Nave around and add Triton and try to see if we can help Triton grow, as we mentioned in our call today. So that’s kind of the strategy around the three different businesses we have.

[Doug Ruth:]

Okay. Well, we’re looking for brighter days ahead, and I appreciate you answer my question.

[David Humphrey:]

Thank you very much, Doug. We appreciate your continued support.

[Operator:]

We’ll move next to Steven Rudd from Blackwell.

[Steven Rudd:]

Hi, but it’s helpful. You guys are doing well. It sounds like, Dave Humphrey, you’re fighting in a cold, but you’re doing valiantly, I appreciate that, appreciate you’re hanging in there.

[David Humphrey:]

Thank you, Steve.

[Steven Rudd:]

A number of questions. On the decommissioning project, we’ve got $3 million, I just want to focus on cash. We have $3 million out, I understand it’s an equity investment or some accounting for it, how much cash has come in?

[David Humphrey:]

Well, when you say how much cash is coming in, help me understand what your – framework your question?

[Steven Rudd:]

Certainly. So we have – before we hoped up with these decommissioning for $3 million in our bank, we handed back to them and they had $3 million in some account somewhere that was normally our money and now represented by, I don’t know, if it shares or how you’ve represented the equity? And so now I wonder, how much has come back to us from the project?

[David Humphrey:]

Well, let me try to jump in. Scott can – first of all, this is a separate entity that, of course, doesn’t flow directly to our operation. So the cash flow that comes in is not going to hit our books and it’s not something we’re going to report on. Yes, there is money coming in. We’re covering basically, we’ve got receivables on our books in the – I’m sorry, again, they’re not going to be in our books, they’re going to be in the other company’s books as receivables and we’re covering the cash balance for that on the operation. So it’s really hard to answer your question concerning to separate entity that doesn’t flow through us. We do – at the end of the day, when the deals all done, obviously, all of the cash will have come back and we’ll have made a profit is our intention on this deal. And so it is a money-making venture for us and that’s how we continue to expect it to operate. But we went into this deal knowing it would take a portion of our cash to cover the operation of the business and basically cover these so-called receivables that are going to be due us as a result of running through this operation. Does that kind of answer your question, Steve?

[Steven Rudd:]

Not at all. No. I appreciate.

[David Humphrey:]

Okay. Well, I don’t know how to shape it.

[Steven Rudd:]

So let me just try to make it even easier. So I certainly know how to account for subsidiaries and equity interest. And what I would do in terms of trying to answer my question is, I would say, okay, the $3 million out, that’s easy, and if I have 40%, and I don’t know what we own of this company, it’s got to be, I guess, less than 80%, because otherwise we’d have to consolidate, I think, I don’t remember it was 80% or 50%, but it’s something below that threshold. But no matter what it is, if I have a 40% interest of this entity and that 40% company has received revenue of X minus cost of Y, then whatever is left of the Z, I’d say, 40% of that and I’d say that’s how much cash is going to come back to me assuming that there’s not some of this falling off for – toward reasons along the way, that that’s how I would look at it. So I could certainly follow the cash on anybody, so it – of where the money has gone and that’s of course, easy and I would come back that should certainly be easy too. And so far I’m not hearing that – like a lot of it come back, or that we even know what that number is year-to-date, or is still so small that’s it’s not something we just don’t want to talk about, those are the three things I’m hearing from the reply and it’s a little bit alarm. So if you could flesh that out and say, oh, look, we put out $3 million, but we get this question the project has come back, it’s sitting in the other entity. Our share of that is roughly $1.6 million and we’re going to see another $2 million out will make $600,000 by July 2017, okay, then I got how the cash is working. Right now all I’m seeing from the investor side is, I’ve got $3 million out the door and I’m not seeing anything back here?

[Scott Francis:]

Well, okay, so let me address some of your questions. Basically what happened is, we are in a 49% partnership with this company for which we are doing. We’re helping them, obviously, with the financial support there. So there is a – it’s not working exactly like you’re saying, because we’re basically financing this structure in the form of an advance, which is why you’re seeing the ups and downs in the advance as timing of the receivables from the joint venture billings through the wireless provider compared to the subcontractor payments. So that, obviously, has timing flows that has nothing to do with whether we own 49%, or 80%, or 100%. So that is just your timing of advances to the company for which as the receivables get paid then that advance will obviously then come down. At September 30, we had a rather large receivable outstanding with them because of just the way the timing of the billings occurred. So that wasn’t necessarily P&L as much as it was just timing of balance sheet advandes. So that that’s the difference here from what you described. What I would say is, if you go to our income statement that we have, you’ll see in there that ultimately, we’re – that investment ultimately, when this project is done, assuming no other projects are completed or started, I should say, or started that investment that we have in them will basically be zero, because we’ll get all monies back from the advances and will earn our management fee that as described in our in MD&A, which is basically a 12% rate, or a 12% fee off of total revenues. And so that and less our expenses, of course, which is why we’re saying still that we’re anticipating in totality not in any one year, in totality somewhere around $1 million pre-tax give or take or pre-tax income to us in totality.

[Steven Rudd:]

Okay.

[Scott Francis:]

So mostly that advance, mostly that investment is in the form of an advance, not in the form of an equity investment in the traditional sense of a capital infusion. So that’s in the form of a promissory note to the joint venture. Hopefully that helps you. And if you –and I know you’ve probably seen it yet. But in our Qs and our K, the K that little bit came out this morning, you can go into the in MD&A, there’s a discussion about that as well in the footnote. Hope that answer.

[Steven Rudd:]

Yes, I definitely want to read that, and you’re right, I haven’t read. Normally, I would like to read before posing a question like this.

[Scott Francis:]

I understand.

[Steven Rudd:]

So, Scott, at the end of the day and at the end of the day on this cycle of this relationship, we’ll have and that would come in roughly July at the end of the day that you’re describing now. In other words, we’ll have the $3 million back in our pocket plus $1 million in fees by July 2017?

[Scott Francis:]

We’ll have in our income statement, yes, about – at the end of the day, again, gross in periods and all that fun stuff, we’ll have about a $1 million in pre-tax, and yes, we’ll get that $3 million that you happen to see right now at September 30, but that will ebb and flow up and down as the advances occur. Yes, that $3 million will come back into our cash flow from operations, or is the repayment of the advance, I shouldn’t say all and the investment…

[Steven Rudd:]

And we’ll have it in our bank account versus their bank account?

[Scott Francis:]

That is correct. That is correct

[Steven Rudd:]

All right. So we’ll have to see here in July, right?

[Scott Francis:]

Yes, and knowing that there’s timing, July, of course, is when the projects anticipated to be done and you still got to get everything build. I’m hoping that it, I would love to be able to kind of put the bow tie [ph] up by September 30, and we’ll see if that will takes place, right?

[Steven Rudd:]

Yes.

[Scott Francis:]

So that’s kind of what we’re looking at.

[Steven Rudd:]

Okay, gotcha. And hopefully, it plays out that way. I just hope that, having raised money in the past, we used to say, the best money is dumb money, and I just hope, we’re not falling into that category, but…

[Scott Francis:]

So far that’s not been my experience on this one.

[Steven Rudd:]

Okay. Yes, with these troubles and if you said was…

[Scott Francis:]

Yes. I understand.

[Steven Rudd:]

All right. The second thing is, yes, the second thing is the acquisition that we just did, do we expect this to be accretive spread out now? I mean, are we – you’re going to have positive – something off of these guys? I know, we’re seeing a $1 million a month in revenue, but…

[David Humphrey:]

Sure. Yes, we – they’ve generated in excess of $2 million of EBITDA, and we anticipate that’s what we’ll continue to do and we’re going to try to grow that.

[Steven Rudd:]

Okay. And there’s not particularly timing issues on it like we should see some of that in the first quarter?

[David Humphrey:]

There we are in their weakest period, but it’s not significantly differentiated, weak, it’s meaning, this quarter is their slowest period. But as I understand, they may do okay, but it’s also done based on what they’re seeing in December right now.

[Steven Rudd:]

Oh, okay.

[David Humphrey:]

But I don’t know, the December is still not done, so.

[Steven Rudd:]

Correct. There’s sort of big part is on the Nave guys, are we done paying them off now, or I’m looking for the cash basis?

[David Humphrey:]

Yes, we didn’t share. The final or the final payment guaranteed payment and final earn-out payment will be completed as of next year in February. So we’ve got another 2.5 months to go on that then it will be all done.

[Steven Rudd:]

How much of that amount, I guess, the earn-out we don’t know yet, but the guarantee?

[David Humphrey:]

The guarantee is a $1 million. The earn-out is anticipated, there may not be a payout this year based on the performance of Nave so far.

[Steven Rudd:]

Okay, all right. And for the moment no squawking, where we won’t get into that, we’ll see what happens actually they were done?

[David Humphrey:]

Yes.

[Steven Rudd:]

Okay, that’s good. I mean, the only ones who should be squawking at this point with us?

[David Humphrey:]

That is correct.

[Steven Rudd:]

Yes. The other thing that I find, but I think I didn’t note the write-down on the inventory, it’s interesting that it’s – which side of the box to hit there, which side we’re going to hit. I think that one thing I find striking is, we still lack, we’re trading at half of our book value now for over two years maybe longer, but the years that I have been with the company as an investor. And so with half a book, we have $4 million in goodwill on the book. And the accountants haven’t written that down at all. And I just don’t think they’re doing you a service and quite candidly, I think, they’re opening in terms of the liability. I just don’t know how that’s even countable at this point?

[Scott Francis:]

Okay. Well, I’ll answer that, this is Scott, Steve. I’ll answer the question of the goodwill if there’s other questions that you’ve got in there. The goodwill assessment that we do, we do it not based on the stock price, okay? So we assess stock – we assess the value, if you will, by virtue of the guidance and you go through a qualitative and quantitative assessment for which we passed up one of those tests, which is described again in the 10-K. So there was nothing for us to do to go to the step two analysis would then indicate whether how much of a write-down you might take. But we didn’t never go there, because we’ve passed the step one analysis, it’s not based on the stock price of the company. So I understand your concern and question there, but it’s not a – that’s not how we do the step one test okay.

[Steven Rudd:]

Yes, I don’t think that that, I understand that maybe not how you do it, but I also believe that if our system works right and whether it does or doesn’t is another question. But the market price is not the void of what the market price is?

[Scott Francis:]

I understand, but I…

[Steven Rudd:]

So what you’re saying is almost farcical. And the other part, I don’t get is, why are you guys so opposed, that’s a part I don’t expect. Can you tell me what is it [indiscernible] violation of loan covenants, and somewhat you are continually opposed to writing down some of that goodwill is appreciable, isn’t it?

[Scott Francis:]

Well, I’m not going to get into that question, Steve. All I can tell you is that, I’m following accounting guidance, as described, as well as with my auditors. And we’ve gone through the assessments, and that’s what – I’m not going to, I can’t – I’m not going to go against what the accounting pronouncements would tell me I need to do and that’s what we have done. And so…

[Steven Rudd:]

That’s wasn’t my question. On the goodwill, how much and forgive me for not remembering this. But what are write-down what’s our depreciation of goodwill annually?

[Scott Francis:]

We don’t depreciate – you don’t depreciate goodwill for book.

[Steven Rudd:]

Not on the acquisition, so we have to depreciate some of that?

[Scott Francis:]

The intangibles we do, which are…

[Steven Rudd:]

Intangibles, I’m coupling it.

[Scott Francis:]

Okay.

[Steven Rudd:]

So what’s our …

[Scott Francis:]

They vary at a rate between a 3 and 10 years, they vary.

[Steven Rudd:]

So let’s speak and forgive me, if I’m not breaking on intangibles, and let’s just, what’s the amount of intangible, Scott?

[Scott Francis:]

Our intangible amount right now is just a second, let me pull that up. We’re sitting there at a net value of right under $6 million, or $5.8 million right now.

[Steven Rudd:]

Okay. With $5.8 million in intangibles, and of that some of that is Nave and some of that is what else?

[Scott Francis:]

That’s all actually related to the Nave side right at the moment. So we haven’t valued right yet.

[Steven Rudd:]

Okay. So right, so we have $5.8 million of Nave intangible, and I know one, both Dave, focusing on, and I’m sure you have, but I just want to laser beam on it a little stronger fixed rate. And how much of that are we depreciating every year?

[Scott Francis:]

Again, I’m going to probably need to focus into the 10-K, because that’s all – actually and I apologize that was actually the 15, it’s actually $5 million right now. We are doing basically right about 800,000 is what we did this past year.

[Steven Rudd:]

Okay, thanks.

[Scott Francis:]

And I’m going to in footnote 5 to the 10-K.

[Steven Rudd:]

Okay. I didn’t get the footnote 5 yet, so it’s still, it’s $800,000 of depreciation, which as we know, it’s roughly approximately $0.08 per share right? [Multiple Speaikers]

[Scott Francis:]

No. That is pre-tax.

[Steven Rudd:]

Pre-tax.

[Scott Francis:]

Pre-tax

[Steven Rudd:]

And so after-tax is $0.06 per share, right?

[Scott Francis:]

Approximately $0.05 or $0.06.

[Steven Rudd:]

$0.06. So if we simply recognize what we already know which is that and we have the ability to do, it’s only that, I actually believe, it’s nearly it’s how it should be done. If you write-down the Nave assets intangible just write it down if this is true. It’s not producing it?

[Scott Francis:]

Steve, I’m not going to Nave the cash here on that one, because again, I get back to, I’m not, I’m following the accounting guidance that I have and evaluations for which we do have and possess internally. And I appreciate what you’re asking. I’d really, really do.

[Steven Rudd:]

I guess, why you guys are resisting? [Multiple Speakers]

[Scott Francis:]

I’m not resisting anything. We’re following, I’m following the guidance, okay?

[Steven Rudd:]

I don’t think so. We just wait [Multiple Speakers]

[Scott Francis:]

We’re going to need to disagree on this one, okay?

[Steven Rudd:]

No, we’ve agreed or disagreed in the past, this one is still confusing.

[Scott Francis:]

That we have. That’s okay.

[Steven Rudd:]

All right. [Multiple Speakers] Thank you very much for hanging in your belief in Q4 there.

[David Humphrey:]

Okay. So thank you, Steve. I appreciate do you have any other follow-up, any other questions?

[Steven Rudd:]

No, no, and I always appreciate that you take me for and laid off the last few conference calls.

[Scott Francis:]

I appreciate it. I don’t mind the conferences at all, I don’t.

[Steven Rudd:]

Okay.

[David Humphrey:]

Okay. Well, we do appreciate you and thank you again.

[Steven Rudd:]

Okay.

[Operator:]

We’ll go back to a follow-up from George Gasper as a private investor.

[Unidentified Analyst:]

Yes, thank you. I want to zero in on Nave, again, and then Triton. In terms of the geographical footprint of Nave and Triton, can you explain what the footprint is geographically that they are supplying and generating revenue streams and what’s your intention you’re trying to break them out more internationally?

[David Humphrey:]

Great. So Dave, does do international sales, but predominantly, they are domestic sale, but they’re, of course, across the country.

[Unidentified Analyst:]

Okay.

[David Humphrey:]

Triton even more so is a domestic sales organization selling to predominantly brokers and end-users in the United States marketing. Some of their product may go offshore, we’re not – we – but I doubt it.

[Unidentified Analyst:]

Okay. Excuse me, yes primarily, George, primarily they’re both U.S.-based.

[Unidentified Analyst:]

U.S.-based.

[David Humphrey:]

So there’s some Canadian sales as well primarily in North America and both of those organizations.

[Unidentified Analyst:]

And you’ve indicated that you’ve added sales personnel into the Nave operation that is – that – are those salespeople still out of the Baltimore area, or do you have them placed around the country?

[David Humphrey:]

Actually, our last two additions have been outside of Baltimore.

[Unidentified Analyst:]

Oh, okay. All right. And what do you anticipate on the Triton acquisition? Do you think you can add salespeople outside of the Miami-based area?

[David Humphrey:]

Not initially, but we will work towards that. We’re – their market is still different. So but we will be working with them to expand sales.

[Unidentified Analyst:]

Okay. Well, maybe you can get into the Cuba market on the Triton side?

[David Humphrey:]

We do have some Cuban employees, the ex-Cuban obviously, the American citizens, but they’re Cuban nationality. So you never know, George.

[Unidentified Analyst:]

Okay. Well, hey good luck to you guys going forward. I think you’ve really got something going here, and it’s a lot of effort obviously that you put into all of this and, hopefully, you can start to pay off as we’re moving into 2017.

[David Humphrey:]

Thank you, again, George. We appreciate you.

[Unidentified Analyst:]

All right. Thank you.

[Operator:]

[Operator Instructions] We’ll move next to [Michael Hess with Hess investments] [ph].

[Unidentified Analyst:]

Hi, guys. I wanted to follow-up on a questions, I guess, the other, it was another gentlemen who was asking a lot of questions about the balance sheet. And I look at it a little differently, I don’t look at it as we should write-down the balance sheet. I sort of look at it as we have a great balance sheet and a disconnect between lower stock price and our balance sheet. And I wanted to ask about your thoughts about buying back stock either in the form of maybe with stock buyback, or accelerate buyback, or some type of partial tender in that, I think, we found some really good investment opportunities. But right now depending on how you look at goodwill and intangibles, our stock price is half or third of our book value. And I think show a lot of confidence in the business, if we were to use the low interest rate that we have right now to buyback our stock at a really huge discount to what the book – what the balance sheet is saying our businesses were?

[Scott Francis:]

Well, and I’ll go ahead and reply that Michael. Well, number one, I agree with you. I think, we were very proud of our balance sheet, as well as our cash flows of business notwithstanding the YKTG seeing in our cash flow, but we went into that deal knowing it would and that we are utilizing our balance sheet to do a lucrative deal. And so that being said, our company, our management, and our Board are pretty committed to our strategy of acquisitions to increase our cash flow and EBITDA. And so that’s where our company has committed our cash, as we generate additional cash from our business line. So as we have completed stock purchases, I think, the last one was completed by 3, 3.5 years ago. And since then, we have discussed it internally as a Board. And the Board is still pretty much aligned. Our strategy right now is committed to continuing to do acquisitions and growing the base business we’ve already acquired and hold onto. So that’s where our cash is going to be going in the near future right now, Michael.

[Unidentified Analyst:]

I’m not sure those are necessarily mutually exclusive. But I guess when we consider an acquisition, I would consider in the light of the fact that if we bought back stock, we’re probably doubling our return if we have a book value of $3 to $4, whereas if we find an acquisition that we’re only going to make 20%, that’s not as good as buying back stock. That seems to me is that buying back stock might be the best opportunity for right now using our balance sheet and I am not saying not to do acquisitions when we think we find good ones. But there’s a huge disconnect and you should not take advantage of it when interest rates are low and our stock price is low?

[Scott Francis:]

I understand what you’re saying. I won’t even disagree with it. We do agree that interest rates are low, number one. And we do also agree that our stock we believe it to be undervalued as well, and we think it’s a good buy right now. That being said, though, the Board has committed that all of our cash will be dedicated to acquisitions and even special projects like the one we did withYKTG, which again going into, we knew who is going to tie up somewhat a portion of our cash. And as Steve Rudd mentioned, it’s tying up $3 million, and you won’t understand, where it all went, we try to explain that as well. So that’s kind of where our commitment is right now, Michael. But I do appreciate your question and we do agree with you, there is a logic to it, and we’ve discussed it as a Board, but we’ve agreed as a Board and the management team to continue to focus on our acquisition and service opportunities to utilize our cash flow.

[Unidentified Analyst:]

Okay. And I agree, I don’t want to say don’t do acquisitions, I’m just saying that if the – just, I guess, the Board will be listening in on the call that we don’t only have to look at our cash flow to determine how much cash we have that we have $21 million-ish in inventory that we just took a look at. And inside of that it’s not – that is good inventory. And that I’m not saying don’t do the acquisitions and do this instead, I’m just saying that wish to both?

[David Humphrey:]

Yes, I – again, I appreciate your comments and we take. I mean, we listen to and we hear. I mean, we have discussed these with the Board on a couple of different occasions. But we’re pretty unanimously decided that we’re going to focus on the acquisition strategy, and these acquisitions have tied up cash, as well as our borrowing capacity. So we’re not on a dry powder at this point in time. But that being said, we certainly want to keep our availability to continue to do and look for additional acquisitions that are accretive to our business.

[Unidentified Analyst:]

Okay. Thank you.

[Operator:]

Mr. Hess, do you have anything further?

[Unidentified Analyst:]

Thank you very much for hearing me up. I appreciate it.

[David Humphrey:]

Michael, thank you. Again, we appreciate the support.

[Operator:]

And at this time, there are no additional callers in the queue.

[David Humphrey:]

Well, very good. Thank you then, operator. I’d just like to make a few closing remarks then. Before we conclude the call, I’d like to reiterate that we are excited about the Triton Data acquisition, and we do see many opportunities to build out our business and achieve steady revenue growth. I’d like to thank our shareholders for their loyalty, support, and patience, as we continue to build value together. Thank you all. This concludes our meeting today.

[Operator:]

That does conclude today’s teleconference. We thank you all for your participation.