Q2 2023 ADDvantage Technologies Group Inc Earnings Call
Participants
Joseph E. Hart; President, CEO & Director; ADDvantage Technologies Group, Inc.
Michael A. Rutledge; CFO; ADDvantage Technologies Group, Inc.
Brett Maas; Managing Partner; Hayden IR, LLC
Unidentified Participant
Presentation
Operator
Greetings, ladies and gentlemen, and welcome to ADDvantage Technologies Group's fiscal 2023 First Quarter Financial Results. (Operator Instructions) As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host, Brett Maas of Hayden IR. Please go ahead, sir.
Brett Maas
Thank you, operator. We are joined today by Joe Hart, President and CEO; as well as Michael Rutledge, company's Chief Financial Officer.
Before we begin today's call, I'd like to remind you this conference call may contain 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 future events, such as the 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 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 the actual future events or results due to a variety of factors such as those contained in advanced technology, which recent report on Form 10-K on the 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 including the ADDvantage Technologies' most recent report on Form 10-K. The guidance regarding anticipated future results on this call is based on limited information currently available on ADDvantage Technologies, which is started to change. Although any such guidance and factors implement may change, ADDvantage Technologies will not necessarily update this information as the company will only provide guidance at certain points during the year. Such information speaks only as of the date of this call.
During this call, we may also present certain non-GAAP financial measures such as non-GAAP net income and certain ratios that are used with these measures. In our press release and in the financial tables issued earlier today, which are located on our website at addvantagetechnologies.com. You will find a reconciliation of these non-GAAP financial measures with the closest GAAP financials and a discussion about why we believe the non-GAAP management manages 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.
I would like to now turn the call over to Joe Hart, President and CEO of ADDvantage Technologies. Joe, please go ahead.
Joseph E. Hart
Thank you, Brett, and thank you to everyone joining us on the call today. This was a challenging quarter. The March quarter is always a challenge for our wireless segment due largely to winter weather in the Midwest. It is typically our slowest quarter. But compounding that was the sudden and precipitous decline in demand for our Telco segment. For the last 2 years, our Telco segment has been delivering robust growth benefiting from several pandemic-related trends such as the disrupted supply chain, the global chip shortage and the remote workforce. Simply put, enterprises needed more Telco equipment from office phones to optical switches to better support a workforce that was more distributed than ever. With the chip shortage, supply chain constraints and high cost to borrow, made it difficult and, in some cases, impossible to buy new equipment.
Last year this led to a large demand curve for used and refurbished network components. The result was overbuying in 2022 from network operators concerned that they wouldn't be able to get critical parts or spares for their network. Now that the OEMs have improved delivery intervals for new equipment, the operators have focused on burning off the excess inventory that they had built up of spares, which has had a significant impact on our business. We expect that inventory buildup will burn off at some point in the next few months and that our equipment business will normalize back to more historic levels during the second half of this year.
In the meantime, our wireless segment continues to perform at normal levels with a slight decline in January due to winter weather. As the weather improves, we are highly confident that our wireless revenue will accelerate significantly this year. We think we've only scratched the surface of the wireless opportunity. We continue to add experienced talent to our team, broadening our opportunities and improving our competitive position. Moreover, the wireless industry is facing unprecedented upheaval. Some of the largest service integrators who had served large carriers in many areas of the country are struggling. Some have had service issues, and one has failed. This has created greenfield opportunities for reliable partners, and we believe we will capture a meaningful share of the near-term CapEx spend.
The overall opportunity is massive, and the new additions to our team bring established relationships and significant experience. The continuing 5G opportunity represents a multiyear growth opportunity for tower work as the carriers are less than halfway complete with their initial 5G deployments. Although some of the carriers are announcing a brief pause or slowdown in their expansion plans, they continue to invest billions of dollars in their networks as they must deliver the capacity and coverage required by the ever-demanding wireless subscriber population.
On the bright side, we benefited from the cost reduction initiatives we put in place last year. We again lowered our SG&A expenses, and we are poised for solid profitability as revenues normalize in the Telco segment and increase in the wireless division in the second half of this year. While consolidated revenues decreased 38% from the same quarter a year ago, gross margins remained essentially flat and our operating expenses decreased by $0.8 million.
With that, I'll now turn the call over to Michael Rutledge, our CFO, and to provide a more detailed review of our financial results. Michael, please go ahead.
Michael A. Rutledge
Thank you, Joe. Consolidated sales decreased $9.1 million or 38% to $14.7 million for the first quarter from $23.8 million for the 3 months ended March 31, 2022. The decrease was primarily due to a decrease of $7.9 million or 49% in Telco revenue and a decrease of $1.2 million or 15% in wireless revenue.
Gross profit was $3.4 million with a 23% gross margin compared to a gross profit of $5 million (sic) [$5.8 million] or a 24% gross margin for the same period last year. Operating expenses decreased approximately $800,000 or 29% to $2.0 million, reflecting the previously announced cost reduction initiatives.
Consolidated selling, general and administrative or SG&A expenses include overhead, which consists of personnel insurance, professional services, communication and other cost categories, decreased approximately $200,000 or 6% to $3.6 million for the 3 months ended March 31, 2023, from $3.9 million for the same period last year.
Net loss for the quarter was $2.7 million or $0.21 per basic and diluted share compared to a net loss of $1.4 million or $0.11 per basic and diluted share for the same quarter last year.
Turning to our balance sheet. Cash and cash equivalents were $2.6 million at March 31, essentially unchanged from December 31, 2022. In April, we entered into a Securities Purchase Agreement issuing 13% secured promissory notes in the aggregate principal amount of $3.0 million, convertible into shares of the common stock of the company, raising net proceeds of $2.9 million. As of March 31, 2023, the company had net inventories of $8.5 million. Outstanding debt as of March 31 was $1.7 million, consisting of vehicle financing leases.
This concludes the financial overview segment of our remarks. I will now turn the call over to the operator to facilitate any questions.
Question and Answer Session
Operator
(Operator Instructions) The first question comes from George Gasmar with the private investor.
Unidentified Participant
All right. Well, needless to say that disappointing quarter, much more so than what you addressed in your last call. But I'd like to know on the wireless area, are you going to be able to expand or what you're operating besides getting on the towers? And is there anything going on in terms of tower development now? You implied that there's a lot of potential changes that have to be made in the past on tellers to update to the 5G that's coming into the market on a regular basis. Are there things that you envisioned going on towers that are going to give you even more work? And can you expand your base of operations in terms of this wireless area in general?
Joseph E. Hart
Thanks, George. This is Joe. Thank you for your question. Yes. There's a lot of new aspects to the services that we perform on towers that we think will improve the future for us. One of those is fixed wireless access, where businesses and homes can directly get Internet over fixed wireless, which is going into the cellular network. That gives us an opportunity. Small cell, which is poles, light poles, street lights, billboards, basically street-side architecture that allows you to put smaller cell sites right in residential and commercial areas and are less obtrusive rather than the big 200-, 300-foot cell towers that exist. Both of those are a coming growth opportunity for us. Some of the carriers are starting to announce their fixed wireless access programs. The one in your geography, U.S. Cellular, is a big advocate of fixed wireless. So we see a bright future in that.
Also, as you increase the speed and the bandwidth from 3G to 4G to 5G, the cell sites need a tremendous amount of bandwidth. And as people doing video streaming and data streaming, it requires a lot more bandwidth. So the height of those antennas is slowly coming down from probably an average of about 220 to 240 feet, down more to the 150-feet 180-foot level. Well, what that does, it shrinks the diameter of the cell and then creates holes in the network. So what happens there? You see companies like Verizon announcing a big program to increase the number of new sites that they have out there. So we'll be doing a lot of new site construction for a number of the carriers. And then recently, AT&T announced that as soon as the dual-band radios are available, they'll be relaunching and rejuvenating their whole C-band program for the new spectrum that they bought in the FCC auctions last year.
So we see quite a bit of opportunity developing beyond just the plain old climb the tower and upgrade radios and antennas. So there's a lot of opportunity out there. And then maybe further down the road, we're looking at potentially expanding into the fiber optic cable network services in some fashion. But that's a little bit further down the road for us. I hope that answers your question.
Unidentified Participant
Okay. Could I just expand that question? Can you talk a little bit about the geographical coverage that you're involved now relative to, say, a few months ago and what you're looking at going forward, state to state? Where are you really concentrating? And where would you like to go from here?
Joseph E. Hart
So we serve basically the central region from north to south. So we serve Illinois, Wisconsin, Michigan, Indiana, a little bit of Minnesota sometimes, but it comes straight down through Arkansas, Oklahoma, Missouri, Kansas, all the way down to the southern border of Texas. And last year, we branched out into Louisiana, Mississippi and a little bit in Alabama. We expect that our geography of growth might be the Minnesota Northern Plains states, including Iowa and Nebraska and then also the Southeastern states, the Gulf, all the way over to Florida, Georgia and potentially up into the Carolinas. But we won't go there without a customer that is giving -- awarding us business that takes us and really provides the opportunity for deployment. We're not just going to go set up a storefront and wait for business.
Unidentified Participant
Okay. And then, Joe, can you identify the number of crews that you have working now as opposed to the end of the year -- this past year? And where do you think you're going by, say, middle of the year?
Joseph E. Hart
Well, I don't know, we had a big rainstorm here this afternoon, George. So I might be off by a couple, but we're currently at about 30 crews north to south. Towards the end of the year, we were -- with the Christmas holidays and the winter weather that hit in the Chicago area and that Great Lakes area, we were probably down around 25, 24 for a few weeks there. But we think this summer will probably hit a level of 50 to 55 crews. We expect our revenues to pick up here in the second half of the year, and that will drive crew count.
Unidentified Participant
Okay. All right. And the -- as far as the crew capability, are you finding it that crews accessible for your service? Or is it not getting crews?
Joseph E. Hart
No. There are a lot of crews available as some of the carrier programs hit either a completion point or a pause in their programs or a change in geography, whatever might cause that. But there are a lot of subcontractor crews available. And the more -- the trickier part about internal crews is just making sure that you're adding really good internal crews that you're just not picking up warm bodies.
Unidentified Participant
Okay. And if I could ask one other additional question. Can you just identify a little more specifically the number of shares that are out at this point in time in terms of the most recent financing that you've accomplished in the conversion of that, where is the share count going to go? Can you just give us a general idea?
Joseph E. Hart
Yes. I'm going to ask Michael Rutledge to answer that, just so that I don't misspeech.
Michael A. Rutledge
All right. Yes. Thanks, Joe. George, on the 10-Q, we disclosed that we have 14.9 million shares outstanding as of May 9. As far as the conversion -- potential conversion of the financing that we did in April, it's not our intent necessarily that any of those shares would convert. And it will be tied to pricing that at the time that if the -- if Mast Hill decided to convert that it would determine how many shares they would get. Given the current share price, I'm not anticipating that they would want to convert and nor do we intend necessarily for them to convert. So determining that a number of shares at this point, we don't have that number.
Unidentified Participant
If you don't have the number beyond the 14.9 million, is that it?
Michael A. Rutledge
That's correct. Like I said, we intend to pay the loan down, so we don't have an intent to have the shares convert.
Unidentified Participant
I see. I got you. I got you. Okay. Well, that's positive also. Hopefully, this all comes together.
Operator
Ladies and gentlemen, we seem to have reached the end of the question-and-answer session. I will now turn the call back over to Joe Hart for closing remarks.
Joseph E. Hart
Thank you, operator. I just want to continuously remember to thank those folks that have invested in ADDvantage Technologies. We had a couple of really great quarters late last year, and we're hitting a rough patch right now as the telephone equipment market for used product sort of readjust itself and gets to a new normal. But we'll get through this. We have a good year ahead of us. The wireless growth looks...
Operator
Apologize, sir. Can I interrupt you there for a moment. I do apologize. We do have another question in the queue.
Joseph E. Hart
Okay.
Operator
The next question comes from Richard McLean with a private investor.
Unidentified Participant
Yes. George just touched on this convertible promissory note of the $3 million here. I have some additional concerns about it, and it basically is tied to the current share price of AEY, and there are situations that stated in the agreement that if the price and market price is below $1 share, which is the floor price for that. First off, the shareholders who would get an opportunity to vote on it, is that going to happen? If not, why not?
Michael A. Rutledge
Yes, thank you for the question, Richard. We have an obligation to -- once the -- as you pointed out, once the shares have been trading for below $1 for 5 consecutive days, which they have now, we have an obligation to request that to shareholders approve a potential sale of over 20% of the company should the shares be -- should that be converted to shares. So that will -- we have a legal obligation to do that, and we'll be doing that in the future.
Unidentified Participant
When can we expect that? Also the aspect of the share price, too, is then if the share -- if the stock is in danger or gets the NASDAQ notifies you that they're going to delist it from the national market because the price is below $1 for 30 consecutive days, you guys will get a notification from that. And that is considered a default on this note, which could set a lot of items in the play as far as what Mast Hill can do to convert the share -- to convert the note, the principal. What does the management have plans for concerning that possibility?
Michael A. Rutledge
We have plans in the works to grow the business, and we'll see where the share price goes from there. And if the share price falls -- stays below $1 and we get notified by NASDAQ, we'll have to deal with that as it comes. But right now, we're focusing...
Unidentified Participant
We're halfway there already. It's 15 days that it's been underneath the $1. It's 30 days usually by NASDAQ, and they will notify that you're -- that the company is no longer in, what's the word, compliance. And I guess you will get -- if I remember correctly, I think you possibly have 180 days to remedy the situation if the stock price doesn't get back up over $1 again. But as [you said], you can see stock is not heading in the right direction for sure, and we're looking at a share price that we haven't seen with AEY in over 20 years. And I'm just kind of curious, even from the beginning when I first saw this note, what led to the necessity of coming up with a convertible like this at such generous terms.
In my opinion, of course, now that I see what the earnings were for the first quarter there, it makes a little more sense. So my concern is liquidity situation for the company to continue operate and as it has been and being able to have enough liquid cash around to keep business going at a rate that as planned. But as I say, I'm very concerned like George, was about the possible dilution to the current shareholders the same because this loan could possibly issue -- and I mean, Mass Hill could end up with close to 3 million shares. And I don't know if that includes the warrants in addition to that and end up with 20% or more of the company outstanding shares at that point. Two, is management...
Joseph E. Hart
Yes, this is -- Richard, this is Joe Hart...
Unidentified Participant
I mean this is rather unusual, considering what we heard at the end of the last earnings call. So it's kind of broad sites, but I'm just curious about this floor price issue and how it would trigger default which could possibly, I guess, make the conversion of shares available by Mast Hill possible at the floor price of $1 a share. Is that correct?
Michael A. Rutledge
It is possible. But as I stated to George, it's not our intent to get to a point where the shares would be converted.
Unidentified Participant
I thought never it has, but it done...
Joseph E. Hart
I mean, Mast Hill would only want to convert if they thought we weren't going to be able to pay. I don't think there's an advantage to them to take 20% or greater of the shares when we're making regular payments on the loan. The other thing is because the share price has declined if now could be a calculation that equals greater than the 20%, which meant that we must go to the shareholders to approve such a potential event. It's not something that we, well, want to happen for sure. But by rule, we have to.
As far as the NASDAQ, once we're ultimately notified that we've exceeded the 30-day sub-$1 category, like we get 45 days to submit a corrective action plan to cure on the stock price, and then we have a total of 180 days from date of notification to cure. And then if you're making progress, there's the potential for an additional 180 days after that. We don't envision that being a necessity. We feel that we're going to have a much improved year compared to this recent quarter. But I would assure you nothing -- we didn't change anything from when we were really having a couple of great quarters in a row and our equipment business was growing like crazy and highly profitable -- nicely profitable.
Nothing changed on our side. It was just the total shutdown of ordering mostly by the optical fiber network providers, who had built up a stockpile of spares and standby equipment because they couldn't order new equipment from the OEMs. Once the OEMs finally resolve the chip shortages, supply chain issues, et cetera, and the OEMs got the supply of new equipment back online, then the fiber network providers decided to burn off that stockpile of spares that they had accumulated and just put a hold on any additional orders to companies like us until such time as they burned off that stockpile. We feel like that sometime in the next couple of months, there's no way to know for sure.
We are talking to the same people that helped us grow this business and order this equipment over the last 2 years. I mean our equipment business tripled in revenue over the last 24 months. Those same customer contacts are saying, "Look, I need this. I need that. I need 10 of this, 6 of that, 12 of this, 20 of that. I'm not allowed to order anything until the inventory level comes down to an acceptable level." And then as soon as they take that hold-off, "I'll be back ordering again." The only thing is we just have no control over when that gate is going to open again.
Our wireless division has been going along steadily earning its -- earning revenue month after month, margins have been good. And we're going to -- we get into our summer months here and people like George, sounds like you too, Richard, have been here quite a while as an investor. Our summer months are really big months for us on the wireless side. So we think this is going to normalize on the equipment side over the next few months, and we still believe we're going to have a strong year on the wireless side. That will change things.
Unidentified Participant
Was this note or this financing something that you guys were hit with -- happen to do suddenly because of the sudden drop-off in the revenues from Telco? You kind of had and get some liquidity?
Michael A. Rutledge
That's exactly correct. The rapid decline from the Telco business put us in a situation where working capital declined from 12/31, and this was a way to bolster our working capital.
Unidentified Participant
Okay. So the first amortization payment on this note is, what, not until October? Is that correct?
Michael A. Rutledge
Yes, 6 months out, yes.
Unidentified Participant
Okay. And then each month, it's -- I think I saw it -- the filing, I guess you had 5 payments. And then, I guess, the last one was supposed to finish whatever the balance was with interest left on that. Okay. So liquidity, I mean I don't know if you can tell me -- tell us how liquidity is currently going on this. But you don't anticipate, feel like that you're going to have a struggle with making those loan payments.
Michael A. Rutledge
No. We don't -- we intend to start paying those payments early. So it is not our intent to get to a point where we're at the latter part of the agreement and making $500,000 payments a month.
Unidentified Participant
All right. Okay. Well, as I say, being with the company and invest in this company or it seems like forever, maybe back to the last millennium. But yes, 20 years. And as I say, when shortly, I guess, after the earnings report came out that the stock went from $1.40 down to [$1] and then with this convertible note was filed and saw that it was dilutive than I thought people aren't going like this. And the market, and like I said, we've had a drop since, I guess, mid-March or so of 40% and 20%, and that's been since this note was filed the details on it because of what looks like a huge dilution possibility for the current shareholders, me included. So -- and I got a pretty decent size holding in this company and big hopes for it as all of us do.
So I say -- I just was mainly wanting to know how those issues, the default that could be triggered by the share price creating an issue with the delisting. And the warrants, the 720,000 warrants -- 720,000 warrant shares that, those go on no matter what, right? If things successfully paid off, those are still -- Mast Hill still has the chance to redeem those or buy those per 5 years?
Michael A. Rutledge
Approximately half of them, they'll keep. The other half, if we pay off successfully, they will return the warrants to us.
Unidentified Participant
Now which one is that, the 250 or the 140? Or does it matter? A little bit of each?
Michael A. Rutledge
No. It's the one that are 140 that return to us.
Unidentified Participant
Returned to us. Okay. Well, and it's up to the market, and business hopefully getting back to firmer ground. All right. Well, those were my concerns mainly. I don't want to -- well, we have much, but it's something that I just felt like I wanted to give more clarification on it, and maybe other shareholders would like to know, too. So -- and I didn't want to be the only one that called in.
Michael A. Rutledge
We appreciate the questions, and we'll continue to monitor and evaluate what we do on a daily basis to do what's best for the shareholders.
Unidentified Participant
That's what I depend on. All right.
Operator
Ladies and gentlemen, we have now reached the end of the question-and-answer session. I will now turn the call back over to Joe Hart for closing remarks. Thank you, sir.
Joseph E. Hart
Thanks, operator. Yes, as I started to say earlier, we thank you for your interest and your investment in ADDvantage Technologies. We feel that we have a bright future. We're feeling that we're in a rough patch at the moment. But this, too, shall pass. We know the cause of it, and we know the cure for it. So we feel that we're going to be headed in the right direction here over these next few months, and we'll hit full stride here as we hit June, July and move into the summer months. It's always our biggest time of the year, and it's also our most profitable. So -- and then we'll go into next year on a different growth trajectory. So thank you for joining the call today, and that concludes our remarks.
Operator
Thank you, sir. Ladies and gentlemen, that concludes today's event. Thank you for attending, and you may now disconnect your lines.
