ADDvantage Technologies Group, Inc. (NASDAQ:AEY) Q1 2023 Earnings Conference Call May 15, 2023 5:00 PM ET
Company Participants
Brett Maas – Hayden IR
Joe Hart – Chief Executive Officer
Michael Rutledge – Chief Financial Officer
Conference Call Participants
Operator
Greetings, ladies and gentlemen .And welcome to the ADDvantage Technologies Group’s Fiscal 2023 First Quarter Financial Results. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host, Brett Maas with 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, the company’s Chief Financial Officer.
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 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 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 the 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.
The guidance regarding anticipated future results on this call is based on limited information currently available on ADDvantage Technologies which is subject to change. Although any such guidance and factors influencing it may change, ADDvantage Technologies will not necessarily update the information as the company will only provide guidance at certain points during the year. Such information speaks as only 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 table issued earlier today, which are located at our website at addvantagetechnologies.com. You’ll find a reconciliation of these non-GAAP financial measures with the closest GAAP financials and a discussion about why we believe these non-GAAP financial measures are relevant. These financial measures are included for the benefit of investors and should be considered in addition to not instead of GAAP measures.
I’d now like to turn the call over to Joe Hart, President and CEO of ADDvantage Technologies. Joe, please go ahead.
Joe 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 two 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. But 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 over buying 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 the 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, to provide a more detailed review of our financial results. Michael, please go ahead.
Michael 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 three 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 $5.8 million, or 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 consist of personnel, insurance, professional services, communication and other cost categories, decreased approximately $200,000 or 6% to $3.6 million for the three 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 Kasmar, who’s a private investor.
Unidentified Analyst
Can you hear me? Okay. All right, well, needless to say, this 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 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 towers to update to the 5G that’s coming into the market on a regular basis. Are there things that you envision 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?
Joe 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 US 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 ft down more to the 150 ft -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 the 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 Analyst
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?
Joe 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 plain states, including Iowa, 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 Analyst
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?
Joe Hart
Well, I 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. 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’ll drive crew count.
Unidentified Analyst
Okay. All right. And then as far as the crew capability, are you finding it crews accessible for your service or is it hard getting crews?
Joe Hart
No, there are a lot of crews available as some of the carrier programs have hit either a completion points 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 cruise, that you’re just not picking up warm bodies.
Unidentified Analyst
Okay. 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? And in terms of the most recent financing that you’ve accomplished in the conversion of that, where’s the share count going to go? Can you just give us a general idea?
Joe Hart
Yes, I’m going to ask Michael Rutledge to answer that just so that I don’t misspeak.
Michael Rutledge
Yes. Thanks, Joe. George is on the 10-Q, we disclose 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. It will be tied to pricing that at the time that 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 Analyst
You don’t have the number beyond the 14.9 million, is that it?
Michael 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.
Operator
Ladies and gentlemen, we seem to have reached the end of the question-and-answer session. I’ll now turn the call back over to Joe Hart for closing remarks.
Joe 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 readjusts 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
Apologies, sir. Can I interrupt you there for a moment? I do apologize. We do have another question in the queue.
Joe Hart
Okay.
Operator
The next question comes from Richard McGlynn, who’s a private investor.
Unidentified Analyst
Hello? Yes, George just touched on these convertibles. 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, as stated in the agreement, that if the price, market price is below $1 share, which is the floor price for it, that first off, the shareholders would get an opportunity to vote on it. Is that going to happen? If not, why not?
Michael Rutledge
Yes, thank you for the question, Richard. We have an obligation to, as you pointed out, once the shares have been trading for below $1 for five consecutive days, which they have now, we have an obligation to request that the shareholders approve a potential sale of over 20% of the company, should the shares be — so that be converted to shares. So we have a legal obligation to do that and we’ll be doing that in the future.
Unidentified Analyst
When can we expect that? Also, the aspect of the share price too, is that if the stock is in danger or gets 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 for that. And that is considered a default on this note, which could set a lot of items into play as far as what Mast Hill can do to convert the note, the principal. What does the management have plans for concerning that possibility?
Michael 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 on –
Unidentified Analyst
We are half way there already, it’s 15 days that it’s been underneath the $1, it’s 30 days usually by Nasdaq. And they will notify you 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 I say, 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 operating as it has been and being able to have enough liquid cash around to keep business going at a rate that has 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, Mast 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. So is management –?
Joe Hart
Yes, Richard, this is Joe.
Unidentified Analyst
I mean this is rather unusual considering what we heard at the end of the last earnings call, so it’s kind of broad sighted. 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 Rutledge
It is possible, but as I stated to Georgia, there’s not our intent to get to a point where the shares would be converted.
Unidentified Analyst
Well, it never is, but it does.
Joe Hart
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, it 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 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, 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 will 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 resolved the chip shortages, supply chain issues, et cetera, and the OEMs 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 ordered this equipment over the last two 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, six of that, 12of 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 revenue month after month. Margins have been good and we get into our summer months here and people like Georgia 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 Analyst
Was this note or this financing something that you guys were hit with having to do suddenly? Because of the sudden drop off in the revenues from Telco, you kind of had to get some liquidity.
Michael 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 Analyst
Okay, so the first amortization payment on this note is what, not till October, is that correct?
Michael Rutledge
Yes, six months out. Yes.
Unidentified Analyst
Okay, and then each month, I think I saw it in the filing. I guess you had five payments, and then I guess the last one was supposed to finish up whatever the balance was, with interest left on that.
Okay, so liquidity I don’t know. You can tell me. Tell us how liquidity is currently going on this. But you don’t anticipate feel like you’re going to have a struggle with making those — the loan payments?
Michael Rutledge
No, 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 Analyst
Right. Okay. Well, as I say, being with the company and invest in this company for it seems like forever, maybe back to the last millennium but yes, 20 years. And as I say, when it was shortly, I guess after the earnings report came out, that the stock went from $1.40 down to $1 and teens in that then when this convertible note was filed and saw that it was dilutive, then I thought, people aren’t going to like this in the market. Like I say, we’ve had a drop since, I guess, mid-March or so, 40% and 20% of that’s been since this note was filed the dowels on it because of what looks like a huge dilution possibility for the current shareholders, me included. So I got a pretty decent size holding in this company and big hopes for it, as all of us do. So I just 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 shares and that those go on no matter what, right. If the things successfully paid off those are still, Mast Hill still has the chance to redeem those or buy those for five years.
Michael Rutledge
Approximately half of them they’ll keep. The other half, if we pay off successfully, they return the warrants to us.
Unidentified Analyst
Now, which ones is that? The $2.50 or the $1.40? Or does it matter? A little bit of each?
Michael Rutledge
No, it’s the ones that are $1.40 that returned to us.
Unidentified Analyst
Returned to us. Okay, well, then it’s up to the market and business, hopefully getting back to firmer ground. All right, well, those were my concerns mainly. Don’t want to spook too much but it’s something that I just felt like I wanted to get more clarification on it, and maybe other shareholders would like to know too, so and I didn’t want you to be — the only one that called in.
Michael Rutledge
Well, 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 Analyst
Yes. That’s what I depend on. All right.
Operator
Thanks you very much, sir. 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 close remarks. Thank you, sir.
Joe 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 line.
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