ADDVANTAGE TECHNOLOGIES GROUP INC - Quarter Report: 2021 December (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
FOR THE QUARTERLY PERIOD ENDED December 31, 2021
OR
FOR THE TRANSITION PERIOD FROM________________ TO ______________
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
Commission File number 1-10799
ADDvantage Technologies Group, Inc.
(Exact name of registrant as specified in its charter)
| Oklahoma | 73-1351610 | |||||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
| 1430 Bradley Lane, Suite 196 | ||
Carrollton, Texas 75007 | ||
| (Address of principal executive office) | ||
(918) 251-9121 | ||
| (Registrant's telephone number, including area code) | ||
| Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. | Yes ☒ No £ | ||||
| Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). | Yes ☒ No £ | ||||
| Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. | |||||
Large accelerated filer £ Accelerated filer £ Non-accelerated filer ☒ Smaller reporting company ☒ Emerging growth company ☐ | |||||
| If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. | |||||
| Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). | Yes ☐ No S | ||||
Shares outstanding of the issuer's $.01 par value common stock as of February 11, 2022 were 13,029,127.
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ADDVANTAGE TECHNOLOGIES GROUP, INC.
Form 10-Q
For Period Ended December 31, 2021
| Page | ||||||||
December 31, 2021 and September 30, 2021 | ||||||||
Three Months Ended December 31, 2021 and 2020 | ||||||||
Three Months Ended December 31, 2021 and 2020 | ||||||||
Three Months Ended December 31, 2021 and 2020 | ||||||||
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. | |||||||
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
ADDvantage Technologies Group, Inc.
Consolidated Balance Sheets
(in thousands, except share amounts)
(Unaudited)
| December 31, 2021 | September 30, 2021 | ||||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 1,837 | 2,608 | ||||||||
| Restricted cash | 581 | 334 | |||||||||
Accounts receivable, net of allowances of $250 | 6,469 | 7,013 | |||||||||
| Unbilled revenue | 2,219 | 2,488 | |||||||||
Inventories, net of allowances of 3,567 and 3,476, respectively | 5,653 | 5,922 | |||||||||
| Prepaid expenses and other current assets | 1,371 | 1,431 | |||||||||
| Total current assets | 18,130 | 19,796 | |||||||||
| Property and equipment, at cost: | |||||||||||
| Machinery and equipment | 5,354 | 4,973 | |||||||||
| Leasehold improvements | 821 | 813 | |||||||||
| Total property and equipment, at cost | 6,175 | 5,786 | |||||||||
| Less: Accumulated depreciation | (2,558) | (2,293) | |||||||||
| Net property and equipment | 3,617 | 3,493 | |||||||||
| Right-of-use lease assets | 2,466 | 2,730 | |||||||||
| Intangibles, net of accumulated amortization | 1,027 | 1,107 | |||||||||
| Goodwill | 58 | 58 | |||||||||
| Other assets | 128 | 128 | |||||||||
| Total assets | $ | 25,426 | $ | 27,312 | |||||||
| Liabilities and Shareholders’ Equity | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | 6,812 | $ | 7,044 | |||||||
| Accrued expenses | 1,184 | 1,581 | |||||||||
| Deferred revenue | 207 | 168 | |||||||||
| Bank line of credit | 2,050 | 2,050 | |||||||||
| Right-of-use lease obligations, current | 1,177 | 1,198 | |||||||||
| Finance lease obligations, current | 652 | 582 | |||||||||
| Other current liabilities | 706 | 692 | |||||||||
| Total current liabilities | 12,788 | 13,315 | |||||||||
| Right-of-use lease obligations, long-term | 1,839 | 2,141 | |||||||||
| Finance lease obligations, long-term | 1,484 | 1,429 | |||||||||
| Total liabilities | 16,111 | 16,885 | |||||||||
| Shareholders’ equity: | |||||||||||
Common stock, $0.01 par value; 30,000,000 shares authorized; 13,041,127 shares issued and outstanding, and 12,610,229 shares issued and outstanding, respectively | 130 | 126 | |||||||||
| Paid in capital | 335 | (578) | |||||||||
| Retained earnings | 8,850 | 10,879 | |||||||||
| Total shareholders’ equity | 9,315 | 10,427 | |||||||||
| Total liabilities and shareholders’ equity | $ | 25,426 | $ | 27,312 | |||||||
See notes to unaudited consolidated financial statements.
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ADDvantage Technologies Group, Inc.
Consolidated Statements of Operations
(in thousands, except share and per share amounts)
(Unaudited)
| Three Months Ended December 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Sales | $ | 18,690 | $ | 12,749 | |||||||
| Cost of sales | 14,059 | 9,120 | |||||||||
| Gross profit | 4,631 | 3,629 | |||||||||
| Operating expenses | 2,500 | 2,047 | |||||||||
| Selling, general and administrative expenses | 3,688 | 3,215 | |||||||||
| Depreciation and amortization expense | 345 | 281 | |||||||||
| Loss from operations | (1,902) | (1,914) | |||||||||
| Other income (expense): | |||||||||||
| Interest income | — | 48 | |||||||||
| Other income (expense) | (72) | (19) | |||||||||
| Interest expense | (55) | (68) | |||||||||
| Other income (expense), net | (127) | (39) | |||||||||
| Loss before income taxes | (2,029) | (1,953) | |||||||||
| Income tax benefit | — | — | |||||||||
| Net loss | $ | (2,029) | $ | (1,953) | |||||||
| Loss per share: | |||||||||||
| Basic and diluted | $ | (0.16) | $ | (0.16) | |||||||
| Shares used in per share calculation: | |||||||||||
| Basic and diluted | 12,683,312 | 12,149,778 | |||||||||
See notes to unaudited consolidated financial statements.
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ADDvantage Technologies Group, Inc.
Consolidated Statements of Changes in Shareholders' Equity
(in thousands, except share amounts)
(Unaudited)
| Common Stock | Paid-in Capital | Retained Earnings | |||||||||||||||||||||||||||
| Shares | Amount | Total | |||||||||||||||||||||||||||
| Balance, September 30, 2021 | 12,610,229 | $ | 126 | $ | (578) | $ | 10,879 | $ | 10,427 | ||||||||||||||||||||
| Net loss | — | — | — | (2,029) | (2,029) | ||||||||||||||||||||||||
| Common stock issuance | 320,787 | 3 | 633 | — | 636 | ||||||||||||||||||||||||
| Restricted stock issuance | 110,111 | 1 | (1) | — | — | ||||||||||||||||||||||||
| Amortization of stock-based compensation | — | — | 281 | — | 281 | ||||||||||||||||||||||||
| Balance, December 31, 2021 | 13,041,127 | $ | 130 | $ | 335 | $ | 8,850 | $ | 9,315 | ||||||||||||||||||||
| Common Stock | Paid-in Capital | Retained Earnings | |||||||||||||||||||||||||||
| Shares | Amount | Total | |||||||||||||||||||||||||||
| Balance, September 30, 2020 | 11,822,009 | $ | 118 | $ | (2,567) | $ | 17,382 | $ | 14,933 | ||||||||||||||||||||
| Net loss | — | — | — | (1,953) | (1,953) | ||||||||||||||||||||||||
| Common stock issuance | 238,194 | 3 | 876 | — | 879 | ||||||||||||||||||||||||
| Restricted stock issuance | 306,390 | 3 | (3) | — | — | ||||||||||||||||||||||||
| Amortization of stock-based compensation | — | — | 315 | — | 315 | ||||||||||||||||||||||||
| Balance, December 31, 2020 | 12,366,593 | $ | 124 | $ | (1,379) | $ | 15,429 | $ | 14,174 | ||||||||||||||||||||
See notes to unaudited consolidated financial statements.
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ADDvantage Technologies Group, Inc
Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
| Three Months Ended December 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Operating Activities: | |||||||||||
| Net loss | $ | (2,029) | $ | (1,953) | |||||||
| Adjustments to reconcile net loss to net cash used in operating activities: | |||||||||||
| Depreciation | 265 | 201 | |||||||||
| Amortization | 80 | 80 | |||||||||
| Non cash amortization of right-of-use asset and liability | (51) | (52) | |||||||||
| Provision for excess and obsolete inventories | 91 | — | |||||||||
| Share based compensation expense | 281 | 315 | |||||||||
| Gain on disposal of property and equipment | — | (10) | |||||||||
| Changes in assets and liabilities: | |||||||||||
| Accounts receivable | 544 | (842) | |||||||||
| Unbilled revenue | 269 | (562) | |||||||||
| Income tax receivable\payable | — | 35 | |||||||||
| Inventories | 179 | (626) | |||||||||
| Prepaid expenses and other current assets | 59 | (112) | |||||||||
| Accounts payable | (232) | 56 | |||||||||
| Accrued expenses and other liabilities | (384) | (250) | |||||||||
| Deferred revenue | 39 | 13 | |||||||||
| Net cash used in operating activities | (889) | (3,707) | |||||||||
| Investing Activities: | |||||||||||
| Proceeds from promissory note receivable | — | 1,505 | |||||||||
| Purchases of property and equipment | (116) | (74) | |||||||||
| Disposals of property and equipment | — | 26 | |||||||||
| Net cash (used in) provided by investing activities | (116) | 1,457 | |||||||||
| Financing Activities: | |||||||||||
| Payments on financing lease obligations | (155) | (86) | |||||||||
| Payments on notes payable | — | (1,249) | |||||||||
| Proceeds from sale of common stock | 636 | 878 | |||||||||
| Net cash provided by (used in) financing activities | 481 | (457) | |||||||||
| Net decrease in cash, cash equivalents and restricted cash | (524) | (2,707) | |||||||||
| Cash, cash equivalents and restricted cash at beginning of period | 2,942 | 8,373 | |||||||||
| Cash, cash equivalents and restricted cash at end of period | $ | 2,418 | $ | 5,666 | |||||||
See notes to unaudited consolidated financial statements.
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ADDvantage Technologies Group, Inc.
Notes to Unaudited Consolidated Financial Statements
Note 1 - Basis of Presentation and Accounting Policies
Basis of presentation
The consolidated financial statements include the accounts of ADDvantage Technologies Group, Inc. and its subsidiaries, all of which are wholly owned (collectively, the “Company”). Intercompany balances and transactions have been eliminated in consolidation. The Company’s reportable segments are Wireless Infrastructure Services (“Wireless”) and Telecommunications (“Telco”).
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial statements and do not include all the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. However, the information furnished reflects all adjustments, which are, in the opinion of management, necessary in order to make the unaudited consolidated financial statements not misleading.
The Company’s business is subject to seasonal variations due to weather in the geographic areas where services are performed, as well as calendar events and national holidays. Therefore, the results of operations for the three months ended December 31, 2021 and 2020, are not necessarily indicative of the results to be expected for the full fiscal year. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2021.
Recently Issued Accounting Standards
In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-13: “Financial Instruments – Credit Losses (Topic 326) – Measurement of Credit Losses on Financial Instruments.” This ASU requires entities to measure all expected credit losses for most financial assets held at the reporting date based on an expected loss model which includes historical experience, current conditions, and reasonable and supportable forecasts. Upon adoption, entities will use forward-looking information to better form their credit loss estimates. This ASU also requires enhanced disclosures to help financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an entity’s portfolio. On November 15, 2019, the FASB delayed the effective date of the standard for companies that qualify under smaller reporting company reporting rules. As amended, the effective date of ASC Topic 326 was delayed until fiscal years beginning after December 15, 2022 for SEC filers that are eligible to be smaller reporting companies under the Securities and Exchange Commission definition. We are currently in the process of evaluating this new standard update, however we do not anticipate the adoption will have a material impact on our results.
Note 2 – Revenue Recognition
The Company’s principal sales are from Wireless services, sales of Telco equipment and Telco recycled equipment, primarily in the United States. Sales to international customers in Central and South America totaled approximately $1.1 million and $0.3 million for the three months ended December 31, 2021 and 2020, respectively.
The Company’s customers include wireless carriers, wireless equipment providers, multiple system operators, resellers and direct sales to end-user customers. Sales to two customers which individually accounted for 10% or greater of the Company's revenue totaled approximately 37% and 29% of consolidated revenues for the three months ended December 31, 2021 and 2020, respectively.
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Our sales by type were as follows, in thousands:
| Three Months Ended December 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Wireless services sales | $ | 7,119 | $ | 5,246 | |||||||
| Telco equipment sales | 11,424 | 7,275 | |||||||||
| Telco repair sales | 11 | 6 | |||||||||
| Telco recycle sales | 136 | 222 | |||||||||
| Total sales | $ | 18,690 | $ | 12,749 | |||||||
Contract assets and contract liabilities are included in Unbilled revenue and Deferred revenue, respectively, in the consolidated balance sheets. At December 31, 2021 and September 30, 2021, contract assets were $2.2 million and $2.5 million, respectively, and contract liabilities were $0.2 million and $0.2 million, respectively. The Company recognized the entire $0.2 million of contract revenue during the three months ended December 31, 2021 related to contract liabilities recorded in Deferred revenue at September 30, 2021.
Note 3 – Accounts Receivable Agreements
The Company’s Fulton segment renewed its $4.5 million accounts receivable purchase facility (“Existing Facility”) with its primary financial lender, secured by the subsidiary’s accounts receivable excluding a major customer. This credit facility was increased by $0.5 million in connection with the renewal. In connection with the renewal, the lender originated a new accounts receivable purchase facility (“New Facility”) with a total capacity of $8.5 million secured by receivables of a major customer that previously was collateralized under the Existing Facility. Under both facilities, the lender advances the Company 90% of sold receivables and establishes a reserve of 10% of the sold receivables until the Company collects the sold receivables. Under the Existing Facility, the lender charges a fee of 1.6% of sold receivables, and under the New Facility the lender charges a fee of 1.5% of sold receivables. Both facilities have a fixed charge coverage ratio of 1.25x to be tested quarterly. Both the Existing Facility and the New Facility mature on December 17, 2022.
At December 31, 2021, the lender has a reserve against the sold receivables of $0.6 million, which is reflected as restricted cash. For the receivables sold under the agreement with recourse, the agreement addresses events and conditions which may obligate the Company to immediately repay the institution the outstanding purchase price of the receivables sold. The total amount of receivables uncollected by the institution was $4.3 million at December 31, 2021 for which there is a limit of $13.0 million. Although the sale of receivables is with recourse, the Company did not record a recourse obligation at December 31, 2021 as the Company concluded that the sold receivables are collectible.
For the three months ended December 31, 2021 and 2020, the Company received proceeds from the sold receivables under all of the various agreements of $7.8 million and $5.0 million, respectively, and included the proceeds in net cash used in operating activities in the consolidated statements of cash flows. The Company recorded costs of $0.1 million and $43 thousand for the three months ended December 31, 2021 and 2020, respectively, in other expense in the consolidated statements of operations.
Note 4 – Inventories
Inventories, which are all within the Telco segment, at December 31, 2021 and September 30, 2021 are as follows, in thousands:
| December 31, 2021 | September 30, 2021 | ||||||||||
| New equipment | $ | 1,396 | $ | 1,295 | |||||||
| Refurbished and used equipment | 7,824 | 8,103 | |||||||||
| Allowance for excess and obsolete inventory | (3,567) | (3,476) | |||||||||
| Total inventories, net | $ | 5,653 | $ | 5,922 | |||||||
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New equipment includes products purchased from manufacturers plus “surplus-new,” which are unused products purchased from other distributors or multiple system operators. Refurbished and used equipment include factory refurbished, Company refurbished and used products.
Note 5 – Intangible Assets
The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the asset’s carrying amount may not be recoverable. The Company groups assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities and evaluate the asset group against the sum of the undiscounted future cash flows. If the undiscounted future cash flows do not indicate the carrying amount of the asset is recoverable, an impairment charge is measured as the amount by which the carrying amount of the asset group exceeds its fair value based on discounted cash flow analysis or appraisals.
Intangible assets with their associated accumulated amortization and impairment at December 31, 2021 and September 30, 2021 are as follows, in thousands:
| December 31, 2021 | |||||||||||||||||
| Intangible assets: | Gross | Accumulated Amortization | Net | ||||||||||||||
Customer relationships – 10 years | $ | 3,155 | $ | (2,807) | $ | 348 | |||||||||||
Trade name – 10 years | 2,122 | (1,443) | 679 | ||||||||||||||
| Total intangible assets | $ | 5,277 | $ | (4,250) | $ | 1,027 | |||||||||||
| September 30, 2021 | |||||||||||||||||
| Intangible assets: | Gross | Accumulated Amortization | Net | ||||||||||||||
Customer relationships – 10 years | $ | 3,155 | $ | (2,780) | $ | 375 | |||||||||||
Trade name – 10 years | 2,122 | (1,390) | 732 | ||||||||||||||
| Total intangible assets | $ | 5,277 | $ | (4,170) | $ | 1,107 | |||||||||||
Note 6 – Debt
Credit Agreement
On December 28, 2021, the Company renewed its credit facility for its Nave and Triton subsidiaries with its primary financial lender by entering into a Business Loan Agreement and various ancillary debt and collateral agreements. The renewed Nave and Triton credit facility is for a maximum of $3.0 million and is secured by the Company’s Nave and Triton Subsidiaries’ accounts receivable and inventory. As renewed, the Nave and Triton credit facility has been reduced by $1.0 million and requires quarterly interest payments based on the Wall Street Journal Prime Rate floating rate (3.25% as of December 31, 2021) plus 0.75%, and a fixed charge coverage ratio of 1.25x to be tested quarterly. The Company is required to pay a non-use fee equal to 25 basis points if the line of credit is not utilized. The Company may repay outstanding loans at any time without premium or penalty. The Nave and Triton credit facility matures on December 17, 2022.
At December 31, 2021, there was $2.1 million outstanding under the line of credit. Future borrowings under the line of credit are limited to the lesser of $3.0 million or the sum of 80% of eligible accounts receivable and 50% of eligible Telco segment inventory. Under these limitations, the Company’s total line of credit borrowing capacity was $3.0 million at December 31, 2021.
As of December, 31, 2021, the Company was not in compliance with the fixed charge coverage ratio. The Company notified its primary financial lender of the covenant violation, and on February 14, 2022, the lender granted a waiver of the covenant violation under the credit facility. Although the covenant violation was waived at December 31, 2021, the Company believes it may again be out of compliance with this covenant at March 31, 2022. If the Company is not in compliance with the covenant at March 31, 2022, it would result in an event of default, which if not cured or waived, could result in the lender accelerating the maturity of the Company’s indebtedness or
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preventing access to additional funds or requiring prepayment of outstanding indebtedness under the line of credit agreement.
Note 7 – Equity Distribution Agreement and Sale of Common Stock
On April 24, 2020, the Company entered into an Equity Distribution Agreement with Northland Securities, Inc., as agent (“Northland”), pursuant to which the Company may offer and sell, from time to time, through Northland, shares of the Company’s common stock, par value 0.01 per share, having an aggregate offering price of up to 13.9 million ("Shares").
The offer and sale of the Shares will be made pursuant to a shelf registration statement on Form S-3 and the related prospectus filed by the Company with the Securities and Exchange Commission (the “SEC”) on March 3, 2020, as amended on March 23, 2020, and declared effective by the SEC on April 1, 2020.
Pursuant to the Sales Agreement, Northland may sell the Shares by any method permitted by law deemed to be an “at the market offering” as defined in Rule 415 of the Securities Act of 1933 (the “Securities Act”), including sales made by means of ordinary brokers’ transactions, including on The Nasdaq Global Market, at market prices or as otherwise agreed with Northland. Northland will use commercially reasonable efforts consistent with its normal trading and sales practices to sell the Shares from time to time, based upon instructions from the Company, including any price or size limits or other customary parameters or conditions the Company may impose. The Sales Agreement may be terminated without prior notice at any time prior to the fulfillment if additional sales are deemed not warranted.
The Company will pay Northland a commission rate equal to an aggregate of 3.0% of the aggregate gross proceeds from each sale of Shares and have agreed to provide Northland with customary indemnification and contribution rights. The Company will also reimburse Northland for certain specified expenses in connection with entering into the Sales Agreement. The Sales Agreement contains customary representations and warranties and conditions to the placements of the Shares pursuant thereto.
During the three months ended December 31, 2021, 320,787 Shares were sold by Northland on behalf of the Company with gross proceeds of $0.7 million, and net proceeds after commissions and fees of $0.6 million.
Note 8 – Earnings Per Share
Basic and diluted earnings per share for the three months ended December 31, 2021 and 2020, in thousands:
| Three Months Ended December 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Net loss attributable to common shareholders | $ | (2,029) | $ | (1,953) | |||||||
| Basic weighted average shares | 12,683 | 12,150 | |||||||||
| Effect of dilutive securities: | |||||||||||
| Stock options | — | — | |||||||||
| Diluted weighted average shares | 12,683 | 12,150 | |||||||||
| Loss per common share: | |||||||||||
| Basic | $ | (0.16) | $ | (0.16) | |||||||
| Diluted | $ | (0.16) | $ | (0.16) | |||||||
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The table below includes information related to stock options that were outstanding at the end of each respective three-month period ended December 31, but have been excluded from the computation of weighted-average stock options for dilutive securities because their effect would be anti-dilutive.
| Three Months Ended December 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| Stock options excluded | 50,000 | 100,000 | |||||||||
| Weighted average exercise price of stock options | $ | 1.28 | $ | 1.55 | |||||||
| Average market price of common stock | $ | 2.05 | $ | 2.54 | |||||||
Note 9 – Supplemental Cash Flow Information
| (in thousands) | Three Months Ended December 31, | ||||||||||
| 2021 | 2020 | ||||||||||
| Supplemental cash flow information: | |||||||||||
| Cash paid for interest | $ | 59 | $ | 43 | |||||||
| Supplemental noncash investing and financing activities: | |||||||||||
| Assets acquired under financing leases | $ | 272 | $ | 34 | |||||||
Note 10 – Stock-Based Compensation
Plan Information
The 2015 Incentive Stock Plan (the “Plan”) provides for awards of stock options and restricted stock to officers, directors, key employees and consultants. At December 31, 2021, 2,100,415 shares of common stock were reserved for stock award grants under the Plan. Of these reserved shares, 221,029 shares were available for future grants.
Stock Options
As of September 30, 2021, there were 50,000 stock options with a weighted average exercise price of $1.28 per share and an aggregate intrinsic value of $54 thousand outstanding under the Plan. There were no stock options granted, exercised, expired or forfeited during the quarter ended December 31, 2021. As of December 31, 2021, 50,000 stock options remained outstanding and exercisable, with an average exercise price of $1.28 per share and an aggregate intrinsic value of $22 thousand.
Restricted stock awards
A summary of the Company's non-vested restricted share awards at December 31, 2021 and changes during the quarter ended December 31, 2021 is presented in the following table (in thousands, except shares):
| Shares | Fair Value | ||||||||||
| Non-vested at September 30, 2021 | 739,913 | $ | 1,706 | ||||||||
| Granted | 130,111 | 333 | |||||||||
| Vested | (112,390) | (230) | |||||||||
| Forfeited | (20,000) | (41) | |||||||||
| Non-vested at December 31, 2021 | 737,634 | $ | 1,768 | ||||||||
Expenses related to stock-based compensation including restricted stock and stock option awards, were $0.3 million in each of the three month periods ended December 31, 2021 and 2020.
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The Company did not recognize a tax benefit for compensation expense recognized during the three months ended December 31, 2021 and 2020.
At December 31, 2021, unrecognized compensation expense related to non-vested stock-based compensation awards not yet recognized in the consolidated statements of operations was $0.9 million. That cost is expected to be recognized over a period of 2.8 years.
Note 11 – Leases
Our Wireless segment has an operating lease for a building in Fridley, Minnesota for Fulton Technologies, Inc. As a result of closing down and vacating Fulton Technologies, Inc.’s Minnesota office in May 2019, a third-party telecom company began subleasing this building in June 2019.
Our Telco segment has an operating lease for a building in Jessup, Maryland for Nave Communications. As a result of moving Nave’s operations to Palco Telecom, a third-party logistics provider in Huntsville, Alabama, in fiscal year 2021, Nave completely vacated the building in May 2020 and has subleased part of the building during certain periods of fiscal year 2022.
Rental payments received related to these subleases were recorded as a reduction of rent expense in our consolidated statements of operations for the periods ending December 31, 2021 and 2020.
Note 12 – Segment Reporting
The Company is reporting its financial performance based on its external reporting segments: Wireless Infrastructure Services and Telecommunications. These reportable segments are described below.
Wireless Infrastructure Services (“Wireless”) The Company's Wireless segment provides turn-key wireless infrastructure services for the four major U.S. wireless carriers, communication tower companies, national integrators, and original equipment manufacturers that support these wireless carriers. These services primarily consist of the installation and upgrade of technology on cell sites and the construction of new small cells for 5G.
Telecommunications (“Telco”) The Company’s Telco segment sells new and refurbished telecommunications networking equipment, including both central office and customer premise equipment, to its customer base of telecommunications providers, enterprise customers and resellers located primarily in North America. This segment also offers its customers repair and testing services for telecommunications networking equipment. In addition, this segment offers its customers decommissioning services for surplus and obsolete equipment, which it in turn processes through its recycling program.
The Company evaluates performance and allocates its resources based on operating income. The accounting policies of its reportable segments are the same as those described in the summary of significant accounting policies. Segment assets consist primarily of cash and cash equivalents, accounts receivable, inventory, property and equipment, goodwill and intangible assets. The Company allocates its corporate general and administrative expenses to the reportable segments.
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| (in thousands) | Three Months Ended | ||||||||||
| December 31, 2021 | December 31, 2020 | ||||||||||
| Sales | |||||||||||
| Wireless | $ | 7,119 | $ | 5,247 | |||||||
| Telco | 11,571 | 7,502 | |||||||||
| Total sales | $ | 18,690 | $ | 12,749 | |||||||
| Gross profit | |||||||||||
| Wireless | $ | 1,507 | $ | 1,609 | |||||||
| Telco | 3,124 | 2,020 | |||||||||
| Total gross profit | $ | 4,631 | $ | 3,629 | |||||||
| Income (loss) from operations | |||||||||||
| Wireless | $ | (2,326) | $ | (1,105) | |||||||
| Telco | 424 | (809) | |||||||||
| Total loss from operations | $ | (1,902) | $ | (1,914) | |||||||
| (in thousands) | December 31, 2021 | September 30, 2021 | |||||||||
| Segment assets | |||||||||||
| Wireless | $ | 7,640 | $ | 7,867 | |||||||
| Telco | 14,545 | 14,472 | |||||||||
| Non-allocated | 3,241 | 4,973 | |||||||||
| Total assets | $ | 25,426 | $ | 27,312 | |||||||
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Special Note on Forward-Looking Statements
Certain statements in Management's Discussion and Analysis (“MD&A”), other than purely historical information, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements generally are identified by the words “estimates,” “projects,” "anticipates," “believes,” “plans,” “intends,” “will likely result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. These statements are subject to a number of risks, uncertainties and developments beyond our control or foresight, including changes in the trends of the wireless infrastructure services industry, changes in the trends of the telecommunications industry, changes in our supplier agreements, technological developments, changes in the general economic environment, the potential impact of the novel strain of coronavirus (“COVID-19”) pandemic, the growth or formation of competitors, changes in governmental regulation or taxation, changes in our personnel and other such factors. Our actual results, performance or achievements may differ significantly from the results, performance or achievements expressed or implied in the forward-looking statements. We do not undertake any obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events.
Overview
The following MD&A is intended to help the reader understand the results of operations, financial condition, and cash flows of the Company. MD&A is provided as a supplement to, and should be read in conjunction with the information presented elsewhere in this quarterly report on Form 10-Q and with the information presented in our annual report on Form 10-K for the year ended September 30, 2021, which includes our audited consolidated financial statements and the accompanying notes to the consolidated financial statements.
The Company reports its financial performance based on two external reporting segments: Wireless and Telecommunications. These reportable segments are described below.
Wireless Infrastructure Services (“Wireless”)
The Company’s Wireless segment provides turn-key wireless infrastructure services for the four major U.S. wireless carriers, communication tower companies, national integrators, and original equipment manufacturers that support these wireless carriers. These services primarily consist of the installation and upgrade of technology on cell sites and the construction of new small cells for 5G.
Telecommunications (“Telco”)
The Company’s Telco segment sells new and refurbished telecommunications networking equipment, including both central office and customer premise equipment, to its customer base of telecommunications providers, enterprise customers and resellers located primarily in North America. This segment also offers its customers repair and testing services for telecommunications networking equipment. In addition, this segment offers its customers decommissioning services for surplus and obsolete equipment.
Recent Business Developments
COVID-19
On March 11, 2020, the World Health Organization declared the current outbreak of COVID-19 to be a global pandemic, and on March 13, 2020, the United States declared a national emergency. In response to these declarations and the rapid spread of COVID-19, federal, state and local governments have imposed varying degrees of restrictions on business and social activities to contain COVID-19, including quarantine and “stay-at-home” or “shelter-in-place” orders in markets where we operate. Despite these “stay-at-home” or “shelter-in-place” orders, we are classified as an essential business due to the services and products we provide to the
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telecommunications industry. Therefore, we continue to operate in the markets we serve while these orders were in place. Most of our back-office and administrative personnel worked from home while these orders were in place, these personnel began working in the office as restrictions were relaxed or lifted. We have not experienced a material disruption in our supply chain to date.
With the partial reopening of the economy the economic effects of the pandemic and resulting societal changes remain unpredictable. Although we experienced increased revenues in recent quarters compared to prior year quarters since the pandemic began in 2020, there are a number of uncertainties that could impact our future results of operations, including the efficacy and widespread distribution of a vaccine, the return of major outdoor events during the summer and fall months, and the impact of COVID-19 on the operating results and capital budgets of our customers.
Results of Operations
Comparison of Results of Operations for the Three Months Ended December 31, 2021 and December 31, 2020
Consolidated
Consolidated sales increased $6.0 million, or 47%, to $18.7 million for the three months ended December 31, 2021 from $12.7 million for the three months ended December 31, 2020. The increase was primarily due to a $1.9 million increase in Wireless revenue related to 5G tower work, and an increase of $4.1 million in Telco revenue due to increased demand for refurbished telecommunications equipment sold by the Telco segment.
Consolidated gross profit was $4.6 million, or 25% gross margin, compared to gross profit of $3.6 million, or 28% gross margin, for the same period last year. The net changes in gross profit were due to higher overall sales in both the Wireless and Telco segments, and the decrease in gross margin as a percent of sales was due to investments made with a new wireless customer and the impact of the Company onboarding new crews in anticipation of near-term wireless revenue increases.
Consolidated operating expenses include indirect costs associated with operating our business. Indirect costs include indirect personnel costs, facility costs, vehicles, insurance, communication, and business taxes, among other cost categories. Operating expenses increased $0.5 million to $2.5 million for the three months ended December 31, 2021 compared to $2.0 million the same period last year. The increase reflects the Company's investment in its regional growth strategy related to expected 5G infrastructure growth.
Consolidated selling, general and administrative ("SG&A") expenses include overhead costs, which consist of personnel costs, insurance, professional services, and communication, among other less significant cost categories. SG&A expense increased $0.5 million, or 15%, to $3.7 million for the three months ended December 31, 2021 from $3.2 million for the same period last year. The increase in SG&A relates primarily to increased selling and commissions expenses to support higher revenues.
Segment Results
Wireless
Revenues for the Wireless segment increased $1.9 million to $7.1 million for the three months ended December 31, 2021 from $5.2 million for the same period of last year. The growth in revenues over the prior year relates to the pace of the 5G services activity now underway and we project further growth in the second half of the fiscal year.
Gross profit was $1.5 million, or 21% for the three months ended December 31, 2021 and $1.6 million, or 31%, for the three months ended December 31, 2020. The decrease in the gross profit percentage was the result of new business with a major customer at a lower margin level, along with continuing investment in our regional growth strategy associated with anticipated 5G infrastructure build outs, which includes the expansion and training of new wireless service crews.
Loss from operations was $2.3 million and $1.1 million for three months ended December 31, 2021 and 2020, respectively. The increase is mainly attributable to investment in our regional growth strategy associated with anticipated 5G infrastructure build outs.
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Telco
Revenues for the Telco segment increased $4.1 million to $11.6 million for the three months ended December 31, 2021 from $7.5 million for the same period last year. The increase in revenues was related to increased sales of used and refurbished equipment as a result of continued global supply chain constraints.
Gross profit was $3.1 million for the three months ended December 31, 2021 and $2.0 million for the three months ended December 31, 2020. The increased gross profit was due primarily to increased revenues of $4.1 million.
Income from operations was $0.4 million for the three months ended December 31, 2021 compared to a loss of $0.8 million for the same period last year, primarily due to the reasons discussed above.
Non-GAAP Financial Measure
Adjusted EBITDA is a supplemental, non-GAAP financial measure. EBITDA is defined as earnings before interest expense, income taxes, depreciation and amortization. Adjusted EBITDA as presented also excludes stock compensation expense, other income, other expense, and interest income. Adjusted EBITDA is presented below because this metric is used by the financial community as a method of measuring our financial performance and of evaluating the market value of companies considered to be in similar businesses. Since Adjusted EBITDA is not a measure of performance calculated in accordance with GAAP, it should not be considered in isolation of, or as a substitute for, net earnings as an indicator of operating performance. Adjusted EBITDA, as calculated below, may not be comparable to similarly titled measures employed by other companies. In addition, Adjusted EBITDA is not necessarily a measure of our ability to fund our cash needs.
The following table provides a reconciliation by segment of income (loss) from operations to Adjusted EBITDA, in thousands:
| Three Months Ended December 31, 2021 | Three Months Ended December 31, 2020 | ||||||||||||||||||||||||||||||||||
| Wireless | Telco | Total | Wireless | Telco | Total | ||||||||||||||||||||||||||||||
| Income (loss) from operations | $ | (2,326) | $ | 424 | $ | (1,902) | $ | (1,105) | $ | (809) | $ | (1,914) | |||||||||||||||||||||||
| Depreciation and amortization expense | 220 | 125 | 345 | 152 | 129 | 281 | |||||||||||||||||||||||||||||
| Stock compensation expense | 144 | 137 | 281 | 140 | 175 | 315 | |||||||||||||||||||||||||||||
| Adjusted EBITDA | $ | (1,962) | $ | 686 | $ | (1,276) | $ | (813) | $ | (505) | $ | (1,318) | |||||||||||||||||||||||
Critical Accounting Policies
Our unaudited consolidated financial statements are impacted by the accounting policies used and the estimates and assumptions made by management during their preparation. A complete summary of our significant accounting policies is included in Note 1- Basis of Presentation and Accounting Policies in our Form 10-K.
General
The preparation of financial statements in conformity with United States generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We base our estimates and judgments on historical experience, current market conditions, and various other factors we believe to be reasonable, which form the basis for making judgments about the carrying values of certain assets. Actual results could differ from these estimates under different assumptions or conditions. The most significant estimates and assumptions are discussed below.
Inventory Valuation
For our Telco segment, our position in the telecommunications industry requires us to carry large inventory quantities relative to annual sales, but it also allows us to realize higher gross profit margins on our sales. We market our products primarily to telecommunication providers, resellers, and other users of telecommunication equipment who are seeking products for which manufacturers have discontinued production or cannot ship new
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equipment on a same-day basis, as well as providing used products as an alternative to new products from the manufacturer. Carrying these large inventory quantities represents our largest risk for our Telco segment.
Our inventories are all carried in the Telco segment and consist of new and used electronic components for the telecommunications industry. Inventory is stated at the lower of cost or net realizable value, with cost determined using the weighted-average method. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. At December 31, 2021, we had total inventory, before the reserve for excess and obsolete inventories, of $9.2 million, consisting of $1.4 million in new products and $7.8 million in used or refurbished products.
We regularly review the value of our inventory in detail with consideration given to rapidly changing technology which can significantly affect future customer demand. For individual inventory items, we may carry inventory quantities that are excessive relative to market potential, or we may not be able to recover our acquisition costs. In order to address the risks associated with our investment in inventory, we review inventory quantities on hand and reduce the carrying value for obsolete and excess inventories, when our analysis indicates that cost will not be recovered when an item is sold.
We identified certain inventory that more than likely will not be sold or that the cost will not be recovered. Therefore, we have an obsolete and excess inventory reserve of $3.6 million at December 31, 2021. If actual market conditions differ from those projected by management, this could have a material impact on our gross margin and inventory balances based on additional write-downs to net realizable value or a benefit from inventories previously written down.
Inbound freight charges are included in cost of sales. Purchasing and receiving costs, inspection costs, warehousing costs, internal transfer costs and other inventory expenditures are included in operating expenses.
Intangibles
Intangible assets that have finite useful lives are amortized on a straight-line basis over their estimated useful lives ranging from 3 years to 10 years. Intangible assets are also tested for impairment when events and circumstances indicate that the carrying value may not be recoverable. As of December 31, 2021, there were no indicators of impairment present.
Liquidity and Capital Resources
Cash Flows Used in Operating Activities
During the three months ended December 31, 2021, cash used in operations was $0.9 million. Cash flows from operations were negatively impacted by a net loss of $2.0 million, partially offset by net cash provided by working capital of $0.5 million and non-cash adjustments of $0.7 million.
Cash Flows Used in Investing Activities
During the three months ended December 31, 2021, cash used in investing activities was $0.1 million, consisting of purchases of property and equipment.
Cash Flows Provided by Financing Activities
During the three months ended December 31, 2021, cash provided by financing activities was $0.5 million, primarily consisting of net proceeds from the sale of our common stock utilizing our shelf registration of $0.6 million, partially offset by payments on financing lease obligations of $0.1 million.
Liquidity and Capital Resources
At December 31, 2021 we had cash and equivalents and restricted cash on hand of $2.4 million and availability under our bank line of credit of $1.0 million, for a total liquidity of $3.4 million.
On December 28, 2021, the Company signed amendments to its credit facilities with its primary financial lender for its Telco and Wireless business segments. In anticipation of significant growth in the Wireless segment to meet
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growing demand related to the 5G expansion, the Company signed an accounts receivable factoring line with its primary financial lender, increasing available borrowing capacity from $4.0 million to $13.0 million subject to available collateral. In addition, the company renewed its line of credit, collateralized by receivables and inventory, for its Telco segment, with a total maximum available borrowing capacity of $3.0 million. The result of the new agreements raises the Company’s total borrowing capacity, subject to available collateral, from $8.0 million to $16.0 million.
We were not in compliance with a covenant on our credit facilities at December 31, 2021. We notified our primary financial lender of the covenant violation, and on February 14, 2022 the primary lender granted a waiver of the covenant violation.
We entered into an Equity Distribution Agreement (the “Sales Agreement”) with Northland Securities, Inc., as agent (“Northland”), pursuant to which we may offer and sell, from time to time, through Northland, shares of our common stock, par value $0.01 per share, having an aggregate offering price of up to $13.9 million ("Shares"). The offer and sale of the Shares will be made pursuant to a shelf registration statement on Form S-3 and the related prospectus filed by us with the Securities and Exchange Commission (the "SEC") on March 3, 2020, as amended on March 23, 2020, and declared effective by the SEC on April 1, 2020. We currently have approximately $10.1 million available to us to fund our working capital needs under the Sales Agreement. Based on our availability under our bank line of credit and our Sales Agreement, we believe we have sufficient liquidity and capital resources to cover our operating losses and our additional working capital and debt payment needs.
We continue to evaluate opportunities to expand our business through selective acquisitions and internal growth initiatives. Our capital investment decisions are determined by an analysis of the projected return on capital employed of each of those alternatives, which is substantially driven by the cost to acquire existing assets from a third party, the capital required to invest in new equipment and the point in the 5G densification cycle. Based on these factors, we make capital investment decisions that we believe will support our long-term growth strategy. Depending on the timing and scope of these opportunities, we may need to seek additional funding to finance the necessary working capital for such opportunities.
Item 4. Controls and Procedures.
We maintain disclosure controls and procedures that are designed to ensure the information we are required to disclose in the reports we file or submit under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Based on their evaluation as of December 31, 2021, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective to accomplish their objectives and to ensure the information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
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PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Securities and Use of Proceeds.
During the quarter ended December 31, 2021, the Company sold 320,787 shares of common stock under its registration statement on Form S-3 effective as of April 1, 2020 (333-236859). Gross proceeds from such sales during the quarter were $0.7 million and net proceeds were $0.6 million after the payment of $20 thousand in commissions to Northland Securities, Inc., the underwriter of the offering. Total gross proceeds to the Company from sales under such registration statement since its effective date are $3.8 million and total net proceeds to the Company are $3.7 million after the payment of $0.1 million in commissions to Northland. All sales have been made pursuant to the Prospectus Supplement filed with the Commission on April 24, 2020, under which the Company may sell up to $13.9 million in common stock. All net proceeds to the Company from such sales have been used in accordance with the “Use of Proceeds” section of such Prospectus Supplement.
Item 6. Exhibits.
| Exhibit No. | Description | ||||
| 31.1 | |||||
| 31.2 | |||||
| 32.1 | |||||
| 32.2 | |||||
| 101.INS | XBRL Instance Document. | ||||
| 101.SCH | XBRL Taxonomy Extension Schema. | ||||
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase. | ||||
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase. | ||||
| 101.LAB | XBRL Taxonomy Extension Label Linkbase. | ||||
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase. | ||||
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
ADDVANTAGE TECHNOLOGIES GROUP, INC. (Registrant) | |||||
| Date: February 14, 2022 | |||||
| /s/ Joseph E. Hart | |||||
| Joseph E. Hart | |||||
| President and Chief Executive Officer | |||||
| (Principal Executive Officer) | |||||
| Date: February 14, 2022 | |||||
| /s/ Michael A. Rutledge | |||||
| Michael A. Rutledge | |||||
| Chief Financial Officer | |||||
| (Principal Financial Officer) | |||||
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