ADDVANTAGE TECHNOLOGIES GROUP INC - Quarter Report: 2023 June (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 | ||||
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 ☒ | ||||
Shares outstanding of the issuer's $.01 par value common stock as of August 9, 2023 were 14,982,524.
1
ADDVANTAGE TECHNOLOGIES GROUP, INC.
Form 10-Q
For Period Ended June 30, 2023
| Page | ||||||||
June 30, 2023 and December 31, 2022 | ||||||||
Three and Six Months Ended June 30, 2023 and 2022 | ||||||||
Three and Six Months Ended June 30, 2023 and 2022 | ||||||||
Six Months Ended June 30, 2023 and 2022 | ||||||||
| Item 3. | Quantitative and Qualitative Disclosures about Market Risk. | |||||||
| Item 1. | Legal Proceedings. | |||||||
| Item 1A. | Risk Factors. | |||||||
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. | |||||||
| Item 3 | Defaults Upon Sales of Securities and Use of Proceeds. | |||||||
| Item 4. | Mine Safety Disclosures. | |||||||
| Item 5. | Other Information. | |||||||
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
ADDvantage Technologies Group, Inc.
Consolidated Balance Sheets
(in thousands, except share amounts)
(Unaudited)
| June 30, 2023 | December 31, 2022 | ||||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 2,832 | $ | 2,552 | |||||||
| Restricted cash | 739 | 1,101 | |||||||||
Accounts receivable, net of allowances of $304 and $262, respectively | 1,385 | 1,682 | |||||||||
| Unbilled revenue | 1,831 | 5,005 | |||||||||
| Income tax receivable | 102 | 102 | |||||||||
Inventories, net of allowances of $4,097 and $3,871, respectively | 8,076 | 9,563 | |||||||||
| Prepaid expenses and other current assets | 1,203 | 1,399 | |||||||||
| Total current assets | 16,168 | 21,404 | |||||||||
| Property and equipment, at cost: | |||||||||||
| Machinery and equipment | 5,565 | 5,542 | |||||||||
| Leasehold improvements | 899 | 899 | |||||||||
| Total property and equipment, at cost | 6,464 | 6,441 | |||||||||
| Less: Accumulated depreciation | (3,533) | (3,057) | |||||||||
| Net property and equipment | 2,931 | 3,384 | |||||||||
| Right-of-use lease assets | 1,060 | 1,540 | |||||||||
| Intangibles, net of accumulated amortization | 549 | 709 | |||||||||
| Goodwill | 58 | 58 | |||||||||
| Other assets | 207 | 123 | |||||||||
| Total assets | $ | 20,973 | $ | 27,218 | |||||||
| Liabilities and Shareholders’ Equity | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | 6,151 | $ | 9,407 | |||||||
| Accrued expenses | 1,428 | 1,445 | |||||||||
| Deferred revenue | 349 | 148 | |||||||||
| Notes payable | 2,210 | — | |||||||||
| Right-of-use lease obligations, current | 933 | 1,204 | |||||||||
| Finance lease obligations, current | 640 | 636 | |||||||||
| Other current liabilities | 589 | 442 | |||||||||
| Total current liabilities | 12,300 | 13,282 | |||||||||
| Right-of-use lease obligations, long-term | 288 | 635 | |||||||||
| Finance lease obligations, long-term | 937 | 1,254 | |||||||||
| Total liabilities | 13,525 | 15,171 | |||||||||
| Shareholders’ equity: | |||||||||||
Common stock, $0.01 par value; 30,000,000 shares authorized; 14,942,524 and 14,132,033 shares issued and outstanding, respectively | 149 | 141 | |||||||||
| Paid in capital | 3,559 | 2,585 | |||||||||
| Retained earnings | 3,740 | 9,321 | |||||||||
| Total shareholders’ equity | 7,448 | 12,047 | |||||||||
| Total liabilities and shareholders’ equity | $ | 20,973 | $ | 27,218 | |||||||
See notes to unaudited consolidated financial statements.
3
ADDvantage Technologies Group, Inc.
Consolidated Statements of Operations
(in thousands, except share and per share amounts)
(Unaudited)
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| $ | 12,088 | $ | 27,789 | $ | 26,807 | $ | 51,548 | ||||||||||||||||
| Cost of sales | 8,816 | 19,642 | 20,118 | 37,643 | |||||||||||||||||||
| Gross profit | 3,272 | 8,147 | 6,689 | 13,905 | |||||||||||||||||||
| Operating expenses | 1,967 | 2,544 | 4,014 | 5,296 | |||||||||||||||||||
| Selling, general and administrative expenses | 3,288 | 4,145 | 6,894 | 7,996 | |||||||||||||||||||
| Depreciation and amortization expense | 317 | 313 | 634 | 630 | |||||||||||||||||||
| Loss on disposal of assets | — | — | — | 2 | |||||||||||||||||||
| Income (loss) from operations | (2,300) | 1,145 | (4,853) | (19) | |||||||||||||||||||
| Other income (expense): | |||||||||||||||||||||||
| Other income (expense) | (184) | (233) | (333) | (401) | |||||||||||||||||||
| Interest expense | (334) | (37) | (379) | (99) | |||||||||||||||||||
| Other income (expense), net | (518) | (270) | (712) | (500) | |||||||||||||||||||
| Income (loss) before income taxes | (2,818) | 875 | (5,565) | (519) | |||||||||||||||||||
| Income tax provision | 16 | — | 16 | — | |||||||||||||||||||
| Net income (loss) | $ | (2,834) | $ | 875 | $ | (5,581) | $ | (519) | |||||||||||||||
| Income (loss) per share: | |||||||||||||||||||||||
| Basic and diluted | $ | (0.20) | $ | 0.07 | $ | (0.41) | $ | (0.04) | |||||||||||||||
| Shares used in per share calculation: | |||||||||||||||||||||||
| Basic and diluted | 13,999,816 | 13,191,792 | 13,638,538 | 13,131,754 | |||||||||||||||||||
See notes to unaudited consolidated financial statements.
4
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, December 31, 2022 | 14,132,033 | $ | 141 | $ | 2,585 | $ | 9,321 | $ | 12,047 | ||||||||||||||||||||
| Net loss | — | — | — | (2,748) | (2,748) | ||||||||||||||||||||||||
| Restricted stock issuance | 656,824 | 7 | (7) | — | — | ||||||||||||||||||||||||
| Amortization of stock-based compensation | — | — | 399 | — | 399 | ||||||||||||||||||||||||
| Balance, March 31, 2023 | 14,788,857 | $ | 148 | $ | 2,977 | $ | 6,573 | $ | 9,698 | ||||||||||||||||||||
| Net loss | — | — | — | (2,834) | (2,834) | ||||||||||||||||||||||||
| Common stock and warrants issuance | 72,000 | 1 | 384 | — | 385 | ||||||||||||||||||||||||
| Restricted stock issuance | 81,667 | 1 | (1) | — | — | ||||||||||||||||||||||||
| Amortization of stock-based compensation | — | — | 199 | — | 199 | ||||||||||||||||||||||||
| Balance, June 30, 2023 | 14,942,524 | $ | 149 | $ | 3,559 | $ | 3,740 | $ | 7,448 | ||||||||||||||||||||
| Common Stock | Paid-in Capital | Retained Earnings | |||||||||||||||||||||||||||
| Shares | Amount | Total | |||||||||||||||||||||||||||
| Balance, December 31, 2021 | 13,041,127 | $ | 130 | $ | 335 | $ | 8,850 | $ | 9,315 | ||||||||||||||||||||
| Net loss | — | — | — | (1,394) | (1,394) | ||||||||||||||||||||||||
| Common stock issuance | 143,985 | 2 | 166 | — | 168 | ||||||||||||||||||||||||
| Restricted stock issuance | 4,000 | — | — | — | — | ||||||||||||||||||||||||
| Amortization of stock-based compensation | — | — | 247 | — | 247 | ||||||||||||||||||||||||
| Balance, March 31, 2022 | 13,189,112 | $ | 132 | $ | 748 | $ | 7,456 | $ | 8,336 | ||||||||||||||||||||
| Net income | — | — | — | 875 | 875 | ||||||||||||||||||||||||
| Common stock issuance | 30,745 | — | 38 | — | 38 | ||||||||||||||||||||||||
| Restricted stock forfeitures | (51,666) | (1) | 1 | — | — | ||||||||||||||||||||||||
| Amortization of stock-based compensation | — | — | 103 | — | 103 | ||||||||||||||||||||||||
| Balance, June 30, 2022 | 13,168,191 | $ | 132 | $ | 890 | $ | 8,331 | $ | 9,353 | ||||||||||||||||||||
Due to rounding, numbers presented may not foot to the totals provided.
See notes to unaudited consolidated financial statements.
5
ADDvantage Technologies Group, Inc
Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
| Six Months Ended June 30, | |||||||||||
| 2023 | 2022 | ||||||||||
| Operating Activities: | |||||||||||
| Net loss | $ | (5,581) | $ | (519) | |||||||
| Adjustments to reconcile net loss to net cash (used in) provided by operating activities: | |||||||||||
| Depreciation | 475 | 471 | |||||||||
| Amortization | 360 | 159 | |||||||||
| Non cash amortization of right-of-use asset and liability | (138) | (131) | |||||||||
| Provision for excess and obsolete inventories | 226 | 147 | |||||||||
| Charge for lower of cost or net realizable value inventories | 51 | — | |||||||||
| Share based compensation expense | 598 | 350 | |||||||||
| Gain on disposal of property and equipment | — | 2 | |||||||||
| Changes in assets and liabilities: | |||||||||||
| Accounts receivable | 297 | 4,085 | |||||||||
| Unbilled revenue | 3,174 | (567) | |||||||||
| Inventories | 1,210 | (2,104) | |||||||||
| Prepaid expenses and other current assets | 112 | (201) | |||||||||
| Accounts payable | (3,256) | 3,747 | |||||||||
| Accrued expenses and other liabilities | 133 | 542 | |||||||||
| Deferred revenue | 201 | (120) | |||||||||
| Net cash (used in) provided by operating activities | (2,138) | 5,861 | |||||||||
| Investing Activities: | |||||||||||
| Purchases of property and equipment | (23) | (129) | |||||||||
| Disposals of property and equipment | — | 42 | |||||||||
| Net cash used in investing activities | (23) | (87) | |||||||||
| Financing Activities: | |||||||||||
| Change in bank line of credit | — | (2,050) | |||||||||
| Proceeds from notes payable | 2,850 | — | |||||||||
| Payment for debt issuance costs | (270) | — | |||||||||
| Payments on notes payable | (187) | — | |||||||||
| Payments on financing lease obligations | (314) | (409) | |||||||||
| Proceeds from sale of common stock | — | 206 | |||||||||
| Net cash provided by (used in) financing activities | 2,079 | (2,253) | |||||||||
| Net (decrease) increase in cash, cash equivalents and restricted cash | (82) | 3,521 | |||||||||
| Cash, cash equivalents and restricted cash at beginning of period | 3,653 | 2,418 | |||||||||
| Cash, cash equivalents and restricted cash at end of period | $ | 3,571 | $ | 5,939 | |||||||
See notes to unaudited consolidated financial statements.
6
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 six months ended June 30, 2023 and 2022, 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 December 31, 2022.
Change in year end
In September 2022, the Company's Board of Directors approved a change in the Company's fiscal year end from September 30 to December 31. The Company's current fiscal year runs from January 1 through December 31. As a result of the change in year end, the Company filed a Transition Report on Form 10-Q for the period from October 1, 2021 through December 31, 2021.
Recently Adopted Accounting Standards
Financial Instruments – Credit Losses. The Financial Accounting Standards Board ("FASB") issued five Accounting Standards Updates (ASUs) related to financial instruments – credit losses. The ASUs issued were: (1) in June 2016, ASU 2016-13, “Financial Instruments – Credit Losses (“ASC 326”): Measurement of Credit Losses on Financial Instruments,” (2) in November 2018, ASU 2018-19, “Codification Improvements to Topic 326, Financial Instruments—Credit Losses,” (3) in April 2019, ASU 2019-04, “Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments,” (4) in May 2019, ASU 2019-05, “Financial Instruments – Credit Losses (Topic 326): Targeted Transition Relief” and (5) in November 2019, ASU 2019-11, “Codification Improvements to Topic 326, Financial Instruments—Credit Losses.” Additionally, in February and March 2020, the FASB issued ASU 2020-02, “Financial Instruments—Credit Losses (Topic 326) and Leases (ASC 842): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016-02, Leases (ASC 842)” and ASU 2020-03, “Codification Improvements to Financial Instruments,” respectively, which include amendments to ASC 326.
ASU 2016-13 is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. ASU 2018-19 clarifies that receivables arising from operating leases are not within the scope of the credit losses standard, but rather, should be accounted for in accordance with the leasing standard. ASU 2019-04 clarifies and improves areas of guidance related to the recently issued standards on financial instruments – credit losses, derivatives and hedging, and financial instruments. ASU 2019-05 provides entities that have certain instruments within the scope of ASC Subtopic 326-20, Financial Instruments—Credit Losses—Measured at Amortized Cost, with an option to irrevocably elect the fair value option in Subtopic 825-10, Financial Instruments—Overall. ASU 2019-11 clarifies guidance around how to report expected recoveries and reinforces existing guidance that prohibits organizations from recording negative allowances for available-for-sale debt securities, among other narrow scope and technical improvements. ASU 2020-02 adds a Securities and Exchange Commission (SEC) paragraph pursuant to the
7
issuance of SEC Staff Accounting Bulletin No. 119 on loan losses to FASB Codification ASC 326 and also updates the SEC section of the Codification for the change in the effective date of ASC 842. ASU 2020-03 makes narrow-scope improvements to various aspects of the financial instrument guidance as part of the FASB’s ongoing Codification improvement project aimed at clarifying specific areas of accounting guidance to help avoid unintended application.
The Company adopted the applicable guidance in ASU 2016-13, ASU 2018-19, ASU 2019-04, ASU 2019-05, ASU 2019-11, ASU 2020-02 and ASU 2020-03 on January 1, 2023, and the adoption did not have a material impact on its consolidated financial statements and related disclosures.
Note 2 - Going Concern Assessment
The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities and commitments in the normal course of business. Should the Company be unable to continue as a going concern, it may be unable to realize the carrying value of its assets and to meet its liabilities as they become due.
The Company has been subject to adverse conditions that raise substantial doubt about the Company's ability to continue as a going concern for one year following the issuance of these unaudited interim consolidated financial statements, including negative financial trends, specifically operating losses, working capital deficiency, and other adverse key financial ratios. Additionally, the impacts of unfavorable wireless industry conditions and significant debt service requirements on the Company’s financial position, results of operations, and cash flows give rise to substantial doubt about the Company’s ability to pay its obligations as they come due. In consideration of the substantial amount of short-term debt outstanding, detailed below, and the aforementioned unfavorable wireless industry conditions, the Company will be engaging advisors to assist with the evaluation, negotiation, and consummation of strategic alternatives, which may include, but are not limited to, seeking a restructuring, amendment or refinancing of existing debt through a private restructuring, the issuance of equity securities, a sale of a portion or all of the Company or its assets, or reorganization under Chapter 11 of the Bankruptcy Code. However, there can be no assurances that the Company will be able to successfully restructure its indebtedness, raise additional capital, improve its financial position or complete any strategic transactions. As a result of these uncertainties and the likelihood of a restructuring or reorganization, management has concluded that there is substantial doubt regarding the Company’s ability to continue as a going concern within one year that these financial statements are made available.
Management’s plans to alleviate the substantial doubt about the Company’s ability to continue as a going concern include attempting to grow its revenues and improve its business profitability and its ability to generate sufficient cash flow from its operations to meet its operating needs on a timely basis, obtaining additional working capital funds through various sources, and eliminating inefficiencies in order to meet its anticipated cash requirements. However, there can be no assurance that these plans and arrangements will be sufficient to fund the Company’s ongoing capital expenditures and other requirements.
The unaudited interim consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classification of liabilities that might be necessary in the event that the Company cannot continue as a going concern.
Management Plans
In assessing the Company’s liquidity, management reviews its cash and its operating and capital expenditure commitments. The Company’s liquidity needs are to meet its working capital requirements, operating expenses, capital expenditure and debt service obligations. As of June 30, 2023, the Company’s current liabilities exceeded the current assets by approximately $4.2 million, exclusive of inventories.
Management is evaluating all options to refinance its existing short-term debt obligations as well as exploring alternative financing, refinancing, restructuring and capital-raising activities, in order to address its ongoing liquidity needs and to maintain sufficient access to the loan and capital markets on commercially acceptable terms to finance its business. In support of these efforts, management is pursuing various initiatives including, but not limited to, the following:
8
•Cash management: An attentive and strategic focus on cash flow has been implemented. A weekly cash flow forecast is produced that analyzes cash flow activities as well as anticipated cash flow. Also, the Company is focused on optimizing working capital management;
•Operating results: Management is committed to focusing on operating results, which is expected to improve operating cash flows and bring the Company’s financial performance back in line with historical operating results. The Company expects to see continued improvement in cash flow throughout 2024 as the increase in orders from new customers improve earnings. As construction in the fiber broadband space increases, along with concerted attempts to enter into a long term agreement with a significant customer in the Wireless segment, sales growth is expected to increase and margins to expand as a result of operating leverage;
•Capital spending: Management expects to minimize capital expenditures in 2024;
•Strategic options: An investment banker is being engaged to investigate all strategic options, including the disposal of assets; and
•Debt refinancing: Continued undertakings to partially or completely refinance the debt.
Note 3 – Revenue Recognition
The Company’s principal sales are from Wireless services and sales of Telco equipment, primarily in the United States. Sales to international customers totaled approximately $1.2 million and $2.0 million for the three months ended June 30, 2023 and 2022, respectively, and $2.8 million and $3.6 million for the six months ended June 30, 2023 and 2022, respectively.
The Company’s customers include wireless carriers, wireless equipment providers, multiple system operators, resellers and direct sales to end-user customers. Sales, which individually amounted to 10% or greater of the Company's revenue, to two customers totaled 31%, and to two customers totaled 33% of consolidated revenues for the six months ended June 30, 2023 and 2022, respectively.
Our sales by type were as follows, in thousands:
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Wireless services sales | $ | 6,329 | $ | 7,243 | $ | 12,901 | $ | 15,009 | |||||||||||||||
| Equipment sales: | |||||||||||||||||||||||
| Telco equipment | 5,750 | 20,346 | 13,897 | 36,333 | |||||||||||||||||||
| Telco repair | 9 | 8 | 9 | 14 | |||||||||||||||||||
| Telco recycle | — | 192 | — | 192 | |||||||||||||||||||
| Total sales | $ | 12,088 | $ | 27,789 | $ | 26,807 | $ | 51,548 | |||||||||||||||
Contract assets and contract liabilities are included in unbilled revenue and deferred revenue, respectively, in the consolidated balance sheets. At June 30, 2023 and December 31, 2022, contract assets were $1.8 million and $5.0 million, respectively, and contract liabilities were $0.3 million and $0.1 million, respectively. The Company recognized $0.1 million of contract revenue during the six months ended June 30, 2023 related to contract liabilities recorded in deferred revenue at December 31, 2022.
Note 4 – Accounts Receivable Agreements
The Company maintains accounts receivable purchase facilities for its Nave and Triton subsidiaries with its primary financial lender with capacities of $10.0 million for Nave and $3.0 million for Triton. The lender charges a fee of 1.75% of sold receivables. The Company also maintains accounts receivable purchase facilities for its Fulton subsidiary, providing a credit capacity excluding a major customer of $3.0 million, with a fee of 2.0% of sold receivables, and credit capacity secured by receivables of a major customer of $3.0 million, with a fee of 1.6% of sold receivables.
All four facilities are secured by the subsidiary's receivables, and the lender advances 90% of sold receivables and establishes a reserve of 10% of the sold receivables at initial sale, which increases to 100% over time after 120 days, until the Company collects the sold receivables. All four facilities mature on December 17, 2023.
9
The Company has a total capacity under all four facilities of $19.0 million. As of June 30, 2023, the lender has a reserve against the sold receivables of $0.7 million, which is reflected as restricted cash on the consolidated balance sheets. The facilities agreements address 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 $3.1 million at June 30, 2023. Although the sale of receivables is with recourse, the Company did not record a recourse obligation at June 30, 2023 as the Company concluded that the sold receivables are collectible.
For the six months ended June 30, 2023, the Company received proceeds from the sold receivables under all of their various agreements of $22.8 million and included the proceeds in net cash provided by operating activities in the consolidated statements of cash flows. The Company recorded related costs of $0.4 million for the six months ended June 30, 2023, in other expense in the consolidated statements of operations.
Note 5 – Inventories
Inventories, which are all within the Telco segment, at June 30, 2023 and December 31, 2022 are as follows, in thousands:
| June 30, 2023 | December 31, 2022 | ||||||||||
| New equipment | $ | 1,976 | $ | 2,286 | |||||||
| Refurbished and used equipment | 10,197 | 11,148 | |||||||||
| Allowance for excess and obsolete inventory | (4,097) | (3,871) | |||||||||
| Total inventories, net | $ | 8,076 | $ | 9,563 | |||||||
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 includes factory refurbished, Company refurbished and used products. Generally, the Company does not refurbish its used inventory until there is a sale of that product or to keep a certain quantity on hand.
Note 6 – Intangible Assets
Intangible assets with their associated accumulated amortization and impairment at June 30, 2023 and December 31, 2022 are as follows, in thousands:
| June 30, 2023 | |||||||||||||||||
| Intangible assets: | Gross | Accumulated Amortization | Net | ||||||||||||||
Customer relationships – 10 years | $ | 3,155 | $ | (2,966) | $ | 189 | |||||||||||
Trade name – 10 years | 2,122 | (1,762) | 360 | ||||||||||||||
| Total intangible assets | $ | 5,277 | $ | (4,728) | $ | 549 | |||||||||||
| December 31, 2022 | |||||||||||||||||
| Intangible assets: | Gross | Accumulated Amortization | Net | ||||||||||||||
Customer relationships – 10 years | $ | 3,155 | $ | (2,913) | $ | 242 | |||||||||||
Trade name – 10 years | 2,122 | (1,655) | 467 | ||||||||||||||
| Total intangible assets | $ | 5,277 | $ | (4,568) | $ | 709 | |||||||||||
10
Note 7 – Debt
Credit Agreement
On March 17, 2022, the Company closed its $3.0 million credit facility for its Nave and Triton subsidiaries with its primary financial lender. See Note 4 - Accounts Receivable Agreements for more information about the Company's receivables purchase facilities.
Convertible Promissory Notes
In April 2023, the Company entered into securities purchase agreements for the issuance of convertible senior promissory notes (the “April Notes”) with Mast Hill Fund, L.P. (the “Holder”). In the aggregate, the principal balance was $3.0 million, of which the purchase price was $2.8 million, and the original issue discount was $0.2 million. The April Notes have a term of one year and bear interest at a rate of 13% per annum. The Company and its subsidiaries entered into certain Security Agreements, creating a security interest in certain property of the Company and its subsidiaries to secure the prompt payment, performance, and discharge in full of the Company’s obligations under the April Notes. The April Notes are subject to certain covenants as defined in the securities purchase agreement which includes maintaining its common stock listing status with the Nasdaq Capital Market, and maintaining a minimum market capitalization of $5 million.
In connection with the issuance of the April Notes, the Company issued (i) warrants to purchase 360,000 shares of common stock with an exercise price of $2.50 exercisable until the five-year anniversary of the closing date, and (ii) a warrant to purchase 288,000 shares of common stock with an exercise price of $1.40 exercisable until the five-year anniversary of the closing date, which warrant shall be cancelled and extinguished against payment of the Notes (together, the “April Warrants”). Additionally, as a commitment fee to the Holder, 72,000 shares of the Company’s common stock were issued in connection with the April Notes. The April Notes also contain a conversion feature which allows the Holder to convert any portion of the outstanding unpaid principal and interest into shares of the Company’s common stock at a conversion price of $2.50 per share. Pursuant to the April Notes, the Company is required to hold an annual shareholders meeting within 90 calendar days after the first date that the Company's common stock traded at a share price below $1.00 during consecutive trading days. The Company's stock traded below $1.00 for consecutive days on May 1, 2023. On June 9, 2023, Mast Hill and the Company amended the April Notes and agreed to allow the Company to hold its Annual Shareholder meeting by September 30, 2023. On August 10, 2023 the Company filed a Definitive Proxy Statement for the meeting of shareholders to be held on September 22, 2023.
The conversion feature contained in the April Notes was evaluated for derivative accounting under ASC 815, Derivatives and Hedging, and determined not to be considered a derivative and therefore has been recorded in liabilities as part of the April Notes and not bifurcated. The April Warrants were evaluated and did not meet the criteria to be classified as derivatives, and accordingly, were recognized as equity instruments at fair value using a Black-Scholes model valuation. The commitment fee shares were earned upon closing, and as such were recognized as equity based on the closing stock price. As of June 30, 2023, the contra-liabilities for the commitment fee and April Warrants were $0.3 million and are amortized to interest expense, the remaining debt issuance costs were $0.3 million, repayments on the April Notes were $0.2 million, and the net outstanding principal balance of the April Notes was $2.2 million.
Note 8 – Equity Distribution Agreement and Sale of Common Stock
On April 24, 2020, the Company entered into an Equity Distribution Agreement (the “Sales 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 were 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.
11
Pursuant to the Sales Agreement, Northland sold 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 Capital Market, at market prices or as otherwise agreed with Northland. Northland used 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 have imposed.
The Company paid Northland a commission rate equal to an aggregate of 3.0% of the aggregate gross proceeds from each sale of Shares and agreed to provide Northland with customary indemnification and contribution rights. The Company also reimbursed Northland for certain specified expenses in connection with entering into the Sales Agreement. The Sales Agreement contained customary representations and warranties and conditions to the placements of the Shares pursuant thereto.
During the six months ended June 30, 2022, 174,730 Shares were sold by Northland on behalf of the Company with gross proceeds of $0.2 million, and net proceeds after commissions and fees of $0.2 million. On November 28, 2022, the Company terminated the Sales Agreement with Northland. There were no penalties associated with the termination of the Sales Agreement. As a result of the termination, no shares were sold during the six months ended June 30, 2023.
Note 9 – Earnings Per Share
Basic and diluted earnings per share for the three and six months ended June 30, 2023 and 2022, in thousands:
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Net income (loss) attributable to common shareholders | $ | (2,834) | $ | 875 | $ | (5,581) | $ | (519) | |||||||||||||||
| Basic and diluted weighted average shares | 14,000 | 13,192 | 13,639 | 13,132 | |||||||||||||||||||
| Basic and diluted loss per common share | $ | (0.20) | $ | 0.07 | $ | (0.41) | $ | (0.04) | |||||||||||||||
The table below includes information related to stock options and restricted stock awards that were outstanding at the end of each respective three and six-month period ended June 30, but have been excluded from the computation of weighted average shares for dilutive securities because their effect would be anti-dilutive.
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Stock options excluded | — | 50,000 | — | 50,000 | |||||||||||||||||||
| Weighted average exercise price of stock options | $ | 1.28 | $ | 1.28 | |||||||||||||||||||
| Average market price of common stock | $ | 1.27 | $ | 1.29 | |||||||||||||||||||
| Unvested restricted stock awards | 897,490 | — | 897,490 | — | |||||||||||||||||||
12
Note 10 – Supplemental Cash Flow Information
| (in thousands) | Six Months Ended June 30, | ||||||||||
| 2023 | 2022 | ||||||||||
| Supplemental cash flow information: | |||||||||||
| Cash paid for interest | $ | 378 | $ | 99 | |||||||
| Cash paid for taxes | $ | 16 | $ | — | |||||||
| Supplemental noncash investing and financing activities: | |||||||||||
| Assets acquired under financing leases | $ | — | $ | 281 | |||||||
| Common stock and warrants issued in conjunction with the issuance of convertible debt | $ | 384 | $ | — | |||||||
Note 11 – 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 June 30, 2023, 3,100,415 shares of common stock were reserved for stock award grants under the Plan. Of these reserved shares, 333,813 shares were available for future grants.
Restricted stock awards
A summary of the Company's non-vested restricted share awards at June 30, 2023 and changes during the three months ended June 30, 2023 is presented in the following table (in thousands, except shares):
| Shares | Fair Value | ||||||||||
| Non-vested at March 31, 2023 | 912,883 | $ | 1,403 | ||||||||
| Granted | 95,000 | 80 | |||||||||
| Vested | (97,060) | (138) | |||||||||
| Forfeited | (13,333) | (34) | |||||||||
| Non-vested at June 30, 2023 | 897,490 | $ | 1,311 | ||||||||
During the three month period ended June 30, 2023 and 2022, expenses related to share-based arrangements including restricted stock, were $0.2 million and $0.1 million, respectively.
During the six month period ended June 30, 2023 and 2022, compensation expenses related to share-based arrangements including restricted stock, were $0.6 million and $0.4 million respectively.
The Company did not recognize a tax benefit for compensation expense recognized during the three and six months ended June 30, 2023 and 2022.
At June 30, 2023, unrecognized compensation expense related to non-vested stock-based compensation awards not yet recognized in the consolidated statements of operations was $0.6 million. That cost is expected to be recognized over a period of 3.0 years.
Note 12 – Leases
The Company has a right-of-use for a building in Jessup, Maryland which was no longer being used in operations. The Maryland property was subleased as of June 30, 2023 and will end in November, 2023. Rental payments received related to the sublease was recorded as a reduction of rent expense in our consolidated statements of operations for the periods ending June 30, 2023 and 2022.
13
Note 13 – 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.
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.
| (in thousands) | Three Months Ended | Six Months Ended | |||||||||||||||||||||
| June 30, 2023 | June 30, 2022 | June 30, 2023 | June 30, 2022 | ||||||||||||||||||||
| Sales | |||||||||||||||||||||||
| Wireless | $ | 6,329 | $ | 7,243 | $ | 12,901 | $ | 15,009 | |||||||||||||||
| Telco | 5,759 | 20,546 | 13,906 | 36,539 | |||||||||||||||||||
| Total sales | $ | 12,088 | $ | 27,789 | $ | 26,807 | $ | 51,548 | |||||||||||||||
| Gross profit | |||||||||||||||||||||||
| Wireless | $ | 1,786 | $ | 1,974 | $ | 3,131 | $ | 3,511 | |||||||||||||||
| Telco | 1,486 | 6,173 | 3,558 | 10,394 | |||||||||||||||||||
| Total gross profit | $ | 3,272 | $ | 8,147 | $ | 6,689 | $ | 13,905 | |||||||||||||||
| Income (loss) from operations | |||||||||||||||||||||||
| Wireless | $ | (1,676) | $ | (1,461) | $ | (3,780) | $ | (3,659) | |||||||||||||||
| Telco | (624) | 2,606 | (1,073) | 3,640 | |||||||||||||||||||
| Total income (loss) from operations | $ | (2,300) | $ | 1,145 | $ | (4,853) | $ | (19) | |||||||||||||||
| (in thousands) | June 30, 2023 | December 31, 2022 | |||||||||
| Segment assets | |||||||||||
| Wireless | $ | 6,260 | $ | 9,790 | |||||||
| Telco | 10,952 | 13,217 | |||||||||
| Non-allocated | 3,761 | 4,211 | |||||||||
| Total assets | $ | 20,973 | $ | 27,218 | |||||||
Note 14 – Subsequent Events
The Company has evaluated subsequent events through the filing of this Form 10-Q, and except as described below, determined that there have been no events that have occurred that would require adjustments to our disclosures in the consolidated financial statements.
Accounts Receivable Agreements with Vast Bank, N.A
On August 9, 2023, due to underutilization as a result of reduced sales the last two quarters, the Company signed Modification Addendums (the “Modification”) to its accounts receivable purchase facilities for its Nave, Triton and
14
Fulton subsidiaries with Vast Bank, N.A. (“Vast”). The Nave and Triton facilities, after Modification, provide credit capacities of $5.0 million for Nave and $1.5 million for Triton. The Fulton facilities, after Modification, provide a credit capacity excluding a major customer of $6.0 million, and credit capacity secured by receivables of a major customer of $1.5 million. For all four facilities, all other terms and provisions remain in full force and effect.
15
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 wireless telecommunications industry, changes in customer and supplier relationships, technological developments, changes in the economic environment generally, the growth or formation of competitors, changes in governmental regulation or taxation, changes in our personnel, our ability to identify, complete and integrate acquisitions on favorable terms 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 December 31, 2022, 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.
Results of Operations
Comparison of Results of Operations for the three months ended June 30, 2023 and June 30, 2022
Consolidated
Consolidated sales decreased $15.7 million, or 57%, to $12.1 million for three months ended June 30, 2023 from $27.8 million for the three months ended June 30, 2022. The decrease in sales was due to decreased sales in the Telco segment of $14.8 million and a decrease in Wireless segment sales of $0.9 million.
16
Consolidated gross profit was $3.3 million, or 27% gross margin for the three months ended June 30, 2023, compared to gross profit of $8.1 million, or 29% gross margin for the three months ended June 30, 2022, a decrease of $4.8 million. The decrease in gross profit was primarily due to a decrease in the Telco segment of $4.7 million.
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 were $2.0 million, compared to $2.5 million in the same period last year, a decrease of $0.5 million due primarily to cost control measures instituted by the Company throughout 2022, which included headcount reductions, fleet reductions and other operating reductions in the Wireless segment.
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 decreased $0.8 million, or 21%, to $3.3 million for the three months ended June 30, 2023 from $4.1 million for the same period last year. The decrease in SG&A relates primarily to decreased selling and commissions expenses related to lower revenues.
Segment Results
Wireless
Revenues for the Wireless segment decreased $0.9 million to $6.3 million for the three months ended June 30, 2023 from $7.2 million for the same period of last year. The decline in revenues over the prior year period relates to the pace of the 5G services construction undertaken on behalf of our expanded customer base. Most of the large wireless carriers slowed their build outs in the second quarter of 2023, causing a reduction in sites we could build.
Gross profit was $1.8 million, or 28% for the three months ended June 30, 2023 compared to $2.0 million, or 27%, for the three months ended June 30, 2022. The decrease in gross profit dollars was the result of lower revenues quarter-over-quarter, offset partially by a higher profit margin.
Loss from operations was $1.7 million and $1.5 million for the three months ended June 30, 2023 and 2022, respectively. The increase is mainly attributable to the decline in revenues and gross profit.
Telco
Sales for the Telco segment decreased $14.8 million to $5.8 million for the three months ended June 30, 2023 from $20.6 million for the same period last year. The decrease in revenues in the three months ended June 30, 2023 was related to lower sales of used and refurbished equipment as wireless and optical carrier customers absorbed quantities of inventory purchased during calendar year 2022.
Gross profit was $1.5 million and $6.2 million for the three months ended June 30, 2023 and 2022, respectively. The decreased gross profit was due primarily to the decline in revenues.
Loss from operations was $0.6 million for the three months ended June 30, 2023 compared to income of $2.6 million for the same period last year, primarily due to the reasons discussed above.
Comparison of Results of Operations for the six months ended June 30, 2023 and June 30, 2022
Consolidated
Consolidated sales decreased $24.7 million, or 48%, to $26.8 million for six months ended June 30, 2023 from $51.5 million for the six months ended June 30, 2022. The decrease in sales was due to decreased sales in the Telco segment of $22.6 million and a decrease in Wireless segment sales of $2.1 million.
Consolidated gross profit was $6.7 million, or 25% gross margin for the six months ended June 30, 2023, compared to gross profit of $13.9 million, or 27% gross margin for the six months ended June 30, 2022, a decrease of $7.2 million. The decrease in gross profit was primarily due to a decrease in the Telco segment of $6.8 million.
17
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 were $4.0 million, compared to $5.3 million in the same period last year, a decrease of $1.3 million due primarily to cost control measures instituted by the Company throughout 2022, which included headcount reductions, fleet reductions and other operating reductions in the Wireless segment.
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 decreased $1.1 million, or 14%, to $6.9 million for the six months ended June 30, 2023 from $8.0 million for the same period last year. The decrease in SG&A relates primarily to decreased selling and commissions expenses related to lower revenues.
Segment Results
Wireless
Revenues for the Wireless segment decreased $2.1 million to $12.9 million for the six months ended June 30, 2023 from $15.0 million for the same period of last year. The decline in revenues over the prior year period relates to the pace of the 5G services construction undertaken on behalf of our expanded customer base, as customers slowed their 5G rollouts for various economic reasons.
Gross profit was $3.1 million, or 24% for the six months ended June 30, 2023 compared to $3.5 million, or 23%, for the six months ended June 30, 2022. The decrease in gross profit dollars was the result of the decline in revenues.
Loss from operations was $3.8 million and $3.7 million for the six months ended June 30, 2023 and 2022, respectively. The increase is mainly attributable to the decline in revenues.
Telco
Sales for the Telco segment decreased $22.6 million to $13.9 million for the six months ended June 30, 2023 from $36.5 million for the same period last year. The decrease in revenues in the first six months of 2023 was related to lower sales of used and refurbished equipment as wireless and optical carrier customers absorbed quantities of inventory purchased during 2022.
Gross profit was $3.6 million and $10.4 million for the six months ended June 30, 2023 and 2022, respectively. The decreased gross profit was due primarily to the decline in revenues.
Loss from operations was $1.1 million for the six months ended June 30, 2023 compared to income of $3.6 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
18
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 June 30, 2023 | Three Months Ended June 30, 2022 | ||||||||||||||||||||||||||||||||||
| Wireless | Telco | Total | Wireless | Telco | Total | ||||||||||||||||||||||||||||||
| Income (loss) from operations | $ | (1,676) | $ | (624) | $ | (2,300) | $ | (1,461) | $ | 2,606 | $ | 1,145 | |||||||||||||||||||||||
| Depreciation and amortization expense | 197 | 120 | 317 | 192 | 121 | 313 | |||||||||||||||||||||||||||||
| Stock compensation expense | 108 | 91 | 199 | 44 | 59 | 103 | |||||||||||||||||||||||||||||
| Adjusted EBITDA | $ | (1,371) | $ | (413) | $ | (1,784) | $ | (1,225) | $ | 2,786 | $ | 1,561 | |||||||||||||||||||||||
| Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | ||||||||||||||||||||||||||||||||||
| Wireless | Telco | Total | Wireless | Telco | Total | ||||||||||||||||||||||||||||||
| Income (loss) from operations | $ | (3,780) | $ | (1,073) | $ | (4,853) | $ | (3,659) | $ | 3,640 | $ | (19) | |||||||||||||||||||||||
| Depreciation and amortization expense | 394 | 240 | 634 | 388 | 242 | 630 | |||||||||||||||||||||||||||||
| Stock compensation expense | 302 | 296 | 598 | 145 | 205 | 350 | |||||||||||||||||||||||||||||
| Adjusted EBITDA | $ | (3,084) | $ | (537) | $ | (3,621) | $ | (3,126) | $ | 4,087 | $ | 961 | |||||||||||||||||||||||
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- Summary of Significant 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.
Accounts receivable
Trade receivables are carried at original invoice amount less an estimate made for doubtful accounts. Management determines the allowance for doubtful accounts by regularly evaluating individual customer receivables and considering a customer’s financial condition, credit history and current economic conditions. Trade receivables are written off against the allowance when deemed uncollectible. Recoveries of trade receivables previously written off are recorded when received. The Company generally does not charge interest on past due accounts. The adoption of the guidance in ASC 326 did not have a material impact on trade receivables and the allowance for doubtful accounts.
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, telecommunication resellers, and other users of telecommunication equipment who are seeking products for which manufacturers have discontinued production or cannot ship new 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.
19
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 June 30, 2023, we had total inventory, before the reserve for excess and obsolete inventories, of $12.2 million, consisting of $2.0 million in new products and $10.2 million in used or refurbished products.
We are required to make judgments as to future demand requirements from our customers. 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 for sales that we do make. In order to address the risks associated with our investment in inventory, we review inventory quantities on hand and reduce the carrying value when the loss of usefulness of an item or other factors, such as obsolete and excess inventories, indicate 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 or that the cost will not be recovered when it is processed through recycling. Therefore, we have an obsolete and excess inventory reserve of $4.1 million at June 30, 2023. 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, since the amounts involved are not considered a material component of cost of sales.
Intangibles
Intangible assets that have finite useful lives are amortized on a straight-line basis over their estimated useful lives of 10 years. Intangible assets are also tested for impairment when events and circumstances indicate that the carrying value may not be recoverable.
Liquidity and Capital Resources
Cash Flows Provided by Operating Activities
During the six months ended June 30, 2023, cash used in operations was $2.1 million. Cash flows from operations were negatively impacted by a net loss of $5.6 million, offset by net cash provided by working capital of $1.9 million and non-cash adjustments of $1.6 million.
Cash Flows Used in Investing Activities
During the six months ended June 30, 2023, cash used in investing activities was $23 thousand, consisting of purchases of property and equipment.
Cash Flows Used in Financing Activities
During the six months ended June 30, 2023, cash provided by financing activities was $2.1 million, consisting of net proceeds from notes payable of $2.9 million, partially offset by payments on financing leases, and payments for debt issuance costs and notes payable.
Liquidity and Capital Resources
At June 30, 2023 we had $3.6 million in cash and equivalents and restricted cash.
After taking into consideration the events listed in Subsequent Event: Accounts Receivable Agreements with Vast Bank, N.A below, the Company has an overall capacity to factor its accounts receivable of $14.0 million for working capital needs. At June 30, 2023, the Company had $3.1 million utilized under the receivables purchase facilities, leaving $10.9 million available to the Company to factor additional receivables generated from future sales.
20
Going Concern
The Company has been subject to adverse conditions, which include a number of quarters with negative operating results, that raise substantial doubt about the Company's ability to continue as a going concern for one year. These conditions relate to unfavorable industry conditions and significant debt service requirements on the Company’s financial position, as discussed in Note 2 of the accompanying unaudited consolidated financial statements. Management’s plans to alleviate the substantial doubt about the Company’s ability to continue as a going concern include attempting to improve its business profitability and its ability to generate sufficient cash flow from its operations to meet its operating needs on a timely basis, obtaining additional working capital funds through various sources, and eliminating inefficiencies in order to meet its anticipated cash requirements. However, there can be no assurance that these plans and arrangements will be sufficient to fund the Company’s ongoing capital expenditures and other requirements.
Notice of Delisting
On June 7, 2023, the Company received a letter (the “Notice”) from The Nasdaq Stock Market notifying the Company that, because the closing bid price for its common stock has been below $1.00 per share for 30 consecutive business days, it no longer complies with the minimum bid price requirement for continued listing on The Nasdaq Capital Market. Nasdaq Listing Rule 5550(a)(2) requires listed securities to maintain a minimum bid price of $1.00 per share (the “Minimum Bid Price Requirement”), and Nasdaq Listing Rule 5810(c)(3)(A) provides that a failure to meet the Minimum Bid Price Requirement exists if the deficiency continues for a period of 30 consecutive business days.
The Notice has no immediate effect on the listing of the Company’s common stock on The Nasdaq Capital Market. Pursuant to Nasdaq Listing Rule 5810(c)(3)(A), the Company has been provided an initial compliance period of 180 calendar days, or until December 4, 2023, to regain compliance with the Minimum Bid Price Requirement. During the compliance period, the Company’s shares of common stock will continue to be listed and traded on The Nasdaq Capital Market. To regain compliance, the closing bid price of the Company’s common stock must meet or exceed $1.00 per share for a minimum of ten consecutive business days during the 180-calendar day grace period.
In the event the Company is not in compliance with the Minimum Bid Price Requirement by December 4, 2023, the Company may be afforded a second 180-calendar day grace period. To qualify, the Company would be required to meet the continued listing requirements for market value of publicly held shares and all other initial listing standards for The Nasdaq Capital Market, with the exception of the Minimum Bid Price Requirement. In addition, the Company would be required to provide written notice of its intention to cure the minimum bid price deficiency during this second 180-day compliance period.
The Company intends to actively monitor the bid price for its common stock between now and December 4, 2023. In order to raise the per share trading price of the Company’s common stock to maintain its listing on the Nasdaq Capital Market, the Company’s stockholders have been asked to approve, at an annual stockholders meeting to be held on September 22, 2023, an amendment to its Certificate of Incorporation to effect a reverse stock split of its common stock at a reverse stock split ratio ranging from 2:1 to 10:1, inclusive, as determined by the Chief Executive Officer in his sole discretion.
Increase in Authorized Shares of Common Stock
By means of a Definitive Proxy Statement filed August 10, 2023, the Company is seeking shareholder approval, on an annual stockholders meeting to be held on September 22, 2023, to amend its Certificate of Incorporation to increase its authorized shares of common stock from 35,000,000 to 100,000,000, of which 95,000,000 shares shall be Common Stock with a par value of $0.01 per share, and 5,000,000 shares shall be Preferred Stock with a par value of $1.00 per share.
Reverse Stock Split
By means of a Definitive Proxy Statement filed August 10, 2023, the Company is seeking shareholder approval, on an annual stockholders meeting to be held on September 22, 2023, to amend its Certificate of Incorporation to effect a reverse stock split of its common stock at a reverse stock split ratio ranging from 2:1 to 10:1, inclusive, as
21
determined by the Chief Executive Officer in his sole discretion with the authorized capital remaining unchanged at 100,000,000 shares. The primary purpose of the reverse stock split is to raise the per share trading price of the Company’s common stock in order to maintain its listing on the Nasdaq Capital Market. Delisting from Nasdaq may adversely affect the Company’s ability to raise additional financing through the public or private sale of our equity securities, may significantly affect the ability of investors to trade in the Company’s securities and may negatively affect the value and liquidity of the Company’s common stock.
Subsequent Event: Accounts Receivable Agreements with Vast Bank, N.A.
On August 9, 2023, due to underutilization as a result of reduced sales the last two quarters, the Company signed Modification Addendums (the “Modification”) to its accounts receivable purchase facilities for its Nave, Triton and Fulton subsidiaries with Vast Bank, N.A. (“Vast”). The Nave and Triton facilities, after Modification, provide credit capacities of $5.0 million for Nave and $1.5 million for Triton. The Fulton facilities, after Modification, provide a credit capacity excluding a major customer of $6.0 million, and credit capacity secured by receivables of a major customer of $1.5 million. For all four facilities, all other terms and provisions remain in full force and effect.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Not applicable.
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 June 30, 2023, 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.
22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
From time to time, we are involved in routine litigation that arises in the ordinary course of business. We are not currently involved in any claims outside the ordinary course of business that are material to our financial condition or results of operations.
Item 1A. Risk Factors.
Not Applicable.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not Applicable.
Item 5. Other Information.
None.
23
Item 6. Exhibits.
| Exhibit No. | Description | ||||
| 10.39 | |||||
| 10.40 | |||||
| 10.41 | |||||
| 10.42 | |||||
| 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. | ||||
24
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: August 14, 2023 | |||||
| /s/ Joseph E. Hart | |||||
| Joseph E. Hart | |||||
| President and Chief Executive Officer | |||||
| (Principal Executive Officer) | |||||
| Date: August 14, 2023 | |||||
| /s/ Michael A. Rutledge | |||||
| Michael A. Rutledge | |||||
| Chief Financial Officer | |||||
| (Principal Financial Officer) | |||||
25