ADDvantage Technologies (AEY) - 2020 Q4 - Annual Report

Part I Business ADDvantage Technologies operates Wireless Infrastructure and Telecommunications segments, with FY2020 consolidated sales decreasing 9% to $50.2 million due to pandemic impacts and customer concentration - The company operates through two reportable segments: Wireless Infrastructure Services ("Wireless") and Telecommunications ("Telco"). The Cable TV segment was sold on June 30, 2019, and is classified as discontinued operations[13] - The Wireless segment provides turnkey infrastructure services, including site development, modifications, and tower services for major U.S. wireless carriers, with a focus on 5G upgrades[8][14] - The Telco segment sells new, surplus, and refurbished telecommunications equipment, and offers decommissioning and recycling services[9][16] Revenues by Segment and Geographic Area (in thousands) | | 2020 | 2019 | | :--- | :--- | :--- | | United States | | | | Wireless | $21,354 | $22,919 | | Telco | $26,880 | $29,789 | | Canada, Central America, Asia, Europe, Mexico, South America and Other | | | | Telco | $1,948 | $2,410 | | Total | $50,182 | $55,118 | - In fiscal year 2020, the Wireless segment had significant customer concentration. AT&T Mobility accounted for 14% of consolidated revenues and 32% of Wireless segment revenues. The top five Wireless customers represented 77% of the segment's revenues[34] Properties The company leases all its operational facilities, including headquarters in Carrollton, Texas, and segment-specific locations, with some unused properties subleased - The company leases all its operational facilities, including its corporate headquarters in Carrollton, Texas, and segment-specific locations in Illinois, Florida, and Alabama[39] - The company has right-of-use for two properties no longer in use in Minneapolis, MN and Jessup, MD, which were subleased as of September 30, 2020[40] Legal Proceedings The company is involved in ordinary course legal proceedings not expected to materially affect its financial position or operations - The company does not expect ongoing legal proceedings to have a material adverse effect on its financial condition or results[41] Mine Safety Disclosures This item is not applicable to the company's operations - Not applicable[41] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on NASDAQ under 'AEY', with no cash dividends paid or anticipated as earnings are retained for growth Quarterly Stock Price (AEY) - Fiscal Year 2020 | Quarter | High | Low | | :--- | :--- | :--- | | First | $2.85 | $1.85 | | Second | $6.49 | $1.80 | | Third | $4.40 | $1.50 | | Fourth | $3.47 | $1.87 | - The company does not currently pay cash dividends and plans to retain future earnings to fund business development and growth[47] Selected Financial Data This item is not applicable as the company is a smaller reporting company - Not applicable[48] Management's Discussion and Analysis of Financial Condition and Results of Operations FY2020 consolidated sales decreased 9% to $50.2 million due to pandemic impacts, leading to significant impairment charges, a $17.3 million net loss, and a $1.2 million tax benefit, with year-end liquidity at $8.9 million - The COVID-19 pandemic was declared a global pandemic, and while the company is an essential business, revenues slowed, particularly in the Wireless segment due to carriers delaying tower projects[52] - Consolidated sales decreased by $4.9 million (9%) to $50.2 million in FY2020, attributed to a $1.6 million decrease in the Wireless segment and a $3.4 million decrease in the Telco segment[59] - The company recorded impairment charges of $8.7 million on intangibles and goodwill, and $0.7 million on its right-of-use asset in the Telco Segment for the year ended September 30, 2020[63] - An income tax benefit of $1.2 million was recognized in 2020 due to a CARES Act provision allowing the carryback of net operating losses[64] Results of Operations FY2020 consolidated sales decreased 9% to $50.2 million, with Wireless revenue down 7% and Telco revenue down 10%, impacted by COVID-19 and increased obsolescence expense Consolidated Operating Results (in millions) | Metric | FY 2020 | FY 2019 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Sales | $50.2 | $55.1 | ($4.9) | -9% | | Gross Profit | $11.7 | $13.5 | ($1.8) | -13% | | Operating Expenses | $8.2 | $6.4 | $1.8 | +28% | - Wireless segment revenue decreased 7% to $21.4 million. The company estimates about $4 million in revenue was lost due to cancellations of events like summer festivals and the DNC convention because of COVID-19 restrictions[66] - Telco segment revenue decreased 10% to $28.8 million, primarily due to decreased spending on office telecommunications equipment as workers shifted to remote work during the pandemic[69] - Telco gross margin decreased from 22% in 2019 to 18% in 2020, mainly due to a $1.8 million increase in inventory obsolescence expense and lower of cost or net realizable value charges[70] Non-GAAP Financial Measure The company uses Adjusted EBITDA, a non-GAAP measure, reporting a loss of $7.0 million in FY2020 compared to a $2.3 million loss in FY2019 Adjusted EBITDA Reconciliation (in thousands) | | FY 2020 | FY 2019 | | :--- | :--- | :--- | | Loss from operations | $(18,530) | $(3,976) | | Depreciation and amortization | 1,554 | 1,453 | | Intangible Impairment | 8,714 | — | | Impairment of right of use asset | 660 | — | | Stock compensation expense | 574 | 199 | | Adjusted EBITDA | $(7,028) | $(2,324) | Liquidity and Capital Resources As of September 30, 2020, total liquidity was $8.9 million, with $3.8 million cash used in operations and $8.2 million provided by financing, including a $2.9 million PPP loan - Total liquidity as of September 30, 2020 was $8.9 million, consisting of $8.4 million in cash and equivalents and $0.5 million available under the bank line of credit[76][79] Summary of Cash Flows (in millions) | Activity | FY 2020 | FY 2019 | | :--- | :--- | :--- | | Cash Used in Operating Activities | $(3.8) | $(4.8) | | Cash Provided by Investing Activities | $2.4 | $6.6 | | Cash Provided by Financing Activities | $8.2 | $(3.3) | - On April 14, 2020, the company received a $2.9 million Paycheck Protection Program (PPP) loan, for which it has applied for forgiveness[78] Critical Accounting Policies and Estimates Critical accounting estimates include inventory valuation, accounts receivable, and impairment testing, leading to $4.8 million goodwill and $3.9 million intangible asset impairments in the Telco segment - The Telco segment carries a large inventory, and the company recorded an obsolete and excess inventory reserve of $3.1 million at September 30, 2020, an increase of $1.8 million from the prior year[83][86] - Due to continued operating losses and COVID-19 impacts, the company tested goodwill for impairment and recorded a $4.8 million charge, fully impairing goodwill for the Telco segment (Nave and Triton)[92] - An impairment test on intangible assets resulted in a $3.9 million charge related to customer relationship intangibles in the Telco segment[94] - The company recorded a $0.7 million impairment of a right-of-use asset in the Telco segment related to a vacated and partially subleased facility[95] Financial Statements and Supplementary Data This section presents the audited consolidated financial statements for FY2020 and FY2019, including balance sheets, statements of operations, cash flows, and detailed notes on accounting policies and impairments Consolidated Balance Sheet Highlights (in thousands) | | Sep 30, 2020 | Sep 30, 2019 | | :--- | :--- | :--- | | Assets | | | | Total Current Assets | $22,254 | $18,965 | | Net Property & Equipment | $2,634 | $1,831 | | Goodwill | $58 | $4,878 | | Intangibles, net | $1,425 | $6,003 | | Total Assets | $32,683 | $36,828 | | Liabilities & Equity | | | | Total Current Liabilities | $11,194 | $7,204 | | Total Liabilities | $17,750 | $7,381 | | Total Shareholders' Equity | $14,933 | $29,447 | | Total Liabilities & Equity | $32,683 | $36,828 | Consolidated Statement of Operations Highlights (in thousands) | | Year Ended Sep 30, 2020 | Year Ended Sep 30, 2019 | | :--- | :--- | :--- | | Sales | $50,182 | $55,118 | | Gross Profit | $11,680 | $13,458 | | Loss from Operations | $(18,530) | $(3,976) | | Loss from Continuing Operations | $(17,333) | $(4,035) | | Net Loss | $(17,333) | $(5,302) | | Net Loss Per Share | $(1.55) | $(0.51) | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure No changes in or disagreements with accountants on accounting and financial disclosure were reported - None reported[227] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of September 30, 2020, following the integration of Fulton Technologies - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of September 30, 2020[231] - Management assessed internal control over financial reporting based on the COSO framework (2013) and concluded it was effective as of September 30, 2020[234][235] - During fiscal year 2020, the company completed the full integration of the acquired Fulton Technologies, Inc. into its internal control over financial reporting processes[228][237] Other Information No other information was reported for this period - None[237] Part III Directors, Executive Officers and Corporate Governance This section details the five-member Board of Directors, five executive officers including CEO Joseph E. Hart, and the independent Audit Committee - The Board of Directors is comprised of five directors: David E. Chymiak, Joseph E. Hart, Timothy S. Harden, Thomas J. Franz, and James C. McGill[239] - The company has five executive officers, including Joseph E. Hart (President and CEO) and Jarrod M. Watson (CFO)[249] - The Audit Committee consists of three independent directors: David W. Sparkman (Chairman), Thomas J. Franz, and James C. McGill. All members are determined to be audit committee financial experts[259][261] Executive Compensation This section details executive compensation, including CEO Joseph E. Hart's $508,840 total compensation in FY2020, and outlines severance agreements and director compensation Summary Compensation Table - Fiscal Year 2020 | Name and Principal Position | Salary ($) | Bonus ($) | Stock Awards ($) | All Other Comp. ($) | Total Comp. ($) | | :--- | :--- | :--- | :--- | :--- | :--- | | Joseph E. Hart (CEO) | 290,769 | 105,000 | 87,898 | 25,173 | 508,840 | | Scott A. Francis (CAO) | 174,462 | 36,000 | 50,988 | 10,000 | 271,450 | | Donald E. Kinison (President, Telco) | 169,231 | 55,000 | — | 112,891 | 337,122 | - The company has employment agreements with Mr. Hart and Mr. Francis that provide for severance payments in the event of termination without cause or in connection with a Change of Control[264][265] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters As of November 30, 2020, director Dave Chymiak was the largest beneficial owner with 22.90% of common stock, while all officers and directors owned 31% - Director Dave Chymiak beneficially owned 2,709,230 shares, representing 22.90% of the class, as of November 30, 2020[275] - All executive officers and directors as a group (11 persons) beneficially owned 3,714,304 shares, or 31% of the class[275] - As of September 30, 2020, there were 100,000 securities to be issued upon exercise of outstanding options, with 789,630 securities remaining available for future issuance under equity compensation plans approved by security holders[277] Related Parties Related party transactions in FY2020 primarily involved director David Chymiak and a $2.3 million outstanding note receivable from the 2019 Cable Segment sale - Related party transactions in FY2020 consisted of receiving payments from director David Chymiak on a promissory note related to the sale of the Cable Segment to his company, Leveling 8, Inc[278] - As of December 15, 2020, Mr. Chymiak had repaid $4.1 million of the loan, with a remaining balance of $2.3 million[279] Principal Accounting Fees and Services HoganTaylor LLP served as the auditor for FY2020 and FY2019, with total fees of $158,400 and $239,650 respectively, deemed compatible with auditor independence Audit Firm Fees (HoganTaylor LLP) | Fee Type | 2020 | 2019 | | :--- | :--- | :--- | | Audit Fees | $117,000 | $137,400 | | Audit-Related Fees | $14,150 | $65,000 | | Tax Fees | $27,250 | $37,250 | | Total | $158,400 | $239,650 | Part IV Exhibits, Financial Statement Schedules This section lists filed financial statements and notes the omission of schedules, referring to the exhibit index for governance documents and certifications - The financial statements listed in Part II, Item 8 are filed as part of this Form 10-K[283] - All consolidated financial statement schedules have been omitted because they are not required, not applicable, or the information is included elsewhere in the report[283] Form 10-K Summary This section is noted as not applicable, with the exhibit index preceding it - Not applicable[287]