ADDvantage Technologies (AEY) - 2023 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION This section provides the unaudited consolidated financial statements and management's discussion and analysis of the Company's financial condition and results of operations Item 1. Financial Statements. This section presents the unaudited consolidated financial statements, including balance sheets, income statements, equity changes, cash flows, and detailed accounting notes Consolidated Balance Sheets (unaudited) Total assets and liabilities decreased, leading to a reduction in total shareholders' equity as of March 31, 2023 | Metric (in thousands) | March 31, 2023 | December 31, 2022 | Change (vs. Dec 31, 2022) | | :-------------------- | :------------- | :---------------- | :------------------------ | | Total Assets | $24,009 | $27,218 | -$3,209 | | Total Liabilities | $14,311 | $15,171 | -$860 | | Total Shareholders' Equity | $9,698 | $12,047 | -$2,349 | - Total current assets decreased by $2,738 thousand, primarily driven by decreases in unbilled revenue, inventories, and accounts receivable[10] - Total current liabilities decreased by $522 thousand, mainly due to a decrease in accounts payable[10] Consolidated Statements of Operations (unaudited) Sales and gross profit declined significantly, resulting in a more than doubled net loss for the three months ended March 31, 2023 | Metric (in thousands) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | Change (YoY) | | :-------------------- | :-------------------------------- | :-------------------------------- | :----------- | | Sales | $14,720 | $23,759 | -$9,039 | | Cost of sales | $11,303 | $18,001 | -$6,698 | | Gross profit | $3,417 | $5,758 | -$2,341 | | Operating expenses | $2,047 | $2,753 | -$706 | | Selling, general and administrative expenses | $3,606 | $3,850 | -$244 | | Loss from operations | $(2,553) | $(1,165) | -$1,388 | | Net loss | $(2,748) | $(1,394) | -$1,354 | | Basic and diluted loss per share | $(0.21) | $(0.11) | -$0.10 | - Sales decreased by 38% year-over-year, leading to a 40.6% decrease in gross profit[13] - Net loss more than doubled from $(1,394) thousand in Q1 2022 to $(2,748) thousand in Q1 2023[13] Consolidated Statements of Changes in Shareholders' Equity (unaudited) Shareholders' equity decreased primarily due to the net loss, partially offset by stock-based compensation during the period | Metric (in thousands, except shares) | Balance, Dec 31, 2022 | Net Loss | Restricted Stock Issuance | Amortization of Stock-Based Compensation | Balance, Mar 31, 2023 | | :----------------------------------- | :-------------------- | :------- | :------------------------ | :--------------------------------------- | :-------------------- | | Common Stock (Shares) | 14,132,033 | — | 656,824 | — | 14,788,857 | | Common Stock (Amount) | $141 | — | $7 | — | $148 | | Paid-in Capital | $2,585 | — | $(7) | $399 | $2,977 | | Retained Earnings | $9,321 | $(2,748) | — | — | $6,573 | | Total Shareholders' Equity | $12,047 | $(2,748) | — | $399 | $9,698 | - Total shareholders' equity decreased by $2,349 thousand from December 31, 2022, to March 31, 2023, primarily due to the net loss of $(2,748) thousand, partially offset by stock-based compensation[16] Consolidated Statements of Cash Flows (unaudited) Operating cash flow significantly decreased year-over-year, primarily due to higher net loss and changes in working capital | Activity (in thousands) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | Change (YoY) | | :---------------------- | :-------------------------------- | :-------------------------------- | :----------- | | Operating Activities | $533 | $5,541 | -$5,008 | | Investing Activities | $(1) | $(36) | +$35 | | Financing Activities | $(157) | $(2,077) | +$1,920 | | Net increase in cash, cash equivalents and restricted cash | $375 | $3,428 | -$3,053 | | Cash, cash equivalents and restricted cash at end of period | $4,028 | $5,846 | -$1,818 | - Net cash provided by operating activities significantly decreased by $5,008 thousand year-over-year, from $5,541 thousand in Q1 2022 to $533 thousand in Q1 2023[20] - The decrease in operating cash flow was primarily due to a higher net loss and reduced positive impact from changes in accounts receivable compared to the prior year[20] Notes to Unaudited Consolidated Financial Statements This section provides detailed explanations of the accounting policies and specific financial statement line items Note 1 - Basis of Presentation and Accounting Policies This note outlines the consolidation principles, reportable segments, fiscal year change, and impact of new accounting guidance - The consolidated financial statements include ADDvantage Technologies Group, Inc. and its wholly-owned subsidiaries, with intercompany balances eliminated[23] - The Company's reportable segments are Wireless Infrastructure Services ("Wireless") and Telecommunications ("Telco")[23] - The Company changed its fiscal year end from September 30 to December 31, effective September 2022[26] - The adoption of new accounting guidance related to financial instruments – credit losses (ASU 2016-13 and related updates) on January 1, 2023, did not have a material impact on the consolidated financial statements[30] Note 2 – Revenue Recognition This note details the Company's revenue sources, customer concentration, and changes in contract assets and liabilities - Principal sales are from Wireless services and Telco equipment, primarily in the United States, with international sales of approximately $1.6 million in Q1 2023[31] - Sales to one customer accounted for 19% of consolidated revenues in Q1 2023, and sales to two customers accounted for 39% in Q1 2022[32] | Sales Type (in thousands) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :------------------------ | :-------------------------------- | :-------------------------------- | | Wireless services sales | $6,572 | $7,767 | | Telco equipment | $8,147 | $15,986 | | Telco repair | $1 | $6 | | Total sales | $14,720 | $23,759 | - Contract assets decreased from $5.0 million at December 31, 2022, to $3.1 million at March 31, 2023, while contract liabilities increased from $0.1 million to $0.2 million[32] Note 3 – Accounts Receivable Agreements This note describes the Company's accounts receivable factoring facilities, utilization, and associated costs - The Company maintains accounts receivable purchase facilities with a total capacity of $19.0 million across its subsidiaries (Nave, Triton, Fulton)[35] - As of March 31, 2023, $7.0 million of receivables were utilized under these facilities, with $12.0 million remaining available[35] - The lender charges fees ranging from 1.6% to 2.0% of sold receivables and maintains a reserve, which was $1.5 million (reflected as restricted cash) at March 31, 2023[33][35] - The Company received $12.9 million in proceeds from sold receivables and incurred $0.2 million in related costs during Q1 2023[36] Note 4 – Inventories This note details inventory composition, valuation methods, and the allowance for excess and obsolete inventory | Inventory Type (in thousands) | March 31, 2023 | December 31, 2022 | | :---------------------------- | :------------- | :---------------- | | New equipment | $2,144 | $2,286 | | Refurbished and used equipment | $10,443 | $11,148 | | Allowance for excess and obsolete inventory | $(4,118) | $(3,871) | | Total inventories, net | $8,469 | $9,563 | - All inventories are within the Telco segment and are stated at the lower of cost or net realizable value, with cost determined using the weighted-average method[37][84] - The allowance for excess and obsolete inventory increased to $4.1 million at March 31, 2023, from $3.871 million at December 31, 2022[37] Note 5 – Intangible Assets This note outlines the Company's intangible assets, their amortization, and net carrying values | Intangible Asset (in thousands) | Gross (Mar 31, 2023) | Accumulated Amortization (Mar 31, 2023) | Net (Mar 31, 2023) | Net (Dec 31, 2022) | | :------------------------------ | :------------------- | :-------------------------------------- | :----------------- | :----------------- | | Customer relationships | $3,155 | $(2,940) | $215 | $242 | | Trade name | $2,122 | $(1,708) | $414 | $467 | | Total intangible assets | $5,277 | $(4,648) | $629 | $709 | - Intangible assets, primarily customer relationships and trade names, are amortized on a straight-line basis over 10 years[38][88] - Net intangible assets decreased from $709 thousand at December 31, 2022, to $629 thousand at March 31, 2023[38] Note 6 – Debt This note provides information on the Company's credit facilities and debt arrangements - The Company closed a $3.0 million credit facility for its Nave and Triton subsidiaries on March 17, 2022[39] Note 7 – Equity Distribution Agreement and Sale of Common Stock This note details the Company's past equity distribution agreement and common stock sales activities - The Company had an Equity Distribution Agreement with Northland Securities, Inc. to sell up to $13.9 million in common stock via an "at the market offering"[41][43] - During Q1 2022, 143,985 shares were sold, generating $0.2 million in gross and net proceeds[45] - The Sales Agreement was terminated on November 28, 2022, with no shares sold in Q1 2023[45] Note 8 – Earnings Per Share This note presents the calculation of basic and diluted loss per share and anti-dilutive exclusions | Metric (in thousands, except per share) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :-------------------------------------- | :-------------------------------- | :-------------------------------- | | Net loss attributable to common shareholders | $(2,748) | $(1,394) | | Basic and diluted weighted average shares | 13,273 | 13,071 | | Basic and diluted loss per common share | $(0.21) | $(0.11) | - Stock options and unvested restricted stock awards were excluded from diluted EPS calculation due to their anti-dilutive effect[47] Note 9 – Supplemental Cash Flow Information This note provides additional details on non-cash investing and financing activities and cash paid for interest | Metric (in thousands) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :-------------------- | :-------------------------------- | :-------------------------------- | | Cash paid for interest | $46 | $62 | | Assets acquired under financing leases | $0 | $203 | Note 10 – Stock-Based Compensation This note describes the Company's stock incentive plan, restricted stock awards, and compensation expense - The 2015 Incentive Stock Plan reserves 3,100,415 shares for awards, with 415,480 shares available for future grants at March 31, 2023[49] - No stock options were outstanding or granted in Q1 2023[50] | Restricted Stock Awards (in thousands, except shares) | Shares | Fair Value | | :---------------------------------------------------- | :-------- | :--------- | | Non-vested at December 31, 2022 | 531,725 | $1,016 | | Granted | 692,824 | $804 | | Vested | (275,666) | $(368) | | Forfeited | (36,000) | $(49) | | Non-vested at March 31, 2023 | 912,883 | $1,403 | - Stock-based compensation expense was $0.4 million in Q1 2023, up from $0.2 million in Q1 2022. Unrecognized compensation expense of $0.8 million is expected to be recognized over 3.0 years[51][52] Note 11 – Leases This note details the Company's lease arrangements, including a sublease agreement - The Company subleased a building in Jessup, Maryland, which was no longer used in operations, with the sublease ending in November 2023[53] - Rental payments received from the sublease were recorded as a reduction of rent expense[53] Note 12 – Segment Reporting This note provides financial performance and asset information for the Wireless and Telco operating segments - The Company operates in two reportable segments: Wireless Infrastructure Services ("Wireless") and Telecommunications ("Telco")[54] - Wireless segment provides turn-key wireless infrastructure services, including 5G small cell construction and technology upgrades on cell sites[55] - Telco segment sells new and refurbished telecommunications networking equipment and offers repair, testing, and decommissioning services[56] | Segment Performance (in thousands) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :--------------------------------- | :-------------------------------- | :-------------------------------- | | Sales: | | | | Wireless | $6,572 | $7,766 | | Telco | $8,148 | $15,993 | | Total sales | $14,720 | $23,759 | | Gross profit: | | | | Wireless | $1,344 | $1,537 | | Telco | $2,073 | $4,221 | | Total gross profit | $3,417 | $5,758 | | Income (loss) from operations: | | | | Wireless | $(2,097) | $(2,203) | | Telco | $(456) | $1,038 | | Total income (loss) from operations | $(2,553) | $(1,165) | | Segment Assets (in thousands) | March 31, 2023 | December 31, 2022 | | :---------------------------- | :------------- | :---------------- | | Wireless | $8,223 | $9,790 | | Telco | $12,224 | $13,217 | | Non-allocated | $3,562 | $4,211 | | Total assets | $24,009 | $27,218 | Note 13 – Subsequent Events This note discloses significant financing activities that occurred after the reporting period end - On April 7 and April 12, 2023, the Company entered into securities purchase agreements with Mast Hill Fund, L.P. for the issuance of 13% senior secured promissory notes totaling $3.0 million[60][61] - The transaction involved an original issue discount of $0.1 million, resulting in net proceeds of $2.9 million[62][63][94] - As part of the agreement, the Company issued warrants to purchase 648,000 shares of common stock and 72,000 shares of common stock as a commitment fee and additional consideration[60][62][63] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Management discusses the Company's financial condition, results of operations, and cash flows, analyzing segment performance, critical accounting policies, and liquidity Special Note on Forward-Looking Statements This note cautions that forward-looking statements are subject to risks and uncertainties, and actual results may differ materially - The section contains forward-looking statements subject to risks and uncertainties, including changes in the wireless telecommunications industry, customer/supplier relationships, technology, economic environment, competition, and regulation[65] - Actual results may differ materially from projections, and the Company does not undertake to update these statements[65] Overview This section provides an overview of the Company's two reportable segments: Wireless Infrastructure Services and Telecommunications - The Company reports financial performance based on two segments: Wireless Infrastructure Services and Telecommunications[67] - The Wireless segment provides turn-key wireless infrastructure services for major U.S. wireless carriers, tower companies, and OEMs, focusing on 5G small cell construction and cell site technology upgrades[68] - The Telco segment sells new and refurbished telecommunications networking equipment and offers repair, testing, and decommissioning services primarily in North America[69] Results of Operations This section analyzes the consolidated and segment-specific financial performance for the reporting period Consolidated Consolidated sales and gross profit declined significantly, while operating and SG&A expenses decreased due to cost control - Consolidated sales decreased by $9.1 million (38%) to $14.7 million in Q1 2023, driven by declines in both Telco ($7.9 million) and Wireless ($1.2 million) segments[70] - Consolidated gross profit decreased by $2.4 million to $3.4 million, with gross margin slightly down from 24% to 23%[71] - Operating expenses decreased by $0.8 million due to cost control measures, and SG&A expenses decreased by $0.2 million (6%) primarily due to lower selling and commission expenses[72][73] Segment Results Wireless segment revenues decreased due to 5G construction pace, while Telco sales significantly declined from lower equipment demand - Wireless segment revenues decreased by $1.2 million to $6.6 million, attributed to the pace of 5G construction and global supply chain issues impacting component availability[74] - Wireless gross profit decreased in dollar terms but maintained a 20% gross margin. Loss from operations for Wireless was $(2.1) million, a slight improvement from $(2.2) million in Q1 2022[75] - Telco segment sales decreased significantly by $7.9 million to $8.1 million, primarily due to lower sales of used and refurbished equipment as customers absorbed prior year inventory[76] - Telco gross profit decreased by $2.1 million, and the segment shifted from an operating income of $1.0 million in Q1 2022 to an operating loss of $(0.5) million in Q1 2023[77] Non-GAAP Financial Measure This section defines and presents Adjusted EBITDA as a non-GAAP measure used to evaluate financial performance and market value - Adjusted EBITDA is a non-GAAP measure defined as earnings before interest expense, income taxes, depreciation, amortization, stock compensation expense, other income, other expense, and interest income[78] - Adjusted EBITDA is used by the financial community to measure financial performance and evaluate market value[78] | Adjusted EBITDA (in thousands) | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :----------------------------- | :-------------------------------- | :-------------------------------- | | Wireless | $(1,764) | $(1,892) | | Telco | $(73) | $1,292 | | Total Adjusted EBITDA | $(1,837) | $(600) | Critical Accounting Policies This section discusses key accounting policies for accounts receivable, inventory valuation, and intangible assets Accounts receivable This policy outlines the valuation of trade receivables and the allowance for doubtful accounts - Trade receivables are carried at original invoice amount less an allowance for doubtful accounts, determined by evaluating individual customer financial condition, credit history, and economic conditions[82] - The adoption of ASC 326 guidance on credit losses did not materially impact trade receivables or the allowance for doubtful accounts[82] Inventory Valuation This policy details the valuation of Telco segment inventories and the assessment for obsolescence - Inventories, all within the Telco segment, consist of new and used electronic components and are stated at the lower of cost or net realizable value using the weighted-average method[84] - The Company carries large inventory quantities, which represents the largest risk for the Telco segment, and regularly reviews inventory for obsolescence due to rapidly changing technology[83][85] - An obsolete and excess inventory reserve of $4.1 million was recorded at March 31, 2023[86] Intangibles This policy describes the amortization and impairment testing of intangible assets with finite useful lives - Intangible assets with finite useful lives are amortized on a straight-line basis over 10 years and are tested for impairment when indicators are present[88] - As of March 31, 2023, no indicators of impairment were present for intangible assets[88] Liquidity and Capital Resources This section analyzes the Company's cash flows, available liquidity, and future capital needs Cash Flows Provided by Operating Activities Operating cash flow was positively impacted by working capital changes and non-cash adjustments, despite a net loss - Cash provided by operations was $0.5 million during Q1 2023, negatively impacted by a $2.7 million net loss, but offset by $2.3 million from working capital changes and $0.9 million in non-cash adjustments[89] Cash Flows Used in Investing Activities Investing activities primarily involved minimal purchases of property and equipment during the period - Cash used in investing activities was minimal at $1 thousand in Q1 2023, primarily for property and equipment purchases[90] Cash Flows Used in Financing Activities Financing activities primarily consisted of payments made on financing leases - Cash used in financing activities was $0.2 million in Q1 2023, consisting of payments on financing leases[91] Liquidity and Capital Resources (General) The Company's liquidity includes cash and available factoring facilities, with potential need for additional funding - At March 31, 2023, the Company had $4.0 million in cash and equivalents and restricted cash[92] - The Company has $12.0 million available under its $19.0 million accounts receivable factoring facilities[92] - If negative operating results continue, the Company may need to seek additional funding through equity sales or debt issuance[93] Subsequent Event: Mast Hill Fund Investments Post-quarter, the Company secured $2.9 million in net proceeds through senior secured promissory notes and issued warrants - Post-quarter, the Company secured $2.9 million in net proceeds from Mast Hill Fund, L.P. through the issuance of $3.0 million in 13% senior secured promissory notes[94][95] - The financing also included the issuance of warrants to purchase 648,000 shares and 72,000 shares of common stock as part of the consideration[60][61][62][63] Item 3. Quantitative and Qualitative Disclosures about Market Risk. This section states that there are no applicable quantitative and qualitative disclosures about market risk for the Company - The Company has no applicable quantitative and qualitative disclosures about market risk[96] Item 4. Controls and Procedures. The Company's management, including the CEO and CFO, concluded that the disclosure controls and procedures were effective as of March 31, 2023, ensuring timely and accurate reporting of required information under the Exchange Act - As of March 31, 2023, the CEO and CFO concluded that the Company's disclosure controls and procedures are effective[97] - These controls are designed to ensure information required for Exchange Act reports is recorded, processed, summarized, and reported within specified time periods[97] PART II. OTHER INFORMATION This section covers legal proceedings, risk factors, equity sales, defaults, mine safety, other information, and exhibits Item 1. Legal Proceedings. The Company is not currently involved in any material legal claims outside the ordinary course of business - The Company is not currently involved in any material legal proceedings outside the ordinary course of business[100] Item 1A. Risk Factors. This section indicates that there are no new material risk factors to report for the current period - Not Applicable[101] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. The Company did not engage in any unregistered sales of equity securities or use of proceeds during the reporting period - None[102] Item 3. Defaults Upon Senior Securities. The Company reported no defaults upon senior securities during the reporting period - None[103] Item 4. Mine Safety Disclosures. This section is not applicable to the Company's operations - Not Applicable[104] Item 5. Other Information. No other information requiring disclosure was reported in this section - None[105] Item 6. Exhibits. This section lists the exhibits filed as part of the Form 10-Q, including certifications under the Sarbanes-Oxley Act and XBRL-related documents - The exhibits include certifications of the CEO and CFO under Sections 302 and 906 of the Sarbanes-Oxley Act of 2002[107] - XBRL Instance Document and Taxonomy Extension Schema, Calculation, Definition, Label, and Presentation Linkbases are also filed[107] SIGNATURES The report is duly signed on behalf of ADDvantage Technologies Group, Inc. by Joseph E. Hart, President and CEO, and Michael A. Rutledge, CFO, on May 15, 2023 - The report was signed by Joseph E. Hart, President and Chief Executive Officer, and Michael A. Rutledge, Chief Financial Officer, on May 15, 2023[111]